EARTHSTONE ENERGY INC - FORM 8-K - EX-99.7 - July 23, 2021

Attached files

file filename
EX-23.1 - EX-23.1 - EARTHSTONE ENERGY INCex231consentofgrantthornto.htm
EX-99.6 - EX-99.6 - EARTHSTONE ENERGY INCex996irmfinancials2020.htm
EX-99.5 - EX-99.5 - EARTHSTONE ENERGY INCex995sequelstatements-dece.htm
EX-99.4 - EX-99.4 - EARTHSTONE ENERGY INCex994trackerfinancials-mar.htm
EX-99.3 - EX-99.3 - EARTHSTONE ENERGY INCex993trackerfinancials-dec.htm
EX-99.2 - EX-99.2 - EARTHSTONE ENERGY INCex992esteinvestorpresent.htm
EX-99.1 - EX-99.1 - EARTHSTONE ENERGY INCex991estetrackerclosingpr.htm
EX-23.2 - EX-23.2 - EARTHSTONE ENERGY INCex232consentsofplantemoran.htm
EX-10.5 - EX-10.5 - EARTHSTONE ENERGY INCex105amendmentno2toltip.htm
EX-10.4 - EX-10.4 - EARTHSTONE ENERGY INCex104zipventureslock-upagr.htm
EX-10.3 - EX-10.3 - EARTHSTONE ENERGY INCex103encaplock-upagreement.htm
EX-10.2 - EX-10.2 - EARTHSTONE ENERGY INCex102sequelregistrationrig.htm
EX-10.1 - EX-10.1 - EARTHSTONE ENERGY INCex101trackerregistrationri.htm
EX-3.1 - EX-3.1 - EARTHSTONE ENERGY INCex31certofamend-articles.htm
8-K - 8-K - EARTHSTONE ENERGY INCeste-20210720.htm

Exhibit 99.7

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

On July 20, 2021, Earthstone Energy, Inc. (“Earthstone” or the “Company”), Earthstone Energy Holdings, LLC, a subsidiary of the Company (“EEH” and collectively with Earthstone, the “Buyer”), Tracker Resource Development III, LLC (“Tracker”), and TRD III Royalty Holdings (TX), LP (“RoyaltyCo” and collectively with Tracker, the “Seller”) consummated the transactions contemplated in the Purchase and Sale Agreement dated March 31, 2021 by and among Earthstone, EEH and the Seller (the “Tracker Agreement”) that was previously reported on Form 8-K. Also, on July 20, 2021, Earthstone, EEH, SEG-TRD LLC (“SEG-I”), and SEG-TRD II LLC (“SEG-II” and collectively with SEG-I, “Sequel”), consummated the transactions contemplated in the Purchase and Sale Agreement dated March 31, 2021 by and among Earthstone, EEH and Sequel (the “Sequel Agreement” and collectively with the Tracker Agreement, the “Purchase Agreements”) that was previously reported on Form 8-K.

Pursuant to the Tracker Agreement, EEH acquired (the “Tracker Acquisition”) interests in oil and gas leases and related property of Tracker located in Irion County, Texas, for a purchase price (the “Tracker Purchase Price”) of $22.5 million in cash (which included a $2.96 million cash deposit previously paid by the Buyer upon the execution of the Tracker Agreement and held in escrow in accordance with the terms of the Tracker Agreement), and 4.7 million shares (the “Tracker Shares”) of Class A common stock, $0.001 par value per share of Earthstone (the “Class A Common Stock”). The cash portion of the Tracker Purchase Price is net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between the Buyer and the Seller.

