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Earthstone Energy (ESTE)

Filed: 14 Jan 22, 4:13pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934

(Amendment No. )

Check the appropriate box:
 
 Preliminary Information Statement
   
 Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))
   
 Definitive Information Statement

Earthstone Energy, Inc.
(Name of Registrant as Specified in Its Charter)

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 Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
 
 (1)Title of each class of securities to which transaction applies:
   
 (2)Aggregate number of securities to which transaction applies:
   
 (3) 
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11
(Set forth the amount on which the filing fee is calculated and state how it was determined):
   
 (4)Proposed maximum aggregate value of transaction:
   
 (5)Total fee paid: 
 
 Fee paid previously with preliminary materials.

 Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the fee was paid previously. Identify the filing by registration statement number, or the Form or Schedule and the date of filing.
 
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Earthstone Energy, Inc.
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380


PRELIMINARY INFORMATION STATEMENT

NOTICE OF ACTION BY WRITTEN CONSENT AND INFORMATION STATEMENT
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
Dear Stockholder:

This notice of action by written consent pursuant to Section 228(e) of the General Corporation Law of the State of Delaware (the “DGCL”) and the accompanying information statement (the “Information Statement”) is being furnished by the Board of Directors (the “Board”) of Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”), to the holders of record at the close of business on January 19, 2022 of the outstanding shares of Earthstone’s Class A common stock, $0.001 par value per share (“Class A Common Stock”), and Class B common stock, $0.001 par value per share (“Class B Common Stock” and collectively with the Class A Common Stock, the “Common Stock”), pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The purpose of the accompanying Information Statement is to inform Earthstone’s stockholders that on December 15, 2021, holders of approximately (i) 55.4% of the voting power of all outstanding shares of Common Stock and (ii) 56.1% of the voting power of all outstanding shares of Common Stock held by stockholders other than affiliates of Warburg Pincus, LLC (the “Warburg Funds”) and executive management of Earthstone (the “Disinterested Shares”), delivered to Earthstone an irrevocable written consent (the “Written Consent”) in lieu of a special meeting of stockholders approving the issuance by Earthstone of 19,417,476 shares (subject to adjustment) of Class A Common Stock (the “Shares” and such issuance, the “Stock Issuance”) upon the closing of the transactions contemplated by that certain purchase and sale agreement dated December 15, 2021 (the “Purchase Agreement”) by and among Earthstone, Earthstone Energy Holdings, LLC, a Delaware limited liability company and subsidiary of Earthstone (“EEH”), as buyer, and Chisholm Energy Operating, LLC, a Delaware limited liability company (“OpCo”), and Chisholm Energy Agent, Inc., a Delaware corporation (“Agent” and collectively with OpCo, “Chisholm”), as seller. Pursuant to the Purchase Agreement, EEH will acquire (the “Transaction”) interests in oil and gas leases and related properties of Chisholm located in Lea County and Eddy County, New Mexico (the “Assets”), for a purchase price (the “Purchase Price”) consisting of $410 million in cash and the Shares. The cash portion of the Purchase Price is subject to customary purchase price adjustments with an effective date of November 1, 2021 and is payable as follows: (i) $340 million at the closing of the Transaction, (ii) $40 million six months after the closing of the Transaction, and (iii) $30 million twelve months after the closing of the Transaction. On December 17, 2021, in connection with the Purchase Agreement, EEH deposited $30.5 million in cash into a third-party escrow account as a deposit pursuant to the Purchase Agreement, which will be credited against the Purchase Price upon closing of the Transaction. At the closing of the Transaction, 4,441,748 of the Shares (the “Escrow Shares”) will be deposited in a stock escrow account for Chisholm indemnity obligations and 14,975,728 of the Shares (the “Closing Shares”) will be issued and delivered to Chisholm. A copy of the Purchase Agreement has been attached to the accompanying Information Statement as Annex A thereto.

The Class A Common Stock is listed on the New York Stock Exchange (the “NYSE”). Under Section 312.03 of the NYSE Listed Company Manual, stockholder approval is required prior to the issuance of shares of common stock, or of securities convertible into common stock, if:

such common stock or securities have, or will have upon issuance, voting power equal to 20% or more of the voting power outstanding before the issuance of such stock or securities convertible into common stock;




the number of shares of common stock to be issued is, or will be upon issuance, equal to 20% or more of the number of shares of common stock outstanding before the issuance of the common stock or securities convertible into common stock; or

the number of shares of common stock to be issued is, or will be upon issuance, equal to more than one percent of the number of shares of common stock outstanding or voting power outstanding before the issuance and such issuance is to a Related Party (as defined in the NYSE Listed Company Manual) of Earthstone, or where such securities are issued as consideration in a transaction in which a Related Party has a five percent or greater interest, directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction and the present or potential issuance of common stock or securities convertible into common stock could result in an issuance that exceeds either five percent of the number of shares of common stock or five percent of the voting power outstanding before the issuance.

Because the number of shares of Class A Common Stock issuable pursuant to the Purchase Agreement would represent greater than each of the foregoing thresholds, and because affiliates of the Warburg Funds who will be issued shares of Class A Common Stock pursuant to the Purchase Agreement are Related Parties (as defined in the NYSE Listed Company Manual) of Earthstone, stockholder approval of the Stock Issuance is required under NYSE rules and regulations. In addition, because affiliates of the Warburg Funds and some of the Warburg Funds are collectively the majority owners of Chisholm and are Related Parties of Earthstone, Earthstone determined to require that the Stock Issuance be approved by the holders of a majority of the Disinterested Shares.

On December 15, 2021, certain entities controlled or affiliated with EnCap Investments L.P. (collectively, the “EnCap Funds”) and certain of the Warburg Funds (together with the EnCap Funds, the “Consenting Stockholders”) delivered to Earthstone the Written Consent approving the Stock Issuance. As of December 15, 2021, the Consenting Stockholders held shares of Common Stock representing approximately 55.4% of the voting power of all outstanding shares of Common Stock. In addition, the EnCap Funds held 56.1% of the Disinterested Shares. Accordingly, the Written Consent provided the requisite approval of the Stock Issuance by Earthstone’s stockholders in accordance with the Third Amended and Restated Certificate of Incorporation of Earthstone, as amended (the “Certificate of Incorporation”), the Amended and Restated Bylaws of Earthstone, as amended (the “Bylaws”), the DGCL, the Purchase Agreement and the NYSE rules and regulations. No further approval of the stockholders is required to complete the Stock Issuance under the DGCL, the Certificate of Incorporation, the Bylaws, the Purchase Agreement or the NYSE rules and regulations. As a result, Earthstone is not soliciting your vote for the Stock Issuance and does not intend to call a meeting of stockholders for purposes of voting on the adoption and approval thereof.

Pursuant to Rule 14c-2 of the Exchange Act, the actions contemplated by written consent may not be taken until [•], 2022, which is 20 calendar days following the date we first mail the accompanying Information Statement to our stockholders.

The audit committee (the “Audit Committee”) of the Board, consisting of independent and disinterested members of the Board, carefully reviewed and considered the terms and conditions of the Purchase Agreement, the Transaction and the Stock Issuance. The Audit Committee unanimously (i) determined that the Transaction is fair to, and in the best interests of, Earthstone and its stockholders; (ii) approved and declared advisable the Purchase Agreement and the ancillary agreements and documents appended thereto and each of the transactions contemplated therein, including the Stock Issuance; and (iii) recommended that the Board approve the Purchase Agreement, the Transaction and the Stock Issuance, and that the approval of the Stock Issuance be submitted to Earthstone’s stockholders for approval in accordance with the terms of the Purchase Agreement and the rules of the NYSE. The Board approved the Purchase Agreement, the Transaction and the Stock Issuance and recommended that the stockholders of Earthstone approve the Stock Issuance and directed that the Stock Issuance be submitted to the holders of the Common Stock for their approval.

This notice of action by written consent and the accompanying Information Statement constitutes notice to you from Earthstone pursuant to Section 228(e) of the DGCL that the Stock Issuance has been approved by the holders of (i) a majority of the voting power of the outstanding shares of Common Stock and (ii) a majority of the voting power of the outstanding Disinterested Shares, in each case by Written Consent in lieu of a special meeting in accordance with Section 228 of the DGCL and the NYSE rules and regulations.

EARTHSTONE IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND EARTHSTONE A PROXY.




PLEASE NOTE THAT THE CONSENTING STOCKHOLDERS HAVE VOTED TO APPROVE THE STOCK ISSUANCE. THE NUMBER OF VOTES HELD BY THE CONSENTING STOCKHOLDERS IS SUFFICIENT TO SATISFY THE STOCKHOLDER VOTE REQUIREMENT UNDER SECTION 312 OF THE NYSE LISTED COMPANY MANUAL AND THE PURCHASE AGREEMENT FOR THESE ACTIONS AND CONSEQUENTLY, NO ADDITIONAL VOTES WILL BE NEEDED TO APPROVE THESE TRANSACTIONS. THE CORPORATE ACTIONS DESCRIBED IN THE ACCOMPANYING INFORMATION STATEMENT REQUIRED STOCKHOLDER APPROVAL FROM THE HOLDERS OF OUR OUTSTANDING COMMON STOCK BECAUSE OUR COMMON STOCK IS TRADED ON THE NYSE AND BECAUSE THE PURCHASE AGREEMENT PROVIDED FOR IT.

The Information Statement accompanying this letter provides you with more specific information concerning the Transaction. We encourage you to carefully read the accompanying Information Statement and the Purchase Agreement attached as Annex A thereto.

By Order of the Board of Directors,


WILLIAM A. WIEDERKEHR, JR.

January [•], 2022


The accompanying Information Statement is dated [•], 2022 and is first being mailed to our stockholders on [•], 2022.







EARTHSTONE ENERGY INC.
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380

INFORMATION STATEMENT

This Information Statement and notice of action by written consent (collectively, this “Information Statement”) contains information relating to the entry into that certain Purchase and Sale Agreement, dated as of December 15, 2021 (the “Purchase Agreement”), by and between Earthstone Energy Inc., a Delaware corporation (“Earthstone” and together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”), and Earthstone Energy Holdings, LLC, a Delaware limited liability company and subsidiary of Earthstone (“EEH”), as buyer, and Chisholm Energy Operating, LLC (“OpCo”) and Chisholm Energy Agent, Inc. (“Agent” and collectively with OpCo, “Chisholm”), as seller.

Pursuant to the Purchase Agreement, EEH will acquire (the “Transaction”) interests in oil and gas leases and related properties of Chisholm located in Lea County and Eddy County, New Mexico (the “Assets”), for a purchase price (the “Purchase Price”) consisting of $410 million in cash and 19,417,476 shares (subject to adjustment) (the “Shares” and such issuance, the “Stock Issuance”) of Class A common stock, $0.001 par value per share of Earthstone (“Class A Common Stock”). The cash portion of the Purchase Price is subject to customary purchase price adjustments with an effective date of November 1, 2021 and is payable as follows: (i) $340 million at the closing of the Transaction, (ii) $40 million six months after the closing of the Transaction, and (iii) $30 million twelve months after the closing of the Transaction. On December 17, 2021, in connection with the Purchase Agreement, EEH deposited $30.5 million in cash into a third-party escrow account as a deposit pursuant to the Purchase Agreement, which will be credited against the Purchase Price upon closing of the Transaction. At the closing of the Transaction, 4,441,748 of the Shares (the “Escrow Shares”) will be deposited in a stock escrow account for indemnity obligations and 14,975,728 of the Shares (the “Closing Shares”) will be issued to Chisholm. A copy of the Purchase Agreement has been attached to this Information Statement as Annex A. This Information Statement is dated January [•], 2022 and is first being mailed to our stockholders on or about such date.

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.









TABLE OF CONTENTS
INFORMATION STATEMENT SUMMARY7
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS17
THE TRANSACTION20
RISK FACTORS37
THE PURCHASE AGREEMENT40
AGREEMENTS RELATED TO THE TRANSACTION48
INFORMATION ABOUT CHISHOLM49
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION56
DESCRIPTION OF CAPITAL STOCK70
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS75
HOUSEHOLDING77
WHERE YOU CAN FIND MORE INFORMATION78
INDEX TO FINANCIAL STATEMENTS80
Annex A – Purchase Agreement
Annex B – Fairness Opinion
Annex C – Form of Registration Rights Agreement
Annex D – Form of Lock-up Agreement
Annex E – Form of Amended and Restated Voting Agreement
Annex F – Glossary of Certain Oil and Natural Gas Terms




INFORMATION STATEMENT SUMMARY
This summary highlights selected information contained in this Information Statement and does not contain all the information that may be important to you. Earthstone urges you to read carefully this Information Statement in its entirety, including the annexes. Additional, important information, which Earthstone also urges you to read, is contained in the documents incorporated by reference into this Information Statement. See “Where You Can Find More Information.” Unless stated otherwise, all references in this Information Statement to Earthstone are to Earthstone Energy, Inc., all references to EEH are to Earthstone Energy Holdings, LLC, and all references to the Company, us, we, and our, are to Earthstone and its consolidated subsidiaries.

Summary of the Transaction

On December 15, 2021, Earthstone, EEH, Chisholm Energy Operating, LLC, a Delaware limited liability company (“OpCo”), and Chisholm Energy Agent, Inc., a Delaware corporation (“Agent” and collectively with OpCo, “Chisholm”), entered into a purchase and sale agreement (the “Purchase Agreement”), which provides that EEH will acquire (the “Transaction”) interests in oil and gas leases and related properties of Chisholm located in Lea County and Eddy County, New Mexico (the “Assets”), for a purchase price (the “Purchase Price”) consisting of $410 million in cash and 19,417,476 shares of Class A Common Stock. The cash portion of the Purchase Price is subject to customary purchase price adjustments with an effective date of November 1, 2021 and is payable as follows: (i) $340 million at the closing of the Transaction, (ii) $40 million six months after the closing of the Transaction, and (iii) $30 million twelve months after the closing of the Transaction.

The Parties

Earthstone Energy, Inc.

Earthstone Energy, Inc., a Delaware corporation, is a growth-oriented independent oil and gas company engaged in the acquisition and development of oil and gas reserves through activities that include the acquisition, drilling and development of undeveloped leases, asset and corporate acquisitions and mergers. Our operations are all in the upstream segment of the oil and natural gas industry and all our properties are onshore in the State of Texas.  Our assets are located primarily in the Midland Basin of west Texas and to a lesser extent, in the Eagle Ford Trend of south Texas. Our Class A Common Stock is listed on the NYSE under the trading symbol “ESTE.” Earthstone’s principal executive offices are located at 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380, and its telephone number is (281) 298-4246.

Earthstone is the sole managing member of Earthstone Energy Holdings, LLC, a Delaware limited liability company (“EEH”), and has 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 consolidated financial statements representing the economic interests of EEH’s members other than Earthstone and Lynden US.

Earthstone Energy Holdings, LLC

EEH was formed on November 4, 2016 and is a holding company of operating subsidiaries that owns and operates our assets and will own and operate the Assets after the closing of the Transaction. EEH’s principal executive offices are located at 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380, and its telephone number is (281) 298-4246.

Chisholm Energy Operating, LLC
Chisholm Energy Agent, Inc.

Chisholm Energy Operating, LLC, a Delaware limited liability company (“OpCo”), was formed on November 18, 2016. Chisholm Energy Agent, Inc., a Delaware corporation (“Agent” and collectively with OpCo, “Chisholm”), was formed on November 18, 2016. OpCo and Agent are wholly-owned subsidiaries of Chisholm Energy Holdings, LLC, a Delaware limited liability company (“Chisholm Holdings”), formed on May 19, 2016. The majority owners of Chisholm Holdings are certain investment funds affiliated with Warburg Pincus, LLC (“Warburg”). The remaining ownership of Chisholm Holdings consists of investment funds associated with the Ontario Teachers’ Pension Plan (“OTPP”) and current and former members of management

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of Chisholm Holdings. OpCo and Agent were formed to hold oil and gas assets, including the Assets. OpCo’s, Agent’s and Chisholm Holdings’ principal executive offices are located at 801 Cherry Street, Suite 1200, Unit 20, Fort Worth, Texas 76102, and their telephone number is (817) 953-6063.

The Audit Committee of the Board of Directors

As a result of Mr. David S. Habachy, a member of our Board, being a Managing Director at Warburg and affiliates of Warburg having ownership interests in both Earthstone and Chisholm Holdings, the audit committee (the “Audit Committee”) of the Board was delegated the responsibility to evaluate a potential transaction between Earthstone and Chisholm and make its recommendation thereon to the full Board. The Audit Committee members are Jay F. Joliat (Chairman), Phil D. Kramer and Zachary G. Urban, each an independent and disinterested member of our Board. To assist with the process, the Audit Committee engaged Richards, Layton & Finger, P.A. (“RLF”), as its legal counsel, and Wells Fargo Securities, LLC (“Wells Fargo Securities”) as its financial advisor.

After such consideration, for the reasons discussed below, the Audit Committee unanimously: (i) determined that the Transaction is fair to, and in the best interests of, Earthstone and its stockholders; (ii) approved and declared advisable the Purchase Agreement and the ancillary agreements and documents appended thereto and each of the transactions contemplated therein, including the Stock Issuance; and (iii) recommended that the Board approve the Purchase Agreement, the Transaction and the Stock Issuance, and that the approval of the Stock Issuance be submitted to Earthstone’s stockholders for approval in accordance with the terms of the Purchase Agreement and the rules of the NYSE.

Opinion of Wells Fargo Securities, LLC, Financial Advisor to the Audit Committee

On December 15, 2021, Wells Fargo Securities, as financial advisor to the Audit Committee, rendered its oral opinion to the Audit Committee (which was subsequently confirmed in writing by delivery of Wells Fargo Securities’ written opinion dated December 15, 2021) that, as of December 15, 2021, the Aggregate Consideration (as defined below) to be issued and paid by Earthstone and EEH in the Transaction is fair, from a financial point of view, to Earthstone.

Wells Fargo Securities’ opinion was directed to the Audit Committee (in its capacity as such) and only addressed the fairness, from a financial point of view, to Earthstone of the Aggregate Consideration to be issued and paid by Earthstone and EEH in the Transaction and did not address any other terms, conditions, aspects or implications of the Transaction. The summary of Wells Fargo Securities’ opinion in this Information Statement is qualified in its entirety by reference to the full text of its written opinion, which is attached as Annex B to this Information Statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Wells Fargo Securities in preparing its opinion. However, neither Wells Fargo Securities’ written opinion nor the summary of its opinion and the related analyses set forth in this Information Statement is intended to be, and they do not constitute, advice or a recommendation to the Audit Committee, the Board or any Earthstone securityholder, or any other person, as to how to vote or act on any matter relating to the proposed Transaction or any other matter. See “The Transaction—Opinion of Wells Fargo Securities, LLC, Financial Advisor to the Audit Committee.”

Agreements Related to the Transaction

Fifth Amendment to Credit Agreement

On December 24, 2021, Earthstone, EEH, as borrower, Wells Fargo Bank, National Association (“Wells Fargo”) as Administrative Agent, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amendment (the “Amendment”) to the Credit Agreement dated November 21, 2019, by and among EEH, as Borrower, Earthstone, as Parent, Wells Fargo as Administrative Agent and Issuing Bank, Royal Bank of Canada, as Syndication Agent, Truist Bank, Citizens Bank, N.A., KeyBank National Association, U.S. Bank National Association, Fifth Third Bank, PNC Bank, National Association, and Bank of America, N.A., as Documentation Agents, and the Lenders party thereto (together with all amendments or other modifications, the “Credit Agreement”). The Amendment is contingent on the closing of the Transaction. Among other things, the Amendment increases the borrowing base under the Credit Agreement from $650 million to $825 million, unless the Company completes a note offering prior to the closing of the Transaction; provides mechanics relating to the transition from the use of LIBOR to a

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benchmark replacement rate upon the occurrence of certain transition events or elections made by EEH and the Administrative Agent; adds certain hedging requirements; adjusts some financial covenants; redefines the limitations on certain restricted payments EEH may make; and makes certain administrative changes to the Credit Agreement.

Registration Rights Agreement

Pursuant to the terms of the Purchase Agreement, at the closing of the Transaction, Earthstone, Chisholm and certain direct and indirect equity holders of Chisholm Holdings will enter into a registration rights agreement (the “Registration Rights Agreement”) relating to the shares of Class A Common Stock issuable upon the closing of the Transaction. See “Agreements Related to the Transaction – Registration Rights Agreement.”

Lock-up Agreement

Pursuant to the terms of the Purchase Agreement, at the closing of the Transaction, Earthstone, Chisholm and certain direct and indirect equity holders of Chisholm Holdings will enter into a lock-up agreement (the “Lock-up Agreement”) providing that such holders will not transfer, subject to limited exceptions, any of the Closing Shares for certain periods of time. See “Agreements Related to the Transaction – Lock-up Agreement.”

Amended and Restated Voting Agreement

Pursuant to the terms of the Purchase Agreement, at the closing of the Transaction, affiliates of Warburg (the "Warburg Funds"), EnCap and Earthstone, will enter into an amendment and restatement (the “Amended and Restated Voting Agreement”) of that certain voting agreement dated January 7, 2021 by and among certain Warburg Funds, EnCap and Earthstone (the “Voting Agreement”) providing that the Shares received by such Warburg Funds in the Transaction will be included in the Voting Agreement. See “Agreements Related to the Transaction – Amended and Restated Voting Agreement.”

Board of Directors and Management of Earthstone Following Completion of the Transaction

Upon closing of the Transaction, Earthstone’s Board and executive management will remain unchanged. Additionally, Earthstone will continue to be headquartered in The Woodlands, Texas.

Treatment of Equity Awards

The Transaction will not affect Earthstone’s outstanding equity awards. All such awards will remain outstanding subject to the same terms and conditions that are applicable prior to the Transaction.

Interests of Directors and Executive Officers in the Transaction

You should be aware that some of the directors and executive officers of Earthstone have interests in the Transaction that may be different from, or are in addition to, the interests of our stockholders generally, including without limitation, that the executive officers and directors of Earthstone have rights to indemnification and directors’ and officers’ liability insurance that will survive the closing of the Transaction.

Accounting Treatment of the Transaction

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Transaction will be 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 Transaction is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. The operating results of Chisholm will be consolidated in our financial statements beginning on the date of the closing of the Transaction. For combined financial information giving effect to the Transaction, see “Unaudited Pro Forma Condensed Combined Financial Information.”


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No Appraisal Rights

Earthstone’s stockholders do not have any rights to appraisal with respect to the Stock Issuance under Delaware law.

Conditions to Completion of the Transaction

The respective obligations of Earthstone, EEH and Chisholm to complete the Transaction are subject to the satisfaction of the following conditions:

•    all representations and warranties of each party contained in the Purchase Agreement must have been true and correct in all material respects as of the execution date, and must be true and correct in all material respects as of the closing date as if made on the closing date, other than any such representation and warranty that refers to a specified date, which need only be true and correct in all material respects on and as of such specified date. All of the fundamental representations of each party must have been true and correct, and must be true and correct as of the closing date as if made on the closing date, other than any such representation and warranty that refers to a specified date, which need only be true and correct in all material respects on and as of such specified date;
    
•    each party shall have performed and satisfied all covenants and agreements required by the Purchase Agreement to be performed and satisfied by each party at or prior to closing in all material respects;
    
•    no order shall have been entered by any court or governmental body that restrains or prohibits the consummation of the Transaction and that remains in effect at the time of closing;
    
•    any waiting period applicable to the consummation of the Transaction under the terms of the Purchase Agreement under the Hart–Scott–Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) shall have expired or been terminated;

•    each party shall have delivered or be ready, willing and able to deliver all of the deliverables they are required to deliver pursuant to the Purchase Agreement; and
    
•    this Information Statement shall have been mailed to Earthstone stockholders at least 20 days prior to the Closing Date.

For a more complete discussion of the conditions to the Transaction, see “The Purchase Agreement—Conditions to Completion of the Transaction.”

Timing of the Transaction

The Transaction is expected to be completed in the first quarter of 2022. However, it is possible that factors outside of each party’s control could require them to complete the Transaction at a later time or not to complete it at all.

Termination of the Purchase Agreement and Termination Fees

The Purchase Agreement may be terminated in any of the following ways:

•    by unanimous written consent of Earthstone, EEH, OpCo and Agent;

•    by either EEH or Chisholm if:

•    the closing has not occurred on or before March 17, 2022 (the “Outside Date”); provided that the Outside Date shall be extended until April 19, 2022 in the event the preliminary Information Statement is filed with the SEC on or before January 14, 2022 and the SEC has not cleared the Information Statement to be mailed to Earthstone stockholders by January 24, 2022;


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    •    a governmental body has issued an order, or taken any action permanently restraining, enjoining or otherwise prohibiting the consummation of the Transaction and such order, decree, ruling or other action has become final and nonappealable; and

•     the sum of (A) all title defect values asserted by EEH in good faith and without taking into account the aggregate defect deductible (less the sum of all title benefit values), plus (B) the aggregate environmental defect values asserted by EEH in good faith and without taking into account the aggregate defect deductible, plus (C) solely in the case of an election by EEH, the aggregate downward Purchase Price adjustments for preferential purchase rights, plus (D) the aggregate downward Purchase Price adjustments for consents not received, exceeds fifteen percent of the unadjusted Purchase Price.

•    by EEH, if Chisholm has committed a material breach of the Purchase Agreement and such breach causes any of the conditions to closing not to be satisfied (or, if prior to closing, such breach is of such a magnitude or effect that it will not be possible for such condition to be satisfied); provided, however, that in the case of a breach that is capable of being cured, Chisholm will have a period of ten business days following receipt of such written notice from EEH to Chisholm to attempt to cure the breach and the termination shall not become effective unless Chisholm fails to cure such Breach prior to the end of such ten business day period; provided, further, EEH shall not be entitled to terminate the Purchase Agreement if EEH or Earthstone is in material breach of the Purchase Agreement.

•    by Chisholm, if Earthstone or EEH has committed a material breach of the Purchase Agreement and such breach causes any of the conditions to closing not to be satisfied (or, if prior to closing, such breach is of such a magnitude or effect that it will not be possible for such condition to be satisfied); provided, however, that in the case of a breach that is capable of being cured, Earthstone or EEH shall have a period of ten business days following receipt of such written notice from Chisholm to EEH to attempt to cure the breach and the termination shall not become effective unless Earthstone and EEH fail to cure such breach prior to the end of such ten business day period; provided, further, Chisholm shall not be entitled to terminate the Purchase Agreement if Chisholm is in material breach of the Purchase Agreement.

The Purchase Agreement provides that, upon a termination of the Purchase Agreement under specified circumstances, the Company is required to pay a termination fee equal to $30.5 million to Chisholm. 

For a more detailed discussion of each party’s termination rights and the related termination fee, see “The Purchase Agreement—Termination of the Purchase Agreement.”

Chisholm Holdings Summary Historical Financial Data
    
Chisholm Holdings' consolidated statements of operations information for the years ended December 31, 2020 and 2019 and Chisholm Holdings' consolidated balance sheet information at December 31, 2020 and 2019 are derived from Chisholm Holdings' audited consolidated financial statements included in this Information Statement. Chisholm Holdings' consolidated statements of operations information for the nine months ended September 30, 2021 and Chisholm Holdings' consolidated balance sheet information at September 30, 2021 are derived from Chisholm Holdings' unaudited consolidated financial statements included in this Information Statement. This information is only a summary and should be read in conjunction with Chisholm

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Holdings' consolidated financial statements and related notes included in this Information Statement. See “Historical Consolidated Financial Statements of Chisholm Holdings” beginning on page F-1.

As of and for the
Year Ended December 31,
 As of and for the Nine Months Ended September 30,
202020192021
(in thousands)(unaudited)
Summary of Operations:
Total revenues$91,303 $124,910 $147,041 
Operating costs and expenses$48,009 $57,672 $51,722 
Depreciation, depletion, amortization and accretion$70,082 $65,280 $52,755 
Impairment expense$— $2,989 $114,907 
Net loss$(21,937)$(28,745)$(165,521)
Summary Balance Sheet Data at Period End:
Property, plant and equipment$727,777 $737,377 $610,000 
Total assets$789,989 $813,630 $661,357 
Credit facility$186,707 $183,960 $152,259 
Total equity$553,991 $575,191 $391,101 




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Summary Unaudited Pro Forma Condensed Combined Financial Information

The following summary unaudited pro forma condensed combined financial information has been derived from and should be read in conjunction with the historical consolidated financial statements and related notes of Earthstone and Chisholm for the periods presented and the unaudited pro forma condensed combined financial information and related notes provided under the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.” The information for the year ended December 31, 2020 also includes balance sheet and statements of operations data for Independence Resources Management, LLC (“Independence”) that was acquired by Earthstone on January 7, 2021, Tracker Resource Development III, LLC and TRD III Royalty Holdings (TX), LP (“Tracker”) that was acquired by Earthstone on July 20, 2021, and SEG-TRD LLC and SEG-TRD II LLC Properties (“Sequel”) that was also acquired by Earthstone on July 20, 2021. The unaudited pro forma condensed combined balance sheet information assumes the Transaction occurred on September 30, 2021. The unaudited pro forma condensed combined statements of operations information for the year ended December 31, 2020 and for the nine months ended September 30, 2021 gives effect to the Transaction as if it had occurred on January 1, 2020.

The summary unaudited pro forma condensed combined financial information does not purport to represent what the Company’s financial position or results of operations would have been had the Transaction been consummated on the assumed dates nor is it indicative of the Company’s future financial position or results of operations. The unaudited pro forma condensed combined financial information does not reflect future events that may occur after the Transaction, including, but not limited to, the anticipated realization of ongoing savings from operating efficiencies.
For the Year Ended
December 31, 2020
As of and for the Nine Months Ended September 30, 2021
(in thousands, except per share data)(unaudited)(unaudited)
Pro Forma Statement of Operations Data
Total revenues$378,662 $463,409 
Net income (loss)$32,858 $(28,341)
Net income (loss) attributable to noncontrolling interest$11,154 $(9,375)
Net income (loss) attributable to Earthstone Energy, Inc. common stockholders$21,704 $(18,966)
Net income (loss) per common share:
    Basic and diluted$0.32 $(0.29)
Pro Forma Balance Sheet Data
Total assets$2,038,454 
Long-term debt$618,253 
Total Earthstone Energy, Inc. stockholders’ equity$685,066 
Equity attributable to noncontrolling interest$458,614 
Total equity$1,143,680 


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Historical and Unaudited Pro Forma Condensed Combined Per Share Information

The following table sets forth certain historical net income (loss) per share of Earthstone and per share book value information on an unaudited pro forma condensed combined basis after giving effect to the Transaction.

Historical per share data of Earthstone for the year ended December 31, 2020 and as of and for the nine months ended September 30, 2021 was derived from Earthstone’s historical financial statements as of and for the respective periods. The information includes the acquisition of Independence by Earthstone on January 7, 2021 and the acquisitions of the assets of Tracker and Sequel on July 20, 2021. This information should be read together with the consolidated financial statements and related notes of Earthstone that are incorporated by reference into this Information Statement. See “Where You Can Find More Information.”

Unaudited pro forma condensed combined net income (loss) per share from continuing operations for the year ended December 31, 2020 and for the nine months ended September 30, 2021, as well as the book value per share of Class A Common Stock as of September 30, 2021, were derived and should be read in conjunction with the unaudited pro forma condensed combined financial data included under “Unaudited Pro Forma Condensed Combined Financial Information.” The pro forma net income (loss) per share from continuing operations is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the Transaction been completed on January 1, 2020. The pro forma book value per share of Class A Common Stock is presented for illustrative purposes only and is not necessarily indicative of the financial position that would have occurred had the Transaction been completed on September 30, 2021. Shares of Class B Common Stock have been excluded from the calculation of amounts presented herein as they hold no share in Earthstone’s earnings or equity. The Class B Common Stock share of such amounts are included in Noncontrolling interest in Earthstone’s Consolidated Balance Sheet and Net (loss) income attributable to noncontrolling interest in the Earthstone’s Consolidated Statements of Operations.
As of and for the Year Ended December 31, 2020As of and for the Nine Months Ended September 30, 2021
Earthstone — Historical
Net loss per common share attributable to Earthstone Energy, Inc.:
Basic and diluted$(0.45)$(0.09)
Book value per share of Class A Common Stock$11.37 $9.69 
Unaudited Pro Forma Condensed Combined Amounts
Net loss per common share attributable to Earthstone Energy, Inc.:
Basic and diluted$0.32 $(0.29)
Book value per share of Class A Common Stock (1)
$9.77 
(1)    Computed by dividing total Earthstone Energy, Inc. equity by the number of issued and outstanding shares of Class A Common Stock as of September 30, 2021, adjusted to include the estimated number of shares of Class A Common Stock to be issued in the Transaction.







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Summary Historical and Combined Reserve and Production Data

The following table sets forth information with respect to the historical and combined estimated oil, natural gas and NGL reserves as of December 31, 2020 for Earthstone, Independence, Tracker, Sequel and Chisholm. The Earthstone reserve data presented below was derived from the independent engineering report of Cawley, Gillespie & Associates, Inc. (“CG&A”), Earthstone’s independent reserve engineer. The Independence reserve information was prepared by Earthstone management. The reserve information of Tracker and Sequel was prepared by Tracker management and Sequel management, respectively. The reserve information of Chisholm was prepared by Chisholm management. Future exploration, exploitation and development expenditures, as well as future commodity prices and service costs, will affect the quantity of reserve volumes. The reserve estimates shown below were determined using the unweighted arithmetic average of the first day of the month price for each of the preceding 12 months for oil, natural gas and NGLs for the year ended December 31, 2020 for Earthstone, Independence, Tracker, Sequel and Chisholm.
 As of December 31, 2020
Earthstone
Historical (1)
Independence Historical (2)
Tracker
Historical
Sequel
Historical
Chisholm
Historical
Combined
Estimated Proved Developed Reserves:
  Oil (MBbl)18,876 13,713 1,673 1,398 12,024 47,684 
  Natural Gas (MMcf)55,752 49,157 24,237 15,186 41,779 186,111 
  Natural Gas Liquids (MBbl)10,123 — 4,009 2,491 — 16,623 
     Total (MBOE) (3)
38,291 21,906 9,721 6,419 18,987 95,324 
Estimated Proved Undeveloped Reserves:
  Oil (MBbl)21,212 19,993 10,641 — 12,262 64,108 
  Natural Gas (MMcf)55,450 31,368 97,386 — 22,475 206,679 
  Natural Gas Liquids (MBbl)10,123 — 16,598 — — 26,721 
     Total (MBOE) (3)
40,577 25,221 43,470 — 16,008 125,276 
Estimated Proved Reserves:
  Oil (MBbl)40,088 33,706 12,314 1,398 24,286 111,792 
  Natural Gas (MMcf)111,202 80,525 121,623 15,186 64,254 392,790 
  Natural Gas Liquids (MBbl)20,246 — 20,607 2,491 — 43,344 
     Total (MBOE) (3)
78,868 47,127 53,192 6,419 34,995 220,601 
(1)    As of December 31, 2020, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 41.5% of the estimated proved reserves, as adjusted for the impact of the Transaction and the acquisition of Independence, Tracker assets and Sequel assets.
(2)    The historical results of Independence are presented with natural gas and natural gas liquids combined within Natural Gas (MMcf).
(3)    Assumes a ratio of 6 Mcf of natural gas per Boe.

The following table sets forth summary information with respect to historical and combined oil, natural gas and natural gas liquids production for the year ended December 31, 2020 for Earthstone, Independence, Tracker, Sequel and Chisholm. The Earthstone oil, natural gas and NGL production data presented below was derived from Earthstone’s Annual Report on Form 10-K for the year ended December 31, 2020, which is incorporated by reference in this Information Statement. The Independence oil and natural gas production data presented below was derived by Earthstone management from Independence's internal management reports. The Tracker oil, natural gas and NGL production data presented below was derived from Tracker management’s internal reports. The Sequel oil, natural gas and NGL production data presented below was derived from Sequel management’s internal reports. The Chisholm oil, natural gas and NGL production data presented below was derived from Chisholm management’s internal reports.


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 Year Ended December 31, 2020
 Earthstone Historical
Independence Historical (1)
Tracker HistoricalSequel
Historical
Chisholm HistoricalCombined
Oil (MBbl)3,180 1,993 440 665 2,276 8,554 
Natural Gas (MMcf)7,282 4,769 3,089 3,645 7,350 26,135 
Natural Gas Liquids (MBbl)1,198 — 495 589 55 2,337 
     Total (MBOE) (2)
5,592 2,788 1,449 1,862 3,556 15,247 
(1)    The historical results of Independence are presented with natural gas and natural gas liquids combined within Natural Gas (MMcf).
(2)    Assumes a ratio of 6 Mcf of natural gas per Boe.

