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Earthstone Energy, Inc. Reports 2019 Fourth Quarter and Full Year Results with Company Record Sales Volumes and Adjusted EBITDAX

03/11/2020

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 year ended December 31, 2019.

Fourth Quarter 2019 Highlights

  • Average daily production of 17,571 Boepd(1)
  • Adjusted EBITDAX(2) of $49.9 million ($30.86 per Boe)
  • All-in cash costs(2) of $12.12 per Boe
  • Capital expenditures of $58.0 million
  • Net loss of $5.6 million or $0.09 per Adjusted Diluted Share(2)
    • Adjusted net income of $18.2 million or $0.28 per Adjusted Diluted Share(2)

Full Year 2019 Highlights

  • Average daily production of 13,429 Boepd(1)
  • Adjusted EBITDAX(2) of $146.3 million ($29.84 per Boe)
  • All-in cash costs(2) of $13.48 per Boe
  • Capital expenditures of $210.4 million
  • Net income of $1.6 million or $0.02 per Adjusted Diluted Share(2)
    • Adjusted net income of $59.3 million or $0.92 per Adjusted Diluted Share(2)
  • Estimated Proved Developed reserves increased 33% over year-end 2018

(1) Represents reported sales volumes.
(2) See “Non-GAAP Financial Measures” section below.

Management Comments

Mr. Robert J. Anderson, President of Earthstone, commented, “Our team performed exceptionally well in 2019 culminating in record levels of production and Adjusted EBITDAX for both the fourth quarter and full year 2019. Our focus on cost control and operational execution throughout our organization demonstrates our ability to drive peer-leading margins and improved capital efficiency thereby extracting value from our assets. By diligently focusing on efficiency in 2019, we reduced drilling and completion costs by approximately 16% and cash G&A and LOE costs per Boe by 11% while increasing production 35% and Adjusted EBITDAX 51% compared to 2018.”

Mr. Anderson commented further, “We are facing a challenging commodity price environment given the recent rapid and steep decline in oil prices. Our conservative approach to the use of leverage, strong hedge book and sharp focus on being a low-cost producer positions us well to manage the current environment. We also have no long-term service contracts and minimal obligation drilling which gives us the flexibility to significantly curtail our capital program, which we are and will continue to evaluate in the near term. Based on our production profile, cost structure and hedge position, should we significantly curtail our capital program, we expect to generate free cash flow and would utilize free cash flow to reduce debt. With our financial discipline and strong foundation, we have managed through difficult commodity price cycles in the past and we are well positioned to do so in the future.”

Capital Program Update

With recent price volatility, we are evaluating our capital program and have significant flexibility with these plans. Should we curtail capital spending considerably, we would expect to generate free cash flow in the second half of 2020.

Selected Financial Data (unaudited)

($000s except where noted)

Three Months Ended

 

Years Ended

 

December 31,

 

December 31,

 

2019

 

2018

 

2019

 

2018

Total revenues

$

66,788

 

 

$

41,235

 

 

$

191,262

 

 

$

165,356

 

 

 

 

 

 

 

 

 

Lease operating expense

8,198

 

 

5,175

 

 

28,683

 

 

18,746

 

 

 

 

 

 

 

 

 

General and administrative expense (excluding stock-based compensation)

5,696

 

 

7,534

 

 

18,963

 

 

20,275

 

Stock-based compensation (non-cash)

1,968

 

 

1,536

 

 

8,648

 

 

7,071

 

General and administrative expense

$

7,664

 

 

$

9,070

 

 

$

27,611

 

 

$

27,346

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(5,640

)

 

$

80,986

 

 

$

1,580

 

 

$

95,213

 

Less: Net (loss) income attributable to noncontrolling interest

(3,016

)

 

44,856

 

 

861

 

 

52,888

 

Net (loss) income attributable to Earthstone Energy, Inc.