Pursuant to the Sequel Agreement, EEH acquired (the “Sequel Acquisition” and with the Tracker Acquisition, the “Transaction”) certain well-bore interests and related equipment held by Sequel that were part of a joint development agreement between Tracker and Sequel involving portions of the acreage covered by the Tracker Agreement for a purchase price (the “Sequel Purchase Price”) of $45.3 million in cash (which included a $5.2 million cash deposit previously paid by the Buyer upon the execution of the Sequel Agreement and held in escrow in accordance with the terms of the Sequel Agreement) and 1.5 million shares (the “Sequel Shares” and with the Tracker Shares, the “Transaction Shares”) of Class A Common Stock. The cash portion of the Sequel Purchase Price is net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between the Buyer and the Sequel.

The Tracker Acquisition and the Sequel Acquisition will be accounted for as asset acquisitions in accordance with Accounting Standards Codification Topic 805, Business Combinations (referred to as “ASC 805”). The fair value of the consideration paid by us and allocation of that amount to the underlying Tracker Assets and Sequel Assets acquired, on a relative fair value basis, will be recorded on our books as of the date of the closing of the Tracker Acquisition and the Sequel Acquisition. Additionally, costs directly related to the Transaction will be capitalized as a component of the purchase price. The operating results of Tracker and Sequel will be consolidated in our financial statements beginning on the date of the closing of the Tracker Acquisition and the Sequel Acquisition, respectively. The pro forma financial statements have been prepared to reflect the transaction accounting adjustments to Earthstone’s historical condensed consolidated financial information in order to account for the Transaction and will include the assumption of liabilities for acquisition-related expenses and the recognition of the estimated tax impact of the pro forma adjustments.

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

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

The unaudited pro forma condensed combined balance sheet does not purport to represent what Earthstone’s financial position would have been had the Transaction actually been consummated on March 31, 2021. 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


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

The unaudited pro forma condensed combined balance sheet as of March 31, 2021 has been derived from and should be read in conjunction with:
•the unaudited historical condensed consolidated balance sheet of Earthstone as of March 31, 2021 included in its Quarterly Report on Form 10-Q for quarter ended March 31, 2021; and
•the unaudited historical condensed consolidated balance sheet of Tracker as of March 31, 2021 included in this Current Report as Exhibit 99.4.
The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2021 has been derived from:
•the unaudited historical condensed consolidated statement of operations of Earthstone for the three months ended March 31, 2021 included in its Quarterly Report on Form 10-Q for quarter ended March 31, 2021;
•the unaudited historical condensed consolidated statement of operations of Independence for the period January 1, 2021 through January 7, 2021, based on the allocated number of days from the entire month’s results;

•the unaudited historical condensed consolidated statement of operations of Tracker for the three months ended March 31, 2021 included in this Current Report as Exhibit 99.4; and
•the unaudited historical statements of revenues and direct expenses of Sequel for the three months ended March 31, 2021 included in this Current Report as Exhibit 99.5.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020 has been derived from:
•the audited historical consolidated statement of operations of Earthstone for the year ended December 31, 2020 included in its 2020 Annual Report on Form 10-K for the year ended December 31, 2020;
•the audited historical consolidated statement of operations of Independence for the year ended December 31, 2020 included in this Current Report as Exhibit 99.6;
•the audited historical consolidated statement of operations of Tracker for the year ended December 31, 2020 included in this Current Report as Exhibit 99.3; and
•the audited historical statements of revenues and direct expenses of Sequel for the year ended December 31, 2020 included in this Current Report as Exhibit 99.5.



EARTHSTONE ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2021
(In thousands, except share and per share amounts)
ASSETSEarthstone HistoricalTracker HistoricalTransaction Accounting AdjustmentsNotesEarthstone Pro Forma as Adjusted
Current assets:
Cash$1,447 $4,677 $(4,677)(a)$1,447 
Accounts receivable:
Oil and natural gas revenues33,134 3,086 (3,086)(a)33,134 
Joint interest billings and other, net of allowance6,497 — — 6,497 
Inventory— 195 (195)(a)— 
Derivative asset196 — — 196 
Prepaid expenses and other current assets3,204 112 (112)(a)3,204 
Total current assets44,478 8,070 (8,070)44,478 
Oil and gas properties, successful efforts method:
Proved properties1,253,689 127,083 (56,743)(b)1,386,100 
60,868 (c)
1,203 (d)
Unproved properties233,767 4,900 (4,900)(b)233,767 
Land (surface rights)5,382 — — 5,382 
Total oil and gas properties1,492,838 131,983 428 1,625,249 
Accumulated depreciation, depletion and amortization(315,460)(65,601)65,601 (b)(315,460)
Net oil and gas properties1,177,378 66,382 66,029 1,309,789 
Other noncurrent assets:
Office and other equipment, net of accumulated depreciation1,249 14 (14)(a)1,249 
Derivative asset1,495 — — 1,495 
Operating lease right-of-use assets2,289 — — 2,289 
Other noncurrent assets2,064 171 (171)(a)2,064 
TOTAL ASSETS$1,228,953 $74,637 $57,774 $1,361,364 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$16,891 $393 $(393)(a)$16,891 
Revenues and royalties payable25,522 2,204 (2,204)(a)$25,522 
Accrued expenses18,688 293 (293)(a)19,891 
1,203 (d)
Asset retirement obligation568 118 (118)(e)568 


Derivative liability25,063 1,876 (1,876)(a)25,063 
Advances2,246 33 (33)(a)2,246 
Operating lease liabilities777 — — 777 
Finance lease liabilities54 — — 54 
Other current liabilities912 1,922 (1,922)(a)912 
Current portion of long-term debt— 18,000 (18,000)(f)— 
Total current liabilities90,721 24,839 (23,636)91,924 
Noncurrent liabilities:
Long-term debt223,424 5,063 (5,063)(f)291,226 
67,802 (f)
Deferred tax liability14,189 — — 14,189 
Asset retirement obligation13,448 3,242 (1,650)(e)15,040 
Derivative liability2,566 — — 2,566 
Operating lease liabilities1,674 — — 1,674 
Finance lease liabilities— — — — 
Other noncurrent liabilities854 — — 854 
Total noncurrent liabilities256,155 8,305 61,089 325,549 
Equity:
Members' Equity— 41,493 (41,493)(g)— 
Preferred stock— — — — 
Class A common stock44 — 6 (h)50 
Class B common stock34 — — 34 
Additional paid-in capital624,916 — 61,808 (h)686,724 
Accumulated deficit(201,091)— — (201,091)
Total Earthstone Energy, Inc. stockholders’ equity423,903 41,493 20,321 485,717 
Noncontrolling interest458,174 — — 458,174 
Total equity882,077 41,493 20,321 943,891 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,228,953 $74,637 $57,774 $1,361,364 


EARTHSTONE ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2021
(In thousands, except share and per share amounts)
Earthstone HistoricalIndependence
Historical
(1/1/21 - 1/7/21)		Tracker HistoricalSequel Historical Transaction Accounting Adjustments NotesEarthstone
Pro Forma
Combined
REVENUES
Oil and natural gas revenues$75,572 $1,696 $7,532 $9,379 $— $94,179 
Loss on sale of oil and gas properties— — (49)— 49 (i)— 
Unrealized loss - commodity derivatives— (1,861)— — 1,861 (i)— 
Total revenues75,572 (165)7,483 9,379 1,910 94,179 
OPERATING COSTS AND EXPENSES
Lease operating expense 10,849 423 903 1,085 — 13,260 
Production and ad valorem taxes5,027 135 472 845 — 6,479 
Depreciation, depletion, amortization and accretion24,697 578 3,694 — 590 (j)29,559 
General and administrative expense 8,380 185 938 — 29 (i)9,532 
Equity-based compensation— 29 — — (29)(i)— 
Transaction costs2,106 — — — — 2,106 
Exploration expense— — 11 — — 11 
Total operating costs and expenses51,059 1,350 6,018 1,930 590 60,947 
(Loss) gain on sale of oil and gas properties— — — — (49)(i)(49)
Income (loss) from operations24,513 (1,515)1,465 7,449 1,271 33,183 
OTHER INCOME (EXPENSE)
Interest expense, net (2,217)(127)(302)— (239)(k)(2,946)
(61)(l)
(Loss) gain on derivative contracts, net(33,263)— (1,388)— (1,861)(i)(36,512)
Loss on disposal of asset— — (16)— — (16)
Other income (expense), net 103 — 1 — — 104 
Total other income (expense)(35,377)(127)(1,705)— (2,161)(39,370)
(Loss) income before income taxes(10,864)(1,642)(240)7,449 (890)(6,187)
Income tax benefit (expense)308 10 (141)(m)177 
Net (loss) income$(10,556)$(1,632)$(240)$7,449 $(1,031)$(6,010)
Less: Net loss attributable to noncontrolling interests(4,723)— (17)— 2,281 (n)(2,459)


Net (loss) income attributable to common stockholders$(5,833)$(1,632)$(223)$7,449 $(3,312)$(3,551)
Net income (loss) per common share:
Basic$(0.14)$(0.07)
Diluted$(0.14)$(0.07)
Weighted average common shares outstanding:
Basic42,778,916 6,200,000 48,978,916 
Diluted42,778,916 6,200,000 48,978,916 


EARTHSTONE ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2020
(In thousands, except share and per share amounts)
Earthstone HistoricalIndependence HistoricalTracker HistoricalSequel HistoricalTransaction Accounting AdjustmentsNotesEarthstone
Pro Forma
Combined
REVENUES
Oil and natural gas revenues$144,523 $80,473 $25,570 $36,793 $— $287,359 
Realized gain (loss) - commodity derivatives— 28,585 — — (28,585)(i)— 
Unrealized (loss) gain - commodity derivatives— (1,109)— — 1,109 (i)— 
Loss on sale of oil and gas properties— — (73)— 73 (i)— 
Other revenues— 56 — — (56)(i)— 
Total revenues144,523 108,005 25,497 36,793 (27,459)287,359 
OPERATING COSTS AND EXPENSES
Lease operating expense 29,131 16,473 5,378 6,960 517 (i)58,459 
Production and ad valorem taxes9,411 5,154 1,381 3,014 — 18,960 
Marketing expenses— — 573 — (573)(i)— 
Rig termination expense426 (24)— — — 402 
Depreciation, depletion, amortization and accretion96,721 47,507 18,982 — (21,181)(j)142,029 
Impairment expense64,498 — 273,838 — (273,838)(o)64,498 
General and administrative expense 28,233 8,735 4,940 — 1,799 (i)43,707 
Equity-based compensation— 1,799 — — (1,799)(i)— 
Transaction costs622 — — — 4,555 (p)5,177 
Exploration expense298 — 130 — — 428 
Total operating costs and expenses229,340 79,644 305,222 9,974 (290,520)333,660 
Gain (loss) on sale of oil and gas properties204 — — — (73)(i)131 
Income (loss) from operations(84,613)28,361 (279,725)26,819 262,988 (46,170)
OTHER INCOME (EXPENSE)
Interest expense, net (5,232)(9,845)(1,907)— (12)(k)(17,242)
(246)(l)
Gain on derivative contracts, net59,899 — 5,962 — 27,476 (i)93,337 
Loss on disposal of asset— — (277)— — (277)
Other income (expense) , net 400 — 22 — — 422 
Total other income (expense)55,067 (9,845)3,800 — 27,218 76,240 
(Loss) income before income taxes(29,546)18,516 (275,925)26,819 290,206 30,070 
Income tax benefit (expense)112 (340)— — (1,281)(m)(1,509)


Net (loss) income$(29,434)$18,176 $(275,925)$26,819 $288,925 $28,561 
Less: Net loss attributable to noncontrolling interests(15,887)— (2,754)— 30,580 (n)11,939 
Net (loss) income attributable to common stockholders$(13,547)$18,176 $(273,171)$26,819 $258,345 $16,622 
Net income (loss) per common share:
Basic$(0.45)$0.34 
Diluted$(0.45)$0.34 
Weighted average common shares outstanding:
Basic29,911,625 18,919,594 48,831,219 
Diluted29,911,625 18,919,594 48,831,219 


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

Note 1. Basis of Presentation

The accompanying pro forma condensed combined financial statements were prepared in accordance with Article 11 of Regulation S-X, as amended by SEC Final Rule Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and based on the historical consolidated and combined financial information of Earthstone, Independence, Tracker and Sequel. The Transaction has been accounted for herein using the acquisition method of accounting (the “Acquisition Method”) in accordance with ASC 805. The fair value of the consideration paid by us and allocation of that amount to the underlying Tracker Assets and Sequel Assets acquired, on a relative fair value basis, will be recorded on our books as of the date of the closing of the Tracker Acquisition and the Sequel Acquisition. Additionally, costs directly related to the Transaction will be capitalized as a component of the purchase price.

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

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

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

Note 2. Accounting Policies and Presentation

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

Note 3. Preliminary Purchase Price Allocation

The preliminary allocation of the total purchase price in the Transaction is based upon management’s estimates of and assumptions related to the fair value of assets to be acquired and liabilities to be assumed as of March 31, 2021 using currently available information. Because the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on financial position and results of operations may differ significantly from the pro forma amounts included herein.

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



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):
TrackerSequelTotal
Consideration:
Shares of Earthstone Class A Common Stock issued4,700,000 1,500,000 6,200,000 
Earthstone Class A Common Stock price as of July 20, 2021$9.97 $9.97 $9.97 
Class A Common Stock consideration46,859 14,955 61,814 
Cash consideration22,523 45,279 67,802 
Direct transaction costs (2)
648 555 1,203 
Total consideration transferred$70,030 $60,789 $130,819 
Fair value of assets acquired:
Oil and gas properties$71,543 $60,868 $132,411 
Amount attributable to assets acquired$71,543 $60,868 $132,411 
Fair value of liabilities assumed:
Noncurrent liabilities - ARO1,513 79 1,592 
Amount attributable to liabilities assumed$1,513 $79 $1,592 
(1)Represents $1.2 million of estimated transaction costs associated with the Tracker Acquisition and the Sequel Acquisition which are expected to be capitalized in accordance with ASC 805-50.

Total consideration transferred was based on the terms of the Tracker Agreement and the Sequel Agreement, the consideration paid by Buyer at closing of the Purchase Agreements was $67.8 million in cash (subject to final post-closing settlement) and 6.2 million shares of Class A Common Stock. The estimated purchase price is based upon the cash and the fair value of the Class A Common Stock which was determined using the closing price of $9.97 per share on July 20, 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 March 31, 2021 and the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2021 and the year ended December 31, 2020:

(a)Adjustment to remove items not acquired as part of the Transaction.
(b)Adjustment to eliminate the historical book value and accumulated depreciation, depletion and amortization of Tracker's oil and gas properties as of March 31, 2021 and to reflect the Tracker Assets acquired, on a relative fair value basis in accordance with the Acquisition Method.
(c)Adjustment to reflect the Sequel Assets acquired, on a relative fair value basis in accordance with the Acquisition Method.
(d)Represents estimated nonrecurring transaction costs, including advisory, legal, regulatory, accounting, valuation and other professional fees, associated with the Tracker Acquisition and the Sequel Acquisition which are expected to be capitalized in accordance with the Acquisition Method. 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)Adjustment to the historical book value of Tracker's asset retirement obligations as of March 31, 2021 to reflect liabilities incurred, on a relative fair value basis, in accordance with the Acquisition Method.
(f)Adjustment to reflect the elimination of outstanding historical debt and record expected cash consideration to be conveyed to Tracker and Sequel of $67.8 million borrowed under the Company's revolving credit facility.
(g)Adjustment to reflect the elimination of Tracker’s Members’ Equity.
(h)Adjustment to reflect the issuance of 4,700,000 and 1,500,000 shares of Class A Common Stock pursuant to the Purchase Agreements.
(i)Adjustment to reflect certain reclassifications of historical line items to conform financial statement presentations.
(j)Adjustments to reflect the depreciation, depletion and amortization expense that would have been recorded had the Acquisitions occurred on January 1, 2020 and the properties were adjusted, on a relative fair value basis, in accordance with the Acquisition Method.
(k)Adjustments to reflect the estimated interest expense that would have been recorded in the periods presented with respect to the incremental borrowings expected to finance the cash consideration for the Acquisitions.
(l)Adjustments to reflect the amortization of deferred financing costs related to the financing of the Acquisitions.
(m)Adjustments to reflect the estimated incremental Income tax expense that would have been recorded in the period presented if the Acquisitions had occurred on January 1, 2020 based on the income tax rates used in calculating the tax impact of the adjustments.
(n)Adjustments to reflect the estimated incremental Net loss (income) attributable to noncontrolling interests that would have been recorded in the period presented if the Acquisitions had occurred on January 1, 2020. The Acquisitions impacted noncontrolling interest as presented below.
 EEH Units Held By Earthstone and Lynden US%EEH Units Held By Others%Total EEH Units Outstanding
Weighted Average Units Outstanding for the Year Ended December 31, 202029,911,625 46.0 %35,077,712 54.0 %64,989,337 
EEH Units assumed issued in connection with the IRM Acquisition on January 1, 202012,719,594 —12,719,594 
EEH Units assumed issued in connection with the Tracker Acquisition on January 1, 20204,700,000 —4,700,000 
EEH Units assumed issued in connection with the Sequel Acquisition on January 1, 20201,500,000 —1,500,000 
Pro Forma Weighted Average Units Outstanding for the Year Ended December 31, 202048,831,219 58.2 %35,077,712 41.8 %83,908,931 
 EEH Units Held By Earthstone and Lynden US%EEH Units Held By Others%Total EEH Units Outstanding
Weighted Average Units Outstanding for the Three Months Ended March 31, 202130,907,295 47.3 %34,502,153 52.7 %65,409,448 
EEH Units assumed issued in connection with the IRM Acquisition on January 1, 202012,719,594 —12,719,594 
EEH Units assumed issued in connection with the Tracker Acquisition on January 1, 20204,700,000 —4,700,000 
EEH Units assumed issued in connection with the Sequel Acquisition on January 1, 20201,500,000 —1,500,000 
Pro Forma Weighted Average Units Outstanding for the Three Months Ended March 31, 202149,826,889 59.1 %34,502,153 40.9 %84,329,042 
(o)Adjustment to reverse the Tracker asset impairment as, based on the purchase price contemplated by the Tracker Agreement, no impairment would have been recorded.
(p)Represents estimated nonrecurring transaction costs related to the acquisition of Independence that are expected to be incurred by Earthstone, including advisory, legal, regulatory, accounting, valuation and other professional fees that are not capitalized as part of the Acquisitions. These transaction costs are based on preliminary estimates and the final amounts and the resulting effect on Earthstone’s financial position and results of operations may differ significantly.



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

The following table sets forth information with respect to the historical and combined estimated oil and natural gas reserves as of December 31, 2020 for Earthstone, Independence, Tracker and Sequel. The Earthstone reserve data presented below was derived from the independent engineering report of Cawley, Gillespie & Associates, Inc. (“CG&A”), Earthstone’s independent reserve engineer. The Independence reserve information was prepared by Earthstone management. The reserve information of Tracker and Sequel was prepared by Tracker management and Sequel management, respectively. Future exploration, exploitation and development expenditures, as well as future commodity prices and service costs, will affect the quantity of reserve volumes. The reserve estimates shown below were determined using the average first day of the month price for each of the preceding 12 months for oil and natural gas for the year ended December 31, 2020 for Earthstone, Independence, Tracker and Sequel.
As of December 31, 2020
Earthstone (1)
Independence (2)
TrackerSequelCombined
Estimated Proved Developed Reserves:
Oil (MBbl)18,876 13,713 1,673 1,398 35,660 
Natural Gas (MMcf)55,752 49,157 24,237 15,186 144,332 
Natural Gas Liquids (MBbl)10,123 — 4,009 2,491 16,623 
Total (MBoe)(3)
38,291 21,906 9,721 6,419 76,337 
Estimated Proved Undeveloped Reserves:
Oil (MBbl)21,212 19,993 10,641 — 51,846 
Natural Gas (MMcf)55,450 31,368 97,386 — 184,204 
Natural Gas Liquids (MBbl)10,123 — 16,598 — 26,721 
Total (MBoe)(3)
40,577 25,221 43,470 — 109,268 
Estimated Proved Reserves:
Oil (MBbl)40,088 33,706 12,314 1,398 87,506 
Natural Gas (MMcf)111,202 80,525 121,623 15,186 328,536 
Natural Gas Liquids (MBbl)20,246 — 20,607 2,491 43,344 
Total (MBoe)(3)
78,868 47,127 53,192 6,419 185,606 
(1) As of December 31, 2020, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 41.5% of the estimated proved reserves, as adjusted for the impact of the Acquisitions.
(2) The historical results of Independence are presented with natural gas and natural gas liquids combined within Natural Gas (MMcf).
(3) Assumes a ratio of 6 Mcf of natural gas per Boe.
The following table sets forth summary information with respect to historical and combined oil and natural gas production for the year ended December 31, 2020 for Earthstone, Independence, Tracker and Sequel. The Earthstone oil and natural gas production data presented below was derived from Earthstone’s Annual Report on Form 10-K for the year ended December 31, 2020. The Independence, Tracker and Sequel oil and natural gas production data presented below was derived from the supplemental oil and gas reserve information (unaudited) included in notes to their audited financial statements for the year ended December 31, 2020.
Year Ended December 31, 2020
Earthstone (1)
Independence (2)
TrackerSequelCombined
Oil (MBbl)3,180 1,993 440 665 6,278 
Natural Gas (MMcf)7,282 4,769 3,089 3,645 18,785 
Natural Gas Liquids (MBbl)1,198 — 495 589 2,282 
Total (MBoe)(3)
5,592 2,788 1,449 1,862 11,691 
(1) As of December 31, 2020, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 41.5% of the estimated proved reserves, as adjusted for the impact of the Acquisitions.
(2) The historical results of Independence are presented with natural gas and natural gas liquids combined within Natural Gas (MMcf).
(3) Assumes a ratio of 6 Mcf of natural gas per Boe.



The following unaudited combined estimated discounted future net cash flows reflect Earthstone, Independence, Tracker and Sequel as of December 31, 2020. The unaudited combined standardized measure of discounted future net cash flows are as follows (in thousands):
As of December 31, 2020
Earthstone (1)
IndependenceTrackerSequelCombined
Future cash inflows$1,902,073 $1,433,588 $724,574 $94,087 $4,154,322 
Future production costs(633,248)(491,740)(282,631)(43,592)(1,451,211)
Future development costs(285,088)(250,836)(239,999)(3,226)(779,149)
Future income tax expense(35,557)(1,582)(1,834)(355)(39,328)
Future net cash flows948,180 689,430 200,110 46,914 1,884,634 
10% annual discount for estimated timing of cash flows(487,327)(426,942)(153,160)(11,937)(1,079,366)
Standardized measure of discounted future net cash flows$460,853 $262,488 $46,950 $34,977 $805,268 
(1) As of December 31, 2020, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 41.5% of the estimated proved reserves, as adjusted for the impact of the Acquisitions.


EARTHSTONE ENERGY INC Reports