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Earthstone Energy, Inc. Reports 2020 Fourth Quarter and Full Year Results

03/10/2021

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, 2020.

Fourth Quarter 2020 Highlights

  • Signed Purchase and Sale Agreement on the IRM Acquisition(1) on December 17, 2020 which was closed on January 7, 2021
  • Average daily production of 14,809 Boepd(2)
  • Adjusted EBITDAX(3) of $29.8 million ($21.87 per Boe)
  • Operating portion of net cash received in settlement of derivative contracts of $8.4 million
  • Free Cash Flow(3) of $8.4 million
  • Capital expenditures of $20.3 million
  • Reduction of long-term debt of $15.0 million
  • Net loss of $18.4 million or $0.28 per Adjusted Diluted Share(3)
    • Adjusted net income of $5.8 million or $0.09 per Adjusted Diluted Share(3)

Full Year 2020 Highlights

  • Average daily production of 15,276 Boepd(2)
  • Adjusted EBITDAX(2) of $144.2 million ($25.80 per Boe)
  • Operating portion of net cash received in settlement of derivative contracts of $56.0 million
  • Free Cash Flow(2) of $72.2 million
  • Capital expenditures of $66.8 million
  • Reduction of long-term debt of $55.0 million
  • Net loss of $29.4 million or $0.45 per Adjusted Diluted Share(3)
    • Adjusted net income of $30.0 million or $0.46 per Adjusted Diluted Share(3)

(1)

On January 7, 2021, Earthstone, Earthstone Energy Holdings, LLC, a subsidiary of the Company, Independence Resources Holdings, LLC, and Independence Resources Manager, LLC executed a Purchase and Sale Agreement dated December 17, 2020 (the “IRM Acquisition”).

(2)

Represents reported sales volumes.

(3)

See “Non-GAAP Financial Measures” section below.

Management Comments

Mr. Robert J. Anderson, President and CEO of Earthstone, commented, “In 2020, Earthstone achieved excellent results and delivered on its commitment to maintain balance sheet strength, operating efficiency and a persistent focus on identifying strategic and accretive growth opportunities. We overcame the unprecedented challenges of 2020 and finished the year in stronger position by managing to increase total production 14% and hold Adjusted EBITDAX almost flat compared to 2019, all while reducing our capital expenditures by 68% and utilizing free cash flow to reduce leverage, defined as total debt to Adjusted EBITDAX, from 1.2x in 2019 to 0.8x in 2020.

“By completing the acquisition of Independence Resource Management, LLC (“IRM”) on January 7, 2021, we have increased our scale with complementary and accretive assets that, similar to our existing assets, carry a low-cost structure in order to further drive free cash flow generation and with drilling inventory that will deliver attractive returns in 2021. We intend to execute on our goals to maintain financial strength, capital efficiency and operating excellence while continuing to seek further strategic growth opportunities.”

Operational Update

The Company recently commenced its 2021 drilling program with the deployment of a rig in Midland County. After drilling on a three-well pad in the Hamman project, the Company expects to drill a four-well pad on the recently acquired IRM Spanish Pearl project. The Company anticipates moving the rig to Upton County and drilling 10-11 wells. Consistent with previously released guidance, the Company anticipates drilling 16 gross / 14.8 net operated wells and spudding an additional 5 gross / 3.7 net operated wells during 2021.

The Company recently completed 5 gross / 3.7 net wells in Upton County and anticipates turning these wells to sales before the end of March. The Company anticipates completing and turning to sales a total of 16 gross / 13.5 net operated wells in 2021, as is consistent with previously released guidance.

The unprecedented weather in February created production challenges for all facets of the industry including producers, mid-stream and gathering companies and refiners. While production has returned to previous levels, we do expect that production and revenue reductions will have an impact on first quarter results.

Selected Financial Data (unaudited)

($000s except where noted)

Three Months Ended

 

Years Ended

 

December 31,

 

December 31,

 

2020

 

2019

 

2020

 

2019

Total revenues

$

36,675

 

 

$

66,788

 

 

$

144,523

 

 

$

191,262

 

 

 

 

 

 

 

 

 

Lease operating expense

7,160

 

 

8,198

 

 

29,131

 

 

28,683

 

 

 

 

 

 

 

 

 

General and administrative expense (excluding stock-based compensation)

6,229

 

 

5,696

 

 

18,179

 

 

18,963

 

Stock-based compensation (non-cash)

2,389

 

 

1,968

 

 

10,054

 

 

8,648

 

General and administrative expense

$

8,618

 

 

$

7,664

 

 

$

28,233

 

 

$

27,611

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(18,381)

 

 

$

(5,640)

 

 

$

(29,434)