(2,624

)

 

36,130

 

 

719

 

 

42,325

 

Net (loss) income per common share(1)

 

 

 

 

 

 

 

Basic

(0.09

)

 

1.26

 

 

0.02

 

 

1.50

 

Diluted

(0.09

)

 

1.26

 

 

0.02

 

 

1.50

 

Adjusted EBITDAX(2)

$

49,893

 

 

$

24,208

 

 

$

146,273

 

 

$

96,981

 

 

 

 

 

 

 

 

 

Production(3):

 

 

 

 

 

 

 

Oil (MBbls)

1,059

 

 

674

 

 

3,086

 

 

2,370

 

Gas (MMcf)

1,442

 

 

728

 

 

4,760

 

 

3,610

 

NGL (MBbls)

317

 

 

167

 

 

1,022

 

 

655

 

Total (MBoe)(4)

1,617

 

 

962

 

 

4,902

 

 

3,627

 

Average Daily Production (Boepd)

17,571

 

 

10,454

 

 

13,429

 

 

9,937

 

Average Prices:

 

 

 

 

 

 

 

Oil ($/Bbl)

56.92

 

 

52.92

 

 

55.71

 

 

59.40

 

Gas ($/Mcf)

1.24

 

 

1.57

 

 

0.82

 

 

2.05

 

NGL ($/Bbl)

14.92

 

 

26.60

 

 

15.09

 

 

26.23

 

Total ($/Boe)

41.31

 

 

42.87

 

 

39.02

 

 

45.59

 

Adj. for Realized Derivatives Settlements:

 

 

 

 

 

 

 

Oil ($/Bbl)

58.67

 

 

51.40

 

 

59.82

 

 

53.13

 

Gas ($/Mcf)

1.48

 

 

0.98

 

 

1.49

 

 

1.98

 

NGL ($/Bbl)

14.92

 

 

26.60

 

 

15.09

 

 

26.23

 

Total ($/Boe)

42.68

 

 

41.37

 

 

42.26

 

 

41.43

 

Operating Margin per Boe

 

 

 

 

 

 

 

Average realized price(5)

$

41.31

 

 

$

42.87

 

 

$

39.02

 

 

$

45.59

 

Lease operating expense

5.07

 

 

5.38

 

 

5.85

 

 

5.17

 

Production and ad valorem taxes

2.39

 

 

2.89

 

 

2.42

 

 

2.71

 

Operating margin per Boe

33.85

 

 

34.60

 

 

30.75

 

 

37.71

 

Realized hedge settlements

1.37

 

 

(1.50

)

 

3.24

 

 

(4.16

)

Operating margin per Boe (including realized hedge settlements)

$

35.22

 

 

$

33.10

 

 

$

33.99

 

 

$

33.55

 

(1)

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

(2)

See “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.

Financial Position

On November 21, 2019, we entered into a new credit agreement with respect to our senior secured revolving credit facility (the “Credit Facility”). The Credit Facility has a maturity date of November 21, 2024 with a maximum credit amount of $1.5 billion and an initial borrowing base of $325 million. The Credit Agreement replaced the prior credit agreement, which was terminated on November 21, 2019. At December 31, 2019, the Company had outstanding borrowings under its Credit Facility of $170.0 million and a cash balance of approximately $13.8 million.

Capital Expenditures

During 2019, we incurred capital expenditures of approximately $210.4 million, on an accrual basis, primarily consisting of drilling and completion costs.

Hedge Position

In 2020, we have 78% of the midpoint of our oil production guidance, or 8,000 barrels of oil per day, hedged at a WTI price of $60.31/Bbl. The following table presents our outstanding derivative contracts at December 31, 2019. When aggregating multiple contracts, the weighted average contract price is shown.

As of December 31, 2019:

 

 

 

 

 

 

Period

 

Commodity

 

Volume

(Bbls / MMBtu)

 

Price

($/Bbl / $/MMBtu)

2020

 

Crude Oil Swap

 

2,928,000

 

$60.31

2020

 

Crude Oil Basis Swap (1)

 

366,000

 

$2.55

2020

 

Crude Oil Basis Swap (2)

 

2,562,000

 

$(1.40)

2020

 

Natural Gas Swap

 

2,562,000

 

$2.85

2020

 

Natural Gas Basis Swap (3)

 

2,562,000

 

$(1.07)

2021

 

Crude Oil Swap

 

1,095,000

 

$55.00

2021

 

Crude Oil Basis Swap (2)

 

1,095,000

 

$0.89

(1)

 

The basis differential price is between WTI Houston and the WTI NYMEX.