The following table sets forth summary information with respect to historical and combined oil, natural gas and NGL production for the nine months ended September 30, 2021 for Earthstone, Independence, Tracker, Sequel and Chisholm. The Earthstone oil, natural gas and NGL production data presented below was derived from Earthstone’s Quarterly Report on Form 10-Q for the period ended September 30, 2021, which is incorporated by reference in this Information Statement. The Independence oil and natural gas production data presented below was derived by Earthstone management from Independence's internal management reports. The Tracker oil, natural gas and NGL production data presented below was derived from Tracker management’s internal reports through June 30, 2021 and Earthstone’s internal reports for the period July 1, 2021 through July 19, 2021. The Sequel oil, natural gas and NGL production data presented below was derived from Sequel management’s internal reports. The Chisholm oil, natural gas and NGL production data presented below was derived from Chisholm management’s internal reports.
 Nine Months Ended September 30, 2021
 Earthstone
Historical
Independence Historical (1)
Tracker
Historical (2)
Sequel
Historical (2)
Chisholm
Historical
Combined
Oil (MBbl)3,195 28 123 165 1,887 5,398 
Natural Gas (MMcf)9,490 52 1,686 2,014 4,601 17,843 
Natural Gas Liquids (MBbl)1,497 10 210 245 586 2,548 
Total (MBOE) (3)
6,273 47 614 746 3,240 10,920 
(1)    Based on the pro rata allocation of 6 days of January 2021 production from internal reports.
(2)    Includes the pro rata allocation of 19 days of July 2021 production from internal reports.
(3)    Assumes a ratio of 6 Mcf of natural gas per Boe.

Common Stock and Dividend Information

The closing price of our Class A Common Stock reported on the NYSE on January [•], 2022 was $[•] per share. On January 10, 2022, we had 53,476,307 issued and outstanding shares of Class A Common Stock, which were held by approximately 1,800 holders of record and 13 holders of record of our Class B Common Stock. Holders of record do not include owners for whom Class A Common Stock may be held in “street” name.

We have never declared or paid any cash dividends on our Class A Common Stock or our Class B Common Stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate declaring or paying any cash dividends on our Class A Common Stock in the foreseeable future. Any future determination as to the declaration and payment of dividends will be at the discretion of our Board and will depend on then-existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors that our Board considers relevant. In addition, our existing revolving credit agreement places restrictions on our ability to pay cash dividends on our Class A Common Stock and our Class B Common Stock.


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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Any statements in this Information Statement regarding the Transaction, the expected timetable for completing the proposed Transaction, future financial and operating results, future capital structure and liquidity, benefits and synergies of the proposed Transaction, future opportunities for the Company, general business outlook and any other statements about the future expectations, beliefs, goals, plans or prospects of the Board or management of Earthstone constitute “forward-looking statements” within the meaning of the Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are not strictly historical statements constitute forward-looking statements and may often, but not always, be identified by the use of such words such as “expects,” “believes,” “intends,” “anticipates,” “plans,” “forecasts,” “projects,” “objective,” “estimates,” “potential,” “possible,” or “probable” or statements that certain actions, events or results “may,” “will,” “should,” or “could” be taken, occur or be achieved. The forward-looking statements include statements about the expected benefits of the proposed Transaction to Earthstone and its stockholders, the anticipated completion of the proposed Transaction or the timing thereof, the expected future reserves, production, financial position, business strategy, revenues, earnings, costs, capital expenditures and debt levels of the Company, and plans and objectives of management for future operations. Forward-looking statements are based on current expectations and assumptions and analyses made by Earthstone and its management in light of experience and perception of historical trends, current conditions and expected future developments, as well as other factors appropriate under the circumstances. Forward-looking statements may include statements about:

•    risks and uncertainties relating to the Transaction, including the possibility that the Transaction does not close when expected or at all because conditions to closing are not satisfied on a timely basis or at all;

•    the possibility that the anticipated benefits of the Transaction are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the Assets with those of the Company;

•    our ability to meet our substantial debt servicing requirements if the Transaction is closed;

•    the possibility that the Transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

•    business strategy;

•    oil, natural gas and NGL reserves;

•    development drilling locations, inventories, projects and programs;

•    our ability to replace the reserves that we produce through drilling and property acquisitions;

•    financial strategy, liquidity and capital required for our development program and other capital expenditures;

•    realized oil and natural gas prices;

•    timing and amount of future production of oil, natural gas and NGLs;

•    our hedging and strategy results;

•    availability of pipeline connections and transportation facilities on economic terms;

•    competition, government regulations and political developments;


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•    our ability to obtain permits and governmental approvals;

•    legal, governmental regulatory and environmental matters;

•    the markets for and our marketing of oil, natural gas and NGLs;

•    asset, leasehold or business acquisitions on desired terms;

•    costs of developing properties;

•    general economic conditions;

•    credit markets and interest rates;

•    impact of new accounting pronouncements on earnings in future periods;

•    estimates of future income taxes and income tax rates;

•    our estimates and forecasts of the timing, number, profitability and other results of wells we expect to drill and other oil and natural gas activities;

•    uncertainty regarding our future operating results and our future revenues and expenses;

•    plans, objectives, expectations and intentions contained in this Information Statement that are not historical;

•    the duration, spread and severity of the COVID-19 pandemic, including the effect of the COVID-19 pandemic on global oil demand and oil price volatility; and

•    the other factors and financial, operational and legal risks or uncertainties described in Earthstone’s public filings with the SEC, including its Annual Report on Form 10-K and as amended by Form 10-K/A for the year ended December 31, 2020 and subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC.

We disclaim any intention or obligation to update or revise any forward-looking statements as a result of developments occurring after the date of this document except as required by law. We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, failure to find, acquire or gain access to other discoveries and prospects or to successfully develop and produce from our current discoveries and prospects, geologic risk, drilling and other operating risks, well control risk, regulatory changes, the uncertainty inherent in estimating reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures and the other risks discussed in the section entitled “Risk Factors” in Earthstone’s filings with the SEC.

Reserve engineering is a process of estimating underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers or other qualified estimators. In addition, the results of drilling, testing and production activities may justify upward or downward revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil, natural gas and NGLs that are ultimately recovered.

Should one or more of the risks or uncertainties described herein occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All

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forward-looking statements, expressed or implied, included in this Information Statement are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All forward-looking statements speak only as of the date of this Information Statement. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Information Statement.


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THE TRANSACTION

THE PARTIES

Earthstone Energy, Inc.

Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and with its consolidated subsidiaries, the “Company,” “we,” “us” and “our”), is a growth-oriented independent oil and natural gas development and production company. In addition, the Company is active in corporate mergers and the acquisition of oil and natural gas properties that have production and future development opportunities. The Company's operations are all in the upstream segment of the oil and natural gas industry and all its properties are onshore in the United States. Our assets are located primarily in the Midland Basin of west Texas and to a lesser extent, in the Eagle Ford Trend of south Texas. Our Class A Common Stock is listed on the NYSE under the trading symbol “ESTE.” Earthstone’s principal offices are located at 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380, and its telephone number is (281) 298-4246.

Earthstone is the sole managing member of EEH with a controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Corp. and Lynden Corp.’s wholly-owned consolidated subsidiary, Lynden US, and also a member of EEH, consolidates the financial results of EEH and records a noncontrolling interest in the consolidated financial statements representing the economic interests of EEH’s members other than Earthstone and Lynden US.

Earthstone Energy Holdings, LLC

Earthstone Energy Holdings, LLC, a Delaware limited liability company and a subsidiary of Earthstone (“EEH”), was formed on November 4, 2016 and is a holding company of operating subsidiaries that owns and operates our assets and will own and operate the Assets after the closing of the Transaction. EEH’s principal executive offices are located at 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380, and its telephone number is (281) 298-4246.

Chisholm Energy Operating, LLC
Chisholm Energy Agent, Inc.

Chisholm Energy Operating, LLC, a Delaware limited liability company (“OpCo”), was formed on November 18, 2016. Chisholm Energy Agent, Inc., a Delaware corporation (“Agent” and collectively with OpCo, “Chisholm”), was formed on November 18, 2016. Chisholm Energy Holdings, LLC, a Delaware limited liability company (“Chisholm Holdings”), was formed on May 19, 2016. OpCo and Agent are wholly-owned subsidiaries of Chisholm Holdings. The majority owners of Chisholm Holdings are certain investment funds affiliated with Warburg Pincus, LLC (“Warburg”). The remaining ownership of Chisholm Holdings consists of investment funds associated with the Ontario Teachers’ Pension Plan (“OTPP”) and current and former members of management of Chisholm Holdings. OpCo and Agent were formed to hold oil and gas assets, including the Assets. OpCo’s, Agent’s and Chisholm Holdings’ principal executive offices are located at 801 Cherry Street, Suite 1200, Unit 20, Fort Worth, Texas 76102, and their telephone number is (817) 953-6063.

SUMMARY OF THE TRANSACTION

General

On December 15, 2021, Earthstone, EEH and Chisholm entered into a purchase and sale agreement (the “Purchase Agreement”), which provides that EEH will acquire (the “Transaction”) interests in oil and gas leases and related properties of Chisholm located in Lea County and Eddy County, New Mexico (the “Assets”), for a purchase price (the “Purchase Price”) consisting of $410 million in cash and 19,417,476 shares of Class A Common Stock. The cash portion of the Purchase Price is subject to customary purchase price adjustments with an effective date of November 1, 2021 and is payable as follows: (i) $340 million at the closing of the Transaction, (ii) $40 million six months after the closing of the Transaction, and (iii) $30 million twelve months after the closing of the Transaction.


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Background of the Transaction

Earthstone is actively involved in acquisition, development and production of oil and natural gas properties throughout the Permian Basin and Texas and the Eagle Ford play. It conducts on-going reviews of oil and natural gas activities in each area based on publicly available data and where available, company-specific data, to assess relative drilling economics and identify acquisition opportunities. Acquisitions, as an important component of Earthstone’s growth, reflect its stated strategy of consolidating geographically compatible oil and gas assets to achieve scale. The Company’s active involvement in its growth strategy is evidenced by the four acquisitions it closed in 2021 across the Permian and Eagle Ford plays. As part of its overall strategy, Earthstone’s management maintains a regular and ongoing dialogue and conducts meetings with numerous investment bankers, institutional investors, private equity firms and industry entities to source potential transactions and/or capital, to further its goal of maximizing Earthstone’s stockholder value. Mr. Anderson, President and Chief Executive Officer of Earthstone, regularly keeps the Board apprised of the substance of these contacts, informs it of current market conditions and trends in various aspects of the oil and natural gas business, and summarizes recent transactions and prices being paid for reserves, production, acreage, and operating companies. Specifically, Earthstone management has devoted significant time and resources to evaluating and reviewing opportunities with operators, including Chisholm, and their financial sponsors in the Delaware Basin (a sub-basin located within the Permian Basin covering parts of New Mexico and Texas) and particularly Eddy and Lea Counties, New Mexico.

In August 2021, representatives of Jefferies LLC (“Jefferies”) reviewed with Earthstone management potential public and private sellers of assets located in the Permian Basin, in their routine discussions with Earthstone management, in order to determine Earthstone's interest level and focus area of acquisition opportunities. Several of the sellers discussed with Jefferies, including Chisholm, were expected to undertake divestiture processes that Jefferies or other advisors would be marketing while other companies were potential future sellers. During the year, the Company participated in several sale processes for oil and natural gas properties in which Jefferies was the advisor to the seller. This included the previously acquired Tracker assets (located in the Midland Basin) that the Company acquired in July 2021. It also included a process for assets located in the Delaware Basin owned by a private seller in which the Company was not successful in acquiring. As oil and natural gas prices improved during the 2021, additional assets became available allowing the Company to continue evaluations in pursuit of its growth strategy.

In September 2021, Jefferies emailed Earthstone with an opportunity overview of the Assets. Jefferies had been engaged by Chisholm as its exclusive advisor (prior to September) to run a formal marketing process to sell the Assets through competitive bids. The highlights of the Assets as described in the Jefferies materials were generally as follows:

Approximately 36,000 net acres in Lea and Eddy counties, New Mexico
Approximately 92% operated; approximately 86% held-by-production; average 8/8ths net revenue interest of approximately 80%
Current production of approximately 13 MBoe/d (approximately 80% liquids)
Approximately 500 remaining core gross operated drilling locations (approximately 75% in Lea County) with an average lateral length of approximately 8,000 ft
68 drilling permits approved with greater than 50 in process

The opportunity overview indicated that the majority owners of Chisholm were certain investment funds affiliated with Warburg and the Warburg Funds also own approximately 15% of the outstanding voting power of Earthstone and one of Warburg’s Managing Directors, Mr. Habachy, is a member of the Board.

After executing a confidentiality agreement on September 14, 2021, the Company gained access to a virtual data room that contained confidential materials related to the Assets and operations of Chisholm. At that time, the Company began to work with Wells Fargo Securities to act as its financial advisor in connection with its evaluation of the Chisholm opportunity. Wells Fargo Securities was chosen to assist the Company due to its familiarity with the area of the Assets and with Earthstone (as its lead lender on its reserve-based credit facility) and Wells Fargo Securities had assisted the Company with several other potential transactions in the past (which had not been consummated).

On September 22, 2021, Jefferies and Chisholm management representatives hosted a web-based presentation of the Assets for Earthstone, attended by Earthstone management and technical and financial personnel. The presentation by Jefferies

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and Chisholm addressed the Assets and Chisholm’s business. Throughout the presentation, Earthstone management asked questions regarding the Assets, operations, cost structure, land and permitting with follow-up questions to be sent to Jefferies. Upon conclusion of the meeting, the Company determined that it would pursue the purchase of the Assets as they furthered the strategic goals of the Company, namely growth through increasing the size and scale of the Company, good drilling economics on the identified locations, de-risked locations due to geologic control in the area, ability to finance the proposed acquisition due to significant cash flow, and ability to maintain debt to Adjusted EBITDAX levels consistent with the Company’s parameters.

On September 28, 2021, Mr. Anderson sent an email to the members of the Audit Committee, informing the Audit Committee of a potential related party transaction. Board member Mr. Habachy was also included on the email to notify Audit Committee members that the Company would likely pursue bidding on the Assets and that all future communication would exclude Mr. Habachy. Board members affiliated with EnCap were excluded from this email because of the multiple portfolio companies EnCap has with assets in the Delaware Basin and the possibility that one of these EnCap portfolio companies might also be considering the Chisholm opportunity. The email highlighted summary information about Chisholm and indicated that Earthstone had signed a confidentiality agreement to further evaluate the potential opportunity.

On October 15, 2021, Mr. Guy Oliphint and Mr. Greg Chitty of Jefferies contacted Mr. Anderson and Mark Lumpkin, Jr., Executive Vice President and Chief Financial Officer of Earthstone, to discuss further the Assets and acquisition process timing. After a discussion, Jefferies confirmed that the initial third-party bids regarding the sale of the Assets would be due on October 28, 2021, with an October 1, 2021, effective date for the transaction. A follow-up call between Jefferies and the Company took place on October 26, 2021, to determine if the Company planned to participate in the bidding process, at which time the Company indicated that it would submit a bid subject to approval by the Audit Committee.

During the month of October 2021, the Company and Wells Fargo Securities held multiple meetings and conference calls discussing the Assets. These calls covered both technical matters and financing discussions. Additional data was requested from Jefferies multiple times throughout the process as the Company continued its due diligence related to the Assets.

On October 28, 2021, the Audit Committee held a meeting with management members and other Board members (not including Mr. Habachy) in order to discuss the Chisholm opportunity and potential bid strategies. Prior to the meeting, Mr. Anderson sent materials which included a detailed technical review and financial information as well as a discussion of the merits of the proposed Transaction. EnCap informed the Company, prior to the meeting, that it had no affiliates that would be continuing to participate in the bidding for Chisholm, and accordingly the Board members affiliated with EnCap were invited to attend the meeting. After a discussion of the Chisholm opportunity, the Audit Committee authorized management to submit a proposal of up to $650 million for the Assets, approximately 50% in cash and 50% in Class A Common Stock. Later that day management presented an initial non-binding proposal to Jefferies for the Company to acquire the Assets for $580 million consisting of $330 million in cash and $250 million of Class A Common Stock with an effective date of October 1, 2021. The effective date in an oil and gas transaction is usually a date prior to closing during which all oil and gas revenues and expenses are determined and an adjustment, upward or downward, made to the agreed upon purchase price.

On November 1, 2021, Jefferies contacted Mr. Anderson to advise the Company that none of the proposals it had received were sufficient to move forward. Jefferies further notified the Company it was seeking revised proposals from a small group of participants, including the Company, with best and final bids due November 5, 2021. It was requested that any such proposal also include a mark-up of the Purchase Agreement available through the Chisholm data room. Jefferies advised that additional operational updates would be provided to the Company and any other questions from the Company regarding the Assets would be answered on a timely basis.

On November 4, 2021, the Audit Committee held a meeting to discuss submission of a final proposal. All members of the Board, other than Mr. Habachy, were also in attendance. The Audit Committee reviewed the initial $580 million proposal submitted by management, management’s recommendation that the price be increased to approximately $600 million, that the technical and financial analysis of the Assets had not changed since the previous meeting, and that the Audit Committee had previously authorized management to submit a bid of up to $650 million. After further discussion, the Audit Committee authorized management to submit a revised bid of approximately $600 million with authority to increase it to up to $650 million, if necessary, approximately half to be paid in cash and the balance in Class A Common Stock. The Audit Committee also authorized management to adjust the cash/stock portions of the final consideration if requested, keeping it within the Company’s borrowing

22


capacity, and to change the effective date as long as it did not result in a purchase price above $650 million with the understanding that the final purchase price and the cash and stock split would be subject to final approval of the Audit Committee and the Board.

On November 5, 2021, management provided an updated proposal to Jefferies with total consideration for the Assets of $600 million with $330 million in cash and $270 million in Class A Common Stock with an effective date of October 1, 2021. This proposal also included a mark-up of the Purchase Agreement, subject to further review and approval by the Audit Committee and the full Board. The mark-up of the Purchase Agreement indicated that, in addition to any vote required by law and the NYSE, the Stock Issuance would require approval by the holders of a majority of the outstanding voting power of the Company not held by Warburg Funds or executive management.

On November 12, 2021, Jefferies contacted Mr. Anderson to advise the Company that Chisholm would be willing to move forward with the Company on the following terms: $600 million in total consideration with $350 million cash at closing, $50 million cash deferred payment, $200 million of Class A Common Stock and a January 1, 2022 effective date. Mr. Anderson asked for some additional information to assess operating cash flows between the effective date and proposed closing date with a focus on capital expenditures.

After receipt and evaluation of that information, and after further discussions with management and members of the Audit Committee, on November 16, 2021, Mr. Anderson responded to Jefferies that the Company would be willing to adjust its proposal as follows: $600 million in total consideration with $350 million cash at closing, $50 million cash deferred payment, $200 million of Class A Common Stock and a November 1, 2021 effective date. Mr. Anderson indicated that this was as much cash consideration as the Company could offer given the internal targets the Company was using for leverage ratios under its credit facility.

On November 17, 2021, Jefferies contacted Mr. Anderson to advise the Company that Chisholm needed additional cash consideration in order to meet certain liabilities or it would retain the Assets and that a November 1, 2021 effective date would leave it cash short, so that the cash consideration needed to increase by $10 million. After further discussion and analysis of the Company’s leverage ratios, and after discussion with the members of the Audit Committee, on November 17, 2021, the Company determined it would make a last, best and final proposal of $610 million in total consideration, with $350 million cash at closing, $60 million cash deferred payment, $200 million of Class A Common Stock and a November 1, 2021 effective date. This proposal was communicated to Jefferies on November 17, 2021, and later in the day on November 17th, Jefferies indicated that Chisholm had accepted this proposal.

On November 23, 2021, the Company received a draft of the Purchase Agreement from Chisholm’s counsel based on the markup provided to Chisholm by Earthstone on November 5, 2021. As part of the markup, Chisholm added requirements that the $60 million deferred cash be treated as an unsecured note among other business and legal points. Earthstone and its legal advisors discussed the various aspects of the Purchase Agreement on multiple occasions over the following weeks including the deferred cash payment and security related to such payment. Under the Company’s credit facility, this additional unsecured debt would have been a restricted payment. The Company and Chisholm ultimately agreed that the deferred cash would not be treated as unsecured notes and would be paid in increments of six and twelve months after closing.

On November 23, 2021, the Audit Committee held a meeting with representatives of Company management for Wells Fargo Securities to review certain financial information and other aspects relating to a potential Chisholm transaction.

Between November 23rd and December 15th, the parties negotiated the Purchase Agreement and associated agreements including an Amended and Restated Voting Agreement by EnCap and the Warburg Funds, form of Lock-up Agreement between the Company and Chisholm and the form of Registration Rights Agreement. On December 14th, Company management and Chisholm held a call to discuss open items regarding the Purchase Agreement, form of Lock-up Agreement and form of Registration Rights Agreement. Management also discussed setting the stock price to be used in calculating the number of shares to be issued as part of the consideration. Management also discussed the volatility with oil prices since the terms were agreed. While keeping the total consideration unchanged, Earthstone requested that an additional $10 million of cash be included in the deferred cash consideration such that cash at closing would be $340 million with $70 million deferred and $200 million in stock. Later that day, Chisholm agreed to the final share number and the increase to deferred cash. After multiple conference calls among

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all parties, the Purchase Agreement and associated agreements were agreed upon subject to final approval by both the Audit Committee and the Board.

On December 14, 2021, the Audit Committee held a meeting with representatives of Wells Fargo Securities and Company management in attendance for Wells Fargo Securities to review its preliminary financial analysis with respect to the Transaction. The Audit Committee invited management to attend the call to answer any questions that could give rise to updates on Earthstone or the Transaction.

On December 15, 2021, the Audit Committee held a telephonic meeting to consider the Purchase Agreement. Counsel to the Company discussed with the Audit Committee the terms of the Purchase Agreement, including, without limitation, the consideration to be paid by the Company, the representations and warranties being made by both parties, the operating and other covenants, the conditions to closing, including the requirement that the Purchase Agreement be approved by the holders of a majority of the outstanding voting power of Earthstone not held by the Warburg Funds and executive management of Earthstone, the termination rights and obligations of the parties. At the request of the Audit Committee, on December 15, 2021, Wells Fargo Securities then reviewed its financial analyses relating to the Transaction and rendered its oral opinion (which was later confirmed in writing by a written opinion addressed to the Audit Committee dated the same date) to the effect that, as of December 15, 2021 and subject to the assumptions made, procedures followed, matters considered and other limitations considered in connection with the preparation of the opinion, the Aggregate Consideration (as defined below) to be issued and paid by Earthstone and EEH in the Transaction was fair, from a financial point of view, to Earthstone. Following further discussion regarding the Transaction and a discussion regarding the fiduciary duties of the Audit Committee, the Audit Committee unanimously (i) determined that the Transaction is fair to, and in the best interests of, Earthstone and its stockholders, (ii) approved and declared advisable the Purchase Agreement and the ancillary agreements and documents appended thereto and each of the transactions contemplated therein, including the Stock Issuance, and (iii) recommended that the Board approve the Purchase Agreement, the Transaction and the Stock Issuance, and that the approval of the Stock Issuance be submitted to Earthstone’s stockholders for approval in accordance with the terms of the Purchase Agreement and the rules of the NYSE. Following the meeting, the full Board met telephonically and received the recommendation by the Audit Committee that it approve the Transaction, the Stock Issuance and the Purchase Agreement. Following discussion, the Board unanimously approved the Transaction, the Stock Issuance, the Purchase Agreement (including the execution, delivery and performance thereof), the associated agreements, including the Voting Agreement, the form of Lock-up Agreement, the form of Chisholm Registration Rights Agreement and recommended approval of the Stock Issuance by the Earthstone stockholders.

Thereafter, the Purchase Agreement, along with all associated agreements and documents, were executed and delivered by the parties to the Transaction, and certain entities controlled or affiliated with EnCap Investments L.P. (collectively, the “EnCap Funds”) and certain of the Warburg Funds (together with the EnCap Funds, the “Consenting Stockholders”) delivered the Written Consent approving the Stock Issuance to Earthstone.

On December 16, 2021, Earthstone issued a press release announcing the proposed Transaction.

Recommendation of the Audit Committee and the Board of Directors and their Reasons for the Transaction

The Audit Committee and the Board determined that the Purchase Agreement and the transactions contemplated thereby, including the Transaction and the Stock Issuance, are fair to, advisable and in the best interests of, Earthstone and its stockholders. Specifically, the Audit Committee and the Board unanimously adopted resolutions determining and declaring that the Purchase Agreement and the transactions contemplated thereby, including the Transaction and the Stock Issuance, are fair to, advisable and in the best interests of Earthstone and its stockholders.

The Audit Committee and the Board considered a variety of factors in determining its recommendation, including without limitation the following material factors:
the Audit Committee, assisted by its legal and financial advisors, and management, was active in each phase of the negotiations and the decision making process leading to the Purchase Agreement;
the opinion dated December 15, 2021 of Wells Fargo Securities to the effect that, as of such date and subject to the assumptions made, procedures followed, matters considered and other limitations considered in connection

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with the preparation thereof, the Aggregate Consideration (as defined below) to be issued and paid by Earthstone and EEH in the Transaction was fair to Earthstone from a financial point of view;
Chisholm has a well-established and high-quality asset base that includes:
Approximately 36,000 net acres in Lea and Eddy counties, New Mexico
Approximately 92% operated; approximately 86% held-by-production; average 8/8ths net revenue interest of approximately 80%
Current production of approximately 13 MBoe/d (approximately 80% liquids)
Approximately 414 remaining core gross operated drilling locations (approximately 75% in Lea County) with an average lateral length of approximately 8,000 ft
65 drilling permits approved by federal and state regulatory authorities with more than 50 in process
the Audit Committee and Board’s belief that the assets available in the Transaction were complementary to those already held by the Company and could be acquired at an attractive price relative to other potential opportunities in the market;
the Audit Committee and the Board’s belief that the Transaction will be a complementary step in the Company’s growth strategy;
the potential to realize operational synergies and efficiencies from the increased scale of operations from acquiring the Assets;
the Audit Committee and the Board’s belief that our post-acquisition market capitalization should enhance our access to debt and equity capital markets on more favorable terms; and
current industry, economic and market conditions, and the present and anticipated environment in the independent upstream sector of the oil and gas industry suggest that attractive potential acquisition and development opportunities will arise in the sector for companies, like the Company, that are able to achieve superior operating efficiencies and are sufficiently capitalized to operate in the current commodity price environment and its volatility from time to time.

The Audit Committee and the Board considered other information and a number of additional factors in reaching their decisions including:
the results of business, legal and financial due diligence investigations of the Assets conducted by our management in consultation with our advisors, and the nature and extent of the representations made by Chisholm in the Purchase Agreement;
the recommendation of our management in favor of the Transaction;
the relative attractiveness of the Assets to other oil and gas assets currently being marketed by third parties in the Company’s geographic operating area; and
the terms of the Purchase Agreement, including the obligations and rights of the parties under the Purchase Agreement, the conditions to each parties’ obligation to complete the Purchase Agreement, the circumstances in which each party is permitted to terminate such agreement, and the related termination fee payable by us in the event of termination of the Purchase Agreement under special circumstances.

The Audit Committee and the Board also considered, and balanced against the potentially positive aspects of the Transaction, the following material potential risks and other negative factors in connection with its deliberations:
the risks relating to the announcement and pendency of the Transaction and the risks and costs to us if the completion of the Transaction is not timely, or does not occur at all, which may be for reasons beyond our control, including the potential impact on the relationships between us and our employees, industry partners,

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service providers and other third parties, as well as the potential impact on the public trading prices of our Class A Common Stock;
the level of obligations and servicing of such obligations related to incremental debt incurred in connection with the Transaction;
a decrease in oil or natural gas prices resulting in the Assets being less desirable from a financial point of view;
the risk that management focus, employee attention and resources available for other strategic opportunities could be diverted for an extended period of time while the parties work to complete the Transaction and the integration process;
the challenges inherent in the integration of the Assets, including the attendant risks that the anticipated production and operational synergies and other benefits sought to be obtained from the Transaction might not be achieved in the time frame contemplated by us if at all; and
the risks inherent in our and Chisholm’s business and operations, including those identified in our SEC filings, which include the matters described under “Cautionary Statement Concerning Forward-Looking Statements.”

This discussion of the information and factors considered by our Audit Committee and our Board in reaching their decision and recommendation includes certain of the material factors considered by the Audit Committee and the Board, but is not intended to be exhaustive and may not include all of the factors considered by each member of the Audit Committee or the Board. In view of the wide variety of factors considered in connection with their evaluation of the Transaction and the complexity of these matters, the Audit Committee and the Board did not consider it practical, nor did they attempt, to quantify, rank or otherwise assign relative weights to the different factors they considered in reaching their decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to their ultimate determination. Rather, the Audit Committee and the Board viewed their decision as being based on the totality of the information presented to them and the factors they considered, particularly, in the case of the Board, the recommendation of the Audit Committee, its discussion with, and the questioning of, members of management and its outside financial and legal advisors. In addition, individual members of the Audit Committee and the Board may have given different weight to different factors.

In considering the recommendation of our Audit Committee and our Board that the stockholders approve the Stock Issuance, the directors and executive officers of Earthstone may have certain interests in the Transaction that may be different from, or in addition to, the interests of Earthstone stockholders generally. Our Audit Committee and our Board were aware of these interests and considered them when approving the Purchase Agreement and recommending that stockholders vote to approve the Stock Issuance, which are described in the section entitled “The Transaction—Interests of Our Directors and Executive Officers in the Transaction.”

The foregoing discussion of the information and factors considered by the Audit Committee and the Board is forward-looking in nature and should be read in light of the factors described in the section entitled “Cautionary Statement Concerning Forward-Looking Statements.”

Required Approval of the Stock Issuance and Action by Stockholder Consent
    
On December 15, 2021, the Consenting Stockholders delivered to Earthstone an irrevocable written consent (the “Written Consent”) in lieu of a special meeting of stockholders of Earthstone approving the Stock Issuance. As of December 15, 2021, the Consenting Stockholders held shares of Common Stock representing approximately 55.4% of the voting power of all outstanding shares of Common Stock. In addition, the EnCap Funds holding 56.1% of the voting power of all outstanding shares of Common Stock other than shares held by the Warburg Funds and executive management of Earthstone (the “Disinterested Shares”) approved the Stock Issuance. Accordingly, approval of the Stock Issuance by Earthstone’s stockholders was effected in accordance with the Third Amended and Restated Certificate of Incorporation of Earthstone, as amended (the “Certificate of Incorporation”), the Amended and Restated Bylaws of Earthstone, as amended (the “Bylaws”), the General Corporation Law of the State of Delaware (the “DGCL”), the Purchase Agreement and the NYSE rules and regulations. No further approval of the stockholders under the DGCL, the Certificate of Incorporation, the Bylaws, the Purchase Agreement or NYSE rules and regulations is required to complete the Stock Issuance. As a result, Earthstone has not solicited and will not be soliciting your vote for the Stock Issuance and does not intend to call a meeting of stockholders for purposes of voting on the adoption thereof.

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Federal securities laws provide that the Stock Issuance may not be completed until 20 days after the date of mailing of this Information Statement to Earthstone’s stockholders. Therefore, notwithstanding the execution and delivery of the Written Consent (which was obtained concurrently with the execution of the Purchase Agreement), the Stock Issuance will not occur until that time has elapsed.

Unaudited Forecasted Financial Information

Earthstone does not as a matter of course make public long-term forecasts or internal projections as to future performance, revenues, production, earnings or other results due to, among other reasons, the uncertainty, unpredictability and subjectivity of the underlying assumptions and estimates. However, in connection with its evaluation of the Transaction, Earthstone’s management prepared certain non-public unaudited internal financial forecasts with respect to Earthstone on a standalone basis for November 2021, December 2021 and the years 2022 through 2025, which were based upon the internal financial model that Earthstone has historically used in connection with strategic planning, and for the Assets for November 2021, December 2021 and the years 2022 through 2025. These forecasts were provided to the Audit Committee in connection with its evaluation of the proposed Transaction and to the Audit Committee’s financial advisor for purposes of its financial analyses and opinion. The inclusion of this information should not be regarded as an indication that any of Earthstone, the Audit Committee or their advisors or other representatives or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future performance or events, or that it should be construed as financial guidance, and such summary projections set forth below should not be relied on as such. The Earthstone forecasted financial information was prepared by and is the responsibility of Earthstone management.

This information was prepared solely for internal use and is subjective in many respects. While presented with numeric specificity, the unaudited prospective financial and operating information reflects numerous estimates and assumptions that are inherently uncertain and may be beyond the control of Earthstone’s management, including, among others, Earthstone’s future results, oil and gas industry activity, commodity prices, demand for crude oil and natural gas, the availability of financing to fund the development costs associated with the respective projected drilling programs, takeaway capacity and the availability of services in the areas in which Earthstone operates, general economic and regulatory conditions and other matters described in the sections entitled “Cautionary Statement Concerning Forward-Looking Statements,” “Where You Can Find Additional Information,” and “Risk Factors.” The unaudited prospective financial and operating information reflects both assumptions as to certain business decisions that are subject to change and, in many respects, subjective judgment, and thus is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. Earthstone can give no assurance that the unaudited prospective financial and operating information and the underlying estimates and assumptions will be realized. In addition, since the unaudited prospective financial and operating information covers multiple years, such information by its nature becomes less predictive with each successive year. This information constitutes “forward-looking statements” and actual results may differ materially and adversely from those projected. Actual results may differ materially from those set forth below, and important factors that may affect actual results and cause the unaudited prospective financial and operating information to be inaccurate include, but are not limited to, risks and uncertainties relating to its business, industry performance, the regulatory environment, general business and economic conditions and other matters described under the section of this Information Statement entitled “Risk Factors.” See also “Cautionary Statement Concerning Forward-Looking Statements” and “Where You Can Find Additional Information.”

The unaudited prospective financial and operating information was not prepared with a view toward public disclosure, nor was it prepared with a view toward compliance with GAAP, published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither Earthstone’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the unaudited prospective financial and operating information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability. The report of the independent registered public accounting firm to Earthstone, which is incorporated by reference in this Information Statement, relates to historical financial information of Earthstone, and such report does not extend to the projections included below and should not be read to do so.

Furthermore, the unaudited prospective financial and operating information does not take into account any circumstances or events occurring after the date it was prepared. Earthstone can give no assurance that, had the unaudited prospective financial

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and operating information been prepared either as of the date of the Purchase Agreement or as of the date of this Information Statement, similar estimates and assumptions would be used. Except as required by applicable securities laws, Earthstone does not intend to, and disclaims any obligation to, make publicly available any update or other revision to the unaudited prospective financial and operating information to reflect circumstances existing since its preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error, including with respect to the accounting treatment of the Transaction under GAAP, or to reflect changes in general economic or industry conditions. The unaudited prospective financial and operating information does not take into account all the possible financial and other effects on Earthstone of the Transaction, the effect on Earthstone of any business or strategic decision or action that has been or will be taken as a result of the Purchase Agreement having been executed, or the effect of any business or strategic decisions or actions which would likely have been taken if the Purchase Agreement had not been executed, but which were instead altered, accelerated, postponed or not taken in anticipation of the Transaction. Further, the unaudited prospective financial and operating information does not take into account the effect on Earthstone of any possible failure of the Transaction to occur. None of Earthstone or its affiliates, officers, directors, advisors or other representatives has made, makes or is authorized in the future to make any representation to any Earthstone stockholder or other person regarding Earthstone’s ultimate performance compared to the information contained in the unaudited prospective financial and operating information or that the forecasted results will be achieved. The inclusion of the unaudited prospective financial and operating information herein should not be deemed an admission or representation by Earthstone or its advisors or any other person that it is viewed as material information of Earthstone, particularly in light of the inherent risks and uncertainties associated with such forecasts. The summary of the unaudited prospective financial and operating information included below is being provided solely because it was made available to the Audit Committee in connection with the Transaction and at the direction of the Audit Committee relied upon by its financial advisor in connection with its financial analyses and opinion.

In light of the foregoing, and considering that the Information Statement will be mailed to Earthstone stockholders a couple of months after the unaudited prospective financial and operating information was prepared, as well as the uncertainties inherent in any forecasted information, Earthstone stockholders are cautioned not to place undue reliance on such information, and Earthstone urges all Earthstone stockholders to review Earthstone’s most recent SEC filings for a description of Earthstone’s reported financial results. See the section entitled “Where You Can Find Additional Information.”

Earthstone’s Assumptions. In preparing the prospective financial and operating information for Earthstone described below, the management team of Earthstone used the following set of price assumptions, which are based on NYMEX oil and gas strip pricing as of December 8, 2021.
 NYMEX Oil & Gas Strip Pricing (as of December 8, 2021)
 11/21E-12/21E2022E    2023E2024E2025E
Commodity Prices
WTI Oil ($/Bbl)$73.81 $67.57 $64.00 $61.80 $60.52 
Henry Hub Gas ($/Mcf)$5.82 $3.58 $3.35 $3.19 $3.09 
In addition to the assumptions with respect to commodity prices, the unaudited forecasted financial and operating information is based on various other assumptions, including, but not limited to, the following principal assumptions: no unannounced acquisitions; no material changes in expenses, including plugging and abandonment; assumptions regarding forecasted production information based on the application of risk factors thereto for known and unknown operational- and weather-related downturn in the forward-looking periods; no material regulatory changes or changes in U.S. law or practice; ongoing investments in infrastructure in Earthstone’s existing entities consistent with historical levels; the amount of outstanding debt as of November 1, 2021; and no material fluctuations in interest rate assumptions over the forward-looking periods. The unaudited forecasted financial and operating information also reflects assumptions regarding the continuing nature of ordinary course operations that may be subject to change.

