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EX-32.2 - EX-32.2 - EARTHSTONE ENERGY INCeste-ex322_8.htm
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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 June 30, 2017

Or

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

Commission File No. 001-35049  

 

EARTHSTONE ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

84-0592823

(State or other jurisdiction

 

(I.R.S 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

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to post such filed).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company  

 

 

 

 

 

 

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

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

As of July 28, 2017, 22,901,449 shares of Class A Common Stock, $0.001 par value per share, and 36,070,828 shares of Class B Common Stock, $0.001 par value per share, were outstanding.

 

 

 


TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

 

3

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016

 

4

 

 

Condensed Consolidated Statement of Equity for the Six Months Ended June 30, 2017

 

5

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

 

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

 

23

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

 

Controls and Procedures

 

36

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

36

Item 1A.

 

Risk Factors

 

36

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 3.

 

Defaults Upon Senior Securities

 

36

Item 4.

 

Mine Safety Disclosures

 

36

Item 5.

 

Other Information

 

36

Item 6.

 

Exhibits

 

36

 

 

Signatures

 

37

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

June 30,

 

 

December 31,

 

ASSETS

 

2017

 

 

2016

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

16,671

 

 

$

10,200

 

Accounts receivable:

 

 

 

 

 

 

 

 

Oil, natural gas, and natural gas liquids revenues

 

 

16,078

 

 

 

13,998

 

Joint interest billings and other, net of allowance of $163 at both June 30, 2017 and December 31, 2016

 

 

9,681

 

 

 

2,698

 

Derivative asset

 

 

1,870

 

 

 

 

Prepaid expenses and other current assets

 

 

1,366

 

 

 

446

 

Total current assets

 

 

45,666

 

 

 

27,342

 

 

 

 

 

 

 

 

 

 

Oil and gas properties, successful efforts method:

 

 

 

 

 

 

 

 

Proved properties

 

 

626,481

 

 

 

363,072

 

Unproved properties

 

 

290,290

 

 

 

51,723

 

Land

 

 

4,547

 

 

 

 

Total oil and gas properties

 

 

921,318

 

 

 

414,795

 

 

 

 

 

 

 

 

 

 

Accumulated depreciation, depletion and amortization

 

 

(163,043

)

 

 

(145,393

)

Net oil and gas properties

 

 

758,275

 

 

 

269,402

 

 

 

 

 

 

 

 

 

 

Other noncurrent assets:

 

 

 

 

 

 

 

 

Goodwill

 

 

17,620

 

 

 

17,620

 

Office and other equipment, net of accumulated depreciation of $2,340 and $1,600 at June 30, 2017 and December 31 2016, respectively

 

 

1,321

 

 

 

1,479

 

Derivative asset

 

 

190

 

 

 

 

Other noncurrent assets

 

 

1,039

 

 

 

669

 

TOTAL ASSETS

 

$

824,111

 

 

$

316,512

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

23,837

 

 

$

11,927

 

Revenues and royalties payable

 

 

11,343

 

 

 

10,769

 

Accrued expenses

 

 

13,940

 

 

 

5,392

 

Derivative liability

 

 

150

 

 

 

4,595

 

Advances

 

 

4,007

 

 

 

4,542

 

Current portion of long-term debt

 

 

1,665

 

 

 

1,604

 

Total current liabilities

 

 

54,942

 

 

 

38,829

 

 

 

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

71,840

 

 

 

12,693

 

Asset retirement obligation

 

 

6,692

 

 

 

6,013

 

Derivative liability

 

 

12

 

 

 

1,575

 

Deferred tax liability

 

 

16,311

 

 

 

15,776

 

Other noncurrent liabilities

 

 

156

 

 

 

169

 

Total noncurrent liabilities

 

 

95,011

 

 

 

36,226

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding

 

 

 

 

 

 

Common stock, $0.001 par value, no shares authorized; none issued or outstanding at June 30, 2017 and 100,000,000 shares authorized; 22,289,177 issued and 22,273,820 outstanding at December 31, 2016

 

 

 

 

 

23

 

Class A Common stock, $0.001 par value, 200,000,000 shares authorized; 22,906,806 issued and 22,891,449 outstanding at June 30, 2017 and none issue or outstanding at December 31, 2016

 

 

23

 

 

 

 

Class B Common Stock, $0.0001 par value, 50,000,000 shares authorized; 36,070,828 shares issued and outstanding at June 30, 2017; none issued or outstanding at December 31, 2016

 

 

36

 

 

 

 

Additional paid-in capital

 

 

462,098

 

 

 

454,202

 

Accumulated deficit

 

 

(228,702

)

 

 

(212,308

)

Treasury stock, 15,357 shares at both June 30, 2017 and December 31, 2016

 

 

(460

)

 

 

(460

)

Total Earthstone Energy, Inc. equity

 

 

232,995

 

 

 

241,457

 

Noncontrolling interest

 

 

441,163

 

 

 

 

Total equity

 

 

674,158

 

 

 

241,457

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

824,111

 

 

$

316,512

 

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

3


 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

REVENUES

 

 

 

 

 

 

Oil

 

$

21,563

 

 

$

8,097

 

 

$

34,082

 

 

$

13,636

 

Natural gas

 

 

2,131

 

 

 

1,016

 

 

 

3,825

 

 

 

1,959

 

Natural gas liquids

 

 

2,083

 

 

 

664

 

 

 

3,213

 

 

 

992

 

Total revenues

 

 

25,777

 

 

 

9,777

 

 

 

41,120

 

 

 

16,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expense

 

 

5,243

 

 

 

3,341

 

 

 

9,582

 

 

 

6,500

 

Severance taxes

 

 

1,327

 

 

 

514

 

 

 

2,117

 

 

 

896

 

Rig idle and termination expense

 

 

 

 

 

3,790

 

 

 

 

 

 

5,059

 

Impairment expense

 

 

66,648

 

 

 

 

 

 

66,648

 

 

 

 

Depreciation, depletion and amortization

 

 

10,039

 

 

 

5,598

 

 

 

17,928

 

 

 

11,103

 

General and administrative expense

 

 

5,738

 

 

 

1,990

 

 

 

9,230

 

 

 

4,676

 

Stock-based compensation

 

 

1,647

 

 

 

561

 

 

 

2,958

 

 

 

561

 

Transaction costs

 

 

3,764

 

 

 

283

 

 

 

4,567

 

 

 

795

 

Accretion of asset retirement obligation

 

 

154

 

 

 

133

 

 

 

306

 

 

 

261

 

Exploration expense

 

 

1

 

 

 

 

 

 

1

 

 

 

5

 

Total operating costs and expenses

 

 

94,561

 

 

 

16,210

 

 

 

113,337

 

 

 

29,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of oil and gas properties

 

 

1,691

 

 

 

 

 

 

1,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(67,093

)

 

 

(6,433

)

 

 

(70,526

)

 

 

(13,269

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(633

)

 

 

(370

)

 

 

(970

)

 

 

(593

)

Write-off of deferred financing costs

 

 

(526

)

 

 

 

 

 

(526

)

 

 

 

Gain (loss) on derivative contracts, net

 

 

3,340

 

 

 

(4,228

)

 

 

7,800

 

 

 

(3,463

)

Other income (expense), net

 

 

31

 

 

 

45

 

 

 

32

 

 

 

(82

)

Total other income (expense)

 

 

2,212

 

 

 

(4,553

)

 

 

6,336

 

 

 

(4,138

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(64,881

)

 

 

(10,986

)

 

 

(64,190

)

 

 

(17,407

)

Income tax benefit (expense)

 

 

9,914

 

 

 

(186

)

 

 

9,952

 

 

 

(186

)

Net loss

 

 

(54,967

)

 

 

(11,172

)

 

 

(54,238

)

 

 

(17,593

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net loss attributable to noncontrolling interest

 

 

(37,844

)

 

 

 

 

 

(37,844

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Earthstone Energy, Inc.

 

$

(17,123

)

 

$

(11,172

)

 

$

(16,394

)

 

$

(17,593

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.75

)

 

$

(0.69

)

 

$

(0.73

)

 

$

(1.17

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

22,728,011

 

 

 

16,121,568

 

 

 

22,503,750

 

 

 

14,978,348

 

 

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

 

 

4


 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(In thousands)

 

 

 

Issued Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Earthstone

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Energy, Inc.

 

 

 

 

 

 

 

 

 

 

 

Common

Stock

 

 

Common

Stock

 

 

Common

Stock

 

 

Common

Stock

 

 

Common

Stock

 

 

Common

Stock

 

 

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Treasury

Stock

 

 

Stockholders'

Equity

 

 

Noncontrolling

Interest

 

 

Total

Equity

 

At December 31, 2016

 

 

22,289,177

 

 

 

 

 

 

 

 

$

23

 

 

$

 

 

$

 

 

$

454,202

 

 

$

(212,308

)

 

$

(460

)

 

$

241,457

 

 

$

 

 

$

241,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,958

 

 

 

 

 

 

 

 

 

2,958

 

 

 

 

 

 

2,958

 

Vesting of restricted stock units prior to completion of Bold Contribution Agreement

 

 

382,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

(1

)

Common stock exchanged in connection with Bold Contribution Agreement

 

 

(22,656,624

)

 

 

22,656,624

 

 

 

 

 

 

(23

)

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury shares converted to Class A Common Stock

 

 

(15,357

)

 

 

15,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closing of Bold Contribution Agreement

 

 

 

 

 

150,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,872

 

 

 

 

 

 

 

 

 

 

12,872

 

 

 

479,007

 

 

 

491,879

 

Class B Shares sold in connection with Bold Contribution Agreement

 

 

 

 

 

 

 

 

36,070,828

 

 

 

 

 

 

 

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

 

 

 

36

 

Deferred tax consequences of Bold Contribution Agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,933

)

 

 

 

 

 

 

 

 

(7,933

)

 

 

 

 

 

(7,933

)

Vesting of restricted stock units following completion of Bold Contribution Agreement

 

 

 

 

 

84,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,394

)

 

 

 

 

 

(16,394

)

 

 

(37,844

)

 

 

(54,238

)

At June 30, 2017

 

 

 

 

 

22,906,806

 

 

 

36,070,828

 

 

 

 

 

$

23

 

 

$

36

 

 

$

462,098

 

 

$

(228,702

)

 

$

(460

)

 

$

232,995

 

 

$

441,163

 

 

$

674,158

 

 

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

 

 

5


 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) 

 

 

 

For the Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

Net loss

 

$

(54,238

)

 

$

(17,593

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Impairment of proved and unproved oil and gas properties

 

 

66,648

 

 

 

 

Depreciation, depletion and amortization

 

 

17,928

 

 

 

11,103

 

Accretion of asset retirement obligations

 

 

306

 

 

 

261

 

Gain on sale of oil and gas properties

 

 

(1,691

)

 

 

 

Rig idle and termination expense

 

 

 

 

 

5,059

 

Total (gain) loss on derivative contracts, net

 

 

(7,800

)

 

 

3,463

 

Operating portion of net cash (paid) received in settlement of derivative contracts

 

 

(267

)

 

 

2,797

 

Stock-based compensation

 

 

2,958

 

 

 

561

 

Deferred income taxes

 

 

(9,952

)

 

 

 

Write-off of deferred financing costs

 

 

526

 

 

 

 

Amortization of deferred financing costs

 

 

137

 

 

 

142

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in accounts receivable

 

 

3,233

 

 

 

4,414

 

Increase in prepaid expenses and other current assets

 

 

(522

)

 

 

(132

)

Decrease in accounts payable and accrued expenses

 

 

(3,148

)

 

 

(6,634

)

Decrease in revenues and royalties payable

 

 

(1,905

)

 

 

(780

)

Decrease in advances

 

 

(535

)

 

 

(14,792

)

Net cash provided by (used in) operating activities

 

 

11,678

 

 

 

(12,131

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Bold Contribution Agreement, net of cash acquired

 

 

(55,609

)

 

 

 

Lynden Arrangement, net of cash acquired

 

 

 

 

 

(31,334

)

Additions to oil and gas properties

 

 

(10,048

)

 

 

(6,749

)

Additions to office and other equipment

 

 

(103

)

 

 

(44

)

Proceeds from sales of oil and gas properties

 

 

2,416

 

 

 

 

Net cash used in investing activities

 

 

(63,344

)

 

 

(38,127

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

70,000

 

 

 

36,597

 

Repayments of borrowings

 

 

(10,792

)

 

 

(37,788

)

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

 

 

 

 

 

47,125

 

Deferred financing costs

 

 

(1,071

)

 

 

(70

)

Net cash provided by financing activities

 

 

58,137

 

 

 

45,864

 

Net increase (decrease) in cash and cash equivalents

 

 

6,471

 

 

 

(4,394

)

Cash at beginning of period

 

 

10,200

 

 

 

23,264

 

Cash at end of period

 

$

16,671

 

 

$

18,870

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

740

 

 

$

416

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Class B Common stock issued in Bold Contribution Agreement

 

$

489,842

 

 

$

 

Class A Common stock issued in Bold Contribution Agreement

 

$

2,037

 

 

$

 

Common stock issued in Lynden Arrangement

 

$

 

 

$

45,699

 

Accrued capital expenditures

 

$

27,054

 

 

$

5,111

 

Asset retirement obligations

 

$

21

 

 

$

94

 

Promissory Note

 

$

 

 

$

5,059

 

 

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