(2)

 

The basis differential price is between WTI Midland Argus Crude and the WTI NYMEX.

(3)

 

The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.

Estimated Proved Reserves

As shown in the table below, the Company’s estimated proved reserves at year-end 2019, which were prepared in accordance with Securities and Exchange Commission (“SEC”) guidelines by Cawley, Gillespie & Associates, Inc. (“CGA”), an independent petroleum engineering firm, were approximately 94.3 million barrels of oil equivalent (“MMBoe”).

Year-End 2019 SEC Estimated Proved Reserves

 

 

Oil

 

Gas

 

NGL

 

Total

 

PV-10

Reserve Category

 

(MBbls)

 

(MMcf)

 

(MBbls)

 

(MBoe)

 

($ in thousands)

Proved Developed

 

18,220

 

35,120

 

7,447

 

31,521

 

$448,533

Proved Undeveloped

 

34,430

 

72,870

 

16,241

 

62,815

 

371,459

Total

 

52,650

 

107,990

 

23,688

 

94,336

 

$819,992

Note: PV-10 is a non-GAAP financial measure. See “Non-GAAP Financial Measures.”

In 2019, the Company added approximately 5.1 MMBoe of proved reserves through drilling and completion activities representing approximately 103% of 2019 production of 4.9 MMBoe.

Changes in our estimated proved reserves for the year ended December 31, 2019 were as follows:

 

Total
(MMBoe)

Proved Reserves at December 31, 2018

98.8

Extensions and discoveries

5.1

Sales of mineral in place

(0.1)

Production

(4.9)

Revision to previous estimates due to price

(5.5)

Revision to previous estimates other than price

0.9

Proved Reserves at December 31, 2019

94.3

SEC rules require that calculations of economically recoverable reserves use the unweighted average price on the first day of the month for the prior twelve-month period. The resulting oil and natural gas prices used for the Company’s 2019 year-end reserve report, prior to adjusting for quality and basis differentials, were $55.69 per barrel and $2.58 per million British Thermal Units (“MMBtu”), respectively. SEC prices net of differentials were $52.60 per barrel and $0.91 per Mcf. Price revisions were a direct result of the drop in SEC prices from year-end 2018 of $65.56 per barrel and $3.10 per MMBtu ($61.52 per barrel and $2.16 per Mcf, net of differentials).

Potential Impairment of our Oil and Gas Properties

With the recent sharp decline in oil prices, we could incur a non-cash impairment expense, which would reduce the carrying value of our oil and gas properties in 2020 if oil prices do not recover.

Conference Call Details

Earthstone is hosting a conference call on Thursday, March 12, 2020 at 11:00 a.m. Eastern (10:00 a.m. Central) to discuss the Company’s operations and financial results for the fourth quarter and full year 2019 and its outlook for 2020. 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's 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 will be available on the Company’s website and by telephone until 11:00 a.m. Eastern (10:00 a.m. Central), Thursday, March 26, 2020. The number for the replay is 877-660-6853 for domestic calls or 201-612-7415 for international calls, using Replay ID: 13699929.

About Earthstone Energy, Inc.

Earthstone Energy, Inc. is a growth-oriented, independent energy company engaged in developing and operating oil and gas properties. The Company’s assets are located in the Midland Basin of west Texas and the Eagle Ford trend of south Texas. Earthstone is listed on the 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,” “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, 2019 and other Securities and Exchange Commission 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)

 

 

December 31,

ASSETS

2019

 

2018

Current assets:

 

 

 

Cash

$

13,822

 

 

$

376

 

Accounts receivable:

 

 

 

Oil, natural gas, and natural gas liquids revenues

29,047

 

 

13,683

 

Joint interest billings and other, net of allowance of $83 and $134 at December 31, 2019 and 2018, respectively

6,672

 

 

4,166

 

Derivative asset

8,860

 

 

