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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________ 
FORM 10-Q
_________________________________________________________ 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2022
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-35049  
este-20220331_g1.jpg
_________________________________________________________ 
EARTHSTONE ENERGY, INC.
(Exact name of registrant as specified in its charter)
 _________________________________________________________ 
 
Delaware 84-0592823
(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380
(Address of principal executive offices)
Registrant’s telephone number, including area code:  (281) 298-4246
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, $0.001 par value per shareESTENew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer 
  Accelerated filer 
Non-accelerated filer 
  Smaller reporting company 
Emerging growth company   
    
 


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  
As of April 28, 2022, 79,091,777 shares of Class A Common Stock, $0.001 par value per share, and 34,271,766 shares of Class B Common Stock, $0.001 par value per share, were outstanding.


TABLE OF CONTENTS
 
    Page
     
    
     
  
   
   
 
   
   
  
  
  
    
   
    
  
  
  
  
  
  
  
   

3

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
 March 31,December 31,
ASSETS20222021
Current assets:  
Cash$482 $4,013 
Accounts receivable:
Oil, natural gas, and natural gas liquids revenues98,182 50,575 
Joint interest billings and other, net of allowance of $19 and $19 at March 31, 2022 and December 31, 2021, respectively
11,980 2,930 
Derivative asset1,849 1,348 
Prepaid expenses and other current assets4,440 2,549 
Total current assets116,933 61,415 
Oil and gas properties, successful efforts method:
Proved properties2,278,496 1,625,367 
Unproved properties280,805 222,025 
Land5,382 5,382 
Total oil and gas properties2,564,683 1,852,774 
Accumulated depreciation, depletion and amortization(429,743)(395,625)
Net oil and gas properties2,134,940 1,457,149 
Other noncurrent assets:
Office and other equipment, net of accumulated depreciation and amortization of $4,636 and $4,547 at March 31, 2022 and December 31, 2021, respectively
2,389 1,986 
Derivative asset5,810 157 
Operating lease right-of-use assets2,310 1,795 
Other noncurrent assets58,889 33,865 
TOTAL ASSETS$2,321,271 $1,556,367 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$69,749 $31,397 
Revenues and royalties payable52,167 36,189 
Accrued expenses39,179 31,704 
Deferred acquisition payment - Chisholm70,000  
Asset retirement obligation609 395 
Derivative liability150,055 45,310 
Advances2,447 4,088 
Operating lease liabilities747 681 
Other current liabilities630 851 
Total current liabilities385,583 150,615 
Noncurrent liabilities:
Long-term debt624,229 320,000 
Deferred tax liability14,404 15,731 
Asset retirement obligation21,509 15,471 
Derivative liability21,775 571 
4

Operating lease liabilities1,725 1,276 
Other noncurrent liabilities9,744 6,442 
Total noncurrent liabilities693,386 359,491 
Commitments and Contingencies (Note 13)
Equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding
  
Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 73,440,800 and 53,467,307 issued and outstanding at March 31, 2022 and December 31, 2021, respectively
73 53 
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,271,766 and 34,344,532 issued and outstanding at March 31, 2022 and December 31, 2021, respectively
34 34 
Additional paid-in capital967,093 718,181 
Accumulated deficit(193,252)(159,774)
Total Earthstone Energy, Inc. equity773,948 558,494 
Noncontrolling interest468,354 487,767 
Total equity1,242,302 1,046,261 
TOTAL LIABILITIES AND EQUITY$2,321,271 $1,556,367 
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
5

EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts) 
Three Months Ended
 March 31,
 20222021
REVENUES 
Oil$137,752 $60,819 
Natural gas22,958 5,852 
Natural gas liquids35,440 8,901 
Total revenues196,150 75,572 
OPERATING COSTS AND EXPENSES
Lease operating expense21,631 10,849 
Production and ad valorem taxes13,315 5,027 
Depreciation, depletion and amortization34,326 24,407 
General and administrative expense12,306 8,380 
Transaction costs10,742 2,106 
Accretion of asset retirement obligation397 290 
Exploration expense92  
Total operating costs and expenses92,809 51,059 
Income from operations103,341 24,513 
OTHER INCOME (EXPENSE)
Interest expense, net(5,318)(2,217)
Loss on derivative contracts, net(151,480)(33,263)
Other income, net47 103 
Total other expense(156,751)(35,377)
Loss before income taxes(53,410)(10,864)
Income tax benefit 1,533 308 
Net loss(51,877)(10,556)
Less: Net loss attributable to noncontrolling interest(18,399)(4,723)
Net loss attributable to Earthstone Energy, Inc.$(33,478)$(5,833)
Net loss per common share attributable to Earthstone Energy, Inc.:
Basic and Diluted$(0.53)$(0.14)
Weighted average common shares outstanding:
Basic and Diluted63,445,649 42,778,916 
 
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
6

EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(In thousands, except share amounts)
 Issued Shares       
 Class A Common StockClass B Common StockClass A Common StockClass B Common StockAdditional Paid-in CapitalAccumulated DeficitTotal Earthstone Energy, Inc. EquityNoncontrolling InterestTotal Equity
At December 31, 202153,467,307 34,344,532 $53 $34 $718,181 $(159,774)$558,494 $487,767 $1,046,261 
Stock-based compensation expense - equity portion— — — — 2,301 — 2,301 — 2,301 
Shares issued in connection with Chisholm Acquisition19,417,476 — 19 — 249,496 — 249,515 — 249,515 
Vesting of restricted stock units, net of taxes paid483,251 — 1 — (1)— — —  
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings286,892 — — — (3,898)— (3,898)— (3,898)
Cancellation of Treasury shares(286,892)— — — — — — — — 
Class B Common Stock converted to Class A Common Stock72,766 (72,766)  1,014 — 1,014 (1,014) 
Net loss— — — — — (33,478)(33,478)(18,399)(51,877)
At March 31, 202273,440,800 34,271,766 $73 $34 $967,093 $(193,252)$773,948 $468,354 $1,242,302 
    
 Issued Shares       
 Class A Common StockClass B Common StockClass A Common StockClass B Common StockAdditional Paid-in CapitalAccumulated DeficitTotal Earthstone Energy, Inc. EquityNoncontrolling InterestTotal Equity
At December 31, 202030,343,421 35,009,371 $30 $35 $540,074 $(195,258)$344,881 $470,655 $815,536 
Stock-based compensation expense— — — — 2,605 — 2,605 — 2,605 
Shares issued in connection with the IRM Acquisition12,719,594 — 13 — 76,559 — 76,572 — 76,572 
Vesting of restricted stock units and performance units, net of taxes paid463,495 — — — — — — —  
Vested restricted stock units and performance units retained by the Company in exchange for payment of recipient mandatory tax withholdings257,764 — — — (2,080)— (2,080)— (2,080)
Cancellation of treasury shares(257,764)— — — — — — — — 
Class B Common Stock converted to Class A Common Stock578,031 (578,031)1 (1)7,758 — 7,758 (7,758) 
Net loss— — — — — (5,833)(5,833)(4,723)(10,556)
At March 31, 202144,104,541 34,431,340 $44 $34 $624,916 $(201,091)$423,903 $458,174 $882,077 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
7

EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)  
 For the Three Months Ended
March 31,
 20222021
Cash flows from operating activities: 
Net loss$(51,877)$(10,556)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization34,326 24,407 
Accretion of asset retirement obligations397 290 
Settlement of asset retirement obligations(201)(15)
Gain on sale of office and other equipment(22) 
Total loss on derivative contracts, net151,480 33,263 
Operating portion of net cash paid in settlement of derivative contracts(31,686)(10,905)
Stock-based compensation - equity portion2,301 3,329 
Deferred income taxes(1,327)(308)
Amortization of deferred financing costs627 141 
Changes in assets and liabilities:
(Increase) decrease in accounts receivable(48,735)(5,379)
(Increase) decrease in prepaid expenses and other current assets(1,896)367 
Increase (decrease) in accounts payable and accrued expenses21,783 5,389 
Increase (decrease) in revenues and royalties payable14,932 (2,081)
Increase (decrease) in advances(7,100)358 
Net cash provided by operating activities83,002 38,300 
Cash flows from investing activities:
Acquisition of oil and gas properties, net of cash acquired(324,198)(134,641)
Additions to oil and gas properties(55,925)(8,913)
Additions to office and other equipment(590)(226)
Net cash used in investing activities(380,713)(143,780)
Cash flows from financing activities:
Proceeds from borrowings582,498 177,114 
Repayments of borrowings(278,269)(68,690)
Cash paid related to the exchange and cancellation of Class A Common Stock(3,898)(2,080)
Cash paid for finance leases (20)
Deferred financing costs(6,151)(891)
Net cash provided by financing activities294,180 105,433 
Net decrease in cash(3,531)(47)
Cash at beginning of period4,013 1,494 
Cash at end of period$482 $1,447 
Supplemental disclosure of cash flow information
Cash paid for:
Interest$4,580 $1,922 
Non-cash investing and financing activities:
Class A Common Stock issued in IRM Acquisition$ $76,572 
Class A Common Stock issued in Chisholm Acquisition$249,515 $ 
Deferred acquisition payment - Chisholm$70,000 $ 
Accrued capital expenditures$49,853 $7,775 
Lease asset additions - ASC 842$678 $ 
Asset retirement obligations$86 $427 
 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
8

EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with its consolidated subsidiaries, the “Company”), is a growth-oriented independent oil and natural gas development and production company. In addition, the Company is active in corporate mergers and the acquisition of oil and natural gas properties that have production and future development opportunities. The Company's operations are all in the upstream segment of the oil and natural gas industry and all its properties are onshore in Texas and New Mexico.
Earthstone is the sole managing member of Earthstone Energy Holdings, LLC, a Delaware limited liability company (together with its wholly-owned consolidated subsidiaries, “EEH”), with a controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Energy Corp., a corporation organized under the laws of British Columbia (“Lynden Corp”), and Lynden Corp’s wholly-owned consolidated subsidiary, Lynden USA Inc., a Utah corporation (“Lynden US”) and also a member of EEH, consolidates the financial results of EEH and records a noncontrolling interest in the Condensed Consolidated Financial Statements representing the economic interests of EEH's members other than Earthstone and Lynden US.
The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying unaudited Condensed Consolidated Financial Statements and notes should be read in conjunction with the financial statements and notes included in Earthstone’s 2021 Annual Report on Form 10-K.
The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for the fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. Any such adjustments are of a normal, recurring nature. The Company’s Condensed Consolidated Balance Sheet at December 31, 2021 is derived from the audited Consolidated Financial Statements at that date.
Recently Issued Accounting Standards
Reference Rate Reform - In March 2020, the FASB issued an update that provides optional guidance for a limited period of time to ease the transition from LIBOR to an alternative reference rate. The ASU intends to address certain concerns relating to accounting for contract modifications and hedge accounting. These optional expedients and exceptions to applying GAAP, assuming certain criteria are met, are allowed through December 31, 2022. As discussed in Note 10. Long-Term Debt, the Company amended its credit facility on January 30, 2022, which, among other things, provided mechanics relating to the transition from LIBOR to a benchmark replacement rate. The transition from LIBOR is not expected to have a material impact on the Company’s consolidated financial statements.
Note 2. Fair Value Measurements
FASB Accounting Standards Codification (“ASC”) Topic 820, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.
The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC 820 is as follows:
Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such
9

EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the three months ended March 31, 2022.
Fair Value on a Recurring Basis
Derivative Financial Instruments
Derivative financial instruments are carried at fair value and measured on a recurring basis. The derivative financial instruments consist of swaps and costless collars for crude oil and natural gas and interest rate swaps. The Company’s commodity price hedges and interest rate swaps are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves and published LIBOR forward curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.
The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.
Share-based Compensation Liability
Certain of our performance-based stock awards (“PSUs” or “performance units”) may be payable in cash. The Company classifies the awards that may be settled in cash as liability awards. These awards are valued quarterly utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. The inputs for the Monte Carlo model are designated as Level 2 within the valuation hierarchy. The share-based compensation liability related to the PSU liability awards is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of March 31, 2022.
10

EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the fair value of the Company’s financial assets and liabilities, by level within the fair-value hierarchy (in thousands):
March 31, 2022Level 1Level 2Level 3Total
Financial assets    
Derivative asset - current$ $1,849 $ $1,849 
Derivative asset - noncurrent 5,810  5,810 
Total financial assets$ $7,659 $ $7,659 
Financial liabilities
Derivative liability - current$ $150,055 $ $150,055 
Derivative liability - noncurrent 21,775  21,775 
Share-based compensation liability - noncurrent 9,630  9,630 
Total financial liabilities$ $181,460 $ $181,460 
December 31, 2021
Financial assets    
Derivative asset - current$ $1,348 $ $1,348 
Derivative asset - noncurrent 157  157 
Total financial assets$ $1,505 $ $1,505 
Financial liabilities
Derivative liability - current$ $45,310 $ $45,310 
Derivative liability - noncurrent 571  571 
Share-based compensation liability - current 7,835  7,835 
Share-based compensation liability - noncurrent 6,324  6,324 
Total financial liabilities$ $60,040 $ $60,040 
Other financial instruments include cash, accounts receivable and payable, and revenue royalties. The carrying amount of these instruments approximates fair value because of their short-term nature. The Company’s long-term debt obligation bears interest at floating market rates, therefore carrying amounts and fair value are approximately equal.
Fair Value on a Nonrecurring Basis
The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties, business combinations and asset retirement obligations. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if events or changes in certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment were observed during the three months ended March 31, 2022. See further discussion in Note 5. Oil and Natural Gas Properties.
Note 3. Derivative Financial Instruments
Commodity Derivative Instruments
The Company’s hedging activities primarily consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swap agreements and costless collars. Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Costless collars set both a maximum (sold ceiling) and a minimum (bought floor) future price. Consistent with its hedging policy, the Company has entered into a series of derivative instruments to hedge a significant portion of its expected oil and natural gas production through December 31, 2024. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, the Company believes these instruments reduce its exposure to oil and natural gas price fluctuations and, thereby, allow the Company to achieve a more predictable cash flow. The Company does not enter into derivative instruments for trading or other speculative purposes.
11

EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
These transactions are recorded in the Condensed Consolidated Financial Statements in accordance with FASB ASC Topic 815. The Company has accounted for these transactions using the mark-to-market accounting method. Generally, the Company incurs accounting losses on derivatives during periods where prices are rising and gains during periods where prices are falling which may cause significant fluctuations in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.
The Company nets its derivative instrument fair value amounts executed with each counterparty pursuant to an International Swap Dealers Association Master Agreement (“ISDA”), which provides for net settlement over the term of the contract. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.
The Company had the following open crude oil and natural gas derivative contracts as of March 31, 2022:
 Price Swaps
PeriodCommodityVolume
(Bbls / MMBtu)
Weighted Average Price
($/Bbl / $/MMBtu)
Q2 - Q4 2022Crude Oil3,247,250 $65.96 
Q1 - Q4 2023Crude Oil1,277,500 $76.20 
Q2 - Q4 2022Crude Oil Basis Swap (1)3,377,500 $0.51 
Q1 - Q4 2023Crude Oil Basis Swap (1)730,000 $0.49 
Q2 - Q4 2022Natural Gas8,062,000 $3.55 
Q1 - Q4 2023Natural Gas3,670,000 $3.35 
Q2 - Q4 2022Natural Gas Basis Swap (2)5,500,000 $(0.33)
Q1 - Q4 2023Natural Gas Basis Swap (2)25,550,000 $(1.28)
Q1 - Q4 2024Natural Gas Basis Swap (2)25,620,000 $(1.04)
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
 Costless Collars
PeriodCommodityVolume
(Bbls / MMBtu)
Sold Ceiling
($/Bbl / $/MMBtu)
Bought Floor
($/Bbl / $/MMBtu)
Q2 - Q4 2022Crude Oil Costless Collar1,560,000 $83.59 $69.42 
Q1 - Q4 2023Crude Oil Costless Collar1,715,500 $80.34 $62.98 
Q2 - Q4 2022Natural Gas Costless Collar12,782,500 $5.47 $3.66 
Q1 - Q4 2023Natural Gas Costless Collar13,188,000 $4.84 $3.28 