 

 

$

1,580

 

Less: Net (loss) income attributable to noncontrolling interest

(9,910)

 

 

(3,016)

 

 

(15,887)

 

 

861

 

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

(8,471)

 

 

(2,624)

 

 

(13,547)

 

 

719

 

Net (loss) income per common share(1)

 

 

 

 

 

 

 

Basic

(0.28)

 

 

(0.09)

 

 

(0.45)

 

 

0.02

 

Diluted

(0.28)

 

 

(0.09)

 

 

(0.45)

 

 

0.02

 

Adjusted EBITDAX(2)

$

29,798

 

 

$

49,893

 

 

$

144,246

 

 

$

146,273

 

 

 

 

 

 

 

 

 

Production(3):

 

 

 

 

 

 

 

Oil (MBbls)

660

 

 

1,059

 

 

3,180

 

 

3,086

 

Gas (MMcf)

2,251

 

 

1,442

 

 

7,282

 

 

4,760

 

NGL (MBbls)

327

 

 

317

 

 

1,198

 

 

1,022

 

Total (MBoe)(4)

1,362

 

 

1,617

 

 

5,591

 

 

4,902

 

Average Daily Production (Boepd)

14,809

 

 

17,571

 

 

15,276

 

 

13,429

 

Average Prices:

 

 

 

 

 

 

 

Oil ($/Bbl)

41.43

 

 

56.92

 

 

37.85

 

 

55.71

 

Gas ($/Mcf)

1.65

 

 

1.24

 

 

1.18

 

 

0.82

 

NGL ($/Bbl)

17.18

 

 

14.92

 

 

13.03

 

 

15.09

 

Total ($/Boe)

26.92

 

 

41.31

 

 

25.85

 

 

39.02

 

Adj. for Realized Derivatives Settlements:

 

 

 

 

 

 

 

Oil ($/Bbl)

54.21

 

 

58.67

 

 

54.95

 

 

59.82

 

Gas ($/Mcf)

1.67

 

 

1.48

 

 

1.42

 

 

1.49

 

NGL ($/Bbl)

17.18

 

 

14.92

 

 

13.03

 

 

15.09

 

Total ($/Boe)

33.15

 

 

42.68

 

 

35.89

 

 

42.26

 

Operating Margin per Boe

 

 

 

 

 

 

 

Average realized price(5)

$

26.92

 

 

$

41.31

 

 

$

25.85

 

 

$

39.02

 

Lease operating expense

5.26

 

 

5.07

 

 

5.21

 

 

5.85

 

Production and ad valorem taxes

1.62

 

 

2.39

 

 

1.68

 

 

2.42

 

Operating margin per Boe

20.04

 

 

33.85

 

 

18.96

 

 

30.75

 

Realized hedge settlements

6.23

 

 

1.37

 

 

10.04

 

 

3.24

 

Operating margin per Boe (including realized hedge settlements)

$

26.27

 

 

$

35.22

 

 

$

29.00

 

 

$

33.99

 

(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.

Liquidity Update

As of December 31, 2020, we had $1.5 million in cash and $115 million of long-term debt outstanding under our credit facility with a borrowing base of $240 million. With the $125 million of undrawn borrowing base capacity and $1.5 million in cash, we had total liquidity of approximately $126.5 million.

On January 7, 2021, Earthstone closed the IRM Acquisition. When adjusting to include the IRM Acquisition, we had an estimated $15.3 million in cash and $260 million outstanding under our credit facility, as amended, with a borrowing base of $360 million. With the $100 million of undrawn borrowing base capacity and $15.3 million in cash, we had total liquidity of approximately $115.3 million on a combined basis. When adjusted to include the impact of the IRM Acquisition, combined leverage at December 31, 2020 was 1.2x.

As of March 1, 2021, we had $10.1 million in cash and $227.5 million of long-term debt outstanding under our credit facility, as amended, with a borrowing base of $360 million. With the $132.5 million of undrawn borrowing base capacity and $10.1 million in cash, we had total liquidity of approximately $142.6 million.

Capital Expenditures

During 2020, we incurred capital expenditures of approximately $66.8 million, on an accrual basis, primarily consisting of drilling and completion costs. We recently commenced our drilling program with the deployment of a rig this month and we expect to spend $90-$100 million in total capital expenditures based on our current 2021 capital spending plan.

Hedge Position

Hedging Activities

The following table sets forth our outstanding derivative contracts at December 31, 2020. When aggregating multiple contracts, the weighted average contract price is disclosed.