43,888

 

Prepaid expenses and other current assets

1,867

 

 

1,443

 

Total current assets

60,268

 

 

63,556

 

 

 

 

 

Oil and gas properties, successful efforts method:

 

 

 

Proved properties

970,808

 

 

755,443

 

Unproved properties

260,271

 

 

266,140

 

Land

5,382

 

 

5,382

 

Total oil and gas properties

1,236,461

 

 

1,026,965

 

 

 

 

 

Accumulated depreciation, depletion and amortization

(195,567

)

 

(127,256

)

Net oil and gas properties

1,040,894

 

 

899,709

 

 

 

 

 

Other noncurrent assets:

 

 

 

Goodwill

17,620

 

 

17,620

 

Office and other equipment, net of accumulated depreciation of $3,180 and $2,490 at December 31, 2019 and 2018, respectively

1,311

 

 

662

 

Derivative asset

770

 

 

21,121

 

Operating lease right-of-use assets

3,108

 

 

 

Other noncurrent assets

1,572

 

 

1,640

 

TOTAL ASSETS

$

1,125,543

 

 

$

1,004,308

 

LIABILITIES AND EQUITY

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

25,284

 

 

$

26,452

 

Revenues and royalties payable

35,815

 

 

28,748

 

Accrued expenses

19,538

 

 

22,406

 

Asset retirement obligation

308

 

 

557

 

Derivative liability

6,889

 

 

528

 

Advances

11,505

 

 

3,174

 

Operating lease liability

570

 

 

 

Finance lease liability

206

 

 

 

Other current liability

43

 

 

 

Total current liabilities

100,158

 

 

81,865

 

 

 

 

 

Noncurrent liabilities:

 

 

 

Long-term debt

170,000

 

 

78,828

 

Asset retirement obligation

1,856

 

 

1,672

 

Derivative liability

 

 

1,891

 

Deferred tax liability

15,154

 

 

13,489

 

Operating lease liability

2,539

 

 

 

Finance lease liability

85

 

 

 

Other noncurrent liabilities

 

 

71

 

Total noncurrent liabilities

189,634

 

 

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; 29,421,131 and 28,696,321 issued and outstanding at December 31, 2019 and 2018, respectively

29

 

 

29

 

Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 35,260,680 and 35,452,178 issued and outstanding at December 31, 2019 and 2018, respectively

35

 

 

35

 

Additional paid-in capital

527,246

 

 

517,073

 

Accumulated deficit

(181,711

)

 

(182,497

)

Total Earthstone Energy, Inc. equity

345,599

 

 

334,640

 

Noncontrolling interest

490,152

 

 

491,852

 

Total equity

835,751

 

 

826,492

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

$

1,125,543

 

 

$

1,004,308

 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)

 

 

Three Months Ended

 

Years Ended

 

December 31,

 

December 31,

 

2019

 

2018

 

2019

 

2018

REVENUES

 

 

 

Oil

$

60,268

 

 

$

35,664

 

 

$

171,925

 

 

$

140,775

 

Natural gas

1,787

 

 

1,139

 

 

3,913

 

 

7,396

 

Natural gas liquids

4,733

 

 

4,432

 

 

15,424

 

 

17,185

 

Total revenues

66,788

 

 

41,235

 

 

191,262

 

 

165,356

 

 

 

 

 

 

 

 

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

Lease operating expense

8,198

 

 

5,175

 

 

28,683

 

 

18,746

 

Production and ad valorem taxes

3,870

 

 

2,783

 

 

11,871

 

 

9,836

 

Impairment expense

 

 

3,748

 

 

 

 

4,581

 

Depreciation, depletion and amortization

26,962

 

 

14,206

 

 

69,243

 

 

47,568

 

General and administrative expense

7,664

 

 

9,070

 

 

27,611

 

 

27,346

 

Transaction costs

279

 

 

12,912

 

 

1,077

 

 

14,337

 

Accretion of asset retirement obligation

54

 

 

41

 

 

214

 

 

169

 

Exploration expense

653

 

 

630

 

 

653

 

 

630

 

Total operating costs and expenses

47,680

 