Earthstone Management Projections for Earthstone Stand-Alone. The following table presents select unaudited forecasted financial and operating information of Earthstone for the fiscal years ending 2021 through 2025 prepared by Earthstone’s management. As described above, the Earthstone unaudited forecasted financial and operating information was based on commodity pricing assumptions as of December 8, 2021.


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 11/21E-12/21E 2022E 2023E 2024E 2025E
 ($ in millions)
Daily Production (MBoe/d)30.4 33.5 38.6 42.2 43.2
Total Revenue$94 $567 $633 $674 $676 
EBITDAX (a)$52  $401  $497  $530  $530 
Capital Expenditures$29  $309  $292  $258  $246 
Unlevered Free Cash Flow (b)$20  $76  $167  $212  $216 

a.EBITDAX is defined as total revenue minus, when applicable, lease operating expenses, production taxes, workovers hedge (gain / (loss)), and general and administrative expenses.

b.Unlevered free cash flow is defined as EBITDAX (defined above), less capital expenditures, cash taxes and stock-based compensation.

Earthstone Management Projections for the Assets Stand-Alone. The following table presents select unaudited forecasted financial and operating information of the Assets for the fiscal years ending 2021 through 2025 prepared by Earthstone’s management. As described above, the Assets unaudited forecasted financial and operating information was based on commodity pricing assumptions as of December 8, 2021.

   11/21E-12/21E2022E2023E 2024E 2025E
   ($ in millions)
Daily Production (MBoe/d)  14.313.2 14.5 15.3 18.1
Total Revenue$49 $253 $263 $271 $318 
EBITDAX (a)  $37 $186 $194  $198  $236 
Capital Expenditures  $13 $102 $100  $126  $102 
Unlevered Free Cash Flow (b)  $23 $69 $77  $64  $117 

a.EBITDAX is defined as total revenue minus, when applicable, lease operating expenses, production taxes, workovers hedge (gain / (loss)), and general and administrative expenses.

b.Unlevered free cash flow is defined as unlevered free cash flow as EBITDAX (defined above), less capital expenditures and cash taxes.

Certain of the measures included in the Earthstone management projections for Earthstone stand-alone and the Earthstone management projections for the Assets stand-alone are non-GAAP financial measures, including, but not limited to, EBITDAX and unlevered free cash flow. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by Earthstone are not reported by all of its competitors and may not be comparable to similarly titled amounts used by other companies.

EARTHSTONE DOES NOT INTEND TO UPDATE OR OTHERWISE REVISE THE ABOVE UNAUDITED FINANCIAL AND OPERATING FORECASTS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING SUCH UNAUDITED FINANCIAL AND OPERATING FORECASTS ARE NO LONGER APPROPRIATE, EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW.

Opinion of Wells Fargo Securities, LLC, Financial Advisor to the Audit Committee

Pursuant to an engagement letter dated December 13, 2021, the Audit Committee formally engaged Wells Fargo Securities as its financial advisor in connection with the Transaction.

On December 15, 2021, Wells Fargo Securities rendered its oral opinion to the Audit Committee which was subsequently confirmed in writing by delivery of Wells Fargo Securities’ written opinion dated the same date, that, as of December 15, 2021, the aggregate consideration consisting of cash scheduled payments amounting to, in the aggregate, $410 million and 19,417,476 shares

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of Class A Common Stock (the “Aggregate Consideration”) to be issued and paid by Earthstone and EEH in the proposed Transaction was fair, from a financial point of view, to Earthstone.
 
Wells Fargo Securities’ opinion was for the information and use of the Audit Committee (in its capacity as such) in connection with its evaluation of the proposed Transaction. Wells Fargo Securities’ opinion only addressed the fairness, from a financial point of view, to Earthstone of the Aggregate Consideration to be issued and paid by Earthstone and EEH in the proposed Transaction and did not address any other aspect or implication of the proposed Transaction. The summary of Wells Fargo Securities’ opinion in this Information Statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex B to this Information Statement and sets forth the procedures followed, assumptions made, matters considered and limitations and qualifications on the review undertaken by Wells Fargo Securities in connection with the preparation of its opinion. However, neither Wells Fargo Securities’ written opinion nor the summary of its opinion and the related analyses set forth in this Information Statement is intended to be, and they do not constitute, advice or a recommendation to the Audit Committee, the Board or any Earthstone securityholder as to how they should act on any matter relating to the proposed Transaction.

In arriving at its opinion, Wells Fargo Securities, among other things:

    •    reviewed a draft dated December 15, 2021 of the Purchase Agreement;
    •    reviewed certain publicly available business and financial information relating to the Assets and Earthstone, and the industries in which they operate;
    •     compared the financial and operating performance of the Assets and Earthstone with publicly available information concerning certain other companies Wells Fargo Securities deemed relevant, and compared current and historic market prices of Class A Common Stock with similar data for such other companies;
    •     reviewed certain internal financial analyses and operating and financial forecasts relating to the Assets (referred to in this section as the “Earthstone Projections for the Assets”) and Earthstone (referred to in this section as the “Earthstone Projections for Earthstone”), as well as certain estimates of pro forma effects of the Transaction (“Pro Forma Effects”), each as prepared or provided by the management of Earthstone;
    •     discussed with the management of Earthstone certain aspects of the proposed Transaction, the business, financial condition and prospects of the Assets and Earthstone, the effect of the proposed Transaction on the business, financial condition and prospects of the Assets and Earthstone, and certain other matters that Wells Fargo Securities deemed relevant; and
    •     considered such other financial analyses and investigations and such other information that Wells Fargo Securities deemed relevant.

In giving its opinion, Wells Fargo Securities assumed and relied upon the accuracy and completeness of all information that was publicly available or was furnished to or discussed with Wells Fargo Securities by Earthstone or Chisholm or otherwise reviewed by Wells Fargo Securities. Wells Fargo Securities did not independently verify any such information, and pursuant to the terms of Wells Fargo Securities’ engagement by Earthstone, Wells Fargo Securities did not have any obligation to undertake any such independent verification. In relying on the Earthstone Projections for the Assets, the Earthstone Projections for Earthstone and the Pro Forma Effects, Wells Fargo Securities assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Earthstone as to the future performance and financial condition of the Assets, Earthstone and the other matters addressed thereby. Wells Fargo Securities expressed no view or opinion with respect to the Earthstone Projections for the Assets, the Earthstone Projections for Earthstone or the Pro Forma Effects, or the assumptions upon which they are based. Wells Fargo Securities assumed that any representations and warranties made by Chisholm or Earthstone in the Purchase Agreement or in other agreements relating to the proposed Transaction will be true and accurate in all respects that are material to its analysis. Wells Fargo Securities assumed that any adjustments to the Aggregate Consideration pursuant to the Purchase Agreement or otherwise would not be material to its analyses or opinion.


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Earthstone and Chisholm do not publicly disclose internal management projections of the type provided to Wells Fargo Securities in connection with Wells Fargo Securities’ analysis of the proposed Transaction, and the Earthstone Projections for the Assets and the Earthstone Projections for Earthstone were not prepared with a view toward public disclosure. The Earthstone Projections for the Assets and the Earthstone Projections for Earthstone were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management, including, without limitation, factors related to general economic and competitive conditions and prevailing interest rates. Accordingly, actual results could vary significantly from those set forth in the Earthstone Projections for the Assets and the Earthstone Projections for Earthstone.

Wells Fargo Securities also assumed that the proposed Transaction will have the tax consequences described in discussions with, and materials provided to Wells Fargo Securities by, Earthstone and its representatives. Wells Fargo Securities also assumed that, in the course of obtaining any regulatory or third-party consents, approvals or agreements in connection with the proposed Transaction, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on the Assets, Earthstone, or the contemplated benefits of the proposed Transaction. Wells Fargo Securities also assumed that the proposed Transaction will be consummated in compliance with all applicable laws and regulations and in accordance with the terms of the Purchase Agreement without waiver, modification or amendment of any term, condition or agreement thereof that is material to its analyses or opinion. In addition, Wells Fargo Securities did not make any independent evaluation, inspection or appraisal of the Assets or liabilities (contingent or otherwise) of the Assets or Earthstone, nor was Wells Fargo Securities furnished with any such evaluations or appraisals. Wells Fargo Securities did not evaluate the fair value or solvency of the Assets or Earthstone under any state or federal laws relating to bankruptcy, insolvency or similar matters. Wells Fargo Securities further assumed that the final form of the Purchase Agreement would conform to the draft reviewed by Wells Fargo Securities in all respects material to its analyses and opinion.

Wells Fargo Securities’ opinion only addressed the fairness, from a financial point of view, to Earthstone of the Aggregate Consideration to be issued and paid by Earthstone and EEH in the proposed Transaction, and Wells Fargo Securities expressed no opinion as to the fairness of any consideration paid in connection with the proposed Transaction to the holders of any particular class of securities, creditors or other constituencies of Earthstone. Furthermore, Wells Fargo Securities expressed no opinion as to any other aspect or implication (financial or otherwise) of the proposed Transaction, including the form or structure of the Transaction or the Aggregate Consideration, any allocation contemplated by the Purchase Agreement of the Aggregate Consideration among the acquired assets, or any other agreement, arrangement or understanding entered into in connection with the proposed Transaction or otherwise, including, without limitation, the fairness of the amount or nature of, or any other aspect relating to, any compensation or consideration to be received by or otherwise payable to any officers, directors or employees of any party to the proposed Transaction, or class of such persons, relative to the Aggregate Consideration or otherwise. Furthermore, Wells Fargo Securities did not express any advice or opinion regarding matters that require legal, regulatory, accounting, insurance, tax, environmental, executive compensation or other similar professional advice and has relied upon the assessments of Earthstone and its advisors with respect to such advice.

Earthstone advised Wells Fargo Securities and, for purposes of its analyses and opinion, Wells Fargo Securities assumed, that there was, and as of the closing of the Transaction there will be, an outstanding share of Class B Common Stock associated with each outstanding unit of EEH not held by Earthstone, that each holder of outstanding shares of Class B Common Stock held, and as of the closing of the Transaction will hold, an equivalent number of units and that, pursuant to the First Amended and Restated Limited Liability Agreement of EEH, dated as of May 9, 2017 (the “EEH LLC Agreement”), holders of units other than Earthstone have the right to require EEH to redeem its units together with the associated shares of Class B Common Stock for, at the election of EEH, an equal number of shares of Class A Common Stock or cash based on the fair market value of Class A Common Stock as determined in accordance with the EEH LLC Agreement, and, consequently, for purposes of its analyses and opinion, at Earthstone’s direction, Wells Fargo Securities treated one share of Class B Common Stock and the associated unit as a single integrated security equivalent in value and identical in all other respects to a share of Class A Common Stock.

Wells Fargo Securities’ opinion was necessarily based upon information made available to Wells Fargo Securities as of the date of its opinion and financial, economic, market and other conditions as they existed and could be evaluated on the date of its opinion. Wells Fargo Securities did not undertake, and is under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring or coming to its attention after the date of its opinion. Wells Fargo Securities’ opinion did not address the relative merits of the proposed Transaction as compared to any alternative transactions or strategies that might have been available to Earthstone, nor did it address the underlying business decision of the Audit Committee,

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the Board or the Company to proceed with or effect the proposed Transaction. Wells Fargo Securities did not express any opinion as to the price at which Class A Common Stock or other securities of Earthstone may be traded or otherwise transferred at any time.

Financial Analyses

In preparing its opinion to the Audit Committee, Wells Fargo Securities performed a variety of analyses, including those described below. The summary of Wells Fargo Securities’ analyses is not a complete description of the analyses underlying Wells Fargo Securities’ opinion. The preparation of such an opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytical methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither Wells Fargo Securities’ opinion nor its underlying analyses is readily susceptible to summary description. Wells Fargo Securities arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, methodology or factor. Accordingly, Wells Fargo Securities believes that its analyses and the following summary must be considered as a whole and that selecting portions of its analyses, methodologies and factors, without considering all analyses, methodologies and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying Wells Fargo Securities’ analyses and opinion.

In performing its analyses, Wells Fargo Securities considered general business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. None of the selected companies used in Wells Fargo Securities’ analyses is identical to the Assets or Earthstone and an evaluation of the results of those analyses is not entirely mathematical. The financial analyses performed by Wells Fargo Securities were performed for analytical purposes only and are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of the Company or Chisholm.

While the results of each analysis were taken into account in reaching its overall conclusion with respect to fairness, from a financial point of view, of the Aggregate Consideration to be issued and paid in the proposed Transaction, Wells Fargo Securities did not make separate or quantifiable judgments regarding individual analyses. Much of the information used in, and accordingly the results of, Wells Fargo Securities’ analyses are inherently subject to substantial uncertainty.

Wells Fargo Securities’ opinion was only one of many factors considered by the Audit Committee in evaluating the proposed Transaction. Neither Wells Fargo Securities’ opinion nor its analyses were determinative of the amount of Aggregate Consideration or the form thereof or of the views of the Audit Committee or the Board or management with respect to the proposed Transaction or the Aggregate Consideration. The type and amount of consideration payable in the proposed Transaction were determined through negotiations between Earthstone and Chisholm, and Earthstone’s decision to enter into the Purchase Agreement was solely that of the Audit Committee and the Board.

The following is a summary of the material financial analyses performed by Wells Fargo Securities in connection with the preparation of its opinion rendered to, and reviewed with, the Audit Committee on December 15, 2021. The order of the analyses summarized below does not represent relative importance or weight given to those analyses by Wells Fargo Securities. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions made, procedures followed, matters considered and limitations and qualifications affecting, each analysis, could create an incomplete view of Wells Fargo Securities’ analyses.

Selected Public Companies Analysis

Wells Fargo Securities reviewed certain data for selected companies with publicly traded equity securities that Wells Fargo Securities deemed relevant. None of the selected companies used in Wells Fargo Securities’ analyses is identical to Earthstone or the Assets. Wells Fargo Securities used the same public companies for its selected public companies analyses relating to the Assets and to Earthstone. The selected companies were selected by Wells Fargo Securities because they are oil and

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gas exploration and production companies with similar size and scale and operations in similar geographic regions, and were deemed by Wells Fargo Securities to be similar to Earthstone and the Assets. The estimates of the future financial performance of the selected companies listed below, including Earthstone, for purposes of deriving applicable multiples were based on certain publicly available research analyst estimates for those companies.

The financial metrics reviewed by Wells Fargo Securities for purposes of the selected public companies analysis included:

    •     Total enterprise value (“TEV”) (calculated as the equity value of the relevant company’s outstanding equity securities on a fully diluted basis, plus any debt, preferred equity and non-controlling interests, less cash and cash equivalents) as a multiple of estimated EBITDAX (earnings before interest, taxes, depreciation, and amortization expense) for the calendar years ending December 31, 2022, or “2022E EBITDAX” and December 31, 2023, or “2023E EBITDAX”; and
    •     Equity Value (“EV”) as a multiple of estimated cash flows from operations for the calendar years ending December 31, 2022, or “2022E CFFO” and December 31, 2023, or “2023E CFFO.”

The selected companies and the mean and median multiples for the selected companies were:

    •    Matador Resources Company
    •    SM Energy Company
    •    Callon Petroleum Company
    •    Centennial Resource Development, Inc.
    •    Ranger Oil Corp.
    •     Laredo Petroleum, Inc.
    •     Earthstone Energy, Inc.
    •     SilverBow Resources, Inc.

 MeanMedian
TEV / 2022E EBITDAX3.5x3.5x
TEV / 2023E EBITDAX3.6x3.6x
EV / 2022E CFFO2.2x2.3x
EV / 2023E CFFO2.3x2.3x

Taking into account the results of the selected public companies analysis, for purposes of its analyses relating to the Assets, Wells Fargo Securities applied multiple ranges of 3.00x to 3.75x to the Assets’ 2022E EBITDAX and 2023E EBITDAX, based on the Earthstone Projections for the Assets. The selected public companies analysis indicated an implied enterprise value reference range for the Assets of $575 million to $725 million.

Taking into account the results of the selected public companies analysis, for purposes of its analyses relating to Earthstone, Wells Fargo Securities applied multiple ranges of 3.00x to 3.75x to Earthstone’s 2022E EBITDAX and 2023E EBITDAX and 2.00x to 2.75x to Earthstone’s 2022E CFFO and 2023E CFFO, based on the Earthstone Projections for Earthstone. The selected public companies analysis indicated an implied enterprise value reference range for Earthstone of $1.1 billion to $1.5 billion and an implied per share reference range for shares of Class A Common Stock of $8.89 to $13.27.

Wells Fargo Securities then derived, from the foregoing, a range of shares that would be issued in the Transaction, adjusting for the cash consideration payable in the Transaction and assuming (x) for the low end of its range, the low end of the enterprise value reference range for the Assets and high end of the per share reference range for Class A Common Stock and (y) for the high end of its range, the high end of the enterprise value reference range for the Assets and low end of the per share reference range for Class A Common Stock. The foregoing analysis reflected an implied range of shares of Class A Common Stock to be issued in the Transaction of 12.4 million shares to 35.4 million shares, as compared to the approximately 19.4 million shares provided for in the Transaction.

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Discounted Cash Flow Analysis

Wells Fargo Securities performed a discounted cash flow analysis for each of the Assets and Earthstone by calculating the estimated net present value of the projected unlevered free cash flows of each of the Assets and Earthstone for the period from November 1, 2021 through December 31, 2025, based on the Earthstone Projections for the Assets and the Earthstone Projections for Earthstone, respectively.

For the discounted cash flow analysis for the Assets, Wells Fargo Securities applied terminal EBITDAX multiples, based on its judgment and experience, of 3.00x to 3.75x and discount rates (selected based on an estimate of the weighted average cost of capital for the Assets) ranging from 11.25% to 13.25%. The discounted cash flow analysis indicated an implied enterprise value reference range for the Assets of $690 million to $846 million.

For discounted cash flow analysis for Earthstone, Wells Fargo Securities applied terminal EBITDAX multiples, based on its judgment and experience, of 3.00x to 3.75x and discount rates (selected based on an estimate of the weighted average cost of capital for Earthstone) ranging from 11.00% to 13.00%. The discounted cash flow analysis indicated an implied enterprise value reference range for Earthstone of $1.473 billion to $1.827 billion and an implied per share reference range for shares of Class A Common Stock of $12.98 to $16.85.

Wells Fargo Securities then derived, from the foregoing, a range of shares that would be issued in the Transaction, adjusting for the cash consideration payable in the Transaction and assuming (x) for the low end of its range, the low end of the enterprise value reference range for the Assets and high end of the per share reference range for Class A Common Stock and (y) for the high end of its range, the high end of the enterprise value reference range for the Assets and low end of the per share reference range for Class A Common Stock. The foregoing analysis reflected an implied range of shares of Class A Common Stock to be issued in the Transaction of 16.6 million shares to 33.6 million shares, as compared to the approximately 19.4 million shares provided for in the Transaction.
Net Asset Value Analysis

Wells Fargo Securities performed a net asset value analysis for each of the Assets and Earthstone by calculating the estimated net present value of the projected unlevered free cash flows of each of the Assets and Earthstone based on estimated financial and operating data provided by Earthstone, reflecting (among other things) Earthstone management’s estimates, for each of the Assets and Earthstone, of oil and natural gas reserves and associated riskings by asset reserve category and NYMEX strip pricing as of December 8, 2021.

For the net asset value analysis for the Assets, Wells Fargo Securities applied discount rates (selected based on an estimate of the weighted average cost of capital for the Assets) ranging from 11.25% to 13.25%. The net asset value analysis indicated an implied enterprise value reference range for the Assets of $671 million to $742 million.

For net asset value analysis for Earthstone, Wells Fargo Securities applied discount rates (selected based on an estimate of the weighted average cost of capital for Earthstone) ranging from 11.00% to 13.00%. The net asset value analysis indicated an implied enterprise value reference range for Earthstone of $1.43 billion to $1.57 billion and an implied per share reference range for shares of Class A Common Stock of $12.50 to $14.04.

Wells Fargo Securities then derived, from the foregoing, a range of shares that would be issued in the Transaction, adjusting for the cash consideration payable in the Transaction and assuming (x) for the low end of its range, the low end of the enterprise value reference range for the Assets and high end of the per share reference range for Class A Common Stock and (y) for the high end of its range, the high end of the enterprise value reference range for the Assets and low end of the per share reference range for Class A Common Stock. The foregoing analysis reflected an implied range of shares of Class A Common Stock to be issued in the Transaction of 18.6 million shares to 26.5 million shares, as compared to the approximately 19.4 million shares provided for in the Transaction.

Selected Asset Transactions Analysis


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In connection with its analysis relating to the Assets, Wells Fargo Securities also considered the financial terms of certain other transactions that Wells Fargo Securities deemed relevant. The selected transactions were selected because the target assets were deemed by Wells Fargo Securities to be similar to the Assets in one or more respects.

The financial metrics reviewed by Wells Fargo Securities for purposes of its selected asset transactions analysis were based on information available from a third-party data analytics and information service provider (“Information Provider”) and included:

    •     TEV as a multiple of estimated daily production (“Current Production”). For the Current Production of the Assets, Wells Fargo Securities used an estimate of Earthstone for the Assets’ production in November 2021;

    •     Acreage Value (an estimate of total transaction value less value of target production per Information Provider, or “AV”) as a multiple of Net Acres; and
            
    •     AV as a multiple of Net Locations.

    The reviewed transactions and the mean and median multiples were:

Date Announced

Acquiror

                    Seller / Target
11/21

Colgate Energy Partners III, LLC

Occidental Petroleum Corp.
11/21

Continental Resources, Inc. Pioneer Natural Resources Co.
11/21 Henry Resources LLC, Pickering Energy Partners LP Centennial Resource Development Inc.
09/21 ConocoPhillips Royal Dutch Shell plc
09/21 Laredo Petroleum, Inc. Pioneer Natural Resources Co.
08/21 Callon Petroleum Company Primexx Resource Development, LLC
07/21 Lime Rock Resources Rosehill Operating Company LLC
06/21 Colgate Energy Partners III, LLC Occidental Petroleum Corp.
05/21 Percussion Petroleum II LLC Oasis Petroleum Inc.
05/21

Laredo Petroleum, Inc. Sabalo Operating, LLC
01/21 Surge Energy US Holdings Co. Grenadier Energy Partners II LLC
12/20 Diamondback Energy, Inc. Guidon Operating LLC
12/19 WPX Energy Inc. Felix Energy Holdings II LLC

   MeanMedian
TEV / Current Production ($ / Boepd)$65,245 $50,800
AV / Net Acres ($ / Net Acre)$9,839 $8,419
AV / Net Locations ($MM / Net Location)

$1.1

$0.9

Taking into account the results of the selected transactions analysis, Wells Fargo Securities applied multiple ranges of (x) $45,000 to $60,000 per Boepd to Earthstone’s estimate of the Assets’ Current Production, (y) $7,000 to $10,000 per net acre to Earthstone’s estimate of the Assets’ Net Acres, and (z) $0.80 million to $1.50 million per net location to Earthstone’s estimate of the Assets’ Net Locations. The selected transactions analysis indicated an implied enterprise value reference range for the Assets of $550 million to $750 million.
Other Matters

Wells Fargo Securities is a trade name of Wells Fargo Securities, LLC, an investment banking subsidiary and affiliate of Wells Fargo & Company. Earthstone retained Wells Fargo Securities as its financial advisor in connection with the proposed Transaction based on Wells Fargo Securities’ experience and reputation. Wells Fargo Securities is regularly engaged to provide

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investment banking and financial advisory services in connection with mergers and acquisitions, financings, and financial restructurings. Earthstone has agreed to pay Wells Fargo Securities an aggregate fee of $6.1 million, $1.5 million of which became payable to Wells Fargo Securities at announcement of the Transaction and the remainder of which is contingent and payable upon the consummation of the Transaction. In addition, Earthstone has agreed to reimburse Wells Fargo Securities for certain expenses and to indemnify Wells Fargo Securities and certain related parties against certain liabilities and other items that may arise out of or relate to Wells Fargo Securities’ engagement. The issuance of Wells Fargo Securities’ opinion was approved by an authorized committee of Wells Fargo Securities.

Wells Fargo Securities and its affiliates provide a wide range of investment and commercial banking advice and services, including financial advisory services, securities underwritings and placements, securities sales and trading, brokerage advice and services, and commercial loans. During the two years preceding the date of Wells Fargo Securities’ written opinion, Wells Fargo Securities and its affiliates had investment or commercial banking relationships with Earthstone and Chisholm, for which Wells Fargo Securities and such affiliates received compensation. Such relationships have included acting as agent, lead bookrunner and co-lead arranger on amendments of Earthstone’s credit facility in December 2020, April 2021, and September 2021, as financial advisor to Earthstone on its acquisition of Independence in January 2021, and as agent, lead bookrunner and co-lead arranger on an amendment of Chisholm’s credit facility in July 2021. Wells Fargo Securities or its affiliates is also an agent and a lender to one or more of the credit facilities of Earthstone, Chisholm, and certain of their respective affiliates. In addition, during the two years preceding the date of Wells Fargo Securities’ written opinion, Wells Fargo Securities and its affiliates had investment or commercial banking relationships with certain of the material stockholders of the parties to the Transaction, including Warburg, EnCap and Ontario Teachers’ Pension Plan as well as their respective portfolio companies, for which Wells Fargo Securities and such affiliates received customary compensation. During such two year period, Wells Fargo Securities received fees for investment or commercial banking services of (x) approximately $600,000 from the Company and (y) approximately $13,500,000 from Chisholm and its affiliates. Such relationships included loan syndications, financial advisory services, and underwriting equity and debt securities. Wells Fargo Securities and its affiliates anticipate that they will arrange and/or provide financing to Earthstone in connection with the Transaction for customary compensation. Wells Fargo Securities and its affiliates hold, on a proprietary basis, less than 1% of the outstanding Class A Common Stock. In the ordinary course of business, Wells Fargo Securities and its affiliates may trade or otherwise effect transactions in the securities or other financial instruments (including bank loans or other obligations) of Earthstone and Chisholm and certain of their respective affiliates for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities or financial instruments.

Interests of Our Directors and Executive Officers in the Transaction

Stockholders should be aware that members of the Board and executive officers have interests in the Transaction that may be different from, or in addition to interests they may have as stockholders.

For example, one of the ten members of the Board, Mr. Habachy is a Managing Director at Warburg. Certain Warburg Funds beneficially own approximately 15.1% of the outstanding voting securities of Earthstone, and approximately 78% of the equity interests (and approximately 68% after accounting for incentive equity awards) of Chisholm Holdings. As a result, the Audit Committee, consisting of three independent and disinterested members of the Board, was vested with the power on behalf of Earthstone to negotiate, approve or terminate discussions with respect to a potential transaction with Chisholm and had its own financial advisor and legal counsel.

Our executive officers and directors will receive no special payments, compensation or other consideration in connection with the Transaction.

Interests of Related Parties in the Transaction

Certain Warburg Funds hold approximately 15.1% of the outstanding voting power of Earthstone and approximately 78% of the equity interests (and approximately 68% after accounting for incentive equity awards) of Chisholm Holdings as of December 15, 2021.


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Board of Directors and Management of Earthstone Following Completion of the Transaction

Upon closing of the Transaction, Earthstone’s Board and executive management will remain unchanged. Additionally, Earthstone will continue to be headquartered in The Woodlands, Texas.

Regulatory Filings and Approvals Required for Completion of the Transaction

We are not aware of any material government or regulatory approval required for the completion of the Transaction.

Treatment of Equity Awards

The Transaction will not affect our outstanding equity awards. All such awards will remain outstanding subject to the same terms and conditions that are applicable prior to the Transaction.

No Appraisal Rights

The stockholders do not have any rights to appraisal with respect to the Transaction or the Stock Issuance under Delaware law.

Accounting Treatment of the Transaction

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Transaction will be 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 Transaction is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. The operating results of Chisholm will be consolidated in our financial statements beginning on the date of the closing of the Transaction. For combined financial information giving effect to the Transaction, see “Unaudited Pro Forma Condensed Combined Financial Information.”

Listing of Shares of Class A Common Stock

It is a condition to completion of the Transaction that Earthstone deliver evidence reasonably satisfactory to Chisholm that it (A) has filed a supplemental listing application with the NYSE with respect to the issuance of the Shares and (B) the Shares have been approved and authorized for listing on the NYSE.

RISK FACTORS

In addition to the other information included and incorporated by reference into this Information Statement, including the matters addressed in the section entitled “Cautionary Statement Concerning Forward-Looking Statements,” you should carefully consider the following risks. In addition, you should read and consider the risks associated with our business. Descriptions of some of these risks can be found in Earthstone’s Annual Report on Form 10-K and as amended on Form 10-K/A for the year ended December 31, 2020, as updated by any subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, all of which are filed with the SEC and incorporated by reference into this Information Statement. You should also read and consider the other information in this Information Statement and the other documents incorporated by reference into this Information Statement. See the section entitled “Where You Can Find More Information.”

Risks Relating to the Transaction

If the Transaction is consummated, we may be unable to successfully integrate the Assets or to realize anticipated cost savings, revenues or other benefits of the Transaction.

Our ability to achieve the anticipated benefits of the Transaction, if consummated, will depend in part upon whether we can successfully integrate the Assets into our existing business in a timely, efficient and effective manner. The beneficial

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acquisition of producing and non-producing properties and undeveloped acreage that can be economically developed, including the Assets, requires an assessment of several factors, including:
 
•    recoverable reserves;

•    future oil and natural gas prices and their market differentials;

•    availability and cost of transportation of production to markets;

•    availability and cost of drilling and completion equipment and of skilled personnel;

•    development and operating costs and potential environmental and other liabilities; and

•    regulatory, permitting and similar matters.

The accuracy of these assessments is inherently uncertain. In connection with these assessments, we have performed, and will continue to perform, a review of the properties of Chisholm that we believe to be generally consistent with reasonable industry practices. Our review may not reveal all existing or potential problems or permit us to become sufficiently familiar with the properties to fully assess their deficiencies and potential recoverable reserves. Inspections will not always be performed on every well, and environmental problems are not necessarily observable even when an inspection is undertaken. The integration process may be subject to delays or changed circumstances, and we can give no assurance that the acquired properties will perform in accordance with our expectations or that our expectations with respect to integration or cost savings resulting from added scale as a result of the Transaction will materialize. Significant acquisitions, including the Transaction, and other strategic transactions may involve other risks that may cause negative impacts on our business, including:
 
•    diversion of our management’s attention resulting in the inability to fully evaluate, negotiate and integrate other significant acquisitions and strategic transactions;

•    the operational challenges and cost of integrating the Assets acquired in the Transaction with existing assets and operations while carrying on our ongoing business; and

•    the failure to realize the full benefit that we expect in estimated proved reserves, production volume, cost savings from operating synergies or other benefits anticipated from the Transaction, or to realize these benefits within the expected time frames.

We will only have limited recourse against Chisholm regarding the properties acquired in the Transaction for losses and liabilities arising or discovered after closing of the Transaction.

Under the terms of the Purchase Agreement, we will have only limited recourse against Chisholm for losses and liabilities arising or discovered after the closing of the Transaction. We have limited indemnification rights in the event of a breach of a representation, warranty or covenant by Chisholm. We also have limited rights to assert title defects or environmental defects, and any claims for title defects which were not timely asserted by us by January 31, 2022 have been deemed waived. As is customary in oil and gas transactions, we have agreed to assume various liabilities associated with the Assets, including environmental liabilities, plugging and abandonment obligations, and unpaid royalties, regardless of when such liabilities arose.

The representations and warranties provided by Chisholm are limited as to scope and in many cases, qualified by knowledge and materiality thresholds. We must bring any claims for indemnification for a breach of a representation or warranty not involving title and environmental defects within the time period after the closing specified in the Purchase Agreement, and for most representations and warranties, this time period ends twelve months after closing of the Transaction.

Indemnification claims are subject to an individual claim threshold of $100,000 and Chisholm is only required to indemnify us for claims totaling in excess of 2.0% of the unadjusted base purchase price. In addition, our right of recovery in most circumstances is limited to $91.5 million. We have conducted, and will continue to conduct, prior to closing, considerable diligence

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on the properties to be acquired in the Transaction, but our diligence may not uncover all events or conditions that might negatively affect the value of the Assets within such time periods. The short period for asserting claims for indemnification increases the likelihood that we may incur or uncover liabilities for which we have no recourse.

In addition, we may be obligated to complete the closing of the Transaction, even if Chisholm may have breached certain representations, warranties or covenants, as long as the breaches do not result in a material adverse effect with respect to the properties to be acquired as part of the Transaction. In such instance, our post-closing right to indemnification for such breaches by Chisholm may be very limited, as described above.

Failure to complete the Transaction could negatively affect our stock price, future business and financial results.

Completion of the Transaction is not assured and is subject to risks, including the risk that certain closing conditions will not be satisfied. If the Transaction is not completed, our ongoing business and financial results may be adversely affected and we will be subject to several risks, including:
•    having to pay certain significant transaction and possible termination costs relating to the Transaction without receiving the benefits of the Transaction;
•    that the share price of our Class A Common Stock may decline to the extent that the current market prices reflect an assumption by the market that the Transaction will be completed; and
•    that we may be subject to litigation related to any failure on our part to complete the Transaction, or litigation resulting from minority stockholder actions.

Delays in completing the Transaction may substantially reduce the expected benefits of the Transaction.

Satisfying the conditions to, and completion of, the Transaction may take longer than, and could cost more than, we expect. Any delay in completing or any additional conditions imposed or obstacles encountered in order to complete the Transaction may materially adversely affect the synergies and other benefits that we expect to achieve from the Transaction and the integration of our respective assets. In addition, we and Chisholm have the right to terminate the Purchase Agreement if the Transaction is not completed by March 17, 2022 (which may be extended under limited circumstances to April 19, 2022).

We will be subject to various uncertainties and contractual restrictions while the Transaction is pending that could adversely affect our financial results.

The pursuit of the Transaction and the preparation for the integration of the Assets with our assets may place a significant burden on our management, our personnel and internal financial resources. Any significant diversion of management attention away from ongoing business and any difficulties encountered in the transition and integration process could adversely affect our financial results.

The financial analyses and forecasts considered by the Audit Committee and its financial advisor may not be realized, which may adversely affect the market price of the Class A Common Stock.

In performing its financial analyses and rendering its opinion regarding fairness, from a financial point of view, of the Aggregate Consideration, at the direction of the Audit Committee, the financial advisor to the Audit Committee relied on, among other things, internal forecasts and projections provided to it. The forecasts were prepared by Earthstone management. None of these analyses and forecasts was prepared with a view towards public disclosure or compliance with the published guidelines of the SEC, GAAP, or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts. These projections are inherently based on various estimates and assumptions that are subject to the judgment of those preparing them. These projections are also subject to significant economic, competitive, industry and other uncertainties and contingencies, all of which are difficult or impossible to predict and many of which are beyond the control of Earthstone. There can be no assurance that Earthstone’s financial condition or results of operations will be consistent with those set

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forth in such analyses and forecasts, which could have a material impact on the market price of the Class A Common Stock. See “The Transaction – Unaudited Forecasted Financial Information.”

The market price of our Class A Common Stock may decline in the future as a result of the Transaction.

The market price of our Class A Common Stock may decline in the future as a result of the Transaction for a number of reasons, including the unsuccessful integration of the Assets with our assets or our failure to achieve the perceived benefits of the Transaction, including financial and operating results, as rapidly as or to the extent anticipated by financial or industry analysts. These factors are, to some extent, beyond our control.

Our current stockholders will have a reduced ownership and voting power after the Transaction.

As a result of the 19,417,476 shares of Class A Common Stock that we expect to issue at the closing of the Transaction, current holders of 53,312,631 shares of Class A Common Stock and holders of 34,397,877 shares of Class B Common Stock are expected to hold approximately 81.9% of Earthstone’s voting power, on an as-converted basis, immediately following completion of the Transaction. Immediately following the Transaction, each of the aforementioned stockholders will have a percentage ownership of Earthstone, on an as-converted basis, that will be smaller than the stockholder’s percentage ownership prior to the Transaction. As a result of the reduced ownership percentages, on an as-converted basis, Earthstone’s stockholders will have less voting power after the Transaction than they have now.

The pro forma condensed combined financial information included in this Information Statement is presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the Transaction.

The pro forma condensed combined financial information contained in this Information Statement is presented for illustrative purposes only, is based on various adjustments, assumptions and preliminary estimates and may not be an indication of our financial condition or results of operations following the Transaction. See “Unaudited Pro Forma Condensed Combined Financial Information.” The actual financial condition and results of operations of the Company following the Transaction may not be consistent with, or evident from, these pro forma financial statements. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect the combined company’s financial condition or results of operations following the Transaction. Any potential decline in our financial condition or results of operations may adversely affect the market price of our Class A Common Stock.

Risks Relating to the Company’s Business

You should read and consider risk factors specific to Earthstone’s business that will also affect the Company after the completion of the Transaction. These risks are described in the Earthstone’s Annual Report on Form 10-K and as amended on Form 10-K/A for the year ended December 31, 2020, as updated by any subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each of which is incorporated by reference herein. For the location of information incorporated by reference in this Information Statement, please see the section entitled “Where You Can Find More Information.”

THE PURCHASE AGREEMENT

The following summarizes material provisions of the Purchase Agreement. This summary does not purport to be complete and may not contain all of the information about the Purchase Agreement that is important to you. The rights and obligations of the parties are governed by the express terms and conditions of the Purchase Agreement and not by this summary or any other information contained in this Information Statement. Earthstone stockholders are urged to read the entire Purchase Agreement carefully, as well as this Information Statement. This summary is qualified in its entirety by reference to the Purchase Agreement, a copy of which is attached as Annex A to this Information Statement.

In reviewing the Purchase Agreement and this summary, please recognize that they have been included to provide you with information regarding the essential terms of the Purchase Agreement and are not intended to provide any other factual information about Earthstone, EEH, Chisholm or any of their subsidiaries or affiliates. The Purchase Agreement contains

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representations and warranties and covenants by each of the parties thereto, certain of which are itemized below. These representations and warranties have been made solely for the benefit of the other parties to the Purchase Agreement and:
•    were not intended as statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
•    may apply standards of materiality in a way that is different from what may be viewed as material by you or other investors; and

•    disclosure schedules to the Purchase Agreement may have materially qualified certain representations and warranties.

Moreover, information concerning the subject matter of the representations and warranties in the Purchase Agreement and described below may have changed since the date of the Purchase Agreement and subsequent developments or new information qualifying a representation or warranty may not have been included in this Information Statement. Accordingly, the representations and warranties and other provisions of the Purchase Agreement should not be read alone, but instead should be read together with the information provided elsewhere in this Information Statement and in the documents incorporated by reference into this Information Statement. See “Where You Can Find More Information.”

General

In general, the Purchase Agreement provides for the acquisition by EEH of interests in oil and gas leases, wells, equipment and related property of Chisholm located in Lea County and Eddy County, New Mexico (the “Assets”). This is and has been referred to herein as the “Transaction.” In connection with the Purchase Agreement, EEH delivered into escrow a deposit of $30.5 million which will be applied toward the cash purchase price at closing. The Purchase Agreement has an effective time of 12:01 a.m., Central Time, on November 1, 2021 for purposes of allocating revenues and property expenses, the “Effective Time.”

The Transaction

The Purchase Agreement provides that:

(a)    EEH will pay to Chisholm an aggregate of $410 million in cash with $70 million deferred and paid as follows: $40 million to be paid six months after the closing of the Transaction and $30 million to be paid 12 months after the closing of the Transaction, subject to acceleration in the event that the Company receives gross proceeds of more than $450 million from a high yield bond offering or more than $50 million in gross proceeds from an offering of Class A Common Stock;

(b)    Earthstone will issue to Chisholm or the equity holders of Chisholm Holdings an aggregate of 19,417,476 shares of its Class A Common Stock; and

(c)    Chisholm will assign its interests in the Assets to EEH.

The cash portion of the purchase price described in clause (a) above is subject to adjustment under the Purchase Agreement by increases or decreases as follows (without duplication):

    (a)    increased by the aggregate amount of (1) proceeds received by EEH from the sale of hydrocarbons produced from and attributable to the Assets during any period prior to the Effective Time to which Chisholm is entitled under the Purchase Agreement (net of any (x) royalties and (y) gathering, processing, transportation, marketing and other midstream costs) and (2) other proceeds received by EEH with respect to the Assets for which Chisholm would otherwise be entitled;

(b)    increased by the amount of all asset taxes allocable to EEH pursuant to the Purchase Agreement but paid or otherwise economically borne by Chisholm;

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    (c)    increased by the aggregate amount of all non-reimbursed property costs that have been paid by Chisholm that are attributable to the ownership and operation of the Assets after the Effective Time (including the amount of any prepayments with respect to any period after the Effective Time);

(d)    increased by to the extent that proceeds for such volumes have not been received by Chisholm, an amount equal to the value of all hydrocarbons attributable to the Assets in storage or existing in stock tanks, pipelines or plants (including inventory, linefill and linepack for which Chisholm or its successors is entitled to a return thereof or proceeds attributable thereto) as of the Effective Time;

(e)    increased by the amount, if any, of imbalances in favor of Chisholm;

(f)    increased by the amount of any other upward adjustment specifically provided for in the Purchase Agreement or mutually agreed upon by the parties;

(i)    decreased by the aggregate amount of (1) proceeds received by Chisholm from the sale of hydrocarbons produced from and attributable to the Assets from and after the Effective Time to which EEH is entitled under the Purchase Agreement (net of any (x) royalties paid by Chisholm and (y) gathering, processing, transportation, marketing and other midstream costs) and (2) other proceeds received by Chisholm with respect to the Assets for which EEH would otherwise be entitled;

    (j)    decreased by the amount of all asset taxes allocable to Chisholm pursuant to the Purchase Agreement but paid or otherwise economically borne by EEH;

    (k)    decreased by the aggregate amount of all downward adjustments pursuant to environmental defects, title defects, preferential purchase rights or consents subject to any applicable thresholds and deductibles;

    (l)    decreased by the aggregate amount of all non-reimbursed property costs that are attributable to the ownership or operation of the Assets prior to the Effective Time (excluding prepayments with respect to any period after the Effective Time) and paid by EEH;

    (m)     decreased by the amount of the suspense funds; and

    (n)    decreased by the amount, if any, of imbalances owing by Chisholm; and

(o)    decreased by the amount of any other downward adjustment specifically provided for in the Purchase Agreement or mutually agreed upon by the parties.

Certain Ordinary-Course Costs and Revenues

    (a)    With respect to revenues earned or property costs incurred with respect to the Assets attributable to the time period prior to the Effective Time:

    (i)    Chisholm shall be entitled to all amounts earned from the sale, during the period up to but excluding the Effective Time, of hydrocarbons produced from, or attributable to, the Assets; and

    (ii)    Chisholm shall be responsible for (and entitled to any refunds and indemnities with respect to) all property costs incurred prior to the Effective Time.

    (b)    With respect to revenues earned or property costs incurred with respect to the Assets from and after the Effective Time:


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    (i)    EEH shall be entitled to all amounts earned from the sale, during the period from and after the Effective Time, of hydrocarbons produced from, or attributable to, the Assets; and

    (ii)    EEH shall be responsible for (and entitled to any refunds and indemnities with respect to) all property costs incurred from and after the Effective Time.

Conditions to Completion of the Transaction

Conditions of Chisholm to Closing

The obligations of Chisholm to consummate the Transaction is subject, at the option of Chisholm, to the satisfaction on or prior to closing of each of the following conditions:

    (a)    all representations and warranties of Earthstone and EEH contained in the Purchase Agreement must have been true and correct in all material respects (or, with respect to representations and warranties qualified by materiality or Material Adverse Effect (as defined below), true and correct in all respects) as of the execution date, and must be true and correct in all material respects (or, with respect to representations and warranties qualified by materiality or Material Adverse Effect, true and correct in all respects) as of the closing date as if made on the closing date, other than any such representation and warranty that refers to a specified date, which need only be true and correct in all material respects (or, if qualified by materiality or Material Adverse Effect, true and correct in all respects) on and as of such specified date. All of EEH’s fundamental representations must have been true and correct (except for de minimis inaccuracies), and must be true and correct (except for de minimis inaccuracies) as of the closing date as if made on the closing date, other than any such representation and warranty that refers to a specified date, which need only be true and correct in all material respects (or, if qualified by materiality or Material Adverse Effect, true and correct in all respects) on and as of such specified date;

    (b)    EEH shall have performed and satisfied all covenants and agreements required by the Purchase Agreement to be performed and satisfied by EEH at or prior to closing in all material respects;

    (c)    no order shall have been entered by any court or governmental body having jurisdiction over the parties or the subject matter of the Purchase Agreement that restrains or prohibits the consummation of the Transaction and that remains in effect at the time of closing;

(d)    any waiting period applicable to the consummation of the Transaction under the terms of the Purchase Agreement under the HSR Act shall have expired or been terminated;

(e)    Earthstone and EEH shall have delivered or be ready, willing and able to deliver all of the deliverables they are required to deliver pursuant to the Purchase Agreement;

(f)    Earthstone shall have obtained all authorizations, qualifications, and approvals required to be obtained prior to closing for the replacement of insurance, bonds, letters of credit, and guaranties; and

(g)    this Information Statement shall have been mailed to Earthstone stockholders at least 20 days prior to the Closing Date.

Conditions of Earthstone and EEH to Closing

The obligations of Earthstone and EEH to consummate the Transaction is subject, at the option of Earthstone and EEH, to the satisfaction on or prior to closing of each of the following conditions:

    (a)    all representations and warranties of Chisholm contained in the Purchase Agreement must have been true and correct, except as would not individually or in the aggregate have a Material Adverse Effect as of the execution date, and must be true and correct, except as would not individually or in the aggregate have a Material Adverse Effect as

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of the closing date as if made on the closing date, other than any such representation and warranty that refers to a specified date, which need only be true and correct, except as would not individually or in the aggregate have a Material Adverse Effect on and as of such specified date. All of Chisholm’s fundamental representations must have been true and correct (except for de minimis inaccuracies), and must be true and correct (except for de minimis inaccuracies) as of the closing date as if made on the closing date, other than any such representation and warranty that refers to a specified date, which need only be true and correct in all material respects (or, if qualified by materiality or Material Adverse Effect, true and correct in all respects) on and as of such specified date;

    (b)    Chisholm shall have performed and satisfied all covenants and agreements required by the Purchase Agreement to be performed and satisfied by Chisholm at or prior to closing in all material respects;

    (c)    no order shall have been entered by any court or governmental body having jurisdiction over the parties or the subject matter of the Purchase Agreement that restrains or prohibits the consummation of the Transaction and that remains in effect at the time of closing;

(d) any waiting period applicable to the consummation of the Transaction under the terms of the Purchase Agreement under the HSR Act shall have expired or been terminated;

(e)    Chisholm shall have delivered or be ready, willing and able to deliver all of the deliverables Chisholm is required to deliver pursuant to the Purchase Agreement; and

(f)    this Information Statement shall have been mailed to Earthstone stockholders at least 20 days prior to the Closing Date.

Representations and Warranties

The Purchase Agreement contains certain customary representations and warranties, many of which are qualified by knowledge, materiality or Material Adverse Effect, made by each of Earthstone, EEH and Chisholm. The statements embodied in those representations and warranties are made solely for purposes of the Purchase Agreement and are subject to important qualifications and limitations agreed to by Earthstone, EEH and Chisholm in connection with negotiating its terms.

The representations and warranties of Earthstone and EEH, and Chisholm relate to, among other items (except where only one party has made representations and warranties as indicated below):

•    organization and qualification;
•    power and authority to perform its obligations;
•    capitalization (Earthstone);
•    authorization for execution and delivery of the Purchase Agreement and its enforceability;
•    absence of bankruptcy, reorganization and receivership proceedings; solvency;
•    absence of conflicts or defaults under organizational documents, absence of material breach of contracts and violations of applicable laws as a result of the transactions contemplated by the Purchase Agreement;
•    litigation;
•    governmental approvals (Earthstone);
•    fairness opinion (Earthstone);
•    environmental matters (Chisholm);
•    compliance with laws (Chisholm);
•    taxes and tax matters (Chisholm);
•    preferential rights and consents (Chisholm);
•    broker fees;
•    permits (Chisholm);
•    wells and equipment (Chisholm);
•    bonds and credit support (Chisholm);

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•    capital projects (Chisholm);
•    payouts (Chisholm);
•    prepayments; imbalances (Chisholm);
•    royalties; suspense funds (Chisholm);
•    wells and equipment (Chisholm);
•    agreements and contracts (Chisholm);
•    non-consent operations (Chisholm);
•    NYSE listing and compliance (Earthstone);
•    Financial ability (Earthstone);
•    SEC compliance (Earthstone);
•    securities laws compliance;
•    valid issuance of securities to Chisholm (Earthstone); and
•    internal controls (Earthstone).

As used in the Purchase Agreement, the term “Material Adverse Effect” in relation to a party means, any change, inaccuracy, effect, event, result, occurrence, condition or fact (for the purposes of this definition, each, an “event”) (whether foreseeable or not and whether covered by insurance or not) that has had or would be reasonably likely to have, individually or in the aggregate with any other event or events, a material adverse effect on the ownership, operation or financial condition of the Assets, taken as a whole; provided, however, that the term “Material Adverse Effect” does not include material adverse effects resulting from: (a) entering into the Purchase Agreement or the announcement of the contemplated Transaction; (b) changes in hydrocarbon or other commodity prices; (c) any action or omission of Seller taken in accordance with the terms of the Purchase Agreement or with the prior consent of Buyer; (d) any effect resulting from general changes in industry, economic, business, financial, regulatory, or political conditions in the United States or any other country or region; (e) civil unrest, any outbreak of disease or hostilities, terrorist activities or war or any similar disorder or cyber-attack or, in each case, any escalation thereof; (f) acts or failures to act of any governmental body, except to the extent arising from Seller’s action or inaction; (g) acts of God; (h) any reclassification or recalculation of reserves in the ordinary course of business; (i) natural declines in well performance; (j) general changes in legal requirements, in regulatory policies, or in GAAP; (k) changes in the stock price of Earthstone; (l) matters that are cured or no longer exist by the earlier of closing and the termination of the Purchase Agreement; (m) any epidemic, pandemic or disease outbreak or any worsening thereof, or any law, regulation, statute, directive, pronouncement or guideline issued by a governmental body, the Centers for Disease Control and Prevention, the World Health Organization or industry group providing for business closures, “sheltering-in-place” or other restrictions that relate to, or arise out of, an epidemic, pandemic or disease outbreak or any worsening thereof or any change in such law, regulation, statute, directive, pronouncement or guideline or interpretation thereof following the execution date of the Purchase Agreement; or (n) any failure to meet any budget, projections, forecasts or predictions of financial performance or estimates of revenue, earnings, cash flow or cash position, for any period.

Conduct of Business of the Chisholm Pending the Transaction

Until the closing, Chisholm shall operate the Assets in the ordinary course, maintain all leases and contracts in full force and effect, and pay or cause to be paid its proportionate share of all costs and expenses incurred in connection with the operation of the Assets and notify EEH of any ongoing activities and major capital expenditures in excess of $100,000 (in net costs) conducted on the Assets and, except as otherwise expressly contemplated by the Purchase Agreement or except as otherwise consented to in writing by EEH and Chisholm shall:

(a)    not transfer, sell, hypothecate, encumber, or otherwise dispose of any of the Assets, except as required under any leases or contracts, and except for sales of hydrocarbons, surplus equipment and inventory in the ordinary course of business;

(b)    not abandon any Asset;

(c)    not commence, propose, or agree to participate in any single operation with respect to the lease or wells with an anticipated cost in excess of $100,000 net to Chisholm’s interest, except for any emergency operations;


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(d)    not execute, terminate, cancel, extend, or materially amend or modify any material contract or lease other than the execution or extension of a contract for the sale, exchange, transportation, gathering, treating, or processing of hydrocarbons terminable without penalty on ninety days’ or shorter notice;

(e)    use commercially reasonable efforts to keep EEH apprised of any drilling, re-drilling or completion operations proposed or conducted by Chisholm with respect to the Assets;

(f)    maintain all material permits and approvals affecting the Assets;

(g)    not voluntarily relinquish Chisholm or its affiliates’ position as operator with respect to any of the Assets;

(h)    not waive, compromise or settle any claim in an amount in excess of $150,000 involving the Assets; and

(i)    not enter into any agreement with respect to any of the foregoing.

Termination of the Purchase Agreement

The Purchase Agreement may be terminated at any time prior to closing:

    (a)    by the mutual prior written consent of Chisholm and EEH;

    (b)    by either Chisholm or EEH if:

    (i)    the closing has not occurred on or before March 17, 2022 (the “Outside Date”); provided that the Outside Date shall be extended until April 19, 2022 in the event the preliminary Information Statement is filed with the SEC on or before January 14, 2022 and the SEC has not cleared the information statement to be mailed to Earthstone Stockholders by January 24, 2022. However, no party shall be entitled to terminate the Purchase Agreement if the closing has failed to occur through the fault of such party. The Purchase Agreement may not be extended beyond April 19, 2022 without the mutual written consent of EEH and Chisholm;

    (ii)    a governmental body has issued an order, or taken any action permanently restraining, enjoining or otherwise prohibiting the consummation of the Transaction and such order, decree, ruling or other action has become final and nonappealable; and

    (iii)    the sum of (A) all title defect values asserted by EEH in good faith and without taking into account the aggregate defect deductible (less the sum of all title benefit values), plus (B) the aggregate environmental defect values asserted by EEH in good faith and without taking into account the aggregate defect deductible, plus (C) solely in the case of an election by EEH, the aggregate downward Purchase Price adjustments for preferential purchase rights, plus (D) the aggregate downward Purchase Price adjustments for consents not received, exceeds fifteen percent of the unadjusted Purchase Price.

(c)    by EEH, if Chisholm has committed a material breach of the Purchase Agreement and such breach causes any of the conditions to closing not to be satisfied (or, if prior to closing, such breach is of such a magnitude or effect that it will not be possible for such condition to be satisfied); provided, however, that in the case of a breach that is capable of being cured, Chisholm shall have a period of ten business days following receipt of such written notice from EEH to Chisholm to attempt to cure the breach and the termination shall not become effective unless Chisholm fails to cure such breach prior to the end of such ten business day period; provided, further, EEH shall not be entitled to terminate the Purchase Agreement if EEH or Earthstone is in material breach of the Purchase Agreement.

(d)    by Chisholm, if Earthstone or EEH has committed a material breach of the Purchase Agreement and such breach causes any of the conditions to closing not to be satisfied (or, if prior to closing, such breach is of

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such a magnitude or effect that it will not be possible for such condition to be satisfied); provided, however, that in the case of a breach that is capable of being cured, Earthstone or EEH shall have a period of ten business days following receipt of such written notice from Chisholm to EEH to attempt to cure the breach and the termination shall not become effective unless Earthstone and EEH fail to cure such breach prior to the end of such ten business day period; provided, further, Chisholm shall not be entitled to terminate the Purchase Agreement if Chisholm is in material breach of the Purchase Agreement.

If the Purchase Agreement is terminated pursuant to the above, the Purchase Agreement shall become void and of no further force or effect (except for certain provisions regarding indemnification, confidentiality, injunctive relief, and remedies, all of which shall continue in full force and effect).

Damages for Failure to Close

In the event that (i) (A) Chisholm is entitled to terminate the Purchase Agreement because the conditions precedent to the obligations of Chisholm set forth above are not satisfied as of the Outside Date as a result of the breach or failure of Earthstone’s and EEH’s representations, warranties, or covenants under the Purchase Agreement, and (B) all conditions precedent to the obligations of Earthstone and EEH set forth above have been satisfied or waived in writing by Earthstone and EEH, or (ii) Chisholm is entitled to terminate the Purchase Agreement because closing has not occurred prior to the Outside Date, which may be extended as set forth above, through no fault of Chisholm, then Chisholm shall be entitled, to terminate the Purchase Agreement and receive the deposit of $30.5 million as liquidated damages.

In the event that (i) (A) all conditions precedent to the obligations of Earthstone and EEH set forth above have been satisfied or waived in writing by Earthstone and EEH and (B) Earthstone and EEH are entitled to terminate the Purchase Agreement because the conditions precedent to the obligations of Earthstone and EEH are not satisfied as of the Outside Date solely as a result of the breach or failure of Chisholm’s representations, warranties, or covenants thereunder, including, if and when required, Chisholm’s obligations to consummate the transactions contemplated hereunder at closing, or (ii) EEH is entitled to terminate the Purchase Agreement because closing has not occurred prior to April 22, 2022 through no fault of Earthstone and EEH, then EEH shall be entitled to elect, in its sole discretion, to either (x) seek specific performance of the Purchase Agreement, or (y) terminate the Purchase Agreement and receive the return of the deposit, and in the event that Chisholm is in willful breach of the Purchase Agreement, EEH may seek actual damages from Chisholm in an amount of up to $30.5 million as liquidated damages.

Other Covenants and Agreements of the Parties

Chisholm, Earthstone and EEH have agreed to several obligations under the Purchase Agreement pending the closing of the Transaction, including:

•    access to the Assets, and related books, records and files;
•    prior mutual agreement with respect to press releases and other public disclosures regarding the Purchase Agreement and the contemplated Transaction;
•    Chisholm’s cooperation and assistance in providing tax, financial, audit and other information that may be required by Earthstone to meet its public disclosure and SEC filing requirements, including this Information Statement;
•    non-compete and similar restrictions on certain persons associated with Transaction activities within the boundaries of the Assets for a period ending approximately nine months after closing;
•    Concurrently with the closing, EEH and OpCo will enter into a transition services agreement (the “Transition Services Agreement”) pursuant to which OpCo will provide EEH with services identical to the services historically provided by OpCo in operating the Assets, including administrative, back office, and day-to-day field level services reasonably necessary to operate the Assets, subject to certain exceptions. The term of the Transition Services Agreement is three months and EEH will pay OpCo a monthly fee plus reimbursement of certain expenses; and

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•    mutual post-closing indemnification rights and obligations for breaches of representations, warranties or covenants with customary basket (minimum limit on claims), holdback escrow of 4,441,748 shares of Class A Common Stock, time periods within which claims must be brought and aggregate limits of liability depending on the nature of the claim.

AGREEMENTS RELATED TO THE TRANSACTION

The following summary describes specific aspects of the Registration Rights Agreement and the Lock-up Agreement to be entered into at the closing of the Transaction. The following summary also describes specific aspects of the Amended and Restated Voting Agreement to be entered into at the closing of the Transaction. This discussion does not purport to be complete and is qualified in its entirety by reference to the form of Registration Rights Agreement, the form of Lock-up Agreement, the form of Amended and Restated Voting Agreement which are attached as Annex C, Annex D and Annex E, respectively. We urge you to read the form of Registration Rights Agreement, the form of Lock-up Agreement and Amended and Restated Voting Agreement carefully and in their entirety.

Fifth Amendment to Credit Agreement

On December 24, 2021, Earthstone, EEH, as borrower, Wells Fargo Bank, National Association (“Wells Fargo”) as Administrative Agent, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amendment (the “Amendment”) to the Credit Agreement dated November 21, 2019, by and among EEH, as Borrower, Earthstone, as Parent, Wells Fargo as Administrative Agent and Issuing Bank, Royal Bank of Canada, as Syndication Agent, Truist Bank, Citizens Bank, N.A., KeyBank National Association, U.S. Bank National Association, Fifth Third Bank, PNC Bank, National Association, and Bank of America, N.A., as Documentation Agents, and the Lenders party thereto (together with all amendments or other modifications, the “Credit Agreement”). The Amendment is contingent on the closing of the Transaction. Among other things, the Amendment increases the borrowing base under the Credit Agreement from $650 million to $825 million, unless the Company completes a note offering prior to the closing of the Transaction; provides mechanics relating to the transition from the use of LIBOR to a benchmark replacement rate upon the occurrence of certain transition events or elections made by EEH and the Administrative Agent; adds certain hedging requirements; adjusts some financial covenants; redefines the limitations on certain restricted payments EEH may make; and makes certain administrative changes to the Credit Agreement.

Registration Rights Agreement

Pursuant to the terms of the Purchase Agreement, at the closing of the Transaction, Earthstone, Chisholm and certain direct and indirect equity holdings of Chisholm Holdings will enter into a registration rights agreement (the “Registration Rights Agreement”) relating to the Shares. The Registration Rights Agreement provides that, within sixty days after the closing of the Transaction, Earthstone will prepare and file a registration statement to permit the public resale of the shares of Class A Common Stock issued by Earthstone to Chisholm in connection with the closing of the Transaction. Earthstone shall cause the registration statement to be continuously effective from and after the date it is first declared or becomes effective until the earlier of (i) all such shares of Class A Common Stock have been disposed of in the manner set forth in the registration statement or until there are no longer any such registrable shares of Class A Common Stock issued in connection with the Transaction outstanding; and (ii) three years after the closing of the Transaction, subject to one-year extensions for holders of greater than two percent of the outstanding voting power of Earthstone.

In addition, in the event that Earthstone proposes to engage in an underwritten offering in which shares of Class A Common Stock are to be sold to an underwriter on a firm commitment basis for reoffering to the public, or an offering that is a “bought deal” with one or more investment banks, Earthstone will give written notice of the proposed underwritten offering to the parties to the Registration Rights Agreement at least ten business days’ prior to the commencement of such offering, and such parties shall then have the right to include in the underwritten offering such number of shares of Class A Common Stock as they may request in writing within five business days of receipt of such notice, subject to certain limitations contained therein. If the underwritten offering is to be structured as an overnight underwritten offering, such that the offering would be launched after the close of trading on one trading day and priced before the open of trading on the next succeeding trading day, Earthstone will notify the parties to the Registration Rights Agreement no later than one business day after Earthstone engages a managing underwriter

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and offer such parties the right to include in the overnight underwritten offering such number of shares of Class A Common Stock as they may request in writing, subject to certain limitations contained therein.

Finally, in the event that holders of at least $25 million of shares of Class A Common Stock registrable under the Registration Rights Agreement elect to dispose of such Class A Common Stock under the shelf registration statement filed by Earthstone as required by the Registration Rights Agreement pursuant to an underwritten offering or overnight underwritten offering, Earthstone will notify the parties to the Registration Rights Agreement of the proposed underwritten offering or overnight underwritten offering and offer such parties the opportunity to include in the underwritten offering or underwritten overnight offering such number of shares of Class A Common Stock as they may request in writing.

Earthstone will pay all registration expenses incident to the performance of its obligations under the Registration Rights Agreement other than: (i) transfer taxes and fees of transfer agents and registrars; (ii) fees and expenses of counsel engaged by the selling stockholders, except for legal fees of selling stockholders up to $20,000 in connection with the initial shelf registration statement; and (iii) commissions and discounts of brokers, dealers and underwriters.

Lock-up Agreement

Pursuant to the terms of the Purchase Agreement, at the closing of the Transaction, Earthstone, Chisholm and certain direct and indirect equity holders of Chisholm Holdings will enter into a lock-up agreement (the “Lock-up Agreement”) providing that such holders will not transfer, subject to limited exceptions, any of the Closing Shares for sixty days after the closing of the Transaction. Sixty days after the closing of Transaction, approximately 8% of the Closing Shares may be transferred; ninety days after the closing of the Transaction, an additional 42% of the Closing Shares may be transferred; and one hundred twenty days after the closing of the Transaction, the remaining 50% of the Closing Shares may be transferred.

Amended and Restated Voting Agreement

Pursuant to the terms of the Purchase Agreement, at the closing of the Transaction, the Warburg Funds, EnCap and Earthstone, will enter into an amendment and restatement (the “Amended and Restated Voting Agreement”) of that certain voting agreement dated January 7, 2021 by and among certain Warburg Funds, EnCap and Earthstone (the “Voting Agreement”) providing for the portion of the Shares held by any Warburg Funds who are signatories to the Voting Agreement will be included in the Voting Agreement. The Voting Agreement contains provisions that provide the Warburg Funds with the ability to appoint one director to the Board and the ability to appoint one director will continue in the Amended and Restated Voting Agreement.

INFORMATION ABOUT CHISHOLM

General

Chisholm Energy Operating, LLC, a Delaware limited liability company (“OpCo”), and Chisholm Energy Agent, Inc., a Delaware corporation (“Agent” and collectively with Opco, “Chisholm”), are privately-held companies that invest in the energy sector through exploration, development and production of oil, natural gas and natural gas liquids. These entities are collectively referred to as Chisholm below. Chisholm holds significant acreage in the Delaware Basin. Chisholm had previously drilled and completed horizontal wells in the Bone Spring and Wolfcamp formations.

As of December 31, 2020, Chisholm’s estimated proved reserves totaled 34,995 MBoe. For the year ended December 31, 2020, Chisholm had oil and natural gas revenues of approximately $91.3 million and incurred a net loss of approximately $21.9 million. For the nine months ended September 30, 2021, Chisholm had oil and natural gas revenues of approximately $147.0 million and incurred a net loss of approximately $165.5 million inclusive of a $114.9 million impairment charge.

Properties
The following sets forth information about Chisholm’s properties and operations.

Proved Reserves


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Substantially all of Chisholm’s oil and gas reserves are in the Delaware Basin. Unaudited information concerning the estimated net quantities of Chisholm’s proved reserves and the standardized measure of future net cash flows from the reserves is presented in the Supplemental Oil and Natural Gas Information (Unaudited), in the Historical Consolidated Financial Statements of Chisholm included elsewhere in this Information Statement. Chisholm’s reserve estimates have been prepared internally by Chisholm management. Set forth below is a summary of Chisholm’s oil, natural gas and natural gas liquids reserves as of December 31, 2020. Chisholm does not have any long-term supply or similar agreements with foreign governments or authorities. Natural gas liquids are immaterial and are included in natural gas sales below.
 
Estimated Proved Reserves Quantities and Standardized Measure
 OilNatural GasTotalStandardized Measure of Discounted Future Net Cash Flows ($ in thousands)
 (MBbl)(MMcf)
(MBOE) (1)
Proved developed12,024 41,779 18,987 $161,862 
Proved undeveloped12,262 22,475 16,008 56,815 
Total proved24,286 64,254 34,995 $218,677 
(1)    Barrels of oil equivalent have been calculated on the basis of six Mcf of natural gas equal to one Boe.

 OilNatural GasTotal
 (MBbl)(MMcf)
(MBOE) (1)
Proved reserves at December 31, 201932,485 108,600 50,585 
Revisions(7,454)(44,055)(14,797)
Extensions1,586 7,059 2,763 
Acquisition of reserves— — — 
Production(2,331)(7,350)(3,556)
Proved reserves at December 31, 202024,286 64,254 34,995 
Proved developed reserves:
December 31, 201910,471 40,700 17,254 
December 31, 202012,024 41,779 18,987 
(1)    Barrels of oil equivalent have been calculated on the basis of six Mcf of natural gas equal to one Boe.
Uncertainties are inherent in estimating quantities of proved reserves, including many risk factors beyond Chisholm’s control. Reserve engineering is a subjective process of estimating subsurface accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and the interpretation thereof. Thus, estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production after the date of the estimates, as well as economic factors such as change in commodity prices and drilling, completion and operating costs, may require revision of such estimates. Accordingly, oil and natural gas quantities ultimately recovered will vary from reserve estimates.
 
Proved Undeveloped Reserves
At December 31, 2020, Chisholm had 64 proved undeveloped (“PUD”) locations with 16,008 MBoe of proved undeveloped reserves, which were a result of Chisholm’s 2020 successful drilling results and those of offset operators.

Preparation of Reserve Estimates

The proved reserves estimates shown herein have been prepared by Chisholm management which has historically prepared annual internal reserve estimates. Proved reserves were estimated in accordance with guidelines established by the SEC, which require that reserve estimates be prepared under existing economic and operating conditions based upon the 12-month unweighted average of the first-day-of-the-month prices. The primary inputs to the reserve estimation process are technical information, financial data, ownership interest and production data. Current revenue and expense information is obtained from Chisholm’s accounting records, which are subject to annual audits. All current financial data such as commodity prices, lease

50


operating expenses, production taxes and field-level commodity price differentials are updated in the reserve database which is prepared by Chisholm’s internal reserve engineer, and then analyzed to ensure that they have been entered accurately and that all updates are complete and accurate. In addition, Chisholm’s current ownership of mineral interests and well production data are incorporated in the reserve database and verified by Chisholm’s personnel to ensure their accuracy and completeness.

Gross and Net Productive Wells

As of December 31, 2020, Chisholm’s total gross and net productive wells were as follows:

 
Oil(1)
Natural Gas(1)
Total(1)
Gross WellsNet WellsGross WellsNet WellsGross WellsNet Wells
Operated151 121 13 164 130 
Non-operated72 11 46 118 19 
    
(1)    A gross well is a well in which a working interest is owned. The number of net wells represents the sum of fractions of working interests Chisholm owns in gross wells. Productive wells are those that produce commercial quantities of hydrocarbons.

Acreage

The following table summarizes Chisholm’s gross and net developed and undeveloped acreage in the Delaware Basin as of December 31, 2020. Net acreage represents Chisholm’s percentage ownership of gross acreage.

 DevelopedUndevelopedTotal
GrossNetGrossNetGrossNet
Delaware Basin58,658 38,370 1,112 1,089 59,770 39,459 
                                                                                    

The following table summarizes, as of December 31, 2020, the portion of Chisholm’s gross and net acreage subject to expiration over the next three years if not successfully developed or renewed.

 Expiring Acreage
 202120222023Total
 GrossNetGrossNetGrossNetGrossNet
Delaware Basin— — 40 40 313 313 353 353 
                                                                                    
Exploratory Wells and Development Wells

Set forth below for the two years ended December 31, 2020 is information concerning the number of wells Chisholm completed during the years indicated.
Net Exploratory
Wells Drilled
Net Development
Wells Drilled
Total Net Productive and Dry Wells Drilled
YearProductiveDryProductiveDry
2020— — — 
2019— — 19 — 19 
                                                                                
Drilling Commitments

Chisholm is the operator of 87% of its acreage in the Delaware Basin. Chisholm began drilling operations in May 2017 and has been developing this acreage with the latest completions occurring in November 2021. Chisholm has the right to earn 3,550 acres through a development agreement with Occidental Petroleum Corporation (“Oxy”). Chisholm will need to drill and

51


complete four initial wells by September 29, 2022, paying 100% of the capital costs attributable to Oxy’s interest in the four initial wells. After the initial four wells, Chisholm will need to maintain a continuous development drilling program until the remainder of the acreage has been earned under the terms of the development agreement.

Management’s Discussion and Analysis of Chisholm Operations

Critical Accounting Policies

Critical accounting policies are those that reflect significant judgments and uncertainties and that could potentially result in materially different results under different assumptions and conditions. For a detailed description of Chisholm’s accounting policies, see Note 2 – Summary of Significant Accounting Policies in the Notes to the Historical Consolidated Financial Statements of Chisholm included in this Information Statement.

Results of Operations

Year ended December 31, 2020 compared to the year ended December 31, 2019
 Years Ended December 31, 
 20202019Change
   
Sales volumes (MBoe) (1)
3,556 3,357 %
Average daily production (Boe per day)9,716 9,196 %
Average prices realized (per Boe)$25.68 $37.21 (31)%
Average prices adjusted for realized derivatives settlements (per Boe)$33.69 $38.26 (12)%
(In thousands) 
Oil and natural gas revenues$91,303 $124,910 (27)%
Lease operating expense$26,209 $31,660 (17)%
Production and ad valorem taxes$8,122 $11,124 (27)%
Depreciation, depletion and amortization$69,996 $65,205 %
Impairment expense$— $2,989 NM
General and administrative expense$10,990 $12,305 (11)%
Interest expense$(11,353)$(9,696)17 %
Gain (loss) on derivative contracts, net$18,282 $(16,507)NM
(1)     Barrels of oil equivalent have been calculated on the basis of six Mcf of natural gas equals one Boe.

NM – Not meaningful

Oil and natural gas revenues

For the year ended December 31, 2020, oil and natural gas revenues decreased by $33.6 million or 27% compared to 2019. The average realized price per Boe decreased 31% from $37.21 for the year ended December 31, 2019 to $25.68 for the year ended December 31, 2020. The total volume of oil and natural gas produced and sold increased 199 MBoe or 6% primarily due to new wells brought online in 2020.

Lease operating expense (“LOE”)


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Lease operating expenses consist of the costs of producing crude oil and natural gas such as labor, supplies, repairs, maintenance, water disposal, workovers and utilities.

For the year ended December 31, 2020, LOE decreased by $5.5 million or 17% compared to 2019, primarily due to cost reduction efforts, offset by increased production in 2020.

Production and ad valorem taxes

Production and ad valorem taxes for the year ended December 31, 2020 decreased by $3.0 million or 27% compared to 2019, as the impact of increased volume was more than offset by the impact of decreased commodity prices. As a percentage of revenues from oil, natural gas, and natural gas liquids, production taxes remained relatively flat in 2020 compared to the prior year.

Depreciation, depletion and amortization (“DD&A”)
DD&A increased for the year ended December 31, 2020 by $4.8 million, or 7% compared to 2019, primarily due to reserve reductions resulting from depressed commodity prices (lower reserve quantities leads to higher DD&A per Boe). This expense category includes depletion expense pertaining to Chisholm's oil and natural gas properties, and depreciation expense pertaining to its fixed assets located in its headquarters and field locations. For the year ended December 31, 2020, Chisholm's total DD&A rate per BOE was $19.68 compared to prior year of $19.42.

Impairment expense

During the year ended December 31, 2020, Chisholm recorded no non-cash impairments. Chisholm recorded non-cash impairments totaling $3.0 million during the year ended December 31, 2019.

Exploration expense

Exploration expense for the year ended December 31, 2020 decreased by $0.7 million or 91% compared to 2019 almost entirely due to the reduced acquisition of seismic data. Under the successful efforts method of accounting, seismic data costs are charged immediately to expense.

General and administrative expense (“G&A”)

G&A expenses consist primarily of payroll related and other administrative expenses to support Chisholm's operations. G&A decreased by $1.3 million for the year ended December 31, 2020 relative to the comparable period in 2019, primarily due to reductions in employees as a result of the staff reductions implemented after the significant drop in realized commodity prices in the first half of the year as well as the implementation of cost reduction initiatives, partially offset by severance expenses related to the employee reductions.

Interest expense, net

Interest expense includes commitment fees, amortization of deferred financing costs, and interest on outstanding indebtedness. Interest expense increased from $9.7 million for the year ended December 31, 2019, to $11.4 million for the year ended December 31, 2020 primarily due to the increased amount outstanding in total under the credit facility and Second Lien Notes.

Gain (loss) on derivative contracts, net

For the year ended December 31, 2020, Chisholm recorded a net gain on derivative contracts of $18.3 million, consisting of net realized gains on settlements of $28.5 million offset by unrealized mark-to-market losses of $10.2 million. For the year ended December 31, 2019, Chisholm recorded a net loss on derivative contracts of $16.5 million, consisting of unrealized mark-to-market losses of $20.0 million, partially offset by net realized gains on settlements of $3.5 million.


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Contractual Obligations

Chisholm had the following contractual obligations and commitments as of December 31, 2020:
                                                                                            
(in thousands)2021202220232024ThereafterTotal
Operating leases$657 $111 $104 $13 $— $885 
    


Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020

 Nine Months Ended
September 30,
 
 20212020Change
   
Sales volumes (MBoe) (1)
3,240 2,688 21 %
Average daily production (Boe per day)11,869 9,809 21 %
Average prices realized (per Boe)$45.38 $24.89 82 %
Average prices adjusted for realized derivatives settlements (per Boe)$36.71 $33.76 %
(In thousands) 
Oil and natural gas revenues$147,041 $66,907 120 %
Lease operating expense$29,076 $20,955 39 %
Production and ad valorem taxes$13,078 $5,933 120 %
Depreciation, depletion and amortization$52,683 $53,074 (1)%
Impairment expense$114,907 $— NM
General and administrative expense$8,891 $8,381 %
Interest expense$(8,708)$(8,800)(1)%
Loss on derivative contracts, net$(84,397)$30,552 NM
(1)    Barrels of oil equivalent have been calculated on the basis of six Mcf of natural gas equals one Boe.

NM – Not meaningful

Oil and natural gas revenues

For the nine months ended September 30, 2021, oil and natural gas revenues increased by $80.1 million or 120% compared to 2020. Chisholm's average realized price per Boe increased 82% from $24.89 for the nine months ended September 30, 2020 to $45.38 for the nine months ended September 30, 2021. The total volume of oil and natural gas produced and sold increased 552 MBoe or 21% primarily due to new wells brought online in the first nine months of 2020 more than offsetting natural production declines.

Lease operating expense (“LOE”)


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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 insurance and overhead charges provided for in operating agreements.

LOE increased by $8.1 million or 39% for the nine months ended September 30, 2021 compared to 2020, primarily due to increased production volumes versus the prior year period.

Production and ad valorem taxes

Production and ad valorem taxes for the nine months ended September 30, 2021 increased by $7.1 million or 120% relative to the comparable period in 2020 due to improved commodity prices and increased volume. As a percentage of revenues from oil, natural gas, and natural gas liquids, production taxes remained relatively flat in 2021 compared to the prior year period.

Depreciation, depletion and amortization (“DD&A”)
DD&A for the nine months ended September 30, 2021 remained relatively flat compared to the same period in 2020, primarily due to an increased reserves base because of converting from 2-stream reserves to 3-stream reserves during 2021. For the nine months ended September 30, 2021 and 2020, the total DD&A rate per BOE was $16.26 and $19.74 respectively.

Impairment expense
During the nine months ended September 30, 2021, Chisholm recorded non-cash impairments totaling $114.9 million which consisted of $30.1 million to proved oil and natural gas properties and $84.8 million to unproved oil and natural gas properties. Chisholm recorded no non-cash impairments for the same period in 2020.

General and administrative expense (“G&A”)

These expenses consist primarily of employee remuneration, professional and consulting fees and other overhead expenses. G&A increased by $0.5 million for the nine months ended September 30, 2021 relative to the comparable period in 2020.

Interest expense, net

Interest expense includes commitment fees, amortization of deferred financing costs, and interest on outstanding indebtedness. Interest expense remained relatively flat for the nine months ended September 30, 2021 primarily due to lower outstanding borrowings compared to the same period in the prior year period offset by reduction in accrued interest from an intercompany note payable during 2021.

(Loss) gain on derivative contracts, net

For the nine months ended September 30, 2021, Chisholm recorded a net loss on derivative contracts of $84.4 million, consisting of net realized losses on settlements of $28.1 million and unrealized mark-to-market losses of $56.3 million. For the nine months ended September 30, 2020, Chisholm recorded a net gain on derivative contracts of $30.5 million, consisting of unrealized mark-to-market gains of $6.7 million and net realized gains on settlements of $23.8 million.



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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On December 15, 2021, Earthstone, EEH and Chisholm entered into the Purchase Agreement. Pursuant to the Purchase Agreement, EEH will acquire (the “Transaction”) interests in oil and gas leases and related properties of Chisholm located in Lea County and Eddy County, New Mexico, for a purchase price (the “Purchase Price”) consisting of $410 million in cash, subject to customary purchase price adjustments, and 19,417,476 shares (the “Shares”) of Class A Common Stock. The cash portion of the Purchase Price is subject to adjustments with an effective date of November 1, 2021. In connection with the Purchase Agreement, EEH deposited $30.5 million in cash into a third-party escrow account as a deposit, which will be credited against the Purchase Price upon closing of the Transaction.

The Purchase Agreement contains customary representations and warranties for transactions of this nature. The Purchase Agreement also contains customary pre-closing covenants of the parties, including the obligation of Chisholm to conduct its business in the ordinary course consistent with past practice and to refrain from taking certain specified actions, subject to certain exceptions.

The Transaction will be accounted for as a business combination in accordance with Accounting Standards Codification Topic 805, Business Combinations (referred to as “ASC 805”) using the acquisition method of accounting, with Earthstone identified as the acquirer. The preliminary allocation of the total purchase price in the Transaction is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. The pro forma financial statements have been prepared to reflect the transaction accounting adjustments to Earthstone’s historical condensed consolidated financial information in order to account for the Transaction and will include the assumption of liabilities for acquisition-related expenses and the recognition of the estimated tax impact of the pro forma adjustments.

As previously disclosed in its Current Report on Form 8-K filed on January 13, 2021 with the SEC, on January 7, 2021, Earthstone completed the acquisition (the “IRM Acquisition”) of all of the issued and outstanding limited liability company interests in Independence and certain wholly owned subsidiaries as contemplated in a purchase and sale agreement dated December 17, 2020. On February 24, 2021, Earthstone filed a Current Report on Form 8-K/A for the purpose of providing unaudited pro forma condensed combined financial statements giving effect to the IRM Acquisition, as required by Item 9.01(b) of Form 8-K. The IRM Acquisition was accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer.

As previously disclosed in its Current Report on Form 8-K filed on July 23, 2021 with the SEC, on July 20, 2021, Earthstone completed the acquisition of the assets of Tracker Resource Development III, LLC and TRD III Royalty Holdings (TX), LP (the “Tracker Acquisition”) and the acquisition of the assets of SEG-TRD LLC (“SEG-I”) and SEG-TRD II LLC (the “Sequel Acquisition”) providing unaudited pro forma condensed combined financial statements giving effect to the Tracker Acquisition and the Sequel Acquisition, as required by Item 9.01(b) of Form 8-K, both of which were accounted for as asset acquisitions in accordance with ASC 805. The fair value of the consideration paid by us and allocation of that amount to the underlying assets acquired, on a relative fair value basis, were recorded on our books as of the date of the closing of the Tracker Acquisition and the Sequel Acquisition. Additionally, costs directly related to the Tracker Acquisition and the Sequel Acquisition were capitalized as a component of the purchase price.

The unaudited pro forma condensed combined balance sheet as of September 30, 2021 gives effect to the Transaction as if it had been completed on September 30, 2021. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 and the nine months ended September 30, 2021 give effect to the IRM Acquisition, the Tracker Acquisition, the Sequel Acquisition and the Transaction (collectively, the “Acquisitions”) as if they had been completed on January 1, 2020. Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the pro forma condensed combined financial statements. As of the date of issuance of the unaudited pro forma condensed combined financial information, Earthstone has not completed the detailed valuation study necessary to arrive at the required final estimates of the fair value of the assets to be acquired and liabilities assumed in the Transaction.

The unaudited pro forma condensed combined balance sheet does not purport to represent what Earthstone’s financial position would have been had the Transaction actually been consummated on September 30, 2021. The unaudited pro forma condensed combined statements of operations do not purport to represent what Earthstone’s results of operations would have been

56


had the Acquisitions actually been consummated on January 1, 2020. The unaudited pro forma condensed combined financial information is not indicative of Earthstone’s future financial position or results of operations and does not reflect future events that may occur after the Acquisitions, including, but not limited to, the anticipated realization of ongoing savings from operating efficiencies, or offsetting unforeseen incremental costs.

The unaudited pro forma condensed combined balance sheet as of September 30, 2021 has been derived from and should be read in conjunction with:
•    the unaudited historical condensed consolidated balance sheet of Earthstone as of September 30, 2021 included in its Quarterly Report on Form 10-Q for quarter ended September 30, 2021; and
•    the unaudited historical condensed consolidated balance sheet of Chisholm Holdings as of September 30, 2021 included in this Information Statement.
The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2021 has been derived from:
•    the unaudited historical condensed consolidated statement of operations of Earthstone for the nine months ended September 30, 2021 included in its Quarterly Report on Form 10-Q for quarter ended September 30, 2021;
•    the unaudited historical condensed consolidated statement of operations of Independence for the period January 1, 2021 through January 7, 2021, based on the allocated number of days from the entire month’s results;

•    the unaudited historical condensed consolidated statement of operations of Chisholm Holdings for the nine months ended September 30, 2021 included in this Information Statement;
•    the unaudited historical condensed consolidated statement of operations of Tracker for the six months ended June 30, 2021 (incorporated by reference from Exhibit 99.1 to the Current Report on Form 8-K filed with the SEC on January 14, 2022);
•    the unaudited historical statements of revenues and direct expenses of Sequel for the six months ended June 30, 2021 (incorporated by reference from Exhibit 99.2 to the Current Report on Form 8-K filed with the SEC on January 14, 2022);
•    the unaudited historical condensed consolidated statement of operations of Tracker for the period July 1, 2021 through July 20, 2021, based on the allocated number of days from the entire month’s results; and
•    the unaudited historical statements of revenues and direct expenses of Sequel for the period July 1, 2021 through July 20, 2021, based on the allocated number of days from the entire month’s results.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020 has been derived from:
•    the audited historical consolidated statement of operations of Earthstone for the year ended December 31, 2020 included in its 2020 Annual Report on Form 10-K for the year ended December 31, 2020;
•    the audited historical consolidated statement of operations of Independence for the year ended December 31, 2020 (incorporated by reference from Exhibit 99.6 to the Current Report on Form 8-K filed with the SEC on July 23, 2021);
•    the audited historical consolidated statement of operations of Chisholm Holdings for the year ended December 31, 2020 included in this Information Statement; and
•    the audited historical consolidated statement of operations of Tracker for the year ended December 31, 2020 (incorporated by reference from Exhibit 99.3 to the Current Report on Form 8-K filed with the SEC on July 23, 2021); and
•    the audited historical statements of revenues and direct expenses of Sequel for the year ended December 31, 2020 (incorporated by reference from Exhibit 99.5 to the Current Report on Form 8-K filed with the SEC on July 23, 2021).

57


EARTHSTONE ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2021
(In thousands, except share and per share amounts)

ASSETSEarthstone HistoricalChisholm Holdings HistoricalTransaction Accounting AdjustmentsNotesEarthstone Pro Forma as Adjusted
Current assets:
Cash$441 $12,437 $(12,437)(a)$441 
Accounts receivable:
Oil and natural gas revenues45,076 23,475 (23,475)(a)45,076 
Joint interest billings and other, net of allowance3,058 7,375 (7,375)(a)3,058 
Due from affiliates— 49 (49)(a)— 
Derivative asset17 — — 17 
Prepaid expenses and other current assets1,565 965 (965)(a)1,565 
Total current assets50,157 44,301 (44,301)50,157 
Oil and gas properties, successful efforts method:
Proved properties1,487,362 739,174 (233,750)(b)1,992,786 
Unproved properties235,232 234,497 (129,411)(b)340,318 
Land (surface rights)5,382 — — 5,382 
Total oil and gas properties1,727,976 973,671 (363,161)2,338,486 
Accumulated depreciation, depletion, amortization and impairment(367,000)(363,671)363,671 (b)(367,000)
Net oil and gas properties1,360,976 610,000 510 1,971,486 
Other noncurrent assets:
Office and other equipment, net of accumulated depreciation1,730 3,056 (3,056)(a)1,730 
Derivative asset453 — — 453 
Operating lease right-of-use assets1,963 — — 1,963 
Other noncurrent assets9,694 4,000 (4,000)(a)12,665 
2,971 (c)
TOTAL ASSETS$1,424,973 $661,357 $(47,876)$2,038,454 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$33,602 $21,644 $(21,644)(a)$36,573 
2,971 (c)

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Revenues and royalties payable30,139 9,030 (9,030)(a)$30,139 
Accrued expenses20,620 13,478 (13,478)(a)20,620 
Asset retirement obligation543 362 (362)(e)543 
Derivative liability67,575 40,055 (40,055)(a)67,575 
Advances1,325 — — 1,325 
Operating lease liabilities732 — — 732 
Other current liabilities634 — 70,000 (d)70,634 
Total current liabilities155,170 84,569 (11,598)228,141 
Noncurrent liabilities:
Long-term debt278,253 152,259 (152,259)(f)618,253 
340,000 (f)
Deferred tax liability13,764 — — 13,764 
Asset retirement obligation14,965 5,027 1,697 (e)21,689 
Derivative liability7,730 28,401 (28,401)(a)7,730 
Operating lease liabilities1,394 — — 1,394 
Other noncurrent liabilities3,803 — — 3,803 
Total noncurrent liabilities319,909 185,687 161,037 666,633 
Equity:
Members' Equity— 391,101 (391,101)(g)— 
Class A common stock51 — 19 (h)70 
Class B common stock34 — — 34 
Additional paid-in capital690,739 — 193,767 (h)884,506 
Accumulated deficit(199,544)— — (199,544)
Total Earthstone Energy, Inc. stockholders’ equity491,280 391,101 (197,315)685,066 
Noncontrolling interest458,614 — — 458,614 
Total equity949,894 391,101 (197,315)1,143,680 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,424,973 $661,357 $(47,876)$2,038,454 




59



EARTHSTONE ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
(In thousands, except share and per share amounts)

Earthstone HistoricalIndependence
Historical
(1/1/21 - 1/7/21)
Tracker
Historical
(1/1/21 - 7/19/21)
Sequel
Historical
(1/1/21 - 7/19/21)
Chisholm Holdings Historical Transaction Accounting AdjustmentsNotesEarthstone
Pro Forma
Combined
REVENUES
Oil and natural gas revenues$275,627 $1,696 $17,365 $21,680 $147,041 $— $463,409 
Unrealized loss - commodity derivatives— (1,861)— — — 1,861 (i)— 
Total revenues275,627 (165)17,365 21,680 147,041 1,861 463,409 
OPERATING COSTS AND EXPENSES
Lease operating expense35,579 423 2,341 1,970 29,706 — 70,019 
Production and ad valorem taxes17,428 135 1,063 1,652 13,078 — 33,356 
Depreciation, depletion, amortization and accretion78,409 578 4,112 — 52,755 (10,228)(j)125,626 
Impairment expense— — — — 114,907 (114,907)(o)— 
General and administrative expense25,200 185 1,969 — 8,891 29 (i)36,274 
Equity-based compensation— 29 — — — (29)(i)— 
Transaction costs2,906 — — — — — 2,906 
Exploration expense326 — 100 — 47 — 473 
Total operating costs and expenses159,848 1,350 9,585 3,622 219,384 (125,135)268,654 
(Loss) gain on sale of oil and gas properties740 — — — — — 740 
Income (loss) from operations116,519 (1,515)7,780 18,058 (72,343)126,996 195,495 
OTHER INCOME (EXPENSE)
Interest expense, net(7,668)(127)(594)— (8,708)(1,962)(k)(19,763)
(704)(l)
(Loss) gain on derivative contracts, net(117,566)— (3,069)— (84,397)(1,861)(i)(206,893)
Other income (expense), net823 — 1,627 — (70)— 2,380 
Total other income (expense)(124,411)(127)(2,036)— (93,175)(4,527)(224,276)
(Loss) income before income taxes(7,892)(1,642)5,744 18,058 (165,518)122,469 (28,781)
Income tax benefit (expense)343 10 — — (3)90 (m)440 

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Net (loss) income$(7,549)$(1,632)$5,744 $18,058 $(165,521)$122,559 $(28,341)
Less: Net loss attributable to noncontrolling interests(3,263)— (44)— — (6,068)(n)(9,375)
Net (loss) income attributable to common stockholders$(4,286)$(1,632)$5,788 $18,058 $(165,521)$128,627 $(18,966)
Net income (loss) per common share:
Basic$(0.09)$(0.29)
Diluted$(0.09)$(0.29)
Weighted average common shares outstanding:
Basic45,406,952 19,417,476 64,824,428 
Diluted45,406,952 19,417,476 64,824,428 



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EARTHSTONE ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2020
(In thousands, except share and per share amounts)

Earthstone HistoricalIndependence HistoricalTracker HistoricalSequel HistoricalChisholm Holdings HistoricalTransaction Accounting AdjustmentsNotesEarthstone
Pro Forma
Combined
REVENUES
Oil and natural gas revenues$144,523 $80,473 $25,570 $36,793 $91,303 $— $378,662 
Realized gain (loss) - commodity derivatives— 28,585 — — — (28,585)(i)— 
Unrealized (loss) gain - commodity derivatives— (1,109)— — — 1,109 (i)— 
Loss on sale of oil and gas properties— — (73)— — 73 (i)— 
Other revenues— 56 — — — (56)(i)— 
Total revenues144,523 108,005 25,497 36,793 91,303 (27,459)378,662 
OPERATING COSTS AND EXPENSES
Lease operating expense29,131 16,473 5,378 6,960 26,896 517 (i)85,355 
Production and ad valorem taxes9,411 5,154 1,381 3,014 8,122 — 27,082 
Marketing expenses— — 573 — — (573)(i)— 
Rig termination expense426 (24)— — 1,934 — 2,336 
Depreciation, depletion, amortization and accretion96,721 47,507 18,982 — 70,082 (54,876)(j)178,416 
Impairment expense64,498 — 273,838 — — (273,838)(o)64,498 
General and administrative expense28,233 8,735 4,940 — 10,990 1,799 (i)54,697 
Equity-based compensation— 1,799 — — — (1,799)(i)— 
Transaction costs622 — — — — 12,381 (p)13,003 
Exploration expense298 — 130 — 67 — 495 
Total operating costs and expenses229,340 79,644 305,222 9,974 118,091 (316,389)425,882 
Gain (loss) on sale of oil and gas properties204 — — — — (73)(i)131 
Income (loss) from operations(84,613)28,361 (279,725)26,819 (26,788)288,857 (47,089)
OTHER INCOME (EXPENSE)
Interest expense, net(5,232)(9,845)(1,907)— (11,353)1,207 (k)(28,068)
(938)(l)
Gain on derivative contracts, net59,899 — 5,962 — 18,282 27,476 (i)111,619 

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Loss on disposal of asset— — (277)— — — (277)
Other income (expense) , net400 — 22 — (2,078)— (1,656)
Total other income (expense)55,067 (9,845)3,800 — 4,851 27,745 81,618 
(Loss) income before income taxes(29,546)18,516 (275,925)26,819 (21,937)316,602 34,529 
Income tax benefit (expense)112 (340)— — — (1,443)(m)(1,671)
Net (loss) income$(29,434)$18,176 $(275,925)$26,819 $(21,937)$315,159 $32,858 
Less: Net loss attributable to noncontrolling interests(15,887)— (2,754)— — 29,795 (n)11,154 
Net (loss) income attributable to common stockholders$(13,547)$18,176 $(273,171)$26,819 $(21,937)$285,364 $21,704 
Net income (loss) per common share:
Basic$(0.45)$0.32 
Diluted$(0.45)$0.32 
Weighted average common shares outstanding:
Basic29,911,625 38,337,070 68,248,695 
Diluted29,911,625 38,337,070 68,248,695 


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EARTHSTONE ENERGY, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Note 1. Basis of Presentation

The accompanying pro forma condensed combined financial statements were prepared in accordance with Article 11 of Regulation S-X, as amended by SEC Final Rule Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and based on the historical consolidated and combined financial information of Earthstone, Independence, Tracker, Sequel and Chisholm Holdings. The Transaction has been accounted for herein as a business combination in accordance with ASC 805 using the acquisition method of accounting, with Earthstone identified as the acquirer. The preliminary allocation of the total purchase price in the Transaction is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed.

Certain transaction accounting adjustments have been made in order to show the effects of the Transaction on the combined historical financial information of Earthstone, Independence, Tracker, Sequel and Chisholm Holdings. The transaction accounting adjustments are preliminary and based on estimates of the purchase consideration and estimates of fair value and useful lives of the assets acquired and liabilities assumed.

The transaction accounting adjustments are described in the accompanying notes and are based on available information and certain assumptions that Earthstone believes are reasonable; however, actual results may differ from those reflected in these statements. The unaudited pro forma condensed combined statements do not purport to represent what Earthstone’s financial position or results of operations would have been if the Transaction had occurred on the dates indicated above, nor are they indicative of Earthstone’s future financial position or results of operations. Certain information normally included in financial statements and the accompanying notes has been condensed or omitted. These unaudited pro forma condensed combined financial statements should be read in conjunction with the historical financial statements and related notes of Earthstone, Independence, Tracker, Sequel and Chisholm Holdings for the periods presented.

The pro forma condensed combined balance sheet as of September 30, 2021 gives effect to the Transaction as if it had been completed on September 30, 2021. The pro forma condensed combined statements of operations for the year ended December 31, 2020 and the nine months ended September 30, 2021 give effect to the Acquisitions as if they had been completed on January 1, 2020.

Note 2. Accounting Policies and Presentation

The unaudited pro forma condensed combined balance sheet as of September 30, 2021 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020 have been compiled in a manner consistent with the accounting policies adopted by Earthstone. Certain reclassifications and adjustments have been made to the historical financial information of Independence, Tracker, Sequel and Chisholm Holdings presented herein to conform to Earthstone’s historical presentation.

Note 3. Preliminary Purchase Price Allocation

The preliminary allocation of the total purchase price in the Transaction is based upon management’s estimates of and assumptions related to the fair value of assets to be acquired and liabilities to be assumed as of September 30, 2021 using currently available information. Because the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on financial position and results of operations may differ significantly from the pro forma amounts included herein.

The preliminary purchase price allocation is subject to change due to several factors, including but not limited to changes in the estimated fair value of assets acquired and liabilities assumed as of the closing date of the Transaction, which could result from changes in future oil and natural gas commodity prices, reserve estimates, interest rates, as well as other factors.


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The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone are expected to be recorded as follows (in thousands, except share amounts and stock price):
Chisholm
Consideration:
Shares of Earthstone Class A Common Stock issued19,417,476 
Earthstone Class A Common Stock price as of December 15, 2021 (1)
$9.98 
Class A Common Stock consideration193,786 
Cash consideration410,000 
Total consideration transferred$603,786 
Fair value of assets acquired:
Oil and gas properties$610,510 
Amount attributable to assets acquired$610,510 
Fair value of liabilities assumed:
Noncurrent liabilities - ARO6,724 
Amount attributable to liabilities assumed$6,724 
(1)    Closing price of ESTE shares as of December 15, 2021 used herein for estimation purposes only. Actual Class A Common Stock consideration will be based on the Class A Common Stock price at the time of the closing of the Transaction.

Total consideration is based on the terms of the Purchase Agreement, the consideration expected to be paid by Earthstone at closing consists of 19,417,476 shares of Class A Common Stock with $340.0 million in cash due at closing and the remaining $70.0 million due over the following twelve months. The estimated purchase price is based upon the cash and the fair value of the Class A Common Stock which was determined using the closing price of $9.98 per share on December 15, 2021 and the number of shares issued.

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.

Note 4. Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet and Unaudited Pro Forma Condensed Combined Statements of Operations

The following adjustments were made in the preparation of the unaudited pro forma condensed combined balance sheet as of September 30, 2021 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020:

(a)        Adjustment to remove items not acquired as part of the Transaction.
(b)        Adjustment to the historical book values of Chisholm’s oil and gas properties as of September 30, 2021 to reflect those properties at their estimated fair values and eliminate Chisholm’s historical accumulated depreciation, depletion and amortization, in accordance with the acquisition method of accounting for business combinations.
(c)        Adjustment to reflect estimated deferred financing costs to be recorded in connection with the Transaction, net of amortization. These pro forma condensed combined financial statements assume all borrowings are under the company’s senior secured revolving credit facility. In the event the Company seeks alternative financing, $8.8

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million in additional deferred financing costs would be recorded. See additional discussion on the impact of alternative financing in (k) below.
(d)        Adjustment to reflect $70.0 million in deferred payments of cash consideration to be conveyed to Chisholm in accordance with the terms of the Purchase Agreement.
(e)        Adjustment to the historical book values of Chisholm’s asset retirement obligations as of September 30, 2021 to reflect their estimated fair values in accordance with the acquisition method of accounting for business combinations.
(f)        Adjustment to reflect the elimination of outstanding historical debt and record initial cash consideration to be conveyed to Chisholm of $340.0 million from borrowings under Earthstone's revolving credit facility or from the issuance of high yield notes payable. The remaining $70.0 million of cash consideration will be deferred and paid over the following twelve months based on the terms of the Purchase Agreement.
(g)        Adjustment to reflect the elimination of Chisholm Holdings’ Members’ Equity.
(h)        Adjustment to reflect the issuance of 19,417,476 shares of Class A Common Stock pursuant to the Purchase Agreement.
(i)        Adjustment to reflect certain reclassifications of historical line items to conform financial statement presentations.
(j)        Adjustments to reflect the depreciation, depletion and amortization expense that would have been recorded had the Acquisitions occurred on January 1, 2020 and the properties were adjusted in accordance with the acquisition method of accounting for business combinations.
(k)        Adjustments to reflect the estimated interest expense that would have been recorded in the periods presented with respect to the incremental borrowings expected to finance the cash consideration for the Transaction. These pro forma condensed combined financial statements assume all borrowings are under the Company’s senior secured revolving credit facility. In the event the Company seeks alternative financing, based on an estimated interest rate of 8%, the impact on these pro forma financial statements would be as follows:

For the Nine Months Ended
September 30, 2021
For the Year Ended
December 31, 2020
(in thousands, except per share amounts)As DisclosedUnder Alternative FinancingAs DisclosedUnder Alternative Financing
Interest expense, net$(19,763)$(34,984)$(28,068)$(50,976)
Net (loss) income$(28,341)$(43,563)$32,858 $9,950 
Net (loss) income attributable to Earthstone Energy, Inc. common stockholders$(18,966)$(29,152)$21,704 $6,573 
Net income (loss) per common share - basic and diluted$(0.29)$(0.45)$0.32 $0.10 

(l)        Adjustments to reflect the amortization of deferred financing costs related to the financing of the Acquisitions.
(m)        Adjustments to reflect the estimated incremental Income tax expense that would have been recorded in the period presented if the Acquisitions had occurred on January 1, 2020. The income tax rates used in calculating the tax impact of the adjustments recorded to the pro forma condensed combined statements of operations presented herein included a statutory federal income tax rate of 21%, a statutory Texas Margin tax rate of 0.75%, and a statutory New Mexico income tax rate of 0.75%, which represent the statutory rates in effect in those jurisdictions during the periods presented.
(n)        Adjustments to reflect the estimated incremental Net loss (income) attributable to noncontrolling interests that would have been recorded in the period presented if the Acquisitions had occurred on January 1, 2020. The Acquisitions impacted noncontrolling interest as presented below.


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 EEH Units Held By Earthstone and Lynden US%EEH Units Held By Others%Total EEH Units Outstanding
Weighted Average Units Outstanding for the Year Ended December 31, 202029,911,625 46.0 %35,077,712 54.0 %64,989,337 
EEH Units assumed issued in connection with the IRM Acquisition on January 1, 202012,719,594 12,719,594 
EEH Units assumed issued in connection with the Tracker Acquisition on January 1, 20204,700,000 4,700,000 
EEH Units assumed issued in connection with the Sequel Acquisition on January 1, 20201,500,000 — 1,500,000 
EEH Units assumed issued in connection with the Chisholm Acquisition on January 1, 202019,417,476 19,417,476 
Pro Forma Weighted Average Units Outstanding for the Year Ended December 31, 202068,248,695 66.1 %35,077,712 33.9 %103,326,407 
    
 EEH Units Held By Earthstone and Lynden US%EEH Units Held By Others%Total EEH Units Outstanding
Weighted Average Units Outstanding for the Nine Months Ended September 30, 202131,309,034 47.6 %34,426,767 52.4 %65,735,801 
EEH Units assumed issued in connection with the IRM Acquisition on January 1, 202012,719,594 12,719,594 
EEH Units assumed issued in connection with the Tracker Acquisition on January 1, 20204,700,000 4,700,000 
EEH Units assumed issued in connection with the Sequel Acquisition on January 1, 20201,500,000 1,500,000 
EEH Units assumed issued in connection with the Chisholm Acquisition on January 1, 202019,417,476 19,417,476 
Pro Forma Weighted Average Units Outstanding for the Nine Months Ended September 30, 202169,646,104 66.9 %34,426,767 33.1 %104,072,871 
(o)        Adjustment to reverse the historical asset impairments as, based on the purchase price contemplated by the Acquisitions, no impairments would have been recorded.
(p)        Represents estimated nonrecurring transaction costs related to the acquisition of Independence, Tracker, Sequel and Chisholm that are expected to be incurred by Earthstone, including advisory, legal, regulatory, accounting, valuation and other professional fees that are not capitalized as part of the Acquisitions. These transaction costs are based on preliminary estimates and the final amounts and the resulting effect on Earthstone’s financial position and results of operations may differ significantly.

Note 5. Supplemental Unaudited Combined Oil and Natural Gas Reserves and Standardized Measure Information

The following table sets forth information with respect to the historical and combined estimated oil and natural gas reserves as of December 31, 2020 for Earthstone, Independence, Tracker, Sequel and Chisholm. The Earthstone reserve data presented below was derived from the independent engineering report of Cawley, Gillespie & Associates, Inc. (“CG&A”), Earthstone’s independent reserve engineer. The Independence reserve information was prepared by Earthstone management. The reserve information of Tracker and Sequel was prepared by Tracker management and Sequel management, respectively. The reserve information of Chisholm was prepared by Chisholm management. Future exploration, exploitation and development expenditures, as well as future commodity prices and service costs, will affect the quantity of reserve volumes. The reserve estimates shown below were determined using the average first day of the month price for each of the preceding 12 months for oil and natural gas for the year ended December 31, 2020 for Earthstone, Independence, Tracker, Sequel and Chisholm.


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As of December 31, 2020
Earthstone (1)
Independence (2)
TrackerSequelChisholmCombined
Estimated Proved Developed Reserves:
Oil (MBbl)18,876 13,713 1,673 1,398 12,024 47,684 
Natural Gas (MMcf)55,752 49,157 24,237 15,186 41,779 186,111 
Natural Gas Liquids (MBbl)10,123 — 4,009 2,491 — 16,623 
Total (MBoe)(3)
38,291 21,906 9,721 6,419 18,987 95,324 
Estimated Proved Undeveloped Reserves:
Oil (MBbl)21,212 19,993 10,641 — 12,262 64,108 
Natural Gas (MMcf)55,450 31,368 97,386 — 22,475 206,679 
Natural Gas Liquids (MBbl)10,123 — 16,598 — — 26,721 
Total (MBoe)(3)
40,577 25,221 43,470 — 16,008 125,276 
Estimated Proved Reserves:
Oil (MBbl)40,088 33,706 12,314 1,398 24,286 111,792 
Natural Gas (MMcf)111,202 80,525 121,623 15,186 64,254 392,790 
Natural Gas Liquids (MBbl)20,246 — 20,607 2,491 — 43,344 
Total (MBoe)(3)
78,868 47,127 53,192 6,419 34,995 220,601 
(1) As of December 31, 2020, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 41.5% of the estimated proved reserves, as adjusted for the impact of the Acquisitions.
(2) The historical results of Independence are presented with natural gas and natural gas liquids combined within Natural Gas (MMcf).
(3) Assumes a ratio of 6 Mcf of natural gas per Boe.
The following table sets forth summary information with respect to historical and combined oil and natural gas production for the year ended December 31, 2020 for Earthstone, Independence, Tracker, Sequel and Chisholm. The Earthstone oil and natural gas production data presented below was derived from Earthstone’s Annual Report on Form 10-K for the year ended December 31, 2020. The Independence, Tracker, Sequel and Chisholm oil and natural gas production data presented below was derived from the supplemental oil and gas reserve information (unaudited) included in notes to their audited financial statements for the year ended December 31, 2020.
Year Ended December 31, 2020
Earthstone (1)
Independence (2)
TrackerSequelChisholmCombined
Oil (MBbl)3,180 1,993 440 665 2,276 8,554 
Natural Gas (MMcf)7,282 4,769 3,089 3,645 7,350 26,135 
Natural Gas Liquids (MBbl)1,198 — 495 589 55 2,337 
Total (MBoe)(3)
5,592 2,788 1,449 1,862 3,556 15,247 
(1) As of December 31, 2020, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 41.5% of the estimated proved reserves, as adjusted for the impact of the Acquisitions.
(2) The historical results of Independence are presented with natural gas and natural gas liquids combined within Natural Gas (MMcf).
(3) Assumes a ratio of 6 Mcf of natural gas per Boe.

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The following unaudited combined estimated discounted future net cash flows reflect Earthstone, Independence, Tracker, Sequel and Chisholm as of December 31, 2020. The unaudited combined standardized measure of discounted future net cash flows are as follows (in thousands):
As of December 31, 2020
Earthstone (1)
IndependenceTrackerSequelChisholmCombined
Future cash inflows$1,902,073 $1,433,588 $724,574 $94,087 $1,035,770 $5,190,092 
Future production costs(633,248)(491,740)(282,631)(43,592)(441,486)(1,892,697)
Future development costs(285,088)(250,836)(239,999)(3,226)(156,447)(935,596)
Future income tax expense(35,557)(1,582)(1,834)(355)— (39,328)
Future net cash flows948,180 689,430 200,110 46,914 437,837 2,322,471 
10% annual discount for estimated timing of cash flows(487,327)(426,942)(153,160)(11,937)(219,160)(1,298,526)
Standardized measure of discounted future net cash flows$460,853 $262,488 $46,950 $34,977 $218,677 $1,023,945 
(1) As of December 31, 2020, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 41.5% of the estimated proved reserves, as adjusted for the impact of the Acquisitions.



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DESCRIPTION OF CAPITAL STOCK

This section of the Information Statement includes a description of our capital stock. You are encouraged to read our Certificate of Incorporation and our Bylaws for greater detail on the provisions that may be important to you. See “Where You Can Find More Information.” You should also be aware that the summary below does not give full effect to the provisions of statutory or common law that may affect your rights as a stockholder.

General
 
The following description summarizes certain important terms of our capital stock. Because it is only a summary, it does not contain all the information that may be important to you and is qualified in its entirety by reference to our Certificate of Incorporation, our Bylaws and to the applicable provisions of the DGCL. For a complete description of the matters set forth in this section entitled “Description of Capital Stock,” you should refer to our Certificate of Incorporation, and our Bylaws, and to the applicable provisions of Delaware law. Our authorized capital stock consists of 270,000,000 shares of capital stock, $0.001 par value per share, of which:
 
•    200,000,000 shares are designated as Class A Common Stock;

•    50,000,000 shares are designated as Class B Common Stock (together with the Class A Common Stock, the “Common Stock”); and

•    20,000,000 shares are designated as preferred stock.

As of January 10, 2022, there were 53,467,307 shares of Class A Common Stock issued and outstanding, 34,344,532 shares of Class B Common Stock issued and outstanding, and no shares of preferred stock issued or outstanding. Our Board is authorized, without stockholder approval except as required by the rules of the NYSE, to issue additional shares of capital stock.
 
Common Stock
 
Each holder of Common Stock is entitled to one vote for each share of Common Stock held on all matters as to which holders of Common Stock are entitled to vote. Except as otherwise provided in our Certificate of Incorporation, or by applicable law, the holders of shares of Common Stock shall vote together as a single class on all matters. Except for and subject to those preferences, rights, and privileges expressly granted to the holders of all classes of stock at the time outstanding having prior rights, and any series of preferred stock which may from time to time come into existence, and except as may be otherwise provided by the laws of the State of Delaware, the holders of Class A Common Stock have exclusively all other rights of stockholders of Earthstone, including but not limited to, (i) the right to receive dividends when, as and if declared by the Board out of assets lawfully available therefore and (ii) in the event of any distribution of assets upon the dissolution and liquidation of Earthstone, the right to receive ratably and equally all of the assets of Earthstone remaining after the payment to the holders of preferred stock of the specific amounts, if any, which they are entitled to receive as may be provided in the future. Holders of Class B Common Stock as such are not entitled to receive dividends or distributions of assets upon dissolution or liquidation of Earthstone.
 
Shares of Class B Common Stock are exchangeable for shares of Class A Common Stock (or, if determined by Earthstone, cash) on the terms and subject to the conditions set forth in the First Amended and Restated Limited Liability Company Agreement of EEH (the “EEH LLC Agreement”). Earthstone has reserved out of its authorized but unissued shares of Class A Common Stock, solely for the purpose of issuance upon exchange of the outstanding shares of Class B Common Stock and EEH Units for Class A Common Stock pursuant to the EEH LLC Agreement, such number of shares of Class A Common Stock that will be issuable upon any such exchange pursuant to the EEH LLC Agreement.
 
Preferred Stock

Our Board is expressly authorized at any time, and from time to time, to provide for the issuance of shares of preferred stock in one or more series, with such voting powers, full or limited, or without voting powers and with such designations,

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preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by our Board, subject to the limitations prescribed by law and in accordance with the provisions of our Certificate of Incorporation, including but not limited to the following:

•    The designation of the series and the number of shares to constitute the series.

•    The dividend rate of the series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock, and whether such dividends shall be cumulative or noncumulative.

•    Whether the shares of the series shall be subject to redemption by Earthstone and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption.

•    The terms and amount of any sinking fund provided for the purchase or redemption of the shares of the series.

•    Whether or not the shares of the series shall be convertible into or exchangeable for shares of any other class or classes or of any other series of any class or classes of stock of the corporation, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange.

•    The extent, if any, to which the holders of the shares of the series shall be entitled to vote with respect to the election of directors or otherwise.

•    The restrictions, if any, on the issue or reissue of any additional preferred stock.

•    The rights of the holders of the shares of the series upon the dissolution, liquidation, or winding up of Earthstone.
 
Anti-Takeover Provisions
 
Certificate of Incorporation and Bylaws

Certain provisions in our Certificate of Incorporation and Bylaws summarized below may be deemed to have an anti-takeover effect and may delay, deter, or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a premium being paid over the market price for the shares held by stockholders.

Our Certificate of Incorporation and Bylaws contain provisions that (unless, as a general matter, a preferred stock designation provides otherwise for that series of preferred stock):

•    permit us to issue, without any further vote or action by our stockholders, shares of preferred stock in one or more series and, with respect to each such series, to fix the number of shares constituting the series and the designation of the series, the voting powers (if any) of the shares of the series, and the preferences and relative, participating, optional, and other special rights, if any, and any qualification, limitations or restrictions of the shares of such series;

•    provide that special meetings of our stockholders may only be called by an officer of Earthstone upon the written request of a majority of the Board;

•    our Board be classified into three classes: Class I, Class II, and Class III, each class having a three-year term of office. Under the Delaware General Corporation Law (the “DGCL”), stockholders of a corporation with a classified board of directors may only remove a director “for cause” unless the certificate of incorporation

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provides otherwise. Our Certificate of Incorporation does not so provide and, accordingly, stockholders may only remove a director “for cause.” The likely effect of the classification of the board of directors is an increase in the time required for the stockholders to change the composition of the board of directors. For example, because only approximately one-third of the directors may be replaced by stockholder vote at each annual meeting of stockholders, stockholders seeking to replace a majority of the members of the Earthstone Board will need at least two annual meetings of stockholders to effect this change;

•    provide that the authorized number of directors may be changed only by resolution of our Board;

•    provide that all vacancies, including newly created directorships shall be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

•    provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide advance notice in writing, and also specify requirements as to the form and content of a stockholder’s notice; and

•    provide that amendments to certain provisions of the Certificate of Incorporation require the approval of the holders of not less than 66-2/3% of the outstanding shares of the capital stock entitled to vote generally in the election of directors.

Delaware Law

We are subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in the manner, summarized below. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” generally is a person who, together with affiliates and associates, owns 15% or more of the corporation’s voting stock. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:

(1)    before the stockholder became an interested stockholder, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

(2)    upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances; or

(3)    at or after the time the stockholder became an interested stockholder, the business combination was approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

The existence of this provision may have an anti-takeover effect with respect to transactions our Board does not approve in advance. Section 203 may also discourage attempts that might result in a premium over the market price for our shares of Class A Common Stock held by stockholders.

Section 203 could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our Class A Common Stock that often result from actual or rumored hostile takeover attempts. It may also have the effect of preventing changes in our management. It is possible that Section 203 could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interest.


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The provisions of Section 203 of the DGCL do not apply to a corporation if, subject to certain requirements, the certificate of incorporation or bylaws of the corporation contain a provision expressly electing not to be governed by the provisions of the statute or the corporation does not have voting stock listed on a national securities exchange or held of record by more than 2,000 stockholders.

Because our Certificate of Incorporation and Bylaws do not include any provision to “opt-out” of Section 203 of the DGCL, the statute will apply to business combinations involving us.

Transfer Agent and Registrar
 
The transfer agent and registrar for our Class A Common Stock and Class B Common Stock is Direct Transfer, LLC, One Glenwood Avenue, Suite 1001, Raleigh, North Carolina 27603. Its telephone number is (919) 744-2722.

Limitations of Liability and Indemnification
     
Our Certificate of Incorporation contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors are not to be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for the following:
 
(1)    any breach of their duty of loyalty to us or our stockholders;

(2)    any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

(3)    unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; or

(4)    any transaction from which they derived an improper personal benefit.
 
Any amendment to, or repeal of, these provisions will not eliminate or reduce the effect of these provisions in respect of any act, omission or claim that occurred or arose prior to that amendment or repeal. If the DGCL is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the DGCL.
 
The Certificate of Incorporation provides that we will indemnify, to the fullest extent permitted by law, any person who is or was a party or is threatened to be made a party to any action, suit or proceeding by reason of the fact that he or she is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust or other enterprise. The Certificate of Incorporation provides that we may indemnify to the fullest extent permitted by law any person who is or was a party or is threatened to be made a party to any action, suit or proceeding by reason of the fact that he or she is or was one of our employees or agents or is or was serving at its request as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise.
 
Further, we have entered into indemnification agreements with each of our directors and executive officers that may be broader than the specific indemnification provisions contained in the DGCL. These indemnification agreements require us, among other things, to indemnify our directors and executive officers against liabilities that may arise by reason of their status or service. These indemnification agreements also require us to advance all expenses incurred by the directors and executive officers in investigating or defending any such action, suit or proceeding. We believe that these agreements are necessary to attract and retain qualified individuals to serve as directors and executive officers.
 
The limitation of liability and indemnification provisions included in the Certificate of Incorporation and in indemnification agreements that we have entered into or will enter into with our directors and executive officers may discourage stockholders from bringing a lawsuit against our directors and executive officers for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against our directors and executive officers, even though an action, if successful,

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might benefit us and our stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and executive officers as required by these indemnification provisions.
 
We have obtained or will obtain insurance policies under which, subject to the limitations of the policies, coverage is provided to our directors and executive officers against loss arising from claims made by reason of breach of fiduciary duty or other wrongful acts as a director or executive officer, including claims relating to public securities matters, and to us with respect to payments that may be made by us to these directors and executive officers pursuant to our indemnification obligations or otherwise as a matter of law.
 
Certain of our non-employee directors may, through their relationships with their employers, be insured and/or indemnified against certain liabilities incurred in their capacity as members of our Board.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
 
Listing
 
Our Class A Common Stock is listed on the NYSE under the symbol “ESTE.”



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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

The following table includes all holdings of our Class A Common Stock and Class B Common Stock, as of January 10, 2022, of our directors and our named executive officers, our directors and named executive officers as a group, and all those known by us to be beneficial owners of more than five percent of our outstanding shares of Class A Common Stock or Class B Common Stock. Unless otherwise noted, the mailing address of each person or entity named below is 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380.
Shares Beneficially Owned by Certain Beneficial Owners and Management (1)(2)
Class A Common StockClass B Common Stock
Combined Voting Power (3)
NameNumber
Percent of Class (4)
Number
Percent of Class (5)
NumberPercent
Named Executive Officers:
Frank A. Lodzinski (6)(7)
552,0291.0%— — 552,029*
Robert J. Anderson (7)
378,347*— — 378,347*
Steven C. Collins (7)
222,119*— — 222,119*
Tony Oviedo (7)
108,775*— — 108,775*
Mark Lumpkin, Jr. (7)
116,473*— — 116,473*
Timothy D. Merrifield (7)
296,648*— — 296,648*
Non-Employee Directors:
David S. Habachy— — 
Jay F. Joliat (7)
211,501*— — 211,501*
Phillip D. Kramer (7)
99,050*— — 99,050*
Ray Singleton (7)
603,7601.1%— — 603,760*
Wynne M. Snoots, Jr.— — — — — 
Brad A. Thielemann (8)
— — — — — 
Zachary G. Urban (7)
62,015*— — 62,015*
Robert L. Zorich (8)
6,914,80812.9%33,956,52498.9%40,871,33246.5%
Officers and Directors as a Group (14 persons):9,565,52517.9%33,956,52498.9%43,522,04949.6%
Beneficial Owners of More than Five Percent:
EnCap Investments L.P. (8)
6,914,80812.9%33,956,52498.9%40,871,33246.5%
Warburg Pincus, LLC (9)
13,238,11024.8%— — 13,238,11015.1%
*    Less than one percent.
(1)    Subject to the terms of the EEH LLC Agreement, holders (“EEH Unit Holders”) of limited liability company interests of EEH (“EEH Units”) will have the right to exchange all or a portion of its EEH Units (together with a corresponding number of shares of Class B Common Stock) for Class A Common Stock (or the cash option) at an exchange ratio of one share of Class A Common Stock for each EEH Unit (and corresponding share of Class B Common Stock) exchanged. Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of a security as to which that person, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares voting power and/or investment power of such security and as to which that person has the right to acquire beneficial ownership of such security within 60 days. The Company has the option to deliver cash in lieu of shares of Class A Common Stock upon exercise by EEH Unit Holders of their exchange right. As a result, beneficial ownership of Class B Common Stock and EEH Units is not reflected as beneficial ownership of shares of our Class A Common Stock for which such units and stock may be exchanged.

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(2)    This table lists beneficial ownership of voting securities as calculated under SEC rules. Otherwise, except to the extent noted below, each director, named executive officer or entity has sole voting and investment power over the shares reported. None of the shares are pledged as security by the named person.
(3)    Represents the percentage of voting power of our Class A Common Stock and Class B Common Stock voting together as a single class. Each share of Class B Common Stock has no economic rights, but entitles the holder thereof to one vote for each EEH Unit held by such holder. Please see footnote (1) above for a discussion of exchange rights.
(4)    The percentage is based upon 53,467,307 shares of Class A Common Stock issued and outstanding as of January 10, 2022.
(5)    The percentage is based upon 34,344,532 shares of Class B Common Stock issued and outstanding as of January 10, 2022.
(6)    515,208 shares are held in the name of Azure Energy, LLC (“Azure”). Mr. Lodzinski disclaims beneficial ownership of the shares held by Azure, except to the extent of his pecuniary interests therein.
(7)    Represents the following number of restricted stock units that will vest within 60 days of January 10, 2022 with each restricted stock unit representing the contingent right to receive one share of our Class A common stock: Mr. Lodzinski – 30,356; Mr. Anderson – 25,572; Mr. Collins – 14,390; Mr. Oviedo – 14,390; Mr. Lumpkin – 14,390; Mr. Merrifield – 13,878; Mr. Joliat – 7,500; Mr. Kramer – 7,500; Mr. Singleton – 7,500; Mr. Urban – 7,500; and all directors and named executive officers as a group – 142,976.
(8)    Three affiliated investment funds (the “EnCap Funds”), specifically EnCap Energy Capital Fund VII, L.P. (“EnCap Fund VII”) holds 4,611,808 shares of Class A Common Stock, EnCap Energy Capital Fund VIII, L.P. (“EnCap Fund VIII”) holds 2,303,000 shares of Class A Common Stock and EnCap Energy Capital Fund IX, L.P. (“EnCap Fund IX”) beneficially holds 33,956,524 shares of Class B Common Stock, which are owned by its wholly-owned subsidiary Bold Holdings. EnCap Partners GP, LLC (“EnCap Partners GP”) is the sole general partner of EnCap Partners, LP (“EnCap Partners”), which is the managing member of EnCap Investments Holdings, LLC (“EnCap Holdings”), which is the sole member of EnCap Investments Blocker, LLC (“EnCap Investments Holdings”). EnCap Investments Holdings is (i) the sole member of EnCap Investments GP, L.L.C. (“EnCap Investments GP”), which is the sole general partner of EnCap, and (ii) the sole limited partner of EnCap. EnCap is the sole general partner of each of EnCap Equity Fund VII GP, L.P. (“EnCap Fund VII GP”), EnCap Equity Fund VIII GP, L.P. (“EnCap Fund VIII GP”) and EnCap Equity Fund IX GP, L.P. (“EnCap Fund IX GP”). EnCap Fund VII GP is the general partner of EnCap Fund VII. EnCap Fund VIII GP is the general partner of EnCap Fund VIII. EnCap Fund IX GP is the general partner of EnCap Fund IX. Therefore, EnCap Partners GP, EnCap Partners, EnCap Holdings, EnCap Investments Holdings, EnCap Investments GP, EnCap, EnCap Fund VII GP, EnCap Fund VIII GP and EnCap Fund IX GP may be deemed to beneficially own the listed securities. Messrs. Thielemann and Zorich do not have the sole or shared power to vote or dispose of the Class A Common Stock or Class B Common Stock held by the EnCap Funds. Mr. Zorich is a managing partner of EnCap Partners and may be deemed to beneficially own the reported securities held by the EnCap Funds. Mr. Thielemann is a partner at EnCap Partners. Mr. Zorich disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein. The address for the EnCap entities listed above is 1100 Louisiana Street, Suite 4900, Houston, Texas 77002.
(9)    Based solely on a Schedule 13D filed with the SEC on January 19, 2021 by the Warburg Entities: the Warburg Pincus LLC shareholders (the “WP Shareholders”) are: (i) Warburg Pincus Private Equity (E&P) XI – A, L.P. (“WP E&P XI A”) which holds 2,123,393 shares of Class A Common Stock, (ii) Warburg Pincus XI (E&P) Partners – A, L.P. (“WP XI E&P Partners A”) which holds 163,270 shares of Class A Common Stock, (iii) WP IRH Holdings, L.P. (“WP IRH Holdings”) which holds 2,068,675 shares of Class A Common Stock, (iv) Warburg Pincus XI (E&P) Partners-B IRH, LLC (“WP XI E&P Partners B IRH”) which holds 57,365 shares of Class A Common Stock, (v) WP Energy IRH Holdings, L.P. (“WPE IRH Holdings”) which holds 3,179,794 shares of Class A Common Stock, (vi) WP Energy Partners IRH Holdings, L.P. (“WPE Partners IRH Holdings”) which holds 260,350 shares of Class A Common Stock, (vii) Warburg Pincus Energy (E&P) Partners-B IRH, LLC (“WPE E&P Partners B IRH”) which holds 101,492 shares of Class A Common Stock, (viii) Warburg Pincus Energy (E&P) Partners-A, L.P. (“WPE E&P Partners A”) which holds 300,946 shares of Class A Common Stock, and (ix) Warburg Pincus Energy (E&P)-A, L.P. (“WPE E&P A”) which holds 4,982,825 shares of Class A Common Stock. Warburg Pincus XI (E&P) Partners – B, L.P. (“WP XI E&P Partners B”) is the general partner of WP XI E&P Partners B IRH. Warburg Pincus (E&P) XI, L.P. (“WP XI E&P GP”) is the general partner of WP E&P XI A, WP XI E&P Partners A, WP IRH Holdings, and WP XI E&P

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Partners B. Warburg Pincus (E&P) XI LLC (“WP XI E&P GP LLC”) is the general partner of WP XI E&P GP. Warburg Pincus Partners (E&P) XI LLC (“WPP E&P XI”) is the managing member of WP XI E&P GP LLC. Warburg Pincus Energy (E&P) Partners-B, L.P. (“WPE E&P Partners B”) is the general partner of WPE E&P Partners B IRH. Warburg Pincus (E&P) Energy GP, L.P. (“WPE E&P GP”) is the general partner of WPE IRH Holdings, WPE Partners IRH Holdings, WPE E&P Partners B, WPE E&P Partners A, and WPE E&P A. Warburg Pincus (E&P) Energy LLC (“WPE E&P GP LLC”) is the general partner of WPE E&P GP. Warburg Pincus Partners II (US), L.P. (“WPP II US”) is the managing member of WPP E&P XI and WPE E&P GP LLC. Warburg Pincus & Company US, LLC (“WP & Co. US LLC”) is the general partner of WPP II US. Warburg Pincus LLC (“WP LLC” and collectively, with WP XI E&P Partners B, WP XI E&P GP, WP XI E&P GP LLC, WPP E&P XI, WPE E&P Partners B, WPE E&P GP, WPE E&P GP LLC, WPP II US, WP & Co. US LLC and the WP Shareholders, the “Warburg Entities”) is a registered investment adviser, and the manager of WP E&P XI A, WP XI E&P Partners A, WPE E&P Partners A, and WPE E&P A. Each of WP XI E&P GP, WP XI E&P GP LLC and WPP E&P XI may be deemed to share beneficial ownership of the shares held of record by each of WP E&P XI A, WP XI E&P Partners A, WP IRH Holdings, WP XI E&P Partners B IRH and WP XI E&P Partners B. WP XI E&P Partners B may be deemed to share beneficial ownership of the shares held of record by WP XI E&P Partners B IRH. Each of WPE E&P GP, WPE E&P GP LLC, WPP II US and WP & Co. US LLC may be deemed to share beneficial ownership of the shares held of record by each of WPE IRH Holdings, WPE Partners IRH Holdings, WPE E&P Partners B IRH, WPE E&P Partners B, WPE E&P Partners A and WPE E&P A. WPE E&P Partners B may be deemed to share beneficial ownership of the shares held of record by WPE E&P Partners B IRH. Each of WPP II US and WP & Co. US LLC may be deemed to share beneficial ownership of the shares held of record by the WP Shareholders. WP & Co. US LLC may be deemed to share beneficial ownership of the shares held of record by each of WP E&P XI A, WP XI E&P Partners A, WPE E&P Partners A, and WPE E&P A. Each of the Warburg Entities disclaims any such beneficial ownership. The address of the Warburg Entities is 450 Lexington Avenue, New York, New York 10017.

HOUSEHOLDING

    As permitted under the Exchange Act, in those instances where Earthstone is mailing a printed copy of this Information Statement, only one copy of this Information Statement is being delivered to stockholders that reside at the same address and share the same last name, unless such stockholders have notified Earthstone of their desire to receive multiple copies of this Information Statement. This practice, known as “householding,” is designed to reduce duplicate mailings and save significant printing and postage costs as well as natural resources.

    Earthstone will promptly deliver, upon oral or written request, a separate copy of this Information Statement to any stockholder residing at an address to which only one copy was mailed. Requests for additional copies should be directed to Earthstone by phone at (281) 298-4246 or by mail to Earthstone Energy Inc., 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380. Stockholders residing at the same address and currently receiving multiple copies of this Information Statement may contact Earthstone at the address or telephone number above to request that only a single copy of an information statement be mailed in the future.




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WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy and information statements and other information with the SEC. We have also filed this Information Statement, including annexes, under the Exchange Act. You can also find our public filings with the SEC on the internet at a web site maintained by the SEC located at http://www.sec.gov. The information contained on the SEC’s website is expressly not incorporated by reference into this Information Statement.

We are “incorporating by reference” specified documents that we file with the SEC, which means:
•    incorporated documents are considered part of this Information Statement;

•    we are disclosing important information to you by referring you to those documents; and

•    information we file with the SEC will automatically update and supersede information contained in this Information Statement.

We incorporate by reference the documents listed below and any future filings we make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Information Statement and before the date on which the Transaction is completed (other than, in each case, those documents, or the portions of those documents or exhibits thereto, deemed to be furnished and not filed in accordance with SEC rules):
•    Our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 10, 2021, and Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2020, filed on April 9, 2021;

•    Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 filed with the SEC on May 5, 2021;

•    Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 filed with the SEC on August 4, 2021;

•    Our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 filed with the SEC on November 3, 2021;

•    Our Current Reports on Form 8-K, filed with the SEC on January 13, 2021, January 29, 2021, April 5, 2021, April 20, 2021, April 29, 2021, June 7, 2021, July 23, 2021, September 20, 2021, October 4, 2021, November 2, 2021, December 17, 2021, December 29, 2021 and January 14, 2022, and on Form 8-K/A filed on February 24, 2021; and

•    The description of our Class A Common Stock contained in our Registration Statement on Form 8-A filed with the SEC on May 9, 2017 and any amendments or reports filed for the purpose of updating that description.

Notwithstanding the foregoing, information furnished under Items 2.02 and 7.01 of any of our Current Reports on Form 8-K, including the related exhibits under Item 9.01, is not incorporated by reference in this Information Statement.


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You may request a copy of any of these filings, at no cost, by request directed to us at the following address or telephone number:

Earthstone Energy, Inc.
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380
Telephone: (281) 298-4246
Attention: Corporate Secretary

You can also find these filings on our website at www.earthstoneenergy.com. However, we are not incorporating the information on our website other than these filings into this Information Statement.


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INDEX TO FINANCIAL STATEMENTS

Page
CHISHOLM ENERGY HOLDINGS, LLC
Independent Auditors' Reports
F-3
Consolidated Balance Sheets as of December 31, 2020 and 2019
F-5
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
F-6
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2020 and 2019
F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
F-8
Notes to Consolidated Financial Statements
F-10
Supplemental Oil and Natural Gas Information (Unaudited)
F-14
Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (Unaudited)
F-41
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 (Unaudited)
F-37
Condensed Consolidated Statements of Changes in Members' Equity for the Three and Nine Months Ended September 30, 2021 (Unaudited)
F-38
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 (Unaudited)
F-39
Notes to Condensed Consolidated Financial Statements (Unaudited)
F-51




80





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CHISHOLM ENERGY HOLDINGS, LLC

801 CHERRY STREET, SUITE 1200 PMB20

FORT WORTH, TEXAS 76102



CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT AUDITORS

AS OF DECEMBER 31, 2020 AND 2019
AND FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019









F-1



CHISHOLM ENERGY HOLDINGS, LLC
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Condensed Consolidated Statements of Changes in Members’ Equity for the Years Ended December 31, 2020 and 2019
Condensed Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to Condensed Consolidated Financial Statements
Supplemental Oil and Natural Gas Information (Unaudited)
F-2

mossadamslogo.jpg
Report of Independent Auditors

The Board of Directors
Chisholm Energy Holdings, LLC

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Chisholm Energy Holdings, LLC (and its subsidiaries), which comprise the consolidated balance sheet as of December 31, 2020, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the year then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chisholm Energy Holdings, LLC (and its subsidiaries), as of December 31, 2020 and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

2019 Financial Statements

The consolidated financial statements as of and for the year then ended December 31, 2019 were audited by other auditors, whose report dated April 29, 2020 expressed an unmodified opinion and included an emphasis of matter expressing substantial doubt about Chisholm Energy Holdings, LLC’s ability to continue as a going concern. The other auditors’ report dated April 29, 2020 was not modified with respect to that matter.

Supplementary Information

Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying Supplemental Schedules about Oil and Natural Gas Producing Properties are presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Because of the significance of the matter described above, it is inappropriate to, and we do not, express an opinion on this supplementary information.

/s/ Moss Adams LLP
Dallas, Texas
March 31, 2021
F-3


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Report of Independent Auditors
To the Board of Directors of Chisholm Energy Holdings, LLC
We have audited the accompanying consolidated financial statements of Chisholm Energy Holdings, LLC, which comprise the consolidated balance sheet as of December 31, 2019, and the related consolidated statements of operations, changes in members’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chisholm Energy Holdings, LLC at December 31, 2019, and the consolidated results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company’s forecasted inability to meet future debt covenants within one year from the financial statement issuance date raises substantial doubt about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 4 where management has also stated that substantial doubt exists about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

/s/ Ernst & Young LLP

April 29, 2020
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F-4


CHISHOLM ENERGY HOLDINGS, LLC

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
    

As of
December 31,
20202019
ASSETS
CURRENT ASSETS:   
Cash and cash equivalents$9,367$17,941
Accounts receivable:   
         Oil and gas sales10,50814,473
Joint interest owners and other3,563 7,602
Due from affiliates49439
Prepaid expenses and other current assets912 1,180
               Total current assets24,39941,635
    
OIL AND NATURAL GAS PROPERTIES, successful efforts method
924,664864,349
Less accumulated depletion and depreciation(196,887) (126,972)
          Net oil and natural gas properties727,777737,377
    
OTHER ASSETS:
     Fixed assets and other, net of accumulated depreciation of $380 and $300, respectively2,3132,278
Notes receivable from affiliate, net35,500 32,340
TOTAL ASSETS$789,989 $813,630
LIABILITIES AND MEMBERS' EQUITY   
CURRENT LIABILITIES:
Accounts payable$5,707 $7,074
Oil and gas sales payable6,70210,045
Accrued liabilities17,784 28,311
Accrued interest1,2751,407
Derivative liabilities8,5731,806
Deferred rent expense92 
          Total current liabilities40,13348,643
    
LONG-TERM LIABILITIES:
Deferred rent expense 236
Asset retirement obligations5,4715,382
Derivative liabilities3,687218
Debt, net186,707 183,960
     Total liabilities235,998238,439
    
COMMITMENTS AND CONTINGENCIES (Note 10)
    
MEMBERS' EQUITY553,991 575,191 
TOTAL LIABILITIES AND MEMBERS' EQUITY$789,989$813,630

The accompanying notes are an integral part of these consolidated financial statements.

F-5



CHISHOLM ENERGY HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)





For the Years Ended
December 31,
20202019
OPERATING REVENUES:
Oil sales$85,815$117,327
     Natural gas sales5,4887,583
          Total operating revenues91,303124,910
    
OPERATING COSTS AND EXPENSES:
Lease operating26,209 31,660
Transportation, gathering and marketing costs687

1,844
Rig termination and standby fees1,934 
Production and ad valorem taxes8,122

11,124
General and administrative10,990 12,305
Depreciation, depletion and amortization69,996

65,205
Exploration67 739
Impairment of oil and natural gas properties

2,989
Accretion of asset retirement obligations86 75
               Total operating costs and expenses118,091125,941
    
LOSS FROM OPERATIONS(26,788)(1,031)
    
OTHER (EXPENSE) INCOME:
Interest expense, net(11,353) (9,696)
(Loss) gain on commodity derivatives, net18,282

(16,507)
     Other expense(2,078) (1,511)
               Total other (expense) income4,851(27,714)
    
NET LOSS$(21,937)$(28,745)


The accompanying notes are an integral part of these consolidated financial statements.

F-6



CHISHOLM ENERGY HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
(Amounts in thousands)

For the Years Ended December 31, 2020 and 2019



Members' equity, December 31, 2018
$567,225
Capital contributions35,000
Equity-based compensation1,711
Net loss(28,745)
Members' equity, December 31, 2019
$575,191
Equity-based compensation737
Net loss(21,937)
Members' equity, December 31, 2020
$553,991




The accompanying notes are an integral part of these consolidated financial statements.

F-7



CHISHOLM ENERGY HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the Years Ended
December 31,
2020 2019
OPERATING ACTIVITIES:
Net loss$(21,937) $(28,745)
Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation, depletion and amortization69,996 65,205
Accretion of asset retirement obligations8675
Loss (gain) on commodity derivatives, net(18,282) 16,507
Cash settlements on commodity derivatives28,5183,522
Loss on sale of oil and natural gas properties1,339
Deferred rent(144) (122)
Amortization of debt issuance costs and original issuance discount1,4981,263
Equity-based compensation737 1,711
Impairment of oil and natural gas properties2,989
         Allowance on notes receivable from affiliate1,908
          Interest income on notes receivable from affiliate(2,863) (1,460)
Changes in operating assets and liabilities:

Accounts receivable8,394 (5,857)
Prepaid expenses and other current assets13(519)
         Other non-current assets(4)(973)
Accounts payable(2,728) 4,052
Oil and gas sales payable(3,343)2,802
Accrued liabilities(3,971) 2,691
Accrued interest(132)1,202
Net cash provided by operating activities57,74665,682
INVESTING ACTIVITIES:   
Acquisitions of oil and natural gas properties(1,049)(32,733)
Development of oil and natural gas properties(64,552) (136,718)
      Proceeds from sale of oil and natural gas properties1,539
      Loans made to affiliates(2,205) (30,880)
Additions to other fixed assets(14)(67)
Net cash used in investing activities(67,820) (198,859)
FINANCING ACTIVITIES:
     Proceeds from issuance of second lien notes, net of discount123,750
Borrowings under revolving credit facility18,000 70,500
Repayments of revolving credit facility borrowings(16,500)(90,500)
Proceeds from capital contributions35,000
      Stock issuance costs 
Payments of debt issuance costs(4,190)
Net cash provided by financing activities1,500 134,560
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(8,574)1,383
CASH AND CASH EQUIVALENTS, beginning of period
17,941 16,558
CASH AND CASH EQUIVALENTS, end of period
9,36717,941
The accompanying notes are an integral part of these consolidated financial statements.

F-8



CHISHOLM ENERGY HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Amounts in thousands)

For the Years Ended
December 31,
2020 2019
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:   
    Cash paid during the period for interest$22,947$8,728
     Change in capital expenditures included in accounts payable, accrued liabilities and accrued acquisition payments$(5,385) $(17,355)
    Capitalized asset retirement obligation$94$607

The accompanying notes are an integral part of these consolidated financial statements.

F-9




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.    ORGANIZATION AND NATURE OF OPERATIONS

Chisholm Energy Holdings, LLC (“Holdings” or the “Company”) is a Delaware limited liability company formed on May 19, 2016 by members of our management team and investment funds sponsored by Warburg Pincus LLC (“Warburg”). Holdings, together with its wholly owned operating subsidiaries (collectively, “Chisholm”, “we,” “us,” or “our”), is an oil and natural gas company engaged in the acquisition, development, exploration and production of crude oil and natural gas properties. Our corporate headquarters are in Fort Worth, Texas.

On March 26, 2018, Holdings amended the LLC Agreement to admit a significant new investor, Ontario Teachers’ Pension Plan Board (“OTPP”), in addition to increasing the equity commitment of Warburg and other existing investors. The aggregate capital commitments are shared by Holdings and Chisholm Energy Midstream Holdings, LLC (“Midstream Holdings”) and can be called by Holdings and Midstream Holdings (entity under common control). As an LLC, the risk of loss for each individual member is limited to the amount of capital contributed to the LLC and, unless otherwise noted, the individual member’s liability for indebtedness of an LLC is limited to the member’s actual capital contributions. During December 31, 2020, there were no capital contributions. During December 31, 2019, Holdings received equity contributions of $35.0 million from its members. The net equity contributions were primarily used for acquisitions, drilling and completion activities, and for general corporate purposes.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation, Basis of Presentation, and Significant Estimates
We prepared the accompanying consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States of America, and the financial statements contain all adjustments necessary for a fair statement of the results for the periods presented. The accompanying consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated.

Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the reporting period. Our consolidated financial statements are based on a number of significant estimates, including the fair value determination of oil and natural gas revenues, accrued assets and liabilities, equity-based compensation, and oil and natural gas reserves. The estimates of oil and natural gas reserves quantities and future net cash flows are the basis for the calculation of depletion and impairment of oil and natural gas properties, as well as estimates of asset retirement obligations and certain tax accruals. While we believe these estimates are reasonable, changes in facts and assumptions or the discovery of new information may result in revised estimates. Actual results could differ from these estimates and it is at least reasonably possible these estimates could be revised in the near term, and these revisions could be material.

Cash and Cash Equivalents
Cash equivalents include highly liquid investments having an original maturity of three months or less. At times, we maintain deposit balances in excess of Federal Deposit Insurance Corporation insurance limits.
F-10




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable
Accounts receivable – oil and gas sales consist of crude oil and natural gas sales proceeds receivable from purchasers. Accounts receivable – joint interest owners and other consists of amounts due from our joint interest partners for drilling, completion and operating costs and other miscellaneous receivables. Accounts receivable are due within 30 to 60 days of the production date and are considered past due if they have been outstanding for 60 days or more. No interest is typically charged on past due amounts. We periodically review accounts receivable for collectability and reduce the carrying amount of the accounts receivable by an allowance. No such allowance was considered necessary at December 31, 2020 or 2019.

At December 31, 2020, amounts due from one purchaser accounted for 57% of our total accounts receivable balance. At December 31, 2019, amounts due from one purchaser accounted for 54% of our total accounts receivable balance.

In the event these companies who currently purchase our oil and natural gas cease doing business with us, we believe there are other alternative purchasers with whom we could establish new relationships and replace one or more purchasers. We would not expect the loss of any single purchaser to have a long-term material adverse effect on our operations, though we may experience a short-term decrease in our revenues as we make arrangements for alternative purchasers.

Substantially all of our accounts receivable at December 31, 2020 are from entities that may be similarly affected by changes in economic or other conditions. We attempt to minimize our credit risk exposure to counterparties by monitoring the financial condition and payment history of our counterparties.

Oil and Natural Gas Properties
Our oil and natural gas properties consisted of the following as of December 31, 2020 and 2019:

(in thousands)20202019
Mineral interests in properties:
Unproved$247,404 $248,637 
Proved238,352 235,411 
Wells and related equipment and facilities438,908 380,301 
924,664 864,349 
Accumulated depletion and depreciation(196,887)(126,972)
Net oil and natural gas properties$727,777 $737,377 

We are primarily engaged in the development and acquisition of crude oil and natural gas properties. We follow the successful efforts method of accounting. Exploration expenses, including seismic, geological and geophysical expenses and delay rentals, are charged to expense when incurred. The costs of drilling exploratory wells are capitalized until the Company has determined whether proved reserves have been found. If proved reserves are found, the costs remain capitalized as part of the wells and related equipment and facilities. If no proved reserves are found, the costs are charged to expense. At December 31, 2020, we had $18.6 million in capitalized costs in four wells that were pending determination of proved reserves.

F-11




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Costs for repairs and maintenance are charged to expense when incurred. Significant tangible equipment added or replaced that extends the useful or productive life of the property is capitalized. Costs incurred to increase the productive capacity from existing reservoirs are capitalized.

Depletion and depreciation of proved properties are computed on the units-of-production method based on estimated proved oil and natural gas reserves. Our development costs and lease and wellhead equipment are depreciated based on proved developed reserves. Our proved leasehold costs are depleted based on total proved reserves. Depletion expense for proved oil and natural gas properties amounted to $69.9 million and $65.2 million for the years ended December 31, 2020 and 2019, respectively.

The carrying value of our properties is assessed for impairment whenever events and circumstances indicate that the carrying value of those assets may not be recoverable. Proved properties are compared to management’s future estimated undiscounted net cash flows from the properties. If undiscounted cash flows are less than the carrying value, then the Company recognizes an impairment charge in income from operations equal to the difference between the carrying value and their estimated fair value. Fair value is based on the discounted present value of the related future net cash flows and other relevant market value data. We assess unproved properties for impairment on a property-by-property basis. The impairment assessment for unproved properties is affected by factors such as the results of exploration and development activities, commodity price projections, remaining lease terms, and potential shifts in our business strategy. There were no impairment costs for the year ended December 31, 2020. For the year ended December 31, 2019, impairment costs for unproved properties were $2.9 million which related to certain term leases expected to expire undeveloped.

On the sale or retirement of a complete unit of a proved property, the cost and related accumulated depletion and depreciation are eliminated from the property accounts, and the resulting gain or loss is recognized. On the sale or retirement of a partial unit of proved property, the proceeds are charged against the carrying basis of the properties until the entire net carrying value of the properties is recovered. Any additional consideration received in excess of the net carrying basis of the properties would be recognized as a gain.

On the sale of an entire interest in an unproved property for cash or cash equivalents, gain or loss on the sale is recognized. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.

Fixed Assets and Other
Fixed assets and other includes costs associated with office furniture and equipment, leasehold improvements, computer hardware and software, and other property. These items are recorded at cost and depreciated using the straight-line method over their estimated useful lives which range from three to five years.

Oil and Gas Sales Payable
Oil and gas sales payable includes amounts that we collect from the purchasers of our crude oil and natural gas sales that are due to other working interest and royalty owners. We are typically required to remit these amounts to the other parties within 60 days from the end of the applicable production month.

F-12




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Retirement Obligations
Asset retirement obligations (“ARO”) represent the future costs to abandon long-lived, tangible assets such as oil and natural gas wells, service assets and other facilities. The fair value of an ARO liability is recorded in the period in which the liability is incurred, and the corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. See further discussion in Note 7 – Fair Value Measurements. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value, and the capitalized cost is depreciated over the useful life of the related asset.

Derivatives
We maintain commodity derivative contracts to partially mitigate the risk associated with fluctuations of prices for our oil and natural gas sales. By locking in minimum prices, we protect a portion of our cash flows which support operational and annual capital expenditure plans. These derivatives are recorded as derivative assets and liabilities on our consolidated balance sheets based upon their respective fair values.