Period

 

Commodity

 

Volume
(Bbls / MMBtu)

 

Price
($/Bbl / $/MMBtu)

2021

 

Crude Oil Swap

 

2,294,000

 

$51.17

2021

 

Crude Oil Basis Swap (1)

 

1,825,000

 

$1.05

2022

 

Crude Oil Swap

 

365,000

 

$47.70

2021

 

Natural Gas Swap

 

4,380,000

 

$2.76

2021

 

Natural Gas Basis Swap (2)

 

4,380,000

 

$(0.45)

(1)

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

(2)

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

Upon closing of the IRM Acquisition on January 7, 2021, Earthstone assumed the hedges that IRM had in place consisting of approximately 1,008,950 Bbls of oil at $41.07/Bbl.

Hedging Update

The following table sets forth our outstanding derivative contracts at March 4, 2021. When aggregating multiple contracts, the weighted average contract price is disclosed.

Period

 

Commodity

 

Volume
(Bbls / MMBtu)

 

Price
($/Bbl / $/MMBtu)

2021

 

Crude Oil Swap

 

3,326,750

 

$48.04

2021

 

Crude Oil Basis Swap (1)

 

2,857,750

 

$0.79

2021

 

Crude Oil Basis Swap (2)

 

1,032,750

 

$(0.26)

2022

 

Crude Oil Swap

 

1,458,500

 

$52.96

2022

 

Crude Oil Basis Swap (1)

 

1,368,750

 

$0.74

2021

 

Natural Gas Swap

 

6,912,000

 

$2.81

2021

 

Natural Gas Basis Swap (3)

 

6,912,000

 

$(0.37)

Q1 2022

 

Natural Gas Swap

 

450,000

 

$2.97

Q1 2022

 

Natural Gas Basis Swap (3)

 

450,000

 

$(0.23)

(1)

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

(2)

The swap is between WTI Roll and the WTI NYMEX.

(3)

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

Conference Call Details

Earthstone is hosting a conference call on Thursday, March 11, 2021 at 10:00 a.m. Eastern (9:00 a.m. Central) to discuss the Company’s operations and financial results for the fourth quarter and full year 2020 and its outlook for 2021. Prepared remarks by Robert J. Anderson, President and Chief Executive Officer, Mark Lumpkin, Jr., Executive Vice President and Chief Financial Officer and Steven C. Collins, Executive Vice President, Operations, 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 10:00 a.m. Eastern (9:00 a.m. Central), Thursday, March 25, 2021. The number for the replay is 877-660-6853 for domestic calls or 201-612-7415 for international calls, using Replay ID: 13717242.

About Earthstone Energy, Inc.

Earthstone Energy, Inc. is a growth-oriented, independent energy company engaged in acquisition, development and operation of oil and natural 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, 2020 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

2020

 

2019

Current assets:

 

 

 

Cash

$

1,494

 

 

$

13,822

 

Accounts receivable:

 

 

 

Oil, natural gas, and natural gas liquids revenues

16,255

 

 

29,047

 

Joint interest billings and other, net of allowance of $19 and $83 at December 31, 2020 and 2019, respectively

7,966

 

 

6,672

 

Derivative asset

7,509

 

 

8,860

 

Prepaid expenses and other current assets

1,509

 

 

1,867

 

Total current assets

34,733

 

 

60,268

 

 

 

 

 

Oil and gas properties, successful efforts method:

 

 

 

Proved properties

1,017,496

 

 

970,808

 

Unproved properties

233,767

 

 

260,271

 

Land

5,382

 

 

5,382

 

Total oil and gas properties

1,256,645

 

 

1,236,461

 

 

 

 

 

Accumulated depreciation, depletion and amortization

(291,213)

 

 

(195,567)

 

Net oil and gas properties

965,432

 

 

1,040,894

 

 

 

 

 

Other noncurrent assets:

 

 

 

Goodwill

 

 

17,620

 

Office and other equipment, net of accumulated depreciation of $3,675 and $3,180 at December 31, 2020 and 2019, respectively

931

 

 

1,311

 

Derivative asset

396

 

 

770

 

Operating lease right-of-use assets

2,450

 

 

3,108

 

Other noncurrent assets

1,315

 

 

1,572

 

TOTAL ASSETS

$

1,005,257

 

 

$

1,125,543

 

LIABILITIES AND EQUITY

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

6,232

 

 

$

25,284

 

Revenues and royalties payable

27,492

 

 

35,815

 

Accrued expenses

16,504

 

 

19,538

 

Asset retirement obligation

447

 

 

308

 

Derivative liability

1,135

 

 

6,889

 

Advances

2,277

 

 

11,505

 

Operating lease liability

773

 

 

570

 

Finance lease liability

69

 

 

206

 

Other current liability

565

 

 

43

 

Total current liabilities

55,494

 