The following table summarizes the location and fair value amounts of all derivative instruments in the Condensed Consolidated Balance Sheets as well as the gross recognized derivative assets, liabilities, and amounts offset in the Condensed Consolidated Balance Sheets (in thousands)
  March 31, 2022December 31, 2021
Derivatives not
designated as hedging
contracts under ASC
Topic 815
Balance Sheet LocationGross
Recognized
Assets /
Liabilities
Gross
Amounts
Offset
Net
Recognized
Assets /
Liabilities
Gross
Recognized
Assets /
Liabilities
Gross
Amounts
Offset
Net
Recognized
Assets /
Liabilities
Commodity contractsDerivative asset - current$6,294 $(4,445)$1,849 $3,191 $(1,843)$1,348 
Commodity contractsDerivative liability - current$154,500 $(4,445)$150,055 $47,153 $(1,843)$45,310 
Commodity contractsDerivative asset - noncurrent$18,223 $(12,413)$5,810 $2,721 $(2,564)$157 
Commodity contractsDerivative liability - noncurrent$34,188 $(12,413)$21,775 $3,135 $(2,564)$571 
12

EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivatives instruments in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows (in thousands)
Derivatives not designated as hedging contracts under ASC Topic 815Three Months Ended
March 31,
Statement of Cash Flows LocationStatement of Operations Location20222021
Unrealized lossNot separately presentedNot separately presented$(119,794)$(22,358)
Realized lossOperating portion of net cash paid in settlement of derivative contractsNot separately presented(31,686)(10,905)
Total loss on derivative contracts, netLoss on derivative contracts, net$(151,480)$(33,263)
Note 4. Acquisitions
Bighorn Agreement
On January 30, 2022, Earthstone, EEH, and Bighorn Asset Company, LLC, a Delaware limited liability company (“Bighorn”), as seller, entered into a Purchase and Sale Agreement (the “Bighorn Agreement”). Pursuant to the Bighorn Agreement, EEH acquired (the “Bighorn Acquisition”) interests in oil and gas leases and related property of Bighorn located in the Midland Basin, Texas, for a purchase price (the “Bighorn Purchase Price”) of $770 million in cash and 6,808,511 shares of Class A Common Stock. The Bighorn Purchase Price is subject to customary purchase price adjustments with an effective date of January 1, 2022. In connection with the Bighorn Agreement, EEH deposited $50 million (the “Bighorn Deposit”) in cash into a third-party escrow account as a deposit pursuant to the Bighorn Agreement, which was credited against the Bighorn Purchase Price upon closing of the Bighorn Acquisition on April 14, 2022. The Bighorn Deposit is included in Other noncurrent assets in the Condensed Consolidated Balance Sheet as of March 31, 2022 and in Acquisition of oil and gas properties, net of cash acquired, on the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2022. For further discussion, see Note 15. Subsequent Events.
Chisholm Acquisition
On December 15, 2021, Earthstone, EEH, as buyer, Chisholm Energy Operating, LLC (“OpCo”) and Chisholm Energy Agent, Inc. (“Agent” and collectively with OpCo, “Chisholm”), collectively as seller, entered into a Purchase and Sale Agreement (the “Chisholm Agreement”), which provided that EEH would acquire (the “Chisholm Acquisition”) interests in oil and gas leases and related property of Chisholm located in Lea County and Eddy County, New Mexico (the “Chisholm Assets”).
On February 15, 2022, Earthstone, EEH and Chisholm consummated the transactions contemplated in the Chisholm Agreement whereby EEH acquired the Chisholm Assets for aggregate consideration, as adjusted for preliminary and customary purchase price adjustments, consisting of: (i) approximately $307.5 million in cash, that continues to remain subject to post-closing settlement adjustments between EEH and Chisholm paid at the closing of the Chisholm Acquisition, (ii) $70 million in cash paid on April 15, 2022 and included in Deferred acquisition payment - Chisholm in the Condensed Consolidated Balance Sheet as of March 31, 2022; and (iii) 19,417,476 shares of the Company’s Class A common stock $0.001 par value per share (“Class A Common Stock”). The fair value of each share of Class A Common Stock was determined using the closing price of $12.85 per share on February 15, 2022. A Significant Shareholder, as described below, was the majority shareholder of Chisholm as of the closing of the Chisholm Acquisition. See Note 12. Related Party Transactions for further discussion.
The Chisholm Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The preliminary allocation of the total purchase price in the Chisholm Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s estimates of the acquired oil and gas properties resulting in changes to the purchase price allocation. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
13

EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consideration:
Shares of Class A Common Stock issued19,417,476 
Class A Common Stock price as of February 15, 2022$12.85 
Class A Common Stock consideration249,515 
Cash consideration(1)
377,528 
Total consideration transferred$627,043 
Fair value of assets acquired:
Oil and gas properties$634,867 
Amount attributable to assets acquired$634,867 
Fair value of liabilities assumed:
Other current liabilities$1,853 
Asset retirement obligation - noncurrent5,971 
Amount attributable to liabilities assumed$7,824 
(1)Includes $307.5 million of cash paid at closing, net of customary purchase price adjustments, and $70.0 million of cash consideration paid subsequent to closing based on the terms of the Chisholm Agreement.
IRM Acquisition
On January 7, 2021, the Company completed the acquisition (the “IRM Acquisition”) of all of the issued and outstanding limited liability company interests of Independence Resources Management, LLC (“IRM”) and certain of its wholly owned subsidiaries for consideration consisting of the following: (i) net cash of approximately $140.5 million (the “Cash Consideration”) and (ii) 12,719,594 shares of the Company’s Class A Common Stock. The fair value of each share of Class A Common Stock was determined using the closing price of $6.02 per share on January 7, 2021.
The IRM Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The allocation of the total purchase price in the IRM Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
14

EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consideration:
Shares of Class A Common Stock issued12,719,594 
Class A Common Stock price as of January 7, 2021$6.02 
Class A Common Stock consideration76,572 
Cash consideration140,507 
Total consideration transferred$217,079 
Fair value of assets acquired:
Cash$4,763 
Other current assets11,524 
Oil and gas properties224,112 
Other non-current assets252 
Amount attributable to assets acquired$240,651 
Fair value of liabilities assumed:
Derivative liability$10,177 
Other current liabilities5,196 
Asset retirement obligation - noncurrent8,199 
Amount attributable to liabilities assumed$23,572 
Tracker/Sequel Acquisitions
On March 31, 2021, Earthstone, EEH, Tracker Resource Development III, LLC, a Delaware limited liability company (“Tracker”), and TRD III Royalty Holdings (TX), LP, a Delaware limited partnership (“RoyaltyCo” and collectively with Tracker, the “Seller”), entered into a purchase and sale agreement (the “Tracker Agreement”), which provided that EEH would acquire (the “Tracker Acquisition”) interests in oil and gas leases and related property of Tracker located in Irion County, Texas (the “Tracker Assets”). Also on March 31, 2021, Earthstone, EEH, SEG-TRD LLC, a Delaware limited liability company (“SEG-I”), and SEG-TRD II LLC, a Delaware limited liability company (“SEG-II” and collectively with SEG-I, “Sequel”) entered into a purchase and sale agreement (the “Sequel Agreement” and collectively with the Tracker Agreement, the “Tracker/Sequel Purchase Agreements”), which provided that EEH would acquire (the “Sequel Acquisition” and collectively with the Tracker Acquisition, the “Tracker/Sequel Acquisitions”) certain well-bore interests and related equipment (the “Sequel Assets”).
On July 20, 2021, Earthstone, EEH and the Seller consummated the transactions contemplated in the Tracker Agreement. At the closing of the Tracker Agreement, among other things, EEH acquired the Tracker Assets for aggregate consideration consisting of: (i) $18.8 million in cash, net of customary purchase price adjustments, and (ii) 4.7 million shares of Class A Common Stock. Also, on July 20, 2021, Earthstone, EEH and Sequel consummated the transactions contemplated in the Sequel Agreement. At the closing of the Sequel Agreement, among other things, EEH acquired the Sequel Assets for aggregate consideration consisting of: (i) $41.4 million in cash, net of customary purchase price adjustments, and (ii) 1.5 million shares of Class A Common Stock. A Significant Shareholder, as described below, owned approximately 49% of Tracker as of the closing of the Tracker Acquisition. See Note 12. Related Party Transactions for further discussion.
The Tracker/Sequel Acquisitions have been accounted for as asset acquisitions in accordance with ASC Topic 805, Business Combinations (referred to as “ASC 805”). The preliminary allocation of the total purchase price in the Tracker/Sequel Acquisitions is based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the acquired oil and natural gas properties. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
15

EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Total
Consideration:
Shares of Class A Common Stock issued6,200,000 
Class A Common Stock price as of July 20, 2021$9.97 
Class A Common Stock consideration61,814 
Cash consideration (1)
60,159 
Direct transaction costs (2)
1,715 
Total consideration transferred$123,688 
Fair value of assets acquired:
Oil and gas properties$124,288 
Amount attributable to assets acquired$124,288 
Fair value of liabilities assumed:
Noncurrent liabilities - asset retirement obligations600 
Amount attributable to liabilities assumed$600 
(1)Includes customary purchase price adjustments.
(2)Represents $1.7 million of transaction costs associated with the Tracker Acquisition and the Sequel Acquisition that have been capitalized in accordance with ASC 805-50.
The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair value of oil and gas properties and asset retirement obligations were measured using the discounted cash flow technique of valuation.
Significant inputs to the valuation of oil and gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future plugging and abandonment costs, (v) estimated future cash flows, and (vi) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates and are the most sensitive and subject to change.
The following unaudited supplemental pro forma condensed results of operations present consolidated information as though the Chisholm Acquisition, IRM Acquisition and Tracker/Sequel Acquisitions had been completed as of January 1, 2021. The unaudited supplemental pro forma financial information was derived from the historical consolidated and combined statements of operations for Chisholm, IRM, Tracker, Sequel and Earthstone and adjusted to include depletion expense applied to the adjusted basis of the properties acquired. These unaudited supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. Future results may vary significantly from the results reflected in this unaudited pro forma financial information (in thousands, except per share amounts):
Three Months Ended
 March 31,
 20222021
Revenue$232,155 $133,854 
Loss before taxes(32,996)(24,497)
Net loss(31,463)(24,189)
Less: Net loss attributable to noncontrolling interest(11,159)(10,823)
Net loss attributable to Earthstone Energy, Inc.(20,304)(13,366)
Pro forma net loss per common share attributable to Earthstone Energy, Inc.:
Basic and Diluted$(0.32)$(0.20)
The Company has included in its Condensed Consolidated Statements of Operations, revenues of $37.8 million and operating expenses of $14.4 million for the period February 15, 2022 to March 31, 2022 related to the Chisholm Acquisition. During the three months ended March 31, 2022, the Company recorded $10.0 million of legal and professional fees related to the Chisholm Acquisition which are included in Transaction costs in the Condensed Consolidated Statements of Operations.
16

EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Eagle Ford Acquisitions
In May and June 2021, the Company completed acquisitions of working interests in certain assets it operates located in southern Gonzales County, Texas (collectively, the “Eagle Ford Acquisitions”) from four separate sellers. The aggregate purchase price of the Eagle Ford Acquisitions was approximately $45.2 million. One of the four separate sellers was a related party. See Note 12. Related Party Transactions for further discussion. The Eagle Ford Acquisitions have been accounted for as asset acquisitions in accordance with ASC 805. The preliminary allocation of each purchase was based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the acquired oil and natural gas properties. These amounts will be finalized no later than one year from the acquisition date.
Foreland-BCC Acquisition
On November 2, 2021, Earthstone, EEH and Foreland Investments LP, a Delaware limited partnership (“Foreland”), consummated the transactions contemplated in the Purchase and Sale Agreement dated as of September 30, 2021 by and among Earthstone, EEH and Foreland (the “Foreland Purchase Agreement”). Net of customary purchase price adjustments, EEH acquired (the “Foreland Acquisition”) interests in oil and gas leases and related property of Foreland located in Irion County and Crockett County, Texas, for a purchase price consisting of: (i) $13.4 million in cash and (ii) 2,611,111 shares of Class A Common Stock.
Also, on November 2, 2021, Earthstone, EEH and BCC-Foreland LLC, a Delaware limited liability company (“BCC”), consummated the transactions contemplated in the Purchase and Sale Agreement dated as of September 30, 2021 by and among Earthstone, EEH and BCC (the “BCC Purchase Agreement”). Net of customary purchase price adjustments, EEH acquired (the “BCC Acquisition” and with the Foreland Acquisition, the “Foreland-BCC Acquisition”) certain well-bore interests and related equipment held by BCC that were part of a joint development agreement between Foreland, Foreland Operating, LLC, and BCC involving portions of the acreage covered by the Foreland Purchase Agreement for a purchase price of $20.5 million in cash.
Note 5. Oil and Natural Gas Properties
The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, costs to acquire oil and natural gas properties, drill and equip exploratory wells that find proved reserves, and drill and equip development wells are capitalized. Exploration costs, including unsuccessful exploratory wells and geological and geophysical costs, are charged to operations as incurred. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.
Costs incurred to maintain wells and related equipment, lease and well operating costs, and other exploration costs are charged to expense as incurred. Gains and losses arising from the sale of properties are included in Income from operations in the Condensed Consolidated Statements of Operations.
The Company’s lease acquisition costs and development costs of proved oil and natural gas properties are amortized using the units-of-production method, at the field level, based on total proved reserves and proved developed reserves, respectively. For the three months ended March 31, 2022, depletion expense for oil and gas producing property and related equipment was $34.1 million. For the three months ended March 31, 2021, depletion expense for oil and gas producing property and related equipment was $24.2 million.
Our accrual basis capital expenditures for the three months ended March 31, 2022 were as follows (in thousands):
Three Months Ended March 31, 2022
Drilling and completions$82,000 
Leasehold costs109 
Total capital expenditures$82,109 
17

EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Proved Properties
Proved oil and natural gas properties are reviewed for impairment on a nonrecurring basis. The impairment charge reduces the carrying values to their estimated fair values. These fair value measurements are classified as Level 3 measurements and include many unobservable inputs. Fair value is calculated as the estimated discounted future net cash flows attributable to the assets. The Company’s primary assumptions in preparing the estimated discounted future net cash flows to be recovered from oil and gas properties are based on (i) proved reserves, (ii) forward commodity prices and assumptions as to costs and expenses, and (iii) the estimated discount rate that would be used by potential purchasers to determine the fair value of the assets.
Unproved Properties
Unproved properties consist of costs incurred to acquire undeveloped leases. Unproved oil and gas leases are generally for a primary term of three to five years. In most cases, the term of the unproved leases can be extended by paying a lease renewal fee, meeting contractual drilling obligations, or by the presence of producing wells on the leases. Unproved costs related to successful drilling on unproved leases are reclassified to proved properties.
The Company reviews its unproved properties periodically for impairment. In determining whether an unproved property is impaired, the Company considers numerous factors including, but not limited to, current exploration and development plans, favorable or unfavorable exploration activity on the property being evaluated and/or adjacent properties, the Company’s geologists' evaluation of the property, and the remaining months in the lease term for the property.
Impairments to Oil and Natural Gas Properties
No impairments were recorded to the Company's oil and natural gas properties during the three months ended March 31, 2022 and 2021.
Note 6. Noncontrolling Interest
Earthstone consolidates the financial results of EEH and its subsidiaries and records a noncontrolling interest for the economic interest in Earthstone held by the members of EEH other than Earthstone and Lynden US. Net loss attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021 represents the portion of net loss attributable to the economic interest in the Company held by the members of EEH other than Earthstone and Lynden US. Noncontrolling interest in the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 represents the portion of net assets of the Company attributable to the members of EEH other than Earthstone and Lynden US. The term “EEH Unit” means the units of limited liability company interests of EEH denominated as common units.
The following table presents the changes in noncontrolling interest for the three months ended March 31, 2022: