EARTHSTONE ENERGY INC - FORM 8-K/A - EX-99.3 - February 24, 2021

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8-K/A - 8-K/A - EARTHSTONE ENERGY INCeste-20210107.htm
EX-99.2 - EX-99.2 - EARTHSTONE ENERGY INCex992-irmfinancials09302020.htm
EX-99.1 - EX-99.1 - EARTHSTONE ENERGY INCex991-irmfinancials2019.htm
EX-23.1 - EX-23.1 - EARTHSTONE ENERGY INCex231consentofgrantthornto.htm

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
FOR EARTHSTONE ENERGY, INC.

On January 7, 2021, Earthstone Energy, Inc. (“Earthstone” or the “Company”), Earthstone Energy Holdings, LLC, a subsidiary of the Company (“EEH” and collectively with Earthstone, the “Buyer”), Independence Resources Holdings, LLC (“Independence”), and Independence Resources Manager, LLC (“Independence Manager” and collectively with Independence, the “Seller”) consummated the transactions contemplated in the Purchase and Sale Agreement dated December 17, 2020 (the “Purchase Agreement”) that was previously reported on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on December 22, 2020. The Seller was unaffiliated with the Company. At the closing of the Purchase Agreement, among other things, EEH acquired (the “Acquisition”) all of the issued and outstanding limited liability company interests in certain wholly owned subsidiaries of Independence and Independence Manager (collectively, “IRM”) for aggregate consideration consisting of the following: (i) an aggregate amount of cash from EEH equal to approximately $131.2 million (the “Cash Consideration”) and (ii) 12,719,594 shares of the Company’s Class A common stock, $0.001 par value per share (“Class A Common Stock”), issued to Independence (such shares, the “Acquisition Shares,” and such issuance, the “Stock Issuance”).

The Purchase Agreement contains customary representations and warranties for transactions of this nature. The Buyer has obtained representation and warranty insurance to provide coverage in the event of certain breaches of representations and warranties of the Seller contained in the Purchase Agreement, which will be subject to various exclusions, deductibles and other terms and conditions set forth therein. The costs of such insurance policy were borne by the Buyer.

The Acquisition will be accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. 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 Acquisition and will include the assumption of liabilities for acquisition-related expenses and the recognition of the estimated tax impact of the pro forma adjustments.

The unaudited pro forma condensed combined balance sheet as of September 30, 2020 gives effect to the Acquisition as if it had been completed on September 30, 2020. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2019 and the nine months ended September 30, 2020 give effect to the Acquisition as if it had been completed on January 1, 2019. 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 the liabilities to be assumed and the related allocations of purchase price.

The unaudited pro forma condensed combined balance sheet does not purport to represent what Earthstone’s financial position would have been had the Acquisition actually been consummated on September 30, 2020. The unaudited pro forma condensed combined statements of operations do not purport to represent what Earthstone’s results of operations would have been had the Acquisition actually been consummated on January 1, 2019. 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 Acquisition, 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 financial statements have been derived from and should be read in conjunction with the historical consolidated financial statements and accompanying notes contained in Earthstone's Annual Report on Form 10-K for the year ended December 31, 2019, Earthstone’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, the audited statement of operations of Independence for the year ended December 31, 2019 included in this report as Exhibit 99.1, and the unaudited interim statement of operations of Independence for the nine months ended September 30, 2020 included in this report as Exhibit 99.2. The historical consolidated financial statements of Independence represent, in all material respects, those of IRM.

The unaudited pro forma condensed combined balance sheet as of September 30, 2020 has been derived from:
•the unaudited historical condensed consolidated balance sheet of Earthstone as of September 30, 2020; and
•the unaudited historical condensed consolidated balance sheet of Independence as of September 30, 2020.
The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2020 has been derived from:


•the unaudited historical condensed consolidated statement of operations of Earthstone for the nine months ended September 30, 2020; and
•the unaudited historical condensed consolidated statement of operations of Independence for the nine months ended September 30, 2020.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 has been derived from:
•the audited historical consolidated statement of operations of Earthstone for the year ended December 31, 2019; and
•the audited historical consolidated statement of operations of Independence for the year ended December 31, 2019.


EARTHSTONE ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2020
(In thousands, except share and per share amounts)
ASSETSEarthstone HistoricalIndependence HistoricalTransaction Accounting AdjustmentsNotesEarthstone Pro Forma as Adjusted
Current assets:
Cash$5,311 $11,673 $— $16,984 
Accounts receivable:
Oil and natural gas revenues12,097 9,578 — 21,675 
Joint interest billings and other, net of allowance11,548 — — 11,548 
Inventory— 138 — 138 
Derivative asset25,097 5,282 — 30,379 
Prepaid expenses and other current assets1,560 351 — 1,911 
Total current assets55,613 27,022 — 82,635 
Oil and gas properties, successful efforts method:
Proved properties995,666 548,274 (336,202)(a)1,207,738 
Unproved properties236,482 56,144 (56,144)(a)236,482 
Furniture, fixtures and other property and equipment— 3,193 (3,193)(b)— 
Land (surface rights)5,382 — — 5,382 
Total oil and gas properties1,237,530 607,611 (395,539)1,449,602 
Accumulated depreciation, depletion and amortization(271,012)(176,082)176,082 (a)(b)(271,012)
Net oil and gas properties966,518 431,529 (219,457)1,178,590 
Other noncurrent assets:
Office and other equipment, net of accumulated depreciation1,044 — 945 (a)(b)1,989 
Derivative asset4,727 — — 4,727 
Operating lease right-of-use assets2,769 — — 2,769 
Other noncurrent assets1,331 39 962 (c)2,332 
TOTAL ASSETS$1,032,002 $458,590 $(217,550)$1,273,042 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$6,910 $6,095 $— $13,005 
Revenues and royalties payable28,047 — — 28,047 
Accrued expenses12,844 501 962 (c)21,164 
1,974 (d)
4,883 (e)
Asset retirement obligation308 90 — 398 
Derivative liability1,040 — — 1,040 
Advances93 — — 93 
Operating lease liabilities768 — — 768 
Finance lease liabilities96 — — 96 
Other current liabilities11 318 — 329 
Current portion of long-term debt— 6,000 (6,000)(f)— 
Total current liabilities50,117 13,004 1,819 64,940 
Noncurrent liabilities:
Long-term debt130,000 150,597 (150,597)(f)261,209 
131,209 (f)
Deferred tax liability15,294 1,225 — 16,519 


Asset retirement obligation2,027 18,164 — 20,191 
Derivative liability577 688 — 1,265 
Operating lease liabilities2,001 — — 2,001 
Finance lease liabilities15 — — 15 
Other noncurrent liabilities138 333 — 471 
Total noncurrent liabilities150,052 171,007 (19,388)301,671 
Equity:
Members' Equity— 274,579 (274,579)(g)— 
Preferred stock— — — — 
Class A common stock30 — 13 (h)43 
Class B common stock35 — — 35 
Additional paid-in capital537,990 — 76,559 (h)614,549 
Accumulated deficit(186,787)— (1,087)(d)(187,874)
Total stockholders’ equity351,268 274,579 (199,094)426,753 
Noncontrolling interest480,565 — (887)(d)479,678 
Total equity831,833 274,579 (199,981)906,431 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,032,002 $458,590 $(217,550)$1,273,042 



EARTHSTONE ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020
(In thousands, except share and per share amounts)
Earthstone HistoricalIndependence HistoricalTransaction Accounting AdjustmentsNotesEarthstone
Pro Forma
Combined
REVENUES
Oil$93,017 $55,336 $— $148,353 
Natural gas and Natural gas liquids14,831 5,327 — 20,158 
Other revenue— 42 (42)(b)— 
Total revenues107,848 60,705 (42)168,511 
OPERATING COSTS AND EXPENSES
Lease operating expense21,971 12,726 (42)(b)34,655 
Production and ad valorem taxes7,198 4,273 — 11,471 
Rig termination expense426 (24)— 402 
Depreciation, depletion and amortization76,096 36,315 (16,986)(i)95,425 
Impairment expense62,548 — — 62,548 
General and administrative expense19,615 7,640 1,458 (b)28,713 
Equity-based compensation— 1,458 (1,458)(b)— 
Transaction costs(324)— — (324)
Accretion of asset retirement obligation137 949 — 1,086 
Exploration expense298 — — 298 
Total operating costs and expenses187,965 63,337 (17,028)234,274 
Gain on sale of oil and gas properties198 — — 198 
Loss from operations(79,919)(2,632)16,986 (65,565)
OTHER INCOME (EXPENSE)
Interest expense, net(4,207)(8,022)(184)(j)(12,413)
Gain on derivative contracts, net73,065 35,343 — 108,408 
Other income (expense), net120 — — 120 
Total other income (expense)68,978 27,321 (184)96,115 
(Loss) income before income taxes(10,941)24,689 16,802 30,550 
Income tax expense(112)(386)(1,204)(k)(1,702)
Net (loss) income$(11,053)$24,303 $15,598 $28,848 
Less: Net loss attributable to noncontrolling interests(5,977)— 19,021 (l)13,044 
Net (loss) income attributable to common stockholders$(5,076)$24,303 $(3,423)$15,804 
Net income (loss) per common share:
Basic$(0.17)$0.37 
Diluted$(0.17)$0.37 
Weighted average common shares outstanding:
Basic29,810,705 12,719,594 42,530,299 
Diluted29,810,705 12,719,594 42,530,299 


EARTHSTONE ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2019
(In thousands, except share and per share amounts)
Earthstone HistoricalIndependence HistoricalTransaction Accounting AdjustmentsNotesEarthstone
Pro Forma
Combined
REVENUES
Oil$171,925 $91,434 $— $263,359 
Natural gas and Natural gas liquids19,337 7,756 — 27,093 
Other revenue— 38 (38)(b)— 
Total revenues191,262 99,228 (38)290,452 
OPERATING COSTS AND EXPENSES
Lease operating expense28,683 17,074 (38)(b)45,719 
Production and ad valorem taxes11,871 6,148 — 18,019 
Rig termination list— 3,854 — 3,854 
Depreciation, depletion and amortization69,243 36,830 (9,228)(i)96,845 
Impairment expense— 56,600 — 56,600 
General and administrative expense27,611 10,755 2,961 (b)41,327 
Equity-based compensation— 2,961 (2,961)(b)— 
Transaction costs1,077 — 1,974 (d)3,051 
Accretion of asset retirement obligation214 1,190 — 1,404 
Exploration expense653 27,272 — 27,925 
Total operating costs and expenses139,352 162,684 (7,292)294,744 
Gain on sale of oil and gas properties3,222 — — 3,222 
Income (loss) from operations55,132 (63,456)7,254 (1,070)
OTHER INCOME (EXPENSE)
Interest expense, net(6,566)(11,866)(246)(j)(18,678)
Write-off of deferred financing costs(1,242)— — (1,242)
Loss on derivative contracts, net(43,983)(18,093)— (62,076)
Other income (expense), net(96)— — (96)
Total other income (expense)(51,887)(29,959)(246)(82,092)
(Loss) income before income taxes3,245 (93,415)7,008 (83,162)
Income tax benefit (expense)(1,665)575 1,346 (k)256 
Net (loss) income$1,580 $(92,840)$8,354 $(82,906)
Less: Net loss attributable to noncontrolling interests861 — (38,923)(l)(38,062)
Net (loss) income attributable to common stockholders$719 $(92,840)$47,277 $(44,844)
Net income (loss) per common share:
Basic$0.02 $(1.08)
Diluted$0.02 $(1.08)
Weighted average common shares outstanding:
Basic28,983,354 12,719,594 41,702,948 
Diluted29,360,885 12,719,594 42,080,479 


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, using the acquisition method of accounting for business combinations under accounting principles generally accepted in the United States of America (“GAAP”) and are based on the historical consolidated and combined financial information of Earthstone and Independence.

Certain transaction accounting adjustments have been made in order to show the effects of the Acquisition on the combined historical financial information of Earthstone and Independence. 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 Acquisition 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 and Independence for the periods presented.

The Company determined the transaction to be a business combination in accordance with Accounting Standards Codification 805. Under the acquisition method of accounting for business combinations, the assets acquired and liabilities assumed will be recorded as of the completion of the Acquisition, primarily at their respective fair values and added to those of Earthstone. The results of operations of Independence will be reflected in the financial statements and reported results of operations of Earthstone from the date of the completion of the Acquisition and Earthstone’s financial statements will not be retroactively restated to reflect the historical financial position or results of operations of Independence.

The pro forma condensed combined balance sheet as of September 30, 2020 gives effect to the Acquisition as if it had been completed on September 30, 2020. The pro forma condensed combined statements of operations for the year ended December 31, 2019 and the nine months ended September 30, 2020 give effect to the Acquisition as if it had been completed on January 1, 2019.

Note 2. Accounting Policies and Presentation

The unaudited pro forma condensed combined balance sheet as of September 30, 2020 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2020 and the year ended December 31, 2019 have been compiled in a manner consistent with the accounting policies adopted by Earthstone. Certain reclassifications and adjustments have been made to Independence’s historical financial information 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 Acquisition 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, 2020 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 Independence’s assets acquired and liabilities assumed as of the closing date of the Acquisition, which could result from changes in future oil and natural gas commodity prices, reserve estimates, interest rates, as well as other factors.



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):
Consideration:
Shares of Earthstone Class A Common Stock issued12,719,594 
Earthstone Class A Common Stock price as of January 7, 2021$6.02 
Class A Common Stock consideration76,572 
Cash consideration131,209 
Total consideration transferred$207,781 
Fair value of assets acquired:
Cash and cash equivalents$11,673 
Other current assets15,349 
Oil and gas properties212,072 
Other non-current assets1,946 
Amount attributable to assets acquired$241,040 
Fair value of liabilities assumed:
Current liabilities$12,849 
Noncurrent liabilities20,410 
Amount attributable to liabilities assumed$33,259 

Total consideration transferred was based on the terms of the Purchase Agreement, the consideration paid by Earthstone at closing consisted of $131.2 million in cash and 12,719,594 shares of Class A Common Stock. The total 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 $6.02 per share on January 7, 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, 2020 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2020 and the year ended December 31, 2019:

(a)    Adjustment to the historical book values of Independence’s oil and gas properties as of September 30, 2020 to reflect those properties at their estimated fair values and eliminate Independence's historical accumulated depreciation, depletion and amortization, in accordance with the acquisition method of accounting for business combinations.
(b)    Adjustment to reflect certain reclassifications of historical Independence line items to conform to the financial statement presentation of Earthstone.
(c)    Adjustment to reflect the capitalization of deferred financing costs related to the financing of the Acquisition.
(d)    Represents estimated nonrecurring transaction costs 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 Acquisition. 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.


(e)    Represents additional estimated costs related to the Acquisition incurred by IRM which will be paid by Earthstone post-Acquisition. These amounts will be recorded as Accrued expenses in Earthstone’s Condensed Combined Balance Sheet on the date of the Acquisition. These amounts will have no impact on Earthstone’s Condensed Combined Statements of Operations in any current or future period.
(f)    Adjustment to reflect the elimination of outstanding historical debt and record actual cash consideration conveyed to Independence on January 7, 2021 of $131.2 million borrowed under the Company's revolving credit facility.
(g)    Adjustment to reflect the elimination of Independence’s Members’ Equity.
(h)    Adjustment to reflect the issuance of 12,719,594 shares of Class A Common Stock pursuant to the Purchase Agreement.
(i)    Adjustments to reflect the depreciation, depletion and amortization expense that would have been recorded had the Acquisition occurred on January 1, 2019 and the properties were adjusted to estimated fair value.
(j)    Adjustments to reflect the amortization of deferred financing costs related to the financing of the Acquisition.
(k)    Adjustments to reflect the estimated incremental Income tax expense that would have been recorded in the period presented if the Acquisition had occurred on January 1, 2019. 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% and a statutory Texas Margin tax rate of 0.75%, which represent the statutory rates in effect in those jurisdictions during the periods presented. The Company and IRM had no operations outside of Texas in the periods presented.
(l)    Adjustments to reflect the estimated incremental Net loss (income) attributable to noncontrolling interests that would have been recorded in the period presented if the Acquisition had occurred on January 1, 2019. The Acquisition impacted noncontrolling interest as presented below.
 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, 201928,983,354 45.0 %35,395,021 55.0 %64,378,375 
EEH Units assumed issued in connection with the Acquisition on January 1, 201912,719,594 —12,719,594 
Pro Forma Weighted Average Units Outstanding for the Year Ended December 31, 201941,702,948 54.1 %35,395,021 45.9 %77,097,969 
 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, 202029,810,819 45.9 %35,100,544 54.1 %64,911,363 
EEH Units assumed issued in connection with the Acquisition on January 1, 201912,719,594 —12,719,594 
Pro Forma Weighted Average Units Outstanding for the Nine Months Ended September 30, 202042,530,413 54.8 %35,100,544 45.2 %77,630,957 



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

The following table sets forth information with respect to the historical and pro forma combined estimated oil and natural gas reserves as of December 31, 2019 for Earthstone and Independence. The reserve data of Earthstone presented below was derived from independent engineering reports of Earthstone. Cawley Gillespie & Associates, Inc. (“CG&A”) prepared the Earthstone reserve estimates as of December 31, 2019. Independence reserve estimates as of December 31, 2019 were prepared by Independence’s principal internal reservoir engineer. 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, 2019 for Earthstone and Independence.
As of the Year Ended December 31, 2019
Earthstone (2)IndependenceCombined
Estimated Proved Reserves:
Oil (MBbl)
52,650 35,338 87,988 
Natural Gas (MMcf)
250,115 76,443 326,558 
Total (MBOE) (1)
94,336 48,080 142,415 
Estimated Proved Developed Reserves:
Oil (MBbl)
18,220 13,548 31,768 
Natural Gas (MMcf)
79,802 42,277 122,079 
Total (MBOE) (1)
31,521 20,595 52,116 
Estimated Proved Undeveloped Reserves:
Oil (MBbl)
34,430 21,790 56,220 
Natural Gas (MMcf)
170,313 34,166 204,479 
Total (MBOE) (1)
62,815 27,484 90,299 
(1) Assumes a ratio of 6 Mcf of natural gas per barrel of oil.
(2) As of December 31, 2019, holders of Earthstone's Class B common stock owned a non-controlling indirect interest of 45.6% of the estimated proved reserves, as adjusted for the impact of the Acquisition.
The following table sets forth summary information with respect to historical and pro forma combined oil and natural gas production for the year ended December 31, 2019 for Earthstone and Independence. 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, 2019. The Independence oil and natural gas production data presented below was derived from the supplemental oil and gas reserve information (unaudited) included in notes to the audited financial statements of Independence for the year ended December 31, 2019.
As of the Year Ended December 31, 2019
Earthstone (2)IndependenceCombined
Oil (MBbl)
3,0861,6974,783
Natural Gas (MMcf)
10,8933,77514,668
Total (MBOE) (1)
4,9022,3267,228
(1) Assumes a ratio of 6 Mcf of natural gas per barrel of oil.
(2) As of December 31, 2019, holders of Earthstone's Class B common stock owned a non-controlling indirect interest of 45.6% of the estimated proved reserves, as adjusted for the impact of the Acquisition.



The following unaudited pro forma estimated discounted future net cash flows reflect Earthstone and Independence as of December 31, 2019. The unaudited pro forma standardized measure of discounted future net cash flows are as follows (in thousands):
As of the Year Ended December 31, 2019
Earthstone (1)IndependenceCombined
Future cash inflows$3,250,868 $2,087,317 $5,338,185 
Future production costs(1,027,464)(533,837)(1,561,301)
Future development costs(628,692)(307,277)(935,969)
Future income tax expense(58,824)(3,270)(62,094)
Future net cash flows1,535,888 1,242,933 2,778,821 
10% annual discount for estimated timing of cash flows(746,311)(718,638)(1,464,949)
Standardized measure of discounted future net cash flows$789,577 $524,295 $1,313,872 
(1) As of December 31, 2019, holders of Earthstone's Class B common stock owned a non-controlling indirect interest of 45.6% of the estimated proved reserves, as adjusted for the impact of the Acquisition.

The following is an unaudited summary of changes in pro forma standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves. The unaudited summary of changes in pro forma standardized measure of discounted future net cash flows is as follows (in thousands):
As of the Year Ended December 31, 2019
Earthstone (1)IndependenceCombined
Beginning of year$959,452 $669,759 $1,629,211 
Sales of oil and gas produced, net of production costs(150,708)(76,006)(226,714)
Sales of minerals in place(458)— (458)
Net changes in prices and production costs(565,240)(139,178)(704,418)
Extensions, discoveries, and improved recoveries127,182 105,979 233,161 
Changes in income taxes, net12,697 57 12,754 
Previously estimated development costs incurred during the period210,520 53,405 263,925 
Net changes in future development costs118,348 29,232 147,580 
Revisions of previous quantity estimates(35,588)(177,387)(212,975)
Accretion of discount107,432 37,740 145,172 
Changes in timing of estimated cash flows and other5,940 20,694 26,634 
End of year$789,577 $524,295 $1,313,872 
(1) As of December 31, 2019, holders of Earthstone's Class B common stock owned a non-controlling indirect interest of 45.6% of the estimated proved reserves, as adjusted for the impact of the Acquisition.


EARTHSTONE ENERGY INC Reports