 

48,565

 

 

139,352

 

 

123,213

 

 

 

 

 

 

 

 

 

Gain (loss) on sale of oil and gas properties, net

3,668

 

 

(2,689

)

 

3,222

 

 

1,919

 

 

 

 

 

 

 

 

 

Income (loss) from operations

22,776

 

 

(10,019

)

 

55,132

 

 

44,062

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

Interest expense, net

(1,831

)

 

(1,110

)

 

(6,566

)

 

(2,898

)

Write-off of deferred financing costs

(1,242

)

 

 

 

(1,242

)

 

 

(Loss) gain on derivative contracts, net

(24,311

)

 

94,553

 

 

(43,983

)

 

60,947

 

Litigation settlement

 

 

100

 

 

 

 

(4,675

)

Other (expense) income, net

(95

)

 

(187

)

 

(96

)

 

247

 

Total other income (expense)

(27,479

)

 

93,356

 

 

(51,887

)

 

53,621

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

(4,703

)

 

83,337

 

 

3,245

 

 

97,683

 

Income tax expense

(937

)

 

(2,351

)

 

(1,665

)

 

(2,470

)

Net (loss) income

(5,640

)

 

80,986

 

 

1,580

 

 

95,213

 

 

 

 

 

 

 

 

 

Less: Net (loss) income attributable to noncontrolling interest

(3,016

)

 

44,856

 

 

861

 

 

52,888

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to Earthstone Energy, Inc.

$

(2,624

)

 

$

36,130

 

 

$

719

 

 

$

42,325

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Basic

$

(0.09

)

 

$

1.26

 

 

$

0.02

 

 

$

1.50

 

Diluted

$

(0.09

)

 

$

1.26

 

 

$

0.02

 

 

$

1.50

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

29,278,455

 

 

28,576,995

 

 

28,983,354

 

 

28,153,885

 

Diluted

29,278,455

 

 

28,576,995

 

 

29,360,885

 

 

28,217,774

 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

 

For the Years Ended December 31,

 

2019

 

2018

Cash flows from operating activities:

 

Net income

$

1,580

 

 

$

95,213

 

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

 

 

 

Impairment of proved and unproved oil and gas properties

 

 

4,581

 

Depreciation, depletion and amortization

69,243

 

 

47,568

 

Accretion of asset retirement obligations

214

 

 

169

 

Gain on sale of oil and gas properties, net

(3,222

)

 

(1,919

)

Settlement of asset retirement obligations

(374

)

 

(79

)

Total loss (gain) on derivative contracts, net

43,983

 

 

(60,947

)

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

15,866

 

 

(15,090

)

Stock-based compensation

8,648

 

 

7,071

 

Deferred income taxes

1,665

 

 

2,470

 

Write-off of deferred financing costs

1,242

 

 

 

Amortization of deferred financing costs

412

 

 

325

 

Changes in assets and liabilities:

 

 

 

(Increase) decrease in accounts receivable

(18,035

)

 

(8,195

)

(Increase) decrease in prepaid expenses and other current assets

66

 

 

(376

)

Increase (decrease) in accounts payable and accrued expenses

(10,438

)

 

1,132

 

Increase (decrease) in revenues and royalties payable

7,067

 

 

31,869

 

Increase (decrease) in advances

8,331

 

 

(1,413

)

Net cash provided by operating activities

126,248

 

 

102,379

 

Cash flows from investing activities:

 

 

 

Acquisition of oil and gas properties

 

 

(32,551

)

Additions to oil and gas properties

(204,268

)

 

(149,999

)

Additions to office and other equipment

(527

)

 

(170

)

Proceeds from sales of oil and gas properties

4,184

 

 

5,965

 

Net cash used in investing activities

(200,611

)

 

(176,755

)

Cash flows from financing activities:

 

 

 

Proceeds from borrowings

234,680

 

 

156,830

 

Repayments of borrowings

(143,508

)

 

(103,002

)

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

(1,135

)

 

(1,524

)

Cash paid for finance leases

(392

)

 

 

Deferred financing costs

(1,836

)

 

(507

)