We do not designate our derivatives as cash flow or fair value hedges. We do not hold or issue derivatives for speculative or trading purposes. Changes in the fair values of our derivative instruments prior to settlement are recorded in earnings as a gain or loss on commodity derivatives in the consolidated statements of operations. Cash flows resulting from the settlement of our derivative instruments are recorded as a gain or loss on commodity derivatives or cash settlements of commodity derivatives in the consolidated statements of cash flows.

We are exposed to credit losses in the event of nonperformance by the counterparties to our commodity derivatives contracts. We do not obtain collateral or other security to support our commodity derivatives contracts. We monitor the credit standing of our counterparties to understand our credit risk. As of December 31, 2020 and 2019, all of our derivative counterparties were members of Holdings’ credit facility lender group. The credit facility is secured by our proved oil and natural gas properties and, therefore, we are not required to post any collateral.

Revenue Recognition
Revenue is recognized from the sales of oil and natural gas when the customer obtains control of the product and when we have no further obligations to perform related to the sale. All our sales of oil and natural gas are made under contracts with customers, which typically include variable consideration based on monthly pricing tied to local indices and monthly volumes delivered. The nature of our contracts with customers does not require us to constrain variable consideration or to estimate the transaction price attributable to future performance obligations for accounting purposes. As of December 31, 2020, we had open contracts with customers with terms of one month to multiple years, as well as “evergreen” contracts that renew on a periodic basis if not canceled by us or the customer. Performance obligations under our contracts with customers are typically satisfied at a point-in-time through delivery of each unit (barrel or MMBtu) of oil or natural gas. There is no significant financing component to our revenues as our contracts with customers typically require payment within one month of delivery. At December 31, 2020 and 2019, we had receivables related to contracts with customers of approximately $10.5 million and $14.5 million, respectively.

We present disaggregated revenue from sales by type of commodity within our consolidated statements of operations. Our revenues from sales of natural gas liquids are immaterial and are included in natural gas
F-13




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
sales. The sales of oil and natural gas represent our share of revenues, net of royalties and excluding revenue interests owned by others. When selling oil or natural gas on behalf of royalty owners or other working interest owners, we act as an agent and thus report only our share of revenue.

Taxes assessed by governmental authorities on oil natural gas sales are presented separately from associated revenues in the accompanying consolidated statements of operations.

Our oil sales contracts are generally structured in one of two ways. First, production is sold at the wellhead at an agreed-upon index price, net of pricing differentials. In this scenario, revenue is recognized when control transfers to the purchaser at the wellhead at the net price received. Alternatively, production is delivered to the purchaser at a contractually agreed-upon delivery point at which point the purchaser takes custody, title and risk of loss of the product. Under this arrangement, a third-party is paid by the purchaser to transport the product and we receive a specified index price from the purchaser with no transportation deduction. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser.

Our natural gas sales consist of unprocessed gas sales and residue gas sales. Unprocessed gas is sold at delivery points at or near the wellhead under percentage of proceeds contracts, under which the customer pays us a transaction price based on its sale of the bifurcated NGLs and residue gas, less associated fees.

Fair Value Measurements
Our assets and liabilities recorded at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. A fair value hierarchy has been established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
Level 3 – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

We classify financial assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. See Note 7 – Fair Value Measurements for amounts recorded at fair value.

F-14




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Holdings is treated as a flow-through entity for U.S. federal income tax purposes with each member separately including their share of Holdings’ income or loss in their respective tax returns. However, Holdings has two subsidiaries that are treated as corporations for U.S. federal income tax purposes and will pay federal and state income tax on their respective taxable income, if applicable. As of December 31, 2020 and 2019, these entities had no tax liability. In addition, the Company is subject to the Texas Margin Tax on its earnings in Texas.

Deferred tax assets or liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities. These balances are measured using tax rates in effect for the year in which the differences are expected to reverse. These balances are negligible as of December 31, 2020 and 2019, respectively. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax assets will not be realized or if we cannot determine whether we can use the deferred tax assets in future periods. As of December 31, 2020 and 2019, respectively, we have not recorded any accruals for uncertain tax positions. We are not involved in any examinations by the Internal Revenue Service. For State and U.S. federal purposes, the review of our income tax returns is open for examination by the related taxing authorities for the 2020, 2019, 2018, and 2017 tax years.

Financial Instruments
The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, due from affiliates, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate their fair values due to their short-term maturities. Notes receivable and debt payable approximate fair value, unless otherwise stated, as of December 31, 2020 and 2019. The carrying amounts for derivative assets and liabilities are recorded at fair value.

Debt Issuance Costs
We capitalize certain issuance costs, such as lender’s and attorney’s fees, associated with borrowings. Our Debt in the consolidated balance sheets is presented net of the unamortized original issue discount and debt issuance costs. These costs are amortized over the life of the related debt and included in interest expense using the effective interest method. Amortized financing costs included in interest expense, net in our consolidated statements of operations, totaled $1.5 million and $1.3 million in 2020 and 2019, respectively.

Equity-Based Compensation
The Company’s Series B units are deemed to be equity-based compensation when awarded. For equity- based compensation awards, compensation expense is recognized in the Company’s financial statements over the awards’ vesting periods based on their grant date fair value and such expense is recognized on a straight-line basis over the requisite service period of the award. The Company has elected to account for forfeitures as they occur rather than estimate expected forfeitures.

Recent Accounting Developments
Fair Value Measurement. In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Disclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement,” which changes the disclosure requirements for fair value measurements by removing, adding, and modifying certain disclosures. ASU 2018-13 is effective for
F-15




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The adoption of this guidance did not have a material impact on our financial statements.

Lease Accounting. In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. This ASU is effective for the annual period beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is still considering the method of adoption and the effect of this guidance on its operating results, financial position or cash flow.

Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” The ASU revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. The ASU affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses.” This ASU clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In May 2019, the FASB issued ASU No. 2019-05, “Targeted Transition Relief.” This ASU provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. The ASU on credit losses will take effect for fiscal years beginning after December 15, 2021. The Company is still considering the method of adoption and the effect of this guidance on its operating results, financial position or cash flow.

3.    ACQUISITION OF OIL AND NATURAL GAS PROPERTIES

During the year ended December 31, 2020, we acquired various acreage in unproved properties totaling $1.0 million.

In March 2019, we completed the asset acquisition of oil and gas properties pursuant to a PSA dated September 2018 for an aggregate consideration of $18.1 million, after applying purchase price adjustments. The acreage included producing leases as well as undeveloped acreage. During 2019, we also made other acreage acquisitions totaling $5.1 million.

F-16




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired assets and assumed liabilities are recorded at their estimated fair values as of the dates of closing. The following is a summary of the consideration paid after applying purchase price adjustments and the recognized amounts of the assets acquired and liabilities assumed, including the acquisitions noted above:

(in thousands)2019
Total purchase consideration$32,733 
Oil and gas properties:
Unproved$22,111 
Proved863 
Asset retirement obligations(386)
Holdback Acquisition Payment (Note 10)10,145 
Net assets acquired$32,733 

The fair values of oil and gas properties were derived using the estimated future net cash flows related to the proved and unproved reserves attributable to such interests, representing Level 3 fair value estimates as discussed in Note 7 – Fair Value Measurements.


4.    INDEBTEDNESS

Debt consisted of the following:

(in thousands)20202019
Revolving credit facility$65,500 $64,000
Second lien notes125,000125,000
Total debt190,500 189,000
Less: current portion
Less: unamortized debt discount(952) (1,131)
Less: debt issuance costs(2,841)(3,909)
Total debt – long-term$186,707 $183,960


Revolving Credit Facility
On September 19, 2017, we entered into a $500 million senior secured revolving credit facility with JPMorgan Chase Bank, N.A. serving as the administrative agent (the “Credit Facility”). The Credit Facility has a maturity date of September 19, 2022. The borrowing base depends on, among other things, the volumes of our proved oil and natural gas reserves and estimated cash flows from these reserves and our commodity hedge positions. At December 31, 2020 and 2019, our borrowing base was $90.0 million and $155.0 million, respectively. The borrowing base is subject to semi-annual redeterminations. At December 31, 2020 and 2019, we had $0.5 million and $0.2 million, respectively, of letters of credit outstanding.

In general, the borrowings under the credit facility bear interest at either the Alternate Base Rate (“ABR”) or LIBOR. Either rate is adjusted upward by an applicable margin based on our percentage of utilization of the credit facility. The ABR is calculated as a rate per annum equal to the greater of (a) the Prime Rate, (b) the
F-17




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Reserve Bank of New York (“NYFRB”) Rate plus 0.5% or (c) the Adjusted LIBOR for a one- month interest period plus 1.0%. The Credit Facility is secured by a priority lien on substantially all of the assets of Holdings and its subsidiaries. At December 31, 2020 and 2019, our interest rate on the credit facility was approximately 3.15% and 4.0%, respectively. Interest expense on the Credit Facility totaled $2.8 million and $3.1 million for the years ended December 31, 2020 and 2019, respectively.

The credit facility contains various covenants, including among others: restrictions on liens; restrictions on incurring other indebtedness; restrictions on dividends, investments and other restricted payments; and maintenance of certain financial covenants determined on a regular basis. For purposes of financial covenant testing, Holdings is subject to a total leverage ratio, which measures the net debt over Earnings Before Interest, Taxes, Depletion and Depreciation, Amortization, Exploration and other adjustments (“EBITDAX”) of Holdings. The total leverage ratio as defined by the credit facility provides that this ratio must not be greater than 3.75 to 1.0. Holdings is also subject to a current ratio, which measures the current assets (including the undrawn amount of the total commitments of the Credit Facility but excluding derivative assets) over the current liabilities (excluding derivative obligations and current maturities of the credit facility of Holdings). The current ratio financial covenant, as defined by the Credit Facility, became effective on December 31, 2017, and provides that this ratio must not be lower than 1.0 to 1.0. Holdings was in compliance with its financial covenants at December 31, 2020 and 2019.

Second Lien Notes
On May 15, 2019, we entered into a Note Purchase Agreement for Senior Secured Second Lien Notes (the “Note Purchase Agreement” and such notes, the “Second Lien Notes”) among the Company as issuer, U.S. Bank National Association as agent and collateral agent and certain holders that are a party thereto, and issued notes in an initial principal amount of $125.0 million, with a $1.25 million discount, for net proceeds of $123.75 million before fees and expenses. We had the ability, subject to the satisfaction of certain conditions, to issue additional notes in a principal amount not to exceed $50.0 million. On March 31, 2020, we entered into a first amendment to the Note Purchase Agreement which eliminated the ability for us to issue up to $50.0 million of additional notes under the Note Purchase Agreement. The Second Lien Notes mature on May 15, 2026.

Interest on the Second Lien Notes is payable quarterly and accrues at LIBOR plus 6.25%; provided that if LIBOR ceases to be available, the Second Lien Notes provides for a mechanism to use ABR (an alternate base rate) plus 5.25% as the applicable interest rate. The definitions of LIBOR and ABR are set forth in the Second Lien Notes. To the extent that a payment, insolvency or, at the holders’ election, another default exists and is continuing, all amounts outstanding under the Second Lien Notes will bear interest at 2.0% per annum above the rate and margin otherwise applicable thereto. Additionally, to the extent we were to default on the Second Lien Notes, this would potentially trigger a cross-default under our revolving credit facility.

We have the right, to the extent permitted under the revolving credit facility and subject to the terms and conditions of the Second Lien Notes, to optionally prepay the notes, subject to the following repayment fees: prior to the 18-month anniversary, a customary “make-whole” amount (which is equal to the present value of the remaining interest payments through the 18-month anniversary of the issuance of the Second Lien Notes, discounted at a rate equal to the U.S. Treasury rate plus 50 basis points) plus 2.0% of the principal amount of the notes repaid; during month 18 until the 30-month anniversary, 2.0% of the principal
F-18




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount of the Second Lien Notes being prepaid; during month 30 until the 42-month anniversary, 1.0% of the principal amount of the Second Lien Notes being prepaid; and thereafter, no premium. However, any prepayment of the Second Lien Notes due to a change of control event prior to the 18-month anniversary shall instead be subject to a prepayment fee of 3.0% of the principal amount of the Second Lien Notes being prepaid. Additionally, the Second Lien Notes contain customary mandatory prepayment obligations upon asset sales, casualty events and incurrences of certain debt, subject to, in certain circumstances, reinvestment periods. The Note Purchase Agreement is evaluated periodically to determine whether certain embedded derivatives, which we initially deemed the likelihood of underlying triggering events to be remote, require separate valuation and accounting. For certain features that are deemed to not be clearly and closely related to the debt host contract we evaluate whether the facts and circumstances have changed regarding the probability of occurrence. There are no features that require bifurcation pursuant to ASC 815, “Derivatives and Hedging” as of December 31, 2020 or 2019.

The obligations under the Second Lien Notes are secured, subject to certain exceptions and other permitted liens (including the liens created under the revolving credit facility), by a perfected security interest, second in priority to the liens securing our revolving credit facility, and mortgage lien on substantially all of our assets and certain of our subsidiaries, including a mortgage lien on oil and natural gas properties attributed with at least 85% of estimated PV-9 of our proved reserves and our subsidiaries. PV-9 is determined using commodity price assumptions by the administrative agent of the revolving credit facility. Beginning in the period ending on December 31, 2019, the Second Lien Notes also contain a financial covenant measuring the ratio of total net debt to EBITDAX, as defined in the Note Purchase Agreement, for the most recently completed four fiscal quarters, not to exceed 4.25 to 1.0 as of the last day of each fiscal quarter. The Second Lien Notes also contain an asset coverage ratio, which includes in the numerator the PV-10 (defined below), based on forward strip pricing, plus the mark-to-market value of our commodity derivative contracts and our restricted subsidiaries and in the denominator the total net of our indebtedness including our restricted subsidiaries. Beginning with the period ending on December 31, 2019, the asset coverage ratio is tested quarterly and cannot be less than 1.25 to 1.0 as of each date of determination. The first amendment to the note purchase agreement dated March 31, 2020 modified the asset coverage ratio to be not less than 0.75 to 1.00 as of March 31, 2020 and then not less than 1.25 to 1.00 for each quarter thereafter. PV-10 Value is the estimated future net revenues to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%. The 2019 financial statement footnote 5 indicated that there was substantial doubt about our ability to continue as a going concern for one year from issuance of those statements. We have continued as a going concern through that period.

As of December 31, 2020, we are in compliance with all financial covenants under the Second Lien Notes.

The Second Lien Notes contain certain customary representations, warranties and covenants, including but not limited to, limitations on incurring debt and liens, limitations on making certain restricted payments, limitations on investments, limitations on asset sales and hedge unwinds, limitations on transactions with affiliates and limitations on modifying organizational documents and material contracts. The Second Lien Notes contain customary events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Second Lien Notes to be immediately due and payable.

F-19




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2020, net amounts outstanding for the Second Lien Notes totaled $121.5 million. Interest expense on the Second Lien Notes totaled $10.0 million and $6.8 million for the years ended December 31, 2020 and 2019, respectively.

5.    EQUITY CONTRIBUTIONS/DISTRIBUTIONS

The member interests consist of Series A units, which obligate members to make capital contributions to the Company, and Series B units, which do not have a capital commitment. As of December 31, 2020, Series A unitholders have contributed a total of $623.7 million to Holdings. The following table shows the total Series A units and amounts contributed by class as of December 31, 2020:

(in thousands)UnitsValue
A-1 Units37,889$378,890
A-2 Units10,531 121,110
A-3 Units10,759123,731
Total A Units59,179 $623,731

Holdings has approved the issuance of 59,179,536 Series A units, all of which are outstanding. None were issued in 2020 and 3,043,478 were issued in 2019. Series A units were issued at $10 per unit prior to March 26, 2018 and $11.50 per unit thereafter.

Holdings has also approved the issuance of 10,000,000 Series B units, of which 240,000 and 107,500 were issued to employees and independent directors in 2020 and 2019, respectively. Series B units of 7,297,500 may be issued to employees and independent directors at future dates.

A summary of Series B units issued and outstanding is presented in the table below:

Units
Units outstanding, beginning of the year8,243,750
Units granted240,000
Units forfeited(5,781,250)
Units outstanding, end of the year2,702,500

Under the terms of the LLC Agreement, distributions are first allocated 100% to the Series A units until such holders have received cumulative distributions equal to their aggregate capital contributions plus a cumulative preferred return. Should cumulative distributions exceed the amount necessary to satisfy the Series A unit requirements, the Series B units are allocated a portion of any additional distributions in accordance with tiered parameters detailed in the LLC Agreement. No distributions have been made as of December 31, 2020.

Seventy-five percent of the Series B units are subject to vesting requirements that depend solely on continued employment with the Company over a four-year service period. The remaining 25% of the Series B units are subject to vesting requirements that depend on a performance condition and continued employment with the Company. Equity-based compensation expense for the awards subject to the service condition only is based on the grant date fair value of the applicable awards and is recognized straight-line
F-20




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
over the vesting period. Compensation expense related to the awards subject to performance conditions will be recognized when the performance condition become probable of being met. Equity-based compensation expense reflected in the consolidated statements of operations totaled $0.7 million and $1.7 million for 2020 and 2019, respectively. As of December 31, 2020, there was $0.5 million of unamortized equity-based compensation expense related to unvested Series B units. That expense is expected to be recognized over a weighted-average four-year period.

At December 31, 2020 and 2019, 1,683,375 and 4,704,375, respectively, of the outstanding Series B units were vested.

A summary of the Company’s unvested Series B units as of December 31, 2020 and 2019 is presented below:

20202019
Unvested UnitsUnits Weighted-average grant date fair value

per Unit
UnitsWeighted-average grant date fair value

per Unit
Unvested units at beginning of the period3,539,375$1.354,710,000$1.33
Units granted240,000 2.41107,5002.41
Units forfeited(2,361,250)1.18(20,000)2.17
Units vested(399,000) 1.84(1,258,125)1.33
Unvested units at end of the year1,019,125 $1.813,539,375$1.35

Equity-based compensation expense is based on the grant date fair value of the applicable awards. The grant date fair values of the Series B units were determined using option pricing models. The models utilize multiple input variables that determine the probability of the Series B unit holders receiving distributions in the future. Average volatility assumptions are based on the historic median volatilities of selected guideline companies. The average risk-free interest rate used in the valuation of Series B units was based on the U.S. Treasury Yield Curve. These assumptions represent Level 3 inputs.

20202019
Expected volatility47.5%47.5%
Expected dividend yields 
Expected term (in years)2.52.5
Risk-free rate2.4% 2.4%


6.    DERIVATIVES

We have entered into commodity derivative financial contracts to mitigate the risk of volatility in commodity prices with respect to a portion of our oil and natural gas production. As of December 31, 2020, our commodity derivative instruments consisted of fixed price swaps, costless collars, and three-way costless collars, which are described below:
F-21




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fixed price swaps: Under a swap contract, we will receive payment if the settlement price is less than the fixed price and would be required to make a payment to the counterparty if the settlement price is greater than the fixed price.

Costless collars: A collar consists of a sold call option (ceiling) combined with a purchased put option (floor) and allows us to benefit from increases in commodity prices up to the ceiling price of the contract and protects us from decreases in commodity prices below the floor price. At settlement, the counterparty is required to make a payment to us if the settlement price is below the floor price, while we are required to make a payment to the counterparty if the settlement price is above the ceiling price. If the settlement price is between the floor price and ceiling price, no payments are due from either party.

Three-way costless collars: A three-way collar consists of a combination of three options–a sold call option (ceiling), a purchased put option (floor) and a sold put (sub-floor). This allows us to benefit from increases in commodity prices up to the ceiling price of the contract and protects us from decreases in commodity prices below the floor price but only up to the sub-floor price. If the settlement price is below the sub-floor price, the counterparty is required to make a payment to us for the difference between the floor price and sub-floor price. If the settlement price is between the floor price and sub-floor price, the counterparty is required to make a payment to us for the difference between the floor price and the settlement price. If the settlement price is between the floor price and ceiling price, no payments are due from either party. If the settlement price is above the ceiling price, we are required to make a payment to the counterparty for the difference.

F-22




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary of the Company’s derivative contracts as of December 31, 2020.

Weighted Average Price
Volume
PeriodType(Bbls/
MMBtu)
SwapFloorSub-FloorCeiling
January -
December 2021
 Swap -
NYMEX WTI
 1,169,250 $42.58
January -
December 2022
Swap -
NYMEX WTI
615,150$44.67
January -
December 2023
 Swap -
NYMEX WTI
 766,125 $45.07
January -
December 2024
Swap -
NYMEX WTI
457,500$45.37
January -
December 2022
Collar -
NYMEX WTI
273,500$37.33$42.40
January -
December 2021
3-Way -
NYMEX WTI
439,050$51.72$41.72$59.75
January -
March 2022
3-Way -
NYMEX WTI
135,000$52.50$42.50$59.05
January -
December 2021
Swap -
Mid/Cush Basis
1,030,550$0.65
January -
December 2022
Swap -
Mid/Cush Basis
317,500$0.62
January -
December 2021
Swap -
Henry Hub
2,052,400$2.75
January -
October 2022
Swap -
Henry Hub
2,267,900$2.49
January -
December 2021
Collar -
Henry Hub
2,151,000$2.37$2.78
January -
December 2022
Collar -
Henry Hub
1,169,900$2.33$2.81
January -
March 2023
Collar -
Henry Hub
540,000$2.54$2.95
January -
March 2021
3-Way -
Henry Hub
585,000$2.40$2.00$3.32
January -
December 2021
Basis Swap -
Waha vs. Henry Hub
4,788,400$(0.74)
January -
October 2022
Basis Swap -
Waha vs. Henry Hub
3,071,800$(0.53)

We are exposed to credit loss in the event of nonperformance by our derivative counterparties; however, we do not currently anticipate that the counterparties will be unable to fulfill their contractual obligations. Additional collateral is not required by us due to the derivative counterparties’ collateral rights as a lender under our credit facility, and we do not require collateral from our derivative counterparties.

F-23




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Company and a counterparty in the event of default or upon the occurrence of certain termination events. The following table presents the gross asset and liability balances of our derivative instruments, the amounts subject to master netting arrangements, the amounts presented on a net basis and the location of these balances in our consolidated balance sheets as of December 31, 2020:

Total GrossCarrying
(in thousands)AmountNettingAmount
December 31, 2020     
Derivative liabilities - current$13,273$(4,700)$8,573
Derivative liabilities - long-term6,388 (2,701) 3,687
December 31, 2019     
Derivative liabilities - current$4,930$(3,124)$1,806
Derivative liabilities - long-term2,324 (2,106) 218

The following table summarizes the effect of derivative instruments on our consolidated statements of operations:

For the Years Ended
December 31,
(in thousands)Location in Consolidated
Statements of Operations
20202019
Realized gain on commodity derivatives Gain on commodity derivatives, net$28,518 $3,522
Unrealized (loss) on commodity derivativesLoss on commodity derivatives, net(10,236)(20,029)
Net gain (loss) on derivative instruments $18,282 $(16,507)

F-24




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.    FAIR VALUE MEASUREMENTS

The following tables summarize the valuation of our financial assets and liabilities that were accounted for at fair value on a recurring basis in accordance with the fair value hierarchy:

As of December 31, 2020
(in thousands)Level 1Level 2Level 3Total
Commodity derivative liabilities - current$$(8,573)$$(8,573)
Commodity derivative liabilities - long-term (3,687)  (3,687)
$$(12,260)$$(12,260)
        
As of December 31, 2019
(in thousands)Level 1Level 2Level 3Total
Commodity derivative liabilities - current$$(1,806)$$(1,806)
Commodity derivative liabilities - long-term(218)(218)
$$(2,024)$$(2,024)
The unrealized gain or loss on commodity derivatives represents estimated future settlements under our commodity derivatives and is based on mark-to-market valuation based on assumptions of forward prices, volatility and the time value of money, representing Level 2 fair value measurements.

Assets and liabilities accounted for at fair value on a non-recurring basis in accordance with the fair value hierarchy include the initial recognition of asset retirement obligations and the fair value of acquired assets and liabilities.

The fair value of our estimated future asset retirement obligations totaled $5.5 million and $5.4 million for the years ended December 31, 2020 and 2019, respectively. The fair value of additions to the asset retirement obligation liability is measured using valuation techniques consistent with the income approach, which converts future cash flows to a single discounted amount. Significant inputs to the valuation include (i) estimated plugging and abandonment cost per well based on our experience and information from third-party vendors; (ii) estimated remaining life per well; (iii) future inflation factors; and (iv) our average credit- adjusted risk-free rate. These assumptions represent Level 3 inputs. See Note 8 – Asset Retirement Obligations for further discussion of our asset retirement obligation.

If the carrying amount of our oil and natural gas properties exceeds the estimated undiscounted future cash flows, we will adjust the carrying amount of the oil and natural gas properties to fair value. The fair value of our oil and natural gas properties is determined using valuation techniques consistent with the income and market approach. The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited to, recent sales prices of comparable properties, the present value of future cash flows, net of estimated operating and development costs using estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and various discount rates commensurate with the risk and current market conditions associated with the expected cash flow projected. These assumptions represent Level 3 inputs.

The book value of our revolving credit facility and Second Lien Notes approximates fair value, which is based on Level 3 inputs.
F-25




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.    ASSET RETIREMENT OBLIGATIONS

At December 31, 2020 and 2019, our liability for asset retirement obligations was $5.5 million and $5.4 million, respectively. The following table describes the changes in our asset retirement obligation:

(in thousands)20202019
Asset retirement obligations, beginning of period $5,382 $4,873
Liabilities assumed in acquisitions (Note 3)386
Liabilities incurred for properties drilled7044
Liabilities settled (92) (103)
Changes in estimates25176
Liabilities sold or traded(69)
Accretion of discount 86 75
Asset retirement obligations, end of period$5,471$5,382

9.    AGREEMENTS AND TRANSACTIONS WITH AFFILIATES

We have entered into contracts with 3 Bear Delaware Holding – NM, LLC (“3BDH-NM”) covering gas gathering and processing, oil gathering, and water gathering and disposal for a portion of our produced oil, gas and water. The business and affairs of 3BDH-NM are managed and controlled by its board of directors. As of December 31, 2020, the board of directors of 3BDH-NM contain two members of our management. As of December 31, 2020 and 2019, we had payables due to 3BDH-NM of $1.2 million and $1.2 million, respectively, and receivables due from 3BDH-NM of $0.7 million and $0.1 million, respectively.

During 2019, we entered into a $25 million loan agreement with our unconsolidated affiliated company, Midstream Holdings, which held a 49% interest in 3BDH-NM at closing. Interest is due and payable quarterly and accrues at LIBOR plus 6.35%. The interest is payable in kind by increasing the outstanding principal amount of the note by the amount of interest due. All accrued and unpaid interest is payable on May 15, 2026 or upon an occurrence of a change of control. Any net sale proceeds from a sale of the existing business will be used to prepay the outstanding principal amount of the note. Interest income for the year ended December 31, 2020 and 2019 was $2.9 and $1.5 million, respectively, and is included in interest expense, net on our consolidated statements of operations. As of December 31, 2020, Midstream’s interest in 3BDH-NM was 40%.

We review open notes receivable balances for collectability each reporting period. If it is determined that it is probable that we will not collect the full amount due under a note agreement, we record reserves against the note receivable balance in accordance with ASC 310 – Receivables. In order to reasonably conclude on the collectability of such balances, we consider the borrower’s current status on payments received, the financial health and other sources of funding available to the borrower, our ability to secure assets collateralized by contractual agreements, as well as other factors. At December 31, 2020, we recorded an allowance of $1.9 million against the notes receivable balance due to expected uncollectablity. The allowance is recorded in other expense on the consolidated statements of operations. See Note 11 – Subsequent Events for further discussion. The following table shows the changes in the notes receivable:

F-26




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)20202019
Notes receivable, beginning of period$32,340 $
Additions2,20530,880
Interest in kind2,863 1,460
Allowance for uncollectibility(1,908)
Notes receivable, end of period$35,500$32,340


10.    COMMITMENTS AND CONTINGENCIES

Lease Obligations
The following table provides estimates of the timing of minimum future payments that we are obligated to make based on long-term lease agreements in place as of December 31, 2020. Of the $0.9 million in commitments, $0.4 million is related to the rental for the Company’s headquarters.

Future Commitments - Payments Due by Year
(in thousands)2021202220232024ThereafterTotal
Operating leases$657 $111 $104 $13 $— $885 

We began 2020 operating two drilling rigs in the Delaware Basin and originally planned to operate both rigs throughout 2020. As a result of the events which negatively impacted commodity pricing during 2020 (refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations), we released one of the drilling rigs in late March 2020 and put the second rig in standby status until August 2020. During the year ended December 31, 2020, we incurred rig termination and standby fees of $1.9 million.

Litigation
In May 2018, we were named as a defendant in a lawsuit filed by Nearburg Exploration Company, LLC, Nearburg Producing Company, Charles E. Nearburg, and Duane A. Davis (the “Plaintiffs”). In late 2016, the parties negotiated an agreement for the purchase and sale of certain oil and gas leases, and well interests (the “Interests”) located in the Delaware Basin of New Mexico (Lea and Eddy Counties). The Interests were owned by the Plaintiffs and other individuals/affiliated entities, on whose behalf the Plaintiffs acted to sell the Interests. The transactions closed on May 15, 2017. In late August 2017, the Plaintiffs claimed to have noticed a discrepancy between certain mineral interests they thought they had retained in the transaction and the interests they actually conveyed under the Purchase and Sales Agreements. An agreement could not be reached on the Interests in dispute; the Plaintiffs subsequently filed suit in Dallas County, Texas, in May 2018 and in Lea County, New Mexico, shortly thereafter. The parties agreed to stay the lawsuit in New Mexico until the Texas lawsuit was resolved. The Plaintiff sought payment of the final $9.8 million acquisition payment (the “Holdback”), which we held back once we learned Plaintiff’s intent, delivery of the disputed interests, and payment of legal fees and interest.

In July 2019, Chisholm settled with the Plaintiffs and paid the Holdback funds of $9.8 million and a settlement amount of $0.4 million. In connection with the settlement, the parties executed a conveyance which transferred to the Plaintiffs, effective October 1, 2016, an undivided 50% ownership interest in the disputed interests. Further, Chisholm paid the Plaintiffs an amount equal to the proceeds attributable to the
F-27




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plaintiff’s undivided 50% interest in the disputed interests for the period beginning with January 1, 2019 production through the end of June 2019.

We are party to several legal proceedings encountered in the ordinary course of business. While the ultimate outcome and impact on us cannot be predicted with certainty, in the opinion of management, it is remote that these legal proceedings will have a material adverse impact on our financial condition, results of operations or cash flows.

Other
Holdings believes it is in compliance with applicable federal, state, and local laws, and the ultimate resolution of any claims or legal proceedings that may arise in the ordinary course of business against us is not expected to have a material adverse effect on our financial position, results of operations or cash flows.

11.    SUBSEQUENT EVENTS

We reviewed subsequent events through March 31, 2021, the date on which these consolidated financial statements were available to be issued and concluded that no events had occurred that would warrant disclosure, other than those matters already disclosed herein.

On March 23, 2021, we received a payment of $31.5 million on the note receivable from our unconsolidated affiliated company, Midstream Holdings. The payment was made in conjunction with the sale of Midstream Holding’s interest in 3BDH-NM. Under the terms of the Membership Interest Purchase Agreement dated March 22, 2021, Midstream Holdings retained an earnout of $4 million which will be payable to Holdings on the occurrence of a triggering event. At December 31, 2020, Holdings recorded an allowance for collectability of $1.9 million against the Midstream Holdings notes receivable. The outstanding balance of the note receivable at March 23, 2021 was $4 million which approximates fair value. In accordance with ASC 310, we account for impaired loans using the modified cost recovery method. Under the cost recovery method, any interest or principal received is recorded as a direct reduction of the recorded investment in the loan. When the recorded investment has been fully collected, any additional amounts are recognized as interest income.

On March 22, 2021, we entered into a second amendment to the Note Purchase Agreement which allows Holdings to utilize the note receivable proceeds to repay $25 million of principal amount of the Second Lien Notes and the balance available for debt repayment under the credit facility and/or for general corporate purposes. The Company believes that the $6.5 million in funds available for general corporate purposes along with the $25 million available under the Company’s Revolving Line of Credit Facility as of December 31, 2020 discussed in Note 4 – Indebtedness mitigate the working capital deficit of $15.7 million, $8.6 million of which related to derivative liabilities, as of December 31, 2020. In addition, the second amendment allows Holdings to forgive and cancel the remaining balance of the note receivable upon payment to Holdings of the earnout net proceeds received by Midstream Holdings at a future date. On March 26, 2021, we used a portion of the proceeds from the note receivable payment and repaid $25 million of principal and accrued interest under our Second Lien Notes.

In early March 2020, there was a global outbreak of COVID-19 that resulted in significant disruptions in global supply and demand of oil and natural gas products. While commodity prices have since recovered to levels preceding the pandemic, there continues to be uncertainty regarding any future impacts. Sustained
F-28




CHISHOLM ENERGY HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
weakness in oil and natural gas prices may adversely affect the financial condition and results of operations and may also reduce the amount of net oil and natural gas reserves the Company can produce economically. Similarly, any improvement in oil and natural gas prices may have a favorable impact on the Company’s financial condition, results of operations, and capital resources.
F-29




CHISHOLM ENERGY HOLDINGS, LLC

Supplemental Schedules about Oil and Natural Gas Producing Properties (Unaudited)

Costs Incurred (Unaudited)

The following table sets forth the costs incurred for property acquisitions, exploration and development activities:

Years Ended December 31,
20202019
Acquisition cost:
Proved$— $863
Unproved1,04922,111
Exploration costs:
Abandonment costs— 2,989
Geological and geophysical67739
Development costs59,266120,796
Total additions$60,382$147,498

Oil and Natural Gas Reserves (Unaudited)

The estimates of proved oil and natural gas reserves and discounted future net cash flows for the Company’s oil and gas properties as of December 31, 2020 and 2019 were prepared using historical data and other information by qualified petroleum engineers engaged by the Company. Users of this information should be aware that the process of estimating quantities of proved oil and natural gas reserves is complex, requiring significant subjective decisions to be made in the evaluation of available geologic, engineering, and economic data for each reservoir. The data for any given reservoir may also change substantially over time as a result of numerous factors, including, but not limited to, additional development activity, production history, and continual reassessment of the viability of production under varying economic conditions. As a result, revisions to existing reserve estimates may occur from time to time.

The estimated proved net recoverable reserves presented below include only those quantities of oil and natural gas that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic, operating, and regulatory practices. In accordance with the SEC’s guidelines, estimates of proved reserves from which present values are derived were based on the unweighted 12-month average price of the first day of the month price for the period and held constant. Proved developed reserves represent only those reserves estimated to be recovered through existing wells. All of the oil and gas reserves set forth herein are in the United States and are proved reserves.

F-30




CHISHOLM ENERGY HOLDINGS, LLC

Supplemental Schedules about Oil and Natural Gas Producing Properties (Unaudited)
The estimated rounded quantities of proved oil and natural gas reserves and changes in net proved reserves are summarized below for the years ended December 31, 2020 and 2019:

OilNatural GasTotal
(MBbls)(MMcf)(MBOE)
Balance, January 1, 201926,381124,71447,168
Revisions(1,843)(44,683)(9,290)
Extensions10,76139,87017,406
Divestitures of reserves(632)(4,256)(1,342)
Acquisition of reserves— — — 
Production(2,182)(7,045)(3,357)
Balance, December 31, 201932,485108,60050,585
Revisions(7,454)(44,055)(14,797)
Extensions1,5867,0592,763
Divestitures of reserves— — — 
Acquisition of reserves— — — 
Production(2,331)(7,350)(3,556)
Balance, December 31, 202024,28664,25434,995

OilNatural GasTotal
Proved developed and undeveloped reserves:(MBbls)(MMcf)(MBOE)
Developed as of December 31, 20186,14832,15211,507
Undeveloped as of December 31, 201820,23392,56235,660
Balance at December 31, 201826,381124,71447,167
Developed as of December 31, 201910,47140,70017,254
Undeveloped as of December 31, 201922,01367,90033,330
Balance at December 31, 201932,484108,60050,584
Developed as of December 31, 202012,02441,77918,987
Undeveloped as of December 31, 202012,26222,47516,008
Balance at December 31, 202024,28664,25434,995

Notable changes are the following:

Revisions. The company made negative revisions in proved reserves of 14,797 and 9,290 for the years ended December 31, 2020 and 2019, respectively.

Negative revisions of previous estimates for 2020 were 14,797 MBoe. The main driver of these revisions was attributable to a price adjustment due to a decrease in pricing as calculated using SEC guidelines, which resulted in an 11,116 MBoe downward revision to previous estimates. A negative revision of 5,167 was the reclassification of certain proved undeveloped (“PUD”) reserves to unproved reserves for PUD locations determined to be outside of the Company’s five-year capital expenditure plan. These were offset by changes in well performance and operating expenses, which together resulted in a positive revision of 1,486 MBoe.

F-31




CHISHOLM ENERGY HOLDINGS, LLC

Supplemental Schedules about Oil and Natural Gas Producing Properties (Unaudited)
Negative revisions of previous estimates for 2019 were 9,290 MBoe. The main driver of these revisions was the reclassification of certain PUD reserves to unproved reserves, which resulted in a 14,939 MBoe downward revision to previous estimates. The PUD locations were determined to be outside of the Company’s five-year capital expenditure plan. A negative revision of 376 MBoe was attributable to a price adjustment due to a decrease in pricing as calculated using SEC guidelines. These were offset by well performance which resulted in a positive revision of 6,025 MBoe.

Extensions. For the years ended December 31, 2020 and 2019, extensions contributed to the increase of 2,763 MBoe and 17,406 MBoe in the Company’s proved reserves, respectively, and for each such year the increase is attributable to the Company’s horizontal drilling program in the Delaware Basin.

Standardized Measure (Unaudited)

A standardized measure of future net cash flows and changes therein relating to estimated proved reserves is computed in accordance with authoritative accounting guidance. The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and the SEC. These assumptions do not necessarily reflect expectations of actual revenue to be derived from those reserves nor their present value amount. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these reserve quantity estimates are the basis for the valuation process.

Future cash inflows and production and development costs are determined by applying prices and costs, including transportation, quality, and basis differentials, to the year-end estimated future reserve quantities. The following prices, as adjusted for transportation, quality, and basis differentials, were used in the calculation of the standardized measure:
20202019
Oil (per Bbl)$39.57$55.69
Natural gas (per Mcf)$1.99$2.58
NGLs (per Bbl)$$

Future operating costs are determined based on estimates of expenditures to be incurred in developing and producing the proved reserves in place at the end of the period using year-end costs and assuming continuation of existing economic conditions. The standardized measure presented here does not include the effects of federal income taxes, as the Company is taxed as a partnership and not subject to federal income taxes; however, the Company is subject to the Texas margin tax, which is included. The resulting future net cash flows are reduced to present value amounts by applying a 10 percent annual discount factor.

F-32




CHISHOLM ENERGY HOLDINGS, LLC

Supplemental Schedules about Oil and Natural Gas Producing Properties (Unaudited)
The standardized measure of discounted future net cash flows relating to the Company’s proved oil and natural gas reserves is as follows as of December 31, 2020 and 2019 (in thousands):
20202019
Future cash inflows$1,035,770$1,913,851
Future production costs(441,486)(658,734)
Future development costs(156,447)(383,427)
Future Texas margin taxes— — 
Future net cash flows437,837871,690
Less 10 percent annual discount for estimated timing of cash flows(219,160)(470,571)
Standardized measure of discounted future net cash flows$218,677$401,119


The changes in the standardized measure of the future net cash flows relating to proved oil and natural gas reserves for the years ended December 31, 2020 and 2019 are as follows (in thousands):
20202019
Balance - Beginning of year$401,119$511,087
Sales of oil and gas produced - Net of production costs(62,194)(80,481)
Net changes in prices and production costs(182,486)(267,398)
Previously estimated development costs incurred during the period31,75824,651
Net changes in future development costs22,74636,271
Revisions of previous quantity estimates, extensions, and divestiture(29,031)107,278
Accretion of discount40,11251,109
Net change in Texas margin taxes--
Changes in timing of estimated cash flows and other(3,347)18,602
Balance - End of year$218,677$401,119



F-33






image_0.jpg




CHISHOLM ENERGY HOLDINGS, LLC

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    
AS OF SEPTEMBER 30, 2021 AND DECEMBER 31, 2020

AND FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2021 AND 2020





F-34




TABLE OF CONTENTS
Page
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020
Condensed Consolidated Statements of Changes in Members’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020
Notes to Unaudited Condensed Consolidated Financial Statements


F-35


CHISHOLM ENERGY HOLDINGS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)

    

September 30, 2021December 31, 2020
ASSETS
Current assets:   
Cash and cash equivalents$ 12,437$ 9,367
Accounts receivable:   
Oil, natural gas and natural gas liquids sales23,47510,508
Joint interest owners and other7,375 3,563
Due from affiliates4949
Prepaid expenses and other current assets965 912
Total current assets44,30124,399
    
Oil and natural gas properties, successful efforts method973,671924,664
Accumulated depreciation, depletion and impairment(363,671) (196,887)
Total oil and natural gas properties, net610,000727,777
    
Other noncurrent assets:
Notes receivable from affiliate, net4,000 35,500
Fixed assets and other, net3,0562,313
TOTAL ASSETS$ 661,357 $ 789,989
LIABILITIES AND MEMBERS' EQUITY   
Current liabilities:
Accounts payable$ 21,644 $ 5,707
Oil and gas sales payable9,0306,702
Accrued liabilities12,319 17,784
Accrued interest1,1591,275
Asset retirement obligations, current portion362 -
Derivative liabilities, current portion40,0558,573
Deferred rent expense- 92
Total current liabilities84,56940,133
    
Noncurrent Liabilities:
Long-term asset retirement obligations5,027 5,471
Long-term derivative liabilities28,4013,687
Long-term debt, net152,259 186,707
Total Liabilities270,256235,998
    
Commitments and contingencies (Note 10)
    
Members' Equity:
Capital contributions622,912 622,912
Retained earnings(231,811)(68,921)
Total Members' Equity391,101 553,991
TOTAL LIABILITIES AND MEMBERS' EQUITY$ 661,357$ 789,989


The accompanying notes are an integral part of these condensed consolidated financial statements.

F-36



CHISHOLM ENERGY HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)





Three Months EndedNine Months Ended
September 30,September 30,
2021202020212020
REVENUES
Oil $ 43,320  $ 23,516  $ 120,960  $ 63,561
Natural gas liquids                5,501

                     -

              12,480

                     -
Natural gas                5,066                 2,119               13,601                 3,346
Total revenues53,88725,635147,04166,907
        
OPERATING COSTS AND EXPENSES
Lease operating expense              12,490                 5,842               29,076               20,955
Transportation, gathering and marketing costs                   184

                   230

                   630

                   526
Rig termination expense                     -                    910                      -                 1,934
Production and ad valorem taxes                4,949

                2,339

              13,078

                5,933
General and administrative                4,743                 2,434                 8,891                 8,381
Depreciation, depletion and amortization              15,126

              19,094

              52,683

              53,074
Exploration expense                     21                      20                      47                      60
Impairment expense             114,907

                     -

              114,907

                     -
Accretion of asset retirement obligation                     24                      22                      72                      64
Total operating costs and expenses152,44430,891219,38490,927
        
Loss from operations(98,557)(5,256)(72,343)(24,020)
        
OTHER INCOME (EXPENSE)
Interest expense, net              (2,868)               (2,925)               (8,708)               (8,800)
Gain (loss) on commodity derivatives, net            (17,404)

              (5,456)

            (84,397)

              30,552
Other income, net                   (20)                      (2)                    (70)                      23
Total other income (expense)(20,292)(8,383)(93,175)21,775
        
Loss before income taxes(118,849)(13,639)(165,518)(2,245)
Income tax expense                  - -                   (3) -
Net loss$ (118,849)$ (13,639)$ (165,521)$ (2,245)

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-37



CHISHOLM ENERGY HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY (UNAUDITED)
(In thousands)




Three-Month Period Ended September 30, 2021
At June 30, 2021$ 507,429
Capital contributions-
Equity-based comp 2,521
Net loss(118,849)
At September 30, 2021$ 391,101
Three-Month Period Ended September 30, 2020
At June 30, 2020$ 587,352
Capital contributions-
Equity-based comp 474
Net loss(13,639)
At September 30, 2020$ 574,187
Nine-Month Period Ended September 30, 2021
At December 31, 2020$ 553,991
Capital contributions-
Equity-based comp 2,631
Net loss(165,521)
At September 30, 2021$ 391,101
Nine-Month Period Ended September 30, 2020
At December 31, 2019$ 575,191
Capital contributions-
Equity-based comp 1,240
Net loss(2,245)
At September 30, 2020$ 574,186


The accompanying notes are an integral part of these condensed consolidated financial statements.

F-38



CHISHOLM ENERGY HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)

For the Nine Months Ended
September 30,
2021 2020
Cash flows from operating activities:
Net loss$ (165,521) $ (2,245)
Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation, depletion and amortization52,683 53,074
Accretion of asset retirement obligations7264
(Gain) loss on commodity derivatives, net84,397 (30,552)
Cash settlements on commodity derivatives(28,201)23,832
Deferred rent(92) (105)
Amortization of deferred debt issuance costs7061,283
Equity-based compensation2,631 1,240
Impairment of oil and natural gas properties114,907-
Interest income on notes receivable- (2,153)
Changes in assets and liabilities:

Accounts receivable(16,779) 14,202
Prepaid expenses and other current assets(64)61
Accounts payable7,430 (17,176)
Oil and gas sales payable2,328(2,359)
Accrued liabilities(46) (2,316)
Accrued interest(116)(165)
Plugging and abandonments(210) -
Net cash provided by operating activities54,12536,685
Cash flows from investing activities:   
Acquisitions of oil and natural gas properties(4,198)(977)
Development of oil and natural gas properties(42,419) (40,209)
Payment received on notes receivable from affiliate31,500(2,205)
Other non-current assets(757) (105)
Additions to other fixed assets(27)(14)
Net cash used in investing activities(15,901) (43,510)
Cash flows from financing activities:
Borrowings under revolving credit facility2,000 18,000
Repayments of revolving credit facility borrowings(10,500)(14,000)
Repayments of second lien note(25,000) 
Payments of deferred debt issuance costs(1,654)-
Net cash provided by (used in) financing activities(35,154) 4,000
Net increase (decrease) in cash3,070(2,825)
Cash and cash equivalents at beginning of period9,367 17,941
Cash and cash equivalents at end of period$ 12,437$ 15,116
Supplemental disclosure of cash flow information   
Cash paid for interest$ 7,985$ 17,483
Change in capital expenditures included in accounts payable and accrued liabilities$ 3,087 $ 407
Capital asset retirement obligation$ 56$ 44


The accompanying notes are an integral part of these condensed consolidated financial statements.

F-39




CHISHOLM ENERGY HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.    ORGANIZATION AND NATURE OF OPERATIONS
Chisholm Energy Holdings, LLC (“Holdings” or the “Company”) is a Delaware limited liability company formed on May 19, 2016 by members of our management team and investment funds sponsored by Warburg Pincus LLC (“Warburg”). Holdings, together with its wholly owned operating subsidiaries (collectively, “Chisholm”, “we”, “us”, or “our”), is an oil and natural gas company engaged in the acquisition, development, exploration and production of crude oil and natural gas properties located primarily in New Mexico’s Eddy and Lea counties.

On March 26, 2018, Holdings amended the LLC Agreement to admit a significant new investor, Ontario Teachers’ Pension Plan Board (“OTPP”), in addition to increasing the equity commitment of Warburg and other existing investors.

On December 15, 2021, the Company signed a definitive agreement with Earthstone Energy, Inc. (“Earthstone”) to sell substantially all of its oil and gas assets. As of September 30, 2021, any contemplated sale transaction was not deemed to be probable and these condensend consolidated financial statements do not present assets held for sale, however an impairment of oil and gas assets was recored to reduce the carrying value to estimated fair value (Note 3).

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation, Basis of Presentation, and Significant Estimates
The Company prepared the accompanying unaudited Condensed Consolidated Financial Statements and notes thereto in accordance with generally accepted accounting principles in the United States of America (“GAAP”), and the financial statements contain all adjustments necessary for a fair statement of the results for the periods presented. The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Holdings and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated.

Use of Estimates
Preparation in accordance with GAAP requires the Company to adopt accounting policies within accounting rules set by the Financial Accounting Standards Board (“FASB”) and make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s management believes the major estimates and assumptions impacting the Company’s condensed consolidated financial statements are the following:

estimates of proved reserves of oil and natural gas, which affect the calculations of depletion, depreciation and amortization (“DD&A”) and impairment of proved oil and natural gas properties;
impairment of unproved properties and other assets;
depreciation of property and equipment; and
valuation of commodity derivative instruments.

Although management believes these estimates are reasonable, actual results may differ from estimates and assumptions of future events and these revisions could be material. Future production may vary materially from estimated oil and natural gas proved reserves. Actual future prices may vary significantly from price assumptions used for determining proved reserves and for financial reporting.

Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, deposits held with banks and other short-term highly liquid investments having an original maturity of three months or less. Balances held by the Company at its banks can exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to the amounts of deposit in excess of FDIC insurance coverage.

Accounts Receivable
Accounts receivable consist of receivables from joint interest owners on properties the Company operates and crude oil, natural gas and natural gas liquids (“NGLs”) production delivered to purchasers. The purchasers remit payment for production directly to the Company. Most payments are received within two months after the production date. For receivables from joint interest owners, the Company typically has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings. Accounts receivable outstanding longer than the contractual payment terms are considered past due.

The Company recognizes an allowance for doubtful accounts in an amount equal to anticipated future uncollectible receivables. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the debtor’s current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company had no allowance for doubtful accounts at each of September 30, 2021 and December 31, 2020.

Fixed Assets and Other
Fixed assets and other includes costs associated with office furniture and equipment, leasehold improvements, computer hardware and software, and other property. These items are recorded at cost and depreciated using the straight-line method over their estimated useful lives which range from three to five years.

Oil and Gas Sales Payable
The accompanying notes are an integral part of these condensed consolidated financial statements.

F-40




CHISHOLM ENERGY HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Oil and gas sales payable includes amounts that we collect from the purchasers of our crude oil and natural gas sales that are due to other working interest and royalty owners. We are typically required to remit these amounts to the other parties within 60 days from the end of the applicable production month.

Asset Retirement Obligations
Asset retirement obligations (“ARO”) represent the future costs to abandon long-lived, tangible assets such as oil and natural gas wells, service assets and other facilities. The fair value of an ARO liability is recorded in the period in which the liability is incurred, and the corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. See further discussion in Note 7 – Fair Value Measurements. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value, and the capitalized cost is depreciated over the useful life of the related asset.

Revenue Recognition
In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), revenue is measured based on considerations specified in contracts with its customers, excluding any sales incentives or amounts collected on behalf of third parties. The Company recognizes revenue when a performance obligation is satisfied by the transfer of control over a product to the ultimate customer. Sales of oil, natural gas and NGLs are recognized at the time that control of the product is transferred to the customer and collectability is reasonably assured. Generally, the pricing provisions in the Company’s contracts are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, the quality of the oil or natural gas, and prevailing supply and demand conditions. As a result, the prices of the Company’s oil, natural gas, and NGLs fluctuate to remain competitive with other available oil, natural gas, and NGLs supplies. There is no significant financing component to our revenues as our contracts with customers typically require payment within one month of delivery. At September 30, 2021 and December 31, 2020, we had receivables related to contracts with customers of approximately $23.5 million and $10.5 million, respectively. The Company reports revenues disaggregated by product on its condensed consolidated statements of operations.

Income Taxes
The Company is treated as a flow-through entity for U.S. federal income tax purposes with each member separately including their share of the Company’s income or loss in their respective tax returns. However, the Company has two subsidiaries that are treated as corporations for U.S. federal income tax purposes and will pay federal and state income tax on their respective taxable income, if applicable. As of September 30, 2021 and December 31, 2020, these entities had no tax liability. In addition, the Company is subject to the Texas Margin Tax on its earnings in Texas and as of September 30, 2021 and December 31, 2020 the Company had no liability.

Recent Accounting Developments

Lease Accounting - In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The ASU will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. This ASU is effective for the annual period beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is still considering the method of adoption and the effect of this guidance on its operating results, financial position or cash flow. Management believes it will have little impact on operating results.

Financial Instruments – Credit Losses - In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” The ASU revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. The ASU affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses.” This ASU clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In May 2019, the FASB issued ASU No. 2019-05, “Targeted Transition Relief.” This ASU provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. The ASU on credit losses will take effect for fiscal years beginning after December 15, 2021. The Company is still considering the method of adoption and the effect of this guidance on its operating results, financial position or cash flow. Management believes it will have little impact on operating results.

3.    OIL AND NATURAL GAS PROPERTIES

The Company follows the successful efforts method of accounting for its oil and natural gas properties. Exploration expenses, including seismic, geological and geophysical expenses and delay rentals, are charged to expense when incurred. The costs of drilling exploratory wells are capitalized until the Company has determined whether proved reserves have been found. If proved reserves are found, the costs remain capitalized as part of the wells and related equipment and facilities. If no proved reserves are found, the costs are charged to expense. The Company had no exploratory wells in progress at September 30, 2021 or December 31, 2020. Costs subject to depletion are proved costs and costs not subject to depletion are unproved costs and current drilling projects or wells in progress (“WIP”). The Company excluded WIP costs of $7.2 million and $18.6 million, and associated reserves, from the depletion calculation at September 30, 2021 and December 31, 2020, respectively

Costs for repairs and maintenance are charged to expense when incurred. Significant tangible equipment added or replaced that extends the useful or productive life of the property is capitalized. Costs incurred to increase the productive capacity from existing reservoirs are capitalized.

As the Company’s exploration and development work progresses and the reserves on the Company’s properties are proven, capitalized costs attributed to the properties and mineral interests are subject to DD&A. Depletion of capitalized costs is provided using the units-of-production method based on proved oil and natural gas reserves related to the associated reservoir. Depletion expense on capitalized oil and natural gas properties was $15.1 million and $52.7 million during the three and nine months ended September 30, 2021, respectively, and
The accompanying notes are an integral part of these condensed consolidated financial statements.

F-41




CHISHOLM ENERGY HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
$19.1 million and $53.0 million for the three and nine months ended September 30, 2020, respectively. See further discussion in Note 7 Fair Value Measuement.

Proved oil and natural gas properties are reviewed for impairment periodically or when events and circumstances indicate a possible decline in the recoverability of the carrying amount of such property. The Company estimates the expected future cash flows of the Company’s oil and natural gas properties and compares the undiscounted cash flows to the carrying amount of the oil and natural gas properties, on a field by field basis, to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the Company will write down the carrying amount of the oil and natural gas properties to estimated fair value. Unproved oil and natural gas properties are assessed periodically for impairment by considering future drilling plans, the results of exploration activities, commodity price outlooks, planned future sales, remaining lease terms and the expiration of all or a portion of such projects. The Company’s periodic assessment also considers its ability to prioritize expenditures to drill leases and to make payments to extend lease terms, as well as its ability to enter into leasehold exchange transactions that allow for higher concentrations of ownership and development. The Company recognizes leasehold abandonment expense for unproved properties at the earlier of the time when the lease term has expired, the continuous development clause has expired or management estimates the lease will expire before it is drilled, sold or traded. During the three and nine months ended September 30, 2021 the Company recorded impairment of our proved and unproved oil and natural gas properties of $114.9 million. There were no such charges during the three and nine months ended September 30, 2020.

On the sale of a complete or partial unit of a proved property, we determine the impact to the unit-of-production amortization rate. If the impact to the unit-of-production amortization rate is considered significant, the cost and related accumulated DD&A are removed from the property accounts and any gain or loss is recognized. If the impact to the unit-of-production amortization rate is not considered significant, the sale is accounted for as a normal retirement with no gain or loss recognized.

For sales of all of our working interests in unproved properties, gain or loss is recognized to the extent of the difference between the proceeds received and the net carrying value of the property. Proceeds from sales of less than all of our working interests in unproved properties are accounted for as a recovery of costs unless the proceeds exceed the entire cost of the property.

Acquisitions and Divestitures

During the three and nine months ended September 30, 2021, the Company incurred costs of $3.3 million and $4.2 million, respectively, related to the purchase of leasehold acreage and incremental working interest of properties. During the three and nine months ended September 30, 2020, the Company incurred costs of $0.0 million and $1.0 million, respectively, related to the purchase of leasehold acreage. During the three and nine months ended September 30, 2021, the Company exchanged certain leasehelod acreage and oil and gas properties with a net book value of $5.5 million and $13.4 million, respectively with no gain or loss recognized. During the three and nine months ended September 30, 2020, the Company did not exchange certain leasehelod acreage or oil and gas properties.


4.    INDEBTEDNESS
The following table provides a summary of the Company’s debt as of the dates indicated (in thousands):

September 30, 2021December 31, 2020
Revolving credit facility$57,000 $65,500
Second lien notes100,000125,000
Total debt157,000 190,500
Less: current portion--
Less: unamortized debt discount(818) (952)
Less: debt issuance costs(3,923)(2,841)
Total debt – long-term$152,259 $186,707

Revolving Credit Facility
On September 19, 2017, we entered into a $500 million senior secured revolving credit facility with JPMorgan Chase Bank, N.A. serving as the administrative agent.

On July 9, 2021, we entered into an amended and restated $500 million senior secured revolving credit facility (the “Credit Facility”). The Credit Facility has a maturity date of July 9, 2025. Availability under the Credit Facility is subject to a borrowing base which depends on, among other things, the volumes of our proved oil and natural gas reserves and estimated cash flows from these reserves and our commodity hedge positions. At September 30, 2021, our borrowing base was $100.0 million. The borrowing base is subject to semi-annual redeterminations.

In general, the borrowings under the credit facility bear interest at either the Alternate Base Rate (“ABR”) or LIBOR. Either rate is adjusted upward by an applicable margin based on our percentage of utilization of the credit facility. The ABR is calculated as a rate per annum equal to the greater of (a) the Prime Rate, (b) the Federal Reserve Bank of New York (“NYFRB”) Rate plus 0.5% or (c) the Adjusted LIBOR for a one-month interest period plus 1.0%. The Credit Facility is secured by a priority lien on substantially all of the assets of Holdings and its subsidiaries. For the nine months ended September 30, 2021 and 2020 our interest rate on the credit facility was approximately 3.63% and 3.15%, respectively. Interest expense on the Credit Facility totaled $1.6 million and $2.2 million for the nine months ended September 30, 2021 and 2020, respectively.
The accompanying notes are an integral part of these condensed consolidated financial statements.

F-42




CHISHOLM ENERGY HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The credit facility contains various covenants, including among others: restrictions on liens; restrictions on incurring other indebtedness; restrictions on dividends, investments and other restricted payments; and maintenance of certain financial covenants determined on a regular basis. For purposes of financial covenant testing, Holdings is subject to a total leverage ratio, which measures the net debt over Earnings Before Interest, Taxes, Depletion and Depreciation, Amortization, Exploration and other adjustments (“EBITDAX”) of Holdings. The total leverage ratio as defined by the credit facility provides that this ratio must not be greater than 3.25 to 1.0. Holdings is also subject to a current ratio, which measures the current assets (including the undrawn amount of the total commitments of the Credit Facility but excluding derivative assets) over the current liabilities (excluding derivative obligations and current maturities of the credit facility of Holdings). The current ratio financial covenant, as defined by the Credit Facility, provides that this ratio must not be lower than 1.0 to 1.0. Holdings was in compliance with its financial covenants at September 30, 2021.

The company believes that the $43 million available under the Company’s Revolving Line of Credit Facility as of September 30, 2021 mitigate the working capital deficit of $40.3 million, $40.1 million of which related to derivative liabilities, as of September 30, 2021.


Second Lien Notes
On May 15, 2019, we entered into a Note Purchase Agreement for Senior Secured Second Lien Notes (the “Note Purchase Agreement” and such notes, the “Second Lien Notes”) among the Company as issuer, U.S. Bank National Association as agent and collateral agent and certain holders that are a party thereto, and issued notes in an initial principal amount of $125.0 million, with a $1.25 million discount, for net proceeds of $123.75 million before fees and expenses. On March 22, 2021, we entered into a second amendment to the Note Purchase Agreement which allows Holdings to utilize the note receivable proceeds to repay $25 million of principal amount of the Second Lien Notes and retain the balance available for debt repayment under the credit facility and/or for general corporate purposes. In addition, the second amendment allows Holdings to forgive and cancel the remaining balance of the note receivable upon payment to Holdings of the earnout net proceeds received by Chisholm Energy Midstream, LLC at a future date. As of September 30, 2021, the note receivable has balance of $4.0 million (note 9). On March 26, 2021, we used a portion of the proceeds from the note receivable payment of $31.5 million and repaid $25 million of principal and accrued interest under our Second Lien Notes. The Second Lien Notes mature on May 15, 2026.

Interest on the Second Lien Notes is payable quarterly and accrues at LIBOR plus 6.25%; provided that if LIBOR ceases to be available, the Second Lien Notes provides for a mechanism to use ABR (an alternate base rate) plus 5.25% as the applicable interest rate. The definitions of LIBOR and ABR are set forth in the Second Lien Notes. To the extent that a payment, insolvency or, at the holders’ election, another default exists and is continuing, all amounts outstanding under the Second Lien Notes will bear interest at 2.0% per annum above the rate and margin otherwise applicable thereto. Additionally, to the extent we were to default on the Second Lien Notes, this would potentially trigger a cross-default under our revolving credit facility.

We have the right, to the extent permitted under the revolving credit facility and subject to the terms and conditions of the Second Lien Notes, to optionally prepay the notes, subject to the following repayment fees: prior to the 18 month anniversary, a customary “make-whole” amount (which is equal to the present value of the remaining interest payments through the 18-month anniversary of the issuance of the Second Lien Notes, discounted at a rate equal to the U.S. Treasury rate plus 50 basis points) plus 2.0% of the principal amount of the notes repaid; during month 18 until the 30 month anniversary, 2.0% of the principal amount of the Second Lien Notes being prepaid; during month 30 until the 42 month anniversary, 1.0% of the principal amount of the Second Lien Notes being prepaid; and thereafter, no premium. However, any prepayment of the Second Lien Notes due to a change of control event prior to the 18 month anniversary shall instead be subject to a prepayment fee of 3.0% of the principal amount of the Second Lien Notes being prepaid. Additionally, the Second Lien Notes contain customary mandatory prepayment obligations upon asset sales, casualty events and incurrences of certain debt, subject to, in certain circumstances, reinvestment periods. The Note Purchase Agreement is evaluated periodically to determine whether certain embedded derivatives, which we initially deemed the likelihood of underlying triggering events to be remote, require separate valuation and accounting. For certain features that are deemed to not be clearly and closely related to the debt host contract we evaluate whether the facts and circumstances have changed regarding the probability of occurrence. There are no features that require bifurcation pursuant to ASC 815, “Derivatives and Hedging” as of September 30, 2021.

The obligations under the Second Lien Notes are secured, subject to certain exceptions and other permitted liens (including the liens created under the revolving credit facility), by a perfected security interest, second in priority to the liens securing our revolving credit facility, and mortgage lien on substantially all of our assets and certain of our subsidiaries, including a mortgage lien on oil and natural gas properties attributed with at least 85% of estimated PV-9 of our proved reserves and our subsidiaries. PV-9 is determined using commodity price assumptions by the administrative agent of the revolving credit facility.

Beginning in the period ending on December 31, 2019, the Second Lien Notes also contain a financial covenant measuring the ratio of total net debt to EBITDAX, as defined in the Note Purchase Agreement, for the most recently completed four fiscal quarters, not to exceed 4.25 to 1.0 as of the last day of each fiscal quarter.

The Second Lien Notes also contain an asset coverage ratio, which includes in the numerator the PV-10 (defined below), based on forward strip pricing, plus the mark-to-market value of our commodity derivative contracts and our restricted subsidiaries and in the denominator the total net of our indebtedness including our restricted subsidiaries. Beginning with the period ending on December 31, 2019, the asset coverage ratio is tested quarterly and cannot be less than 1.25 to 1.0 as of each date of determination. The first amendment to the note purchase agreement dated March 31, 2020 modified the asset coverage ratio to be not less than 0.75 to 1.00 as of March 31, 2020 and then not less than 1.25 to 1.00 for each quarter thereafter. PV-10 Value is the estimated future net revenues to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%.

As of September 30, 2021, the Company is in compliance with all financial covenants under the Second Lien Notes.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CHISHOLM ENERGY HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Second Lien Notes contain certain customary representations, warranties and covenants, including but not limited to, limitations on incurring debt and liens, limitations on making certain restricted payments, limitations on investments, limitations on asset sales and hedge unwinds, limitations on transactions with affiliates and limitations on modifying organizational documents and material contracts. The Second Lien Notes contain customary events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Second Lien Notes to be immediately due and payable.

As of September 30, 2021, net amounts outstanding for the Second Lien Notes totaled $97.0 million. Interest expense on the Second Lien Notes totaled $6.4 million and $7.5 million for the nine months ended September 30, 2021 and 2020, respectively.

5.    EQUITY CONTRIBUTIONS/DISTRIBUTIONS

The member interests consist of Series A units, which obligate members to make capital contribution to the Company. In May 2021, Holdings amended and restated its LLC Agreement (the “Fourth LLC Agreement”) which combined three classes of Series A units into a single class of units. As of September 30, 2021, Series A unitholders have contributed a total of $623.7 million to the Company. The Company has approved the issuance of 59,179,536 Series A units, all of which are outstanding in connection with the Fourth LLC Agreement as of September 30, 2021. None were issued during the nine-month period ending September 30, 2021.

The Company has also approved the issuance of 10,000,000 Series B units, of which 8,364,445 were issued as of September 30, 2021. As part of the Fourth LLC Agreement, Holdings issued a new class of Series B units to replace the original class of Series B units. The new class of Series B units modified the parameters utilized to determine distributions. During the nine-month period ending September 30, 2021 the Company repurchased all outstanding old Series B units and issued a total of 8,364,445 new Series B units.

Under the terms of the Fourth LLC Agreement, distributions are first allocated 100% to the Series A units until such holders have received cumulative distributions equal to a deemed aggregate capital contributions plus a cumulative preferred return. Should cumulative distributions exceed the amount necessary to satisfy the Series A unit requirements, the Series B units are allocated a portion of any additional distributions in accordance with tiered parameters detailed in the Fourth LLC Agreement. No distributions have been made as of September 30, 2021.

Seventy-five percent of the Series B units held by current employees and independent directors are subject to vesting requirements that depend solely on continued employment with the Company over a four-year service period. The remaining twenty-five percent of the Series B units held by current employees and independent directors are subject to vesting requirements that depend on a performance condition and continued employment with the Company. Equity-based compensation expense for the awards subject only to the service condition is based on the grant date fair value of the applicable awards and is recognized straight-line over the vesting period. Compensation expense related to the awards subject to performance conditions will be recognized when the performance condition becomes probable of being met. The Fourth LLC Agreement resulted in a modification of the equity awards in accordance with ASC 718. The modification resulted in additional equity-based compensation expense of $1.4 million. The Company estimated the fair value of certain Series B units, granted to certain employees of the Company, on a minority, non-marketable basis, as of May 27, 2021 and May 28, 2021 (“valuation dates”). Key input variables as of the valuation dates are the following:

Expected volatility of 85.9%
Expected risk-free rate of 1.606%

Equity-based compensation expense reflected in the consolidated statements of operations totaled $2.5 million and $2.6 million during the three and nine months ended September 30, 2021, respectively, and $0.5 million and $1.2 million for the three and nine months ended September 30, 2020, respectively.


6.    DERIVATIVE FINANCIAL INSTRUMENTS

We have entered into commodity derivative financial contracts to mitigate the risk of volatility in commodity prices with respect to a portion of our oil and natural gas production. As of September 30, 2021, our commodity derivative instruments consisted of fixed price swaps, costless collars, and three-way costless collars, which are described below:
Fixed price swaps: Under a swap contract, we will receive payment if the settlement price is less than the fixed price and would be required to make a payment to the counterparty if the settlement price is greater than the fixed price.
Costless collars: A collar consists of a sold call option (ceiling) combined with a purchased put option (floor) and allows us to benefit from increases in commodity prices up to the ceiling price of the contract and protects us from decreases in commodity prices below the floor price. At settlement, the counterparty is required to make a payment to us if the settlement price is below the floor price, while we are required to make a payment to the counterparty if the settlement price is above the ceiling price. If the settlement price is between the floor price and ceiling price, no payments are due from either party.
Three-way costless collars: A three-way collar consists of a combination of three options–a sold call option (ceiling), a purchased put option (floor) and a sold put (sub-floor). This allows us to benefit from increases in commodity prices up to the ceiling price of the contract and protects us from decreases in commodity prices below the floor price but only up to the sub-floor price. If the settlement price is below the sub-floor price, the counterparty is required to make a
The accompanying notes are an integral part of these condensed consolidated financial statements.

F-44




CHISHOLM ENERGY HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
payment to us for the difference between the floor price and sub-floor price. If the settlement price is between the floor price and sub-floor price, the counterparty is required to make a payment to us for the difference between the floor price and the settlement price. If the settlement price is between the floor price and ceiling price, no payments are due from either party. If the settlement price is above the ceiling price, we are required to make a payment to the counterparty for the difference.

The Company had the following open crude oil and natural gas derivative contracts as of September 30, 2021:

Price Swaps
VolumeWeighted Average Price
PeriodCommodity(Bbls / MMBtu)$/Bbl / $MMBtu
Q4 2021 Crude Oil 271,400 $ 45.02
Q1 - Q4 2022Crude Oil615,150$ 44.67
Q1 - Q4 2023 Crude Oil 766,125 $ 45.07
Q1 - Q4 2024Crude Oil457,500$ 45.37
Q4 2021 Natural Gas 461,650 $ 2.74
Q1 - Q4 2022Natural Gas2,267,900$ 2.49

Basis Swaps
VolumeWeighted Average Price
PeriodCommodity(Bbls / MMBtu)$/Bbl / $MMBtu
Q4 2021 MidCush Diff363,400 $ 0.75
Q1 - Q4 2022MidCush Diff728,125$ 0.65
Q1 - Q4 2023MidCush Diff365,000 $ 0.65
Q4 2021Waha Diff1,060,150$ (0.67)
Q1 - Q4 2022Waha Diff3,071,800 $ (0.53)

Put Options
VolumeBough Floor
PeriodCommodity(Bbls / MMBtu)$/Bbl / $MMBtu
Q4 2021 Crude Oil 138,000 $ 42.50

2-Way Collars
VolumeSold CeilingBought Floor
PeriodCommodity(Bbls / MMBtu)$/Bbl / $MMBtu$/Bbl / $MMBtu
Q4 2021 Crude Oil 69,000 $ 66.67 $ 57.32
Q1 - Q4 2022Crude Oil454,500$ 52.87$ 46.19
Q4 2021 Natural Gas 690,500 $ 3.05 $ 2.52
Q1 - Q4 2022Natural Gas1,259,900$ 2.93$ 2.43
Q1 - Q4 2023Natural Gas 1,460,000 $ 3.16 $ 2.60
Q1 - Q4 2024Natural Gas364,000$ 3.38$ 2.70

3-Way Collars
VolumeSold CeilingBought FloorSold Sub-Floor
PeriodCommodity(Bbls / MMBtu)$/Bbl / $MMBtu$/Bbl / $MMBtu$/Bbl / $MMBtu
Q4 2021 Crude Oil 138,000 $ 59.42 $ 52.50 $ 42.50
Q1 - Q4 2022Crude Oil135,000$ 59.05$ 52.50$ 42.50
Q1 - Q4 2023Natural Gas 613,750 $ 2.86 $ 2.25 $ 1.75


The accompanying notes are an integral part of these condensed consolidated financial statements.

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CHISHOLM ENERGY HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company’s derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Company and a counterparty in the event of default or upon the occurrence of certain termination events. The following table presents the gross asset and liability balances of our derivative instruments, the amounts subject to master netting arrangements, the amounts presented on a net basis and the location of these balances in our consolidated balance sheets as of September 30, 2021 and December 31, 2020 (in thousands):
Total GrossCarrying
AmountNettingAmount
September 30, 2021     
Derivative liabilities, current portion$ 41,336(1,281)$ 40,055
Long-term derivative liabilities$ 29,010 (609) $ 28,401
December 31, 2020     
Derivative liabilities, current portion$ 13,273(4,700)$ 8,573
Long-term derivative liabilities$ 6,388 (2,701) $ 3,687

The following table summarizes the effect of derivative instruments on our consolidated statements of operations (in thousands):

For the Three Months EndedFor the Nine Months Ended
September 30,September 30,
2021202020212020
Realized (loss) gain on commodity derivatives$ (11,335)$ 4,612$ (28,201) $ 23,832
Unrealized (loss) gain on commodity derivatives(6,069)(10,068)(56,196)6,720
Net gain (loss) on derivative instruments$ (17,404)$ (5,456)$ (84,397) $ 30,552

7.    FAIR VALUE MEASUREMENTS

The Company uses a valuation framework based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. These two types of inputs are further prioritized into the following fair value input hierarchy:

Level 1:    Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.
Level 2:    Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable as of the reporting date.
Level 3:    Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.
Fair Value on a Recurring Basis

Derivative Financial Instruments

Commodity derivative contracts are marked-to-market each quarter and are thus stated at fair value in the Company’s condensed consolidated balance sheets and in Note 6 – Derivative Financial Instruments. The Company adjusts the valuations from the valuation model for nonperformance risk and for counterparty risk. The fair values of the Company’s commodity derivative instruments are classified as Level 2 measurements because they are calculated using industry standard models that utilize assumptions and inputs which are substantially observable in active markets throughout the full term of the instruments. These include market price curves, contract terms and prices, credit risk adjustments, implied market volatility and discount factors. The following table summarizes the fair value of the Company’s derivative assets and liabilities according to their fair value hierarchy as of the reporting dates indicated (in thousands):

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CHISHOLM ENERGY HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2021Level 1Level 2Level 3Total
Financial assets           
Derivative asset - current$-$1,281