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Earthstone Energy, Inc. Reports 2019 Third Quarter and Year-to-Date Financial Results

11/06/2019

THE WOODLANDS, Texas--(BUSINESS WIRE)-- Earthstone Energy, Inc. (NYSE: ESTE) (“Earthstone”, the “Company”, “we” or “us”), today announced financial and operating results for the quarter and nine months ended September 30, 2019.

Third Quarter 2019 Highlights

  • Average daily production of 12,181 Boepd(1)
  • Adjusted EBITDAX(2) of $29.8 million
  • Adjusted EBITDAX(2) per Boe of $26.58
  • Operating Margin(2) of $26.84 per Boe ($30.15 including realized hedge settlements)
  • Capital expenditures of $78.6 million representing 38% of guidance with expected 2019 total capital expenditures of $205 million
  • Net income of $26.1 million, or $0.41 per Adjusted Diluted Share(2)
    • Adjusted net income of $11.6 million, or $0.18 per Adjusted Diluted Share(2)

Year to Date 2019 Highlights

  • Average daily production of 12,033 Boepd(1)
  • Adjusted EBITDAX(2) of $95.8 million
  • Adjusted EBITDAX(2) per Boe of $29.16
  • Operating Margin(2) of $29.22 per Boe ($33.38 including realized hedge settlements)
  • Capital expenditures of $152.4 million representing 74% of guidance with expected 2019 total capital expenditures of $205 million
  • Net income of $7.2 million, or $0.12 per Adjusted Diluted Share(2)
    • Adjusted net income of $40.5 million, or $0.63 per Adjusted Diluted Share(2)

(1) Represents reported sales volumes.

(2) Adjusted EBITDAX, Operating Margin, Adjusted Net Income and Adjusted Diluted Shares are non-GAAP financial measures. See “Reconciliation of Non-GAAP Financial Measures” section below.

Management Comments

Robert J. Anderson, President of Earthstone Energy, Inc., commented, “We are off to a great start to the 2019 fourth quarter as our third quarter production was almost 12,200 Boepd with minimal contribution from the five operated wells brought online late in the quarter. During the quarter, we benefited from shallower production declines and reduced production downtime. The five operated Mid-States wells brought online in late September have shown promising results thus far, setting the stage for significant production growth in the fourth quarter.

“Our back-end weighted capital program is driving a substantial increase in fourth quarter production with eight gross operated Midland Basin wells already online out of our remaining 14 gross operated Midland Basin completions planned for the second half of 2019, and seven of our 10 gross operated 2019 Eagle Ford wells are online with the remaining three expected to come online during the fourth quarter. We also expect recently completed non-operated wells to have a meaningful impact on our production levels.

“With the contributions of recent and upcoming wells, we expect to be at the high end of our production exit rate of 15,000 Boepd. From an operational standpoint, our drilling and completions activities have remained on schedule, and we continue to focus on both cost and operating efficiencies in our effort to drive stronger well level returns and, ultimately, shareholder value. Based on current commodity prices and a one-rig operated program in 2020, we believe our operating cash flows will exceed our capital expenditures in the second half of 2020.”

Operational Update

Midland Basin

We ran two rigs and one frac crew in the Midland Basin during the third quarter. Highlights include:

  • Spudded 11 gross (8.7 net) operated wells and completed eight gross (5.3 net) wells
    • Continue to run one rig, currently located in Reagan County, on the WTG prospect (100% working interest)
  • Completed and brought online five-well Mid-States project (67% working interest) with 10,000-foot laterals targeting the Wolfcamp A and B intervals which have achieved an average peak 30-day production rate of 1,290 Boepd (88% oil)
  • Completed a three-well pad on our TSRH unit (65% working interest) targeting two wells in the Wolfcamp B Upper formation and one well in the Wolfcamp B Lower formation, each with approximately 12,000-foot laterals
    • TSRH wells brought online in October and are cleaning-up as expected
  • Expect to bring online an additional six gross (4.4 net) operated wells in Reagan County during the fourth quarter
  • Three gross (1.2 net) non-operated wells were brought online in Howard County averaging approximately 10,000-foot laterals
    • Wolfcamp A well (40% working interest) achieved a peak 30-day production rate of 2,381 Boepd (88% oil)
    • Two Wolfcamp D wells (40% and 35% working interest) have achieved average peak 30-day production rate of 969 Boepd (86% oil)

Eagle Ford

We ran one rig and commenced completion activity in the Eagle Ford during the third quarter. Highlights include:

  • Completed drilling on four gross (1.8 net) wells on our Pen Ranch project area and spudded an additional three gross (2.0 net) wells on the Davis East project area
  • Completed three gross (1.3 net) wells that were drilled but uncompleted as of the end of second quarter and commenced completions on the remaining four gross (1.8 net) wells on the Pen Ranch project area
    • Pen Ranch seven-well project (3.1 net) began producing in October with the wells currently cleaning-up
  • We finished drilling and expect to complete and bring online the three gross (2.0 net) wells in the Davis East project near the end of the fourth quarter

Selected Financial Data (unaudited)

 

($000s except where noted)

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2019

2018

 

2019

2018

Total Revenues

39,204

 

46,076

 

 

124,474

 

124,121

 

 

 

 

 

 

 

 

 

Lease operating expense

7,259

 

4,843

 

 

22,531

 

14,509

 

 

 

 

 

 

 

 

 

General and administrative expense (excluding stock-based compensation)

4,023

 

3,422

 

 

13,848

 

13,274

 

Stock-based compensation (non-cash)

2,207

 

1,522

 

 

6,680

 

5,535

 

General and administrative expense

6,230

 

4,944

 

 

20,528

 

18,809

 

 

 

 

 

 

 

 

 

Net income

26,127

 

564

 

 

7,220

 

14,227

 

Less: Net income attributable to noncontrolling interest

14,357

 

340

 

 

3,877

 

8,032

 

Net income attributable to Earthstone Energy, Inc.

11,770

 

224

 

 

3,343

 

6,195

 

Net income per common share(1)

 

 

 

 

 

 

 

Basic

0.41

 

0.01

 

 

0.12

 

 

0.22

 

Diluted

0.41

 

0.01

 

 

0.12

 

 

0.22

 

Adjusted EBITDAX(2)

29,790

 

26,443

 

 

95,799

 

(5

)

72,239

 

 

 

 

 

 

 

 

 

Production(3):

 

 

 

 

 

 

 

Oil (MBbls)

646

 

 

645

 

 

2,027

 

 

1,696

 

Gas (MMcf)

1,248

 

 

947

 

 

3,318

 

 

2,883

 

NGL (MBbls)

267

 

 

188

 

 

705

 

 

489

 

Total (MBoe)(4)

1,121

 

 

991

 

 

3,285

 

 

2,665

 

Average Daily Production (Boepd)

12,181

 

 

10,766

 

 

12,033

 

 

9,762

 

Average Prices:

 

 

 

 

 

 

 

Oil ($/Bbl)

54.89

 

 

60.12

 

 

55.08

 

 

61.97

 

Gas ($/Mcf)

0.72

 

 

1.89

 

 

0.64

 

 

2.17

 

NGL ($/Bbl)

10.71

 

 

29.31

 

 

15.17

 

 

26.10

 

Total ($/Boe)

34.98

 

 

46.52

 

 

37.89

 

 

46.57

 

Adj. for Realized Derivatives Settlements:

 

 

 

 

 

 

 

Oil ($/Bbl)(5)

59.43

 

53.30

 

 

60.42

 

53.82

 

Gas ($/Mcf)(5)

1.34

 

1.92

 

 

1.49

 

2.23

 

NGL ($/Bbl)

10.71

 

29.31

 

 

15.17

 

26.10

 

Total ($/Boe)(5)

38.29

 

42.10

 

 

42.05

 

41.45

 

Operating Margin per Boe

 

 

 

 

 

 

 

Average realized price(5)

34.98

 

46.52

 

 

37.89

 

46.57

 

Lease operating expense

6.48

 

4.89

 

 

6.86

 

5.44

 

Severance taxes

1.66

 

2.28

 

 

1.81

 

2.29

 

Operating margin per Boe

26.84

 

39.35

 

 

29.22

 

38.84

 

Realized hedge settlements

3.31

 

(4.42

)

 

4.16

 

(5.12

)

Operating margin per Boe (including realized hedge settlements)

30.15

 

34.93

 

 

33.38

 

33.72

 

(1) Net income per common share attributable to Earthstone Energy, Inc.

(2) See “Reconciliation of Non-GAAP Financial Measures” section below.

(3) Represents reported sales volumes.

(4) Barrels of oil equivalent have been calculated on the basis of six thousand cubic feet (Mcf) of natural gas equals one barrel of oil equivalent (Boe).

(5) Includes $2.1 million of cash proceeds related to hedges unwound during the first quarter of 2019.

Liquidity Update

As of September 30, 2019, we had $9.8 million in cash and $125.0 million of long-term debt outstanding under our credit facility with a borrowing base of $325 million. With the $200 million of undrawn borrowing base capacity and $9.8 million in cash, we had total liquidity of approximately $209.8 million. However, our working capital deficit increased during the third quarter, largely based on timing of our drilling and completion activities and the high level of activity we had in process at quarter end. We expect this working capital deficit to decrease and outstanding borrowings under our credit facility to increase over the remainder of 2019.

Conference Call Details

Earthstone is hosting a conference call on Thursday, November 7, 2019 at 12:00 p.m. Eastern (11:00 a.m. Central) to discuss the Company’s financial results for the third quarter of 2019 and its outlook for the remainder of 2019. Prepared remarks by Frank A. Lodzinski, Chief Executive Officer, Robert J. Anderson, President, and Mark Lumpkin, Jr., Executive Vice President and Chief Financial Officer will be followed by a question and answer session.

Investors and analysts are invited to participate in the call by dialing 877-407-6184 for domestic calls or 201-389-0877 for international calls, in both cases asking for the Earthstone conference call. A webcast will also be available through the Company website (www.earthstoneenergy.com). Please select "Events & Presentations" under the "Investors" section of the Company's website and log on at least 10 minutes in advance to register.

A replay of the call and webcast will be available on the Company’s website and by telephone until 12:00 p.m. Eastern (11:00 a.m. Central), Thursday, November 21, 2019. The number for the replay is 877-660-6853 for domestic calls or 201-612-7415 for international calls, using Replay ID: 13696190.

About Earthstone Energy, Inc.

Earthstone Energy, Inc. is a growth-oriented, independent energy company engaged in development and operation of oil and natural gas properties. The Company’s primary assets are in the Midland Basin of west Texas and the Eagle Ford Trend of south Texas. Earthstone is traded on NYSE under the symbol “ESTE.” For more information, visit the Company’s website at www.earthstoneenergy.com.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are not strictly historical statements constitute forward-looking statements and may often, but not always, be identified by the use of such words such as “expects,” “believes,” “intends,” “anticipates,” “plans,” “estimates,” “forecast,” “guidance,” “target,” “potential,” “possible,” or “probable” or statements that certain actions, events or results “may,” “will,” “should,” or “could” be taken, occur or be achieved. Forward-looking statements are based on current expectations and assumptions and analyses made by Earthstone and its management in light of experience and perception of historical trends, current conditions and expected future developments, as well as other factors appropriate under the circumstances that involve various risks and uncertainties that could cause actual results to differ materially from those reflected in the statements. These risks include, but are not limited to, those set forth in Earthstone’s annual report on Form 10-K for the year ended December 31, 2018, quarterly reports on Form 10-Q, recent current reports on Form 8-K, and other Securities and Exchange Commission (“SEC”) filings. Earthstone undertakes no obligation to revise or update publicly any forward-looking statements except as required by law.

 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

September 30,

 

December 31,

ASSETS

 

2019

 

2018

Current assets:

 

 

 

 

Cash

 

$

 

9,816

 

 

$

 

376

 

Accounts receivable:

 

 

 

 

Oil, natural gas, and natural gas liquids revenues

 

 

14,990

 

 

 

13,683

 

Joint interest billings and other, both net of allowance of $134

 

 

8,001

 

 

 

4,166

 

Derivative asset

 

 

20,179

 

 

 

43,888

 

Prepaid expenses and other current assets

 

 

2,488

 

 

 

1,443

 

Total current assets

 

 

55,474

 

 

 

63,556

 

 

 

 

 

 

Oil and gas properties, successful efforts method:

 

 

 

 

Proved properties

 

 

904,323

 

 

 

755,443

 

Unproved properties

 

 

269,417

 

 

 

266,140

 

Land

 

 

5,382

 

 

 

5,382

 

Total oil and gas properties

 

 

1,179,122

 

 

 

1,026,965

 

 

 

 

 

 

Accumulated depreciation, depletion and amortization

 

 

(168,988

)

 

 

(127,256

)

Net oil and gas properties

 

 

1,010,134

 

 

 

899,709

 

 

 

 

 

 

Other noncurrent assets:

 

 

 

 

Goodwill

 

 

17,620

 

 

 

17,620

 

Office and other equipment, net of accumulated depreciation and amortization of $3,033 and $2,490 at September 30, 2019 and December 31, 2018, respectively

 

 

1,350

 

 

 

662

 

Derivative asset

 

 

9,246

 

 

 

21,121

 

Operating lease right-of-use assets

 

 

3,295

 

 

 

Other noncurrent assets

 

 

1,532

 

 

 

1,640

 

TOTAL ASSETS

 

$

 

1,098,651

 

 

$

 

1,004,308

 

LIABILITIES AND EQUITY

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

 

$

 

37,405

 

 

$

 

26,452

 

Revenues and royalties payable

 

 

19,706

 

 

 

28,748

 

Accrued expenses

 

 

35,604

 

 

 

22,406

 

Asset retirement obligation

 

 

420

 

 

 

557

 

Advances

 

 

20,894

 

 

 

3,174

 

Derivative liability

 

 

137

 

 

 

528

 

Operating lease liabilities

 

 

586

 

 

 

Finance lease liabilities

 

 

256

 

 

 

Total current liabilities

 

 

115,008

 

 

 

81,865

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

Long-term debt

 

 

125,000

 

 

 

78,828

 

Deferred tax liability

 

 

14,217

 

 

 

13,489

 

Asset retirement obligation

 

 

1,833

 

 

 

1,672

 

Derivative liability

 

 

29

 

 

 

1,891

 

Operating lease liabilities

 

 

2,722

 

 

 

Finance lease liabilities

 

 

111

 

 

 

Other noncurrent liabilities

 

 

 

 

71

 

Total noncurrent liabilities

 

 

143,912

 

 

 

95,951

 

 

 

 

 

 

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; 29,150,220 and 28,696,321 issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

29

 

 

 

29

 

Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 35,416,446 and 35,452,178 issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

35

 

 

 

35

 

Additional paid-in capital

 

 

523,402

 

 

 

517,073

 

Accumulated deficit

 

 

(179,087

)

 

 

(182,497

)

Total Earthstone Energy, Inc. equity

 

 

344,379

 

 

 

334,640

 

Noncontrolling interest

 

 

495,352

 

 

 

491,852

 

Total equity

 

 

839,731

 

 

 

826,492

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

 

1,098,651

 

 

$

 

1,004,308

 

 

 

 

 

 

 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2019

 

2018

 

2019

 

2018

REVENUES

 

 

 

 

Oil

 

$

35,443

 

 

$

38,791

 

 

$

111,657

 

 

$

105,111

 

Natural gas

 

903

 

 

1,790

 

 

2,126

 

 

6,257

 

Natural gas liquids

 

2,858

 

 

5,495

 

 

10,691

 

 

12,753

 

Total revenues

 

39,204

 

 

46,076

 

 

124,474

 

 

124,121

 

 

 

 

 

 

 

 

 

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Lease operating expense

 

7,259

 

 

4,843

 

 

22,531

 

 

14,509

 

Severance taxes

 

1,858

 

 

2,254

 

 

5,955

 

 

6,115

 

Impairment expense

 

 

 

833

 

 

 

 

833

 

Depreciation, depletion and amortization

 

14,079

 

 

12,842

 

 

42,281

 

 

33,362

 

General and administrative expense

 

6,230

 

 

4,944

 

 

20,528

 

 

18,809

 

Transaction costs

 

42

 

 

892

 

 

217

 

 

892

 

Accretion of asset retirement obligation

 

52

 

 

44

 

 

160

 

 

128

 

Total operating costs and expenses

 

29,520

 

 

26,652

 

 

91,672

 

 

74,648

 

 

 

 

 

 

 

 

 

 

(Loss) gain on sale of oil and gas properties

 

(120

)

 

4,096

 

 

(446

)

 

4,608

 

 

 

 

 

 

 

 

 

 

Income from operations

 

9,564

 

 

23,520

 

 

32,356

 

 

54,081

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Interest expense, net

 

(1,609

)

 

(565

)

 

(4,735

)

 

(1,788

)

Gain (loss) on derivative contracts, net

 

18,726

 

 

(17,481

)

 

(19,672

)

 

(33,606

)

Litigation settlement

 

 

 

(4,775

)

 

 

 

(4,775

)

Other (expense) income, net

 

21

 

 

37

 

 

(1

)

 

434

 

Total other income (expense)

 

17,138

 

 

(22,784

)

 

(24,408

)

 

(39,735

)

 

 

 

 

 

 

 

 

 

Income before income taxes

 

26,702

 

 

736

 

 

7,948

 

 

14,346

 

Income tax expense

 

(575

)

 

(172

)

 

(728

)

 

(119

)

Net income

 

26,127

 

 

564

 

 

7,220

 

 

14,227

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

14,357

 

 

340

 

 

3,877

 

 

8,032

 

 

 

 

 

 

 

 

 

 

Net income attributable to Earthstone Energy, Inc.

 

$

11,770

 

 

$

224

 

 

$

3,343

 

 

$

6,195

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Basic

 

$

0.41

 

 

$

0.01

 

 

$

0.12

 

 

$

0.22

 

Diluted

 

$

0.41

 

 

$

0.01

 

 

$

0.12

 

 

$

0.22

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

29,032,842

 

 

28,257,376

 

 

28,883,907

 

 

28,011,298

 

Diluted

 

29,032,842

 

 

28,311,759

 

 

28,883,907

 

 

28,108,365

 

 

 

 

 

 

 

 

 

 

 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

 

 

 

 

For the Nine Months Ended
September 30,

 

 

2019

 

2018

Cash flows from operating activities:

 

 

Net income

 

$

 

7,220

 

 

$

 

14,227

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Impairment of proved and unproved oil and gas properties

 

 

 

 

833

 

Depreciation, depletion and amortization

 

 

42,281

 

 

 

33,362

 

Accretion of asset retirement obligations

 

 

160

 

 

 

128

 

Settlement of asset retirement obligations

 

 

(179

)

 

 

(79

)

Loss (gain) on sale of oil and gas properties

 

 

446

 

 

 

(4,608

)

Total loss on derivative contracts, net

 

 

19,672

 

 

 

33,606

 

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

 

 

13,660

 

 

 

(13,643

)

Stock-based compensation

 

 

6,680

 

 

 

5,535

 

Deferred income taxes

 

 

728

 

 

 

119

 

Amortization of deferred financing costs

 

 

336

 

 

 

228

 

Changes in assets and liabilities:

 

 

 

 

(Increase) decrease in accounts receivable

 

 

(5,585

)

 

 

(1,476

)

(Increase) decrease in prepaid expenses and other current assets

 

 

(28

)

 

 

(372

)

Increase (decrease) in accounts payable and accrued expenses

 

 

(8,330

)

 

 

3,939

 

Increase (decrease) in revenues and royalties payable

 

 

(9,042

)

 

 

26,572

 

Increase (decrease) in advances

 

 

17,720

 

 

 

(1,816

)

Net cash provided by operating activities

 

 

85,739

 

 

 

96,555

 

Cash flows from investing activities:

 

 

 

 

Additions to oil and gas properties

 

 

(120,685

)

 

 

(120,124

)

Additions to office and other equipment

 

 

(379

)

 

 

(121

)

Proceeds from sales of oil and gas properties

 

 

2

 

 

 

5,840

 

Net cash used in investing activities

 

 

(121,062

)

 

 

(114,405

)

Cash flows from financing activities:

 

 

 

 

Proceeds from borrowings

 

 

165,272

 

 

 

70,308

 

Repayments of borrowings

 

 

(119,099

)

 

 

(60,308

)

Cash paid related to the exchange and cancellation of Class A Common Stock

 

 

(827

)

 

 

(1,402

)

Cash paid for finance leases

 

 

(355

)

 

 

Deferred financing costs

 

 

(228

)

 

 

(274

)

Net cash provided by financing activities

 

 

44,763

 

 

 

8,324

 

Net increase (decrease) in cash

 

 

9,440

 

 

 

(9,526

)

Cash at beginning of period

 

 

376

 

 

 

22,955

 

Cash at end of period

 

$

 

9,816

 

 

$

 

13,429

 

Supplemental disclosure of cash flow information

 

 

 

 

Cash paid for:

 

 

 

 

Interest

 

$

 

4,235

 

 

$

 

1,480

 

Non-cash investing and financing activities:

 

 

 

 

Accrued capital expenditures

 

$

 

50,615

 

 

$

 

11,314

 

Lease asset additions - ASC 842

 

$

 

4,710

 

 

$

 

 

Asset retirement obligations

 

$

 

43

 

 

$

 

(120

)

Earthstone Energy, Inc.
Reconciliation of Non-GAAP Financial Measures
Unaudited

The non-GAAP financial measures of Adjusted Diluted Shares, Adjusted EBITDAX, Adjusted Net Income and Operating Margin, as defined and calculated by us below, are intended to provide readers with meaningful information that supplements our financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Further, these non-GAAP measures should only be considered in conjunction with financial statements and disclosures prepared in accordance with GAAP and should not be considered in isolation or as a substitute for GAAP measures, such as net income or loss, operating income or loss or any other GAAP measure of financial position or results of operations. Adjusted EBITDAX and Adjusted Net Income are presented herein and reconciled from the GAAP measure of net income because of its wide acceptance by the investment community as a financial indicator.

I. Adjusted Diluted Shares

We define “Adjusted Diluted Shares” as the weighted average shares of Class A Common Stock - Diluted outstanding plus the weighted average shares of Class B Common Stock outstanding.

Our Adjusted Diluted Shares measure provides a comparable per share measurement when presenting results such as Adjusted EBITDAX and Adjusted Net Income that include the interests of both Earthstone and the noncontrolling interest. Adjusted Diluted Shares is used in calculating several metrics that we use as supplemental financial measurements in the evaluation of our business, none of which should be considered as an alternative to, or more meaningful than, net income as an indicator of operating performance.

Adjusted Diluted Shares for the periods indicated:

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2019

 

2018

 

2019

 

2018

Class A Common Stock - Diluted

29,032,842

 

 

28,311,759

 

 

28,883,907

 

 

28,108,365

 

Class B Common Stock

35,416,446

 

 

35,722,482

 

 

35,430,594

 

 

35,825,070

 

Adjusted Diluted Shares

64,449,288

 

 

64,034,241

 

 

64,314,501

 

 

63,933,435

 

 

 

 

 

 

 

 

 

II. Adjusted EBITDAX

We define “Adjusted EBITDAX” as net income plus, when applicable, accretion of asset retirement obligations; impairment expense; depletion, depreciation and amortization; interest expense, net; transaction costs; loss (gain) on sale of oil and gas properties; unrealized (gain) loss on derivatives; stock-based compensation; and income tax expense.

Our Adjusted EBITDAX measure provides additional information that may be used to better understand our operations. Adjusted EBITDAX is one of several metrics that we use as a supplemental financial measurement in the evaluation of our business and should not be considered as an alternative to, or more meaningful than, net income as an indicator of operating performance. Certain items excluded from Adjusted EBITDAX are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic cost of depreciable and depletable assets. Adjusted EBITDAX, as used by us, may not be comparable to similarly titled measures reported by other companies. We believe that Adjusted EBITDAX is a widely followed measure of operating performance and is one of many metrics used by our management team and by other users of our consolidated financial statements. For example, Adjusted EBITDAX can be used to assess our operating performance and return on capital in comparison to other independent exploration and production companies without regard to financial or capital structure and to assess the financial performance of our assets and our company without regard to capital structure or historical cost basis.

The following table provides a reconciliation of Net income to Adjusted EBITDAX for the periods indicated:

($000s)

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2019

 

2018

 

2019

 

2018

Net income

26,127

 

 

564

 

 

7,220

 

 

14,227

 

Accretion of asset retirement obligations

52

 

 

44

 

 

160

 

 

128

 

Impairment expense

 

 

833

 

 

 

 

833

 

Depletion, depreciation and amortization

14,079

 

 

12,842

 

 

42,281

 

 

33,362

 

Interest expense, net

1,609

 

 

565

 

 

4,735

 

 

1,788

 

Transaction costs

42

 

 

892

 

 

217

 

 

892

 

Loss (gain) on sale of oil and gas properties

120

 

 

(4,096

)

 

446

 

 

(4,608

)

Unrealized (gain) loss on derivative contracts

(15,021

)

 

13,105

 

 

33,332

 

 

19,963

 

Stock based compensation (non-cash)(1)

2,207

 

 

1,522

 

 

6,680

 

 

5,535

 

Income tax expense

575

 

 

172

 

 

728

 

 

119

 

Adjusted EBITDAX

29,790

 

 

26,443

 

 

95,799

 

 

72,239

 

Total production (MBoe)(2)(3)

1,121

 

 

991

 

 

3,285

 

 

2,665

 

Adjusted EBITDAX per Boe

26.58

 

 

26.68

 

 

29.16

 

 

27.11

 

 

 

 

 

 

 

 

 

(1) Included in General and administrative expense in the Condensed Consolidated Statements of Operations.

(2) Represents reported sales volumes.

(3) Barrels of oil equivalent have been calculated on the basis of six thousand cubic feet (Mcf) of natural gas equals one barrel of oil equivalent (Boe).

III. Adjusted Net Income

We define “Adjusted Net Income” as net income plus, when applicable, unrealized (gain) loss on derivative contracts; impairment expense; loss (gain) on sale of oil and gas properties; transaction costs; and the associated changes in estimated income tax.

Our Adjusted Net Income measure provides additional information that may be used to further understand our operations. Adjusted Net Income is one of several metrics that we use as a supplemental financial measurement in the evaluation of our business and should not be considered as an alternative to, or more meaningful than, net income as an indicator of operating performance. Certain items excluded from Adjusted Net Income are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic cost of depreciable and depletable assets. Adjusted Net Income, as used by us, may not be comparable to similarly titled measures reported by other companies. We believe that Adjusted Net Income is a widely followed measure of operating performance and is one of many metrics used by our management team and by other users of our consolidated financial statements. For example, Adjusted Net Income can be used to assess our operating performance and return on capital in comparison to other independent exploration and production companies without regard to financial or capital structure and to assess the financial performance of our assets and our company without regard to capital structure or historical cost basis.

The following table provides a reconciliation of Net income to Adjusted Net Income for the periods indicated:

($000s)

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2019

 

2018

 

2019

 

2018

Net income

26,127

 

 

564

 

 

7,220

 

 

14,227

 

Unrealized (gain) loss on derivative contracts

(15,021

)

 

13,105

 

 

33,332

 

 

19,963

 

Impairment expense

 

 

833

 

 

 

 

833

 

Loss (gain) on sale of oil and gas properties

120

 

 

(4,096

)

 

446

 

 

(4,608

)

Transaction costs

42

 

 

892

 

 

217

 

 

892

 

Income tax effect of the above

305

 

 

(203

)

 

(698

)

 

(324

)

Adjusted Net Income

11,573

 

 

11,095

 

 

40,517

 

 

30,983

 

Adjusted Diluted Shares

64,449,288

 

 

64,034,241

 

 

64,314,501

 

 

63,933,435

 

Adjusted Net Income per Adjusted Diluted Share

0.18

 

 

0.17

 

 

0.63

 

 

0.48

 

 

 

 

 

 

 

 

 

IV. Operating Margin

We define “Operating Margin” as total revenues less lease operating expenses and severance taxes.

Our Operating Margin measure provides additional information that may be used to further understand our operations. We use Operating Margin as a supplemental financial measurement in the evaluation of our operational performance. We believe that investors benefit from having access to the same financial measures that our management uses in evaluating our results. Operating Margin should not be considered as an alternative to, or more meaningful than, net income (loss) as an indicator of operating performance. Operating Margin, as used by us, may not be comparable to similarly titled measures reported by other companies.

Operating Margin for the periods indicated:

(000's)

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2019

 

2018

 

2019

 

2018

Total revenues

39,204

 

 

46,076

 

 

124,474

 

 

124,121

 

Less: Lease operating expense

7,259

 

 

4,843

 

 

22,531

 

 

14,509

 

Less: Severance taxes

1,858

 

 

2,254

 

 

5,955

 

 

6,115

 

Operating Margin

30,087

 

 

38,979

 

 

95,988

 

 

103,497

 

Total production (MBoe)(1)(2)

1,121

 

 

991

 

 

3,285

 

 

2,665

 

Operating Margin per Boe

26.84

 

 

39.35

 

 

29.22

 

 

38.84

 

 

 

 

 

 

 

 

 

(1) Represents reported sales volumes.

(2) Barrels of oil equivalent have been calculated on the basis of six thousand cubic feet (Mcf) of natural gas equals one barrel of oil equivalent (Boe).

 

Mark Lumpkin, Jr.
Executive Vice President – Chief Financial Officer
Earthstone Energy, Inc.
1400 Woodloch Forest Drive, Suite 300
The Woodlands, TX 77380
281-298-4246
mark.lumpkin@earthstoneenergy.com

Scott Thelander
Vice President of Finance
Earthstone Energy, Inc.
1400 Woodloch Forest Drive, Suite 300
The Woodlands, TX 77380
281-298-4246
scott@earthstoneenergy.com

Source: Earthstone Energy, Inc.

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