Net cash provided by financing activities

87,809

 

 

51,797

 

Net increase (decrease) in cash

13,446

 

 

(22,579

)

Cash at beginning of period

376

 

 

22,955

 

Cash at end of period

$

13,822

 

 

$

376

 

Supplemental disclosure of cash flow information

 

 

 

Cash paid for:

 

 

 

Interest

$

6,405

 

 

$

2,290

 

Non-cash investing and financing activities:

 

 

 

Accrued capital expenditures

$

28,356

 

 

$

22,801

 

Lease asset additions - ASC 842

$

3,722

 

 

$

 

Asset retirement obligations

$

105

 

 

$

252

 

Earthstone Energy, Inc.
Non-GAAP Financial Measures
Unaudited

The non-GAAP financial measures of Adjusted Diluted Shares, Adjusted EBITDAX, Adjusted Net Income, All-In Cash Costs and PV-10, as defined and presented 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 (loss) 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

 

Years Ended

 

December 31,

 

December 31,

 

2019

 

2018

 

2019

 

2018

Class A Common Stock - Diluted

29,278,455

 

 

28,576,995

 

 

29,360,885

 

 

28,217,774

 

Class B Common Stock

35,288,526

 

 

35,488,849

 

 

35,395,021

 

 

35,740,324

 

Adjusted Diluted Shares

64,566,981

 

 

64,065,844

 

 

64,755,906

 

 

63,958,098

 

II. Adjusted EBITDAX

The non-GAAP financial measure of Adjusted EBITDAX (as defined below), as calculated by us below, is intended to provide readers with meaningful information that supplements our financial statements prepared in accordance with GAAP. Further, this non-GAAP measure 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 is presented herein and reconciled from the GAAP measure of net (loss) income because of its wide acceptance by the investment community as a financial indicator.

We define “Adjusted EBITDAX” as net (loss) income plus, when applicable, accretion of asset retirement obligations; impairment expense; depletion, depreciation and amortization; interest expense, net; transaction costs; (gain) loss on sale of oil and gas properties, net; exploration expense; unrealized loss (gain) on derivative contracts; stock-based compensation (non-cash); 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 (loss) 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 (loss) income to Adjusted EBITDAX for the periods indicated:

($000s)

Three Months Ended

 

Years Ended

 

December 31,

 

December 31,

 

2019

 

2018

 

2019

 

2018

Net (loss) income

$

(5,640

)

 

$

80,986

 

 

$

1,580

 

 

$

95,213

 

Accretion of asset retirement obligations

54

 

 

41

 

 

214

 

 

169

 

Impairment expense

 

 

3,748

 

 

 

 

4,581

 

Depletion, depreciation and amortization

26,962

 

 

14,206

 

 

69,243

 

 

47,568

 

Interest expense, net

1,831

 

 

1,110

 

 

6,566

 

 

2,898

 

Transaction costs

279

 

 

12,912

 

 

1,077

 

 

14,337

 

(Gain) loss on sale of oil and gas properties, net

(3,668

)

 

2,689

 

 

(3,222

)

 

(1,919

)

Exploration expense

653

 

 

630

 

 

653

 

 

630

 

Unrealized loss (gain) on derivative contracts

26,517

 

 

(96,001

)

 

59,849

 

 

(76,037

)

Stock based compensation (non-cash)(1)

1,968

 

 

1,536

 

 

8,648

 

 

7,071

 

Income tax expense

937

 

 

2,351

 

 

1,665

 

 

2,470

 

Adjusted EBITDAX

$

49,893

 

 

$

24,208

 

 

$

146,273

 

 

$

96,981

 

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

III. Adjusted Net Income

We define “Adjusted Net Income” as net (loss) income plus, when applicable, unrealized loss (gain) on derivative contracts; impairment expense; (gain) loss on sale of oil and gas properties; write-off of deferred financing costs; 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 (loss) 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 (loss) income to Adjusted Net Income for the periods indicated:

($000s, except per share data)

Three Months Ended

 

Years Ended

 

December 31,

 

December 31,

 

2019

 

2018

 

2019

 

2018

Net (loss) income

$

(5,640

)

 

$

80,986

 

 

$

1,580

 

 

$

95,213

 

Unrealized loss (gain) on derivative contracts

26,517

 

 

(96,001

)

 

59,849

 

 

(76,037

)

Impairment expense

 

 

3,748

 

 

 

 

4,581

 

(Gain) loss on sale of oil and gas properties

(3,668

)

 

2,689

 

 

(3,222

)

 

(1,919

)

Write-off of deferred financing costs

1,242

 

 

 

 

1,242

 

 

 

Transaction costs

279

 

 

12,912

 

 

1,077

 

 

14,337

 

Income tax effect of the above

(500

)

 

1,472

 

 

(1,210

)

 

1,134

 

Adjusted Net Income

$

18,230

 

 

$

5,806

 

 

$

59,316

 

 

$

37,309

 

Adjusted Diluted Shares

64,566,981

 

 

64,065,844

 

 

64,755,906

 

 

63,958,098

 

Adjusted Net Income per Adjusted Diluted Share

$

0.28

 

 

$

0.09

 

 

$

0.92

 

 

$

0.58

 

IV. All-In Cash Costs

We define “All-In Cash Costs” as lease operating expenses plus production and ad valorem taxes, interest expense and general and administrative expense (excluding stock-based compensation).

Our All-In Cash Costs measure provides additional information that may be used to further understand our total cost of production. We use All-In Cash Costs 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. All-In Cash Costs should not be considered as an alternative to, or more meaningful than, net (loss) income as an indicator of operating performance. All-In Cash Costs, as used by us, may not be comparable to similarly titled measures reported by other companies.

All-In Cash Costs for the periods indicated:

($000s, except per Boe data)

Three Months Ended

 

Years Ended

 

December 31,

 

December 31,

 

2019

 

2018

 

2019

 

2018

Lease operating expense

$

8,198

 

 

$

5,175

 

 

$

28,683

 

 

$

18,746

 

Production and ad valorem taxes

3,870

 

 

2,783

 

 

11,871

 

 

9,836

 

Interest expense, net

1,831

 

 

1,110

 

 

6,566

 

 

2,898

 

General and administrative expense (excluding stock-based compensation)

5,696

 

 

7,534

 

 

18,963

 

 

20,275

 

All-In Cash Costs

$

19,595

 

 

$

16,602

 

 

$

66,083

 

 

$

51,755

 

Total production (MBoe)(1)(2)

1,617

 

 

962

 

 

4,902

 

 

3,627

 

All-In Cash Costs per Boe

$

12.12

 

 

$

17.26

 

 

$

13.48

 

 

$

14.27

 

(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).

V. PV-10

PV-10 is derived from the standardized measure of discounted future net cash flows (“Standardized Measure”), which is the most directly comparable financial measure under GAAP. PV-10 is a computation of the Standardized Measure on a pre-tax basis. PV-10 is equal to the Standardized Measure at the applicable date, before deducting future income taxes, discounted at 10%. We believe that the presentation of PV-10 is relevant and useful to investors because it presents the discounted future net cash flows attributable to our estimated net proved reserves prior to taking into account future corporate income taxes, and it is a useful measure for evaluating the relative monetary significance of our oil and natural gas properties. Further, investors may utilize the measure as a basis for comparison of the relative size and value of our reserves to other companies. We use this measure when assessing the potential return on investment related to our oil and natural gas properties. PV-10, however, is not a substitute for the Standardized Measure. Our PV-10 measure and the Standardized Measure do not purport to present the fair value of our oil and natural gas reserves.

The following table provides a reconciliation of PV-10 of the Company’s estimated proved properties to the Standardized Measure (in thousands):

Present value of estimated future net revenues (PV-10)

$

819,992

 

Future income taxes, discounted at 10%

(30,415

)

Standardized measure of discounted future net cash flows

$

789,577

 

VI. Free Cash Flow

Free cash flow is a measure that we use as an indicator of our ability to fund our development activities. We define free cash flow as Adjusted EBITDAX (defined above), less interest expense, less accrual-based capital expenditures.

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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