 

100,158

 

 

 

 

 

Noncurrent liabilities:

 

 

 

Long-term debt

115,000

 

 

170,000

 

Asset retirement obligation

2,580

 

 

1,856

 

Derivative liability

173

 

 

 

Deferred tax liability

14,497

 

 

15,154

 

Operating lease liability

1,840

 

 

2,539

 

Finance lease liability

5

 

 

85

 

Other noncurrent liabilities

132

 

 

 

Total noncurrent liabilities

134,227

 

 

189,634

 

 

 

 

 

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; 30,343,421 and 29,421,131 issued and outstanding at December 31, 2020 and 2019, respectively

30

 

 

29

 

Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 35,009,371 and 35,260,680 issued and outstanding at December 31, 2020 and 2019, respectively

35

 

 

35

 

Additional paid-in capital

540,074

 

 

527,246

 

Accumulated deficit

(195,258)

 

 

(181,711)

 

Total Earthstone Energy, Inc. equity

344,881

 

 

345,599

 

Noncontrolling interest

470,655

 

 

490,152

 

Total equity

815,536

 

 

835,751

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

$

1,005,257

 

 

$

1,125,543

 

 

 

 

 

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,

 

2020

 

2019

 

2020

 

2019

REVENUES

 

 

 

Oil

$

27,338

 

 

$

60,268

 

 

$

120,355

 

 

$

171,925

 

Natural gas

3,712

 

 

1,787

 

 

8,567

 

 

3,913

 

Natural gas liquids

5,625

 

 

4,733

 

 

15,601

 

 

15,424

 

Total revenues

36,675

 

 

66,788

 

 

144,523

 

 

191,262

 

 

 

 

 

 

 

 

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

Lease operating expense

7,160

 

 

8,198

 

 

29,131

 

 

28,683

 

Production and ad valorem taxes

2,213

 

 

3,870

 

 

9,411

 

 

11,871

 

Rig idle and termination expense

 

 

 

 

426

 

 

 

Impairment expense

1,950

 

 

 

 

64,498

 

 

 

Depreciation, depletion and amortization

20,318

 

 

26,962

 

 

96,414

 

 

69,243

 

General and administrative expense

8,618

 

 

7,664

 

 

28,233

 

 

27,611

 

Transaction costs

946

 

 

279

 

 

622

 

 

1,077

 

Accretion of asset retirement obligation

170

 

 

54

 

 

307

 

 

214

 

Exploration expense

 

 

653

 

 

298

 

 

653

 

Total operating costs and expenses

41,375

 

 

47,680

 

 

229,340

 

 

139,352

 

 

 

 

 

 

 

 

 

Gain on sale of oil and gas properties, net

6

 

 

3,668

 

 

204

 

 

3,222

 

 

 

 

 

 

 

 

 

(Loss) income from operations

(4,694)

 

 

22,776

 

 

(84,613)

 

 

55,132

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

Interest expense, net

(1,025)

 

 

(1,831)

 

 

(5,232)

 

 

(6,566)

 

Write-off of deferred financing costs

 

 

(1,242)

 

 

 

 

(1,242)

 

(Loss) gain on derivative contracts, net

(13,166)

 

 

(24,311)

 

 

59,899

 

 

(43,983)

 

Other income (expense), net

280

 

 

(95)

 

 

400

 

 

(96)

 

Total other (expense) income

(13,911)

 

 

(27,479)

 

 

55,067

 

 

(51,887)

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

(18,605)

 

 

(4,703)

 

 

(29,546)

 

 

3,245

 

Income tax benefit (expense)

224

 

 

(937)

 

 

112

 

 

(1,665)

 

Net (loss) income

(18,381)

 

 

(5,640)

 

 

(29,434)

 

 

1,580

 

 

 

 

 

 

 

 

 

Less: Net (loss) income attributable to noncontrolling interest

(9,910)

 

 

(3,016)

 

 

(15,887)

 

 

861

 

 

 

 

 

 

 

 

 

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

$

(8,471)

 

 

$

(2,624)

 

 

$

(13,547)

 

 

$

719

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Basic

$

(0.28)

 

 

$

(0.09)

 

 

$

(0.45)

 

 

$

0.02

 

Diluted

$

(0.28)

 

 

$

(0.09)

 

 

$

(0.45)

 

 

$

0.02

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

30,212,191

 

 

29,278,455

 

 

29,911,625

 

 

28,983,354

 

Diluted

30,212,191

 

 

29,278,455

 

 

29,911,625

 

 

29,360,885

 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

 

For the Years Ended December 31,

 

2020

 

2019

Cash flows from operating activities:

 

Net (loss) income

$

(29,434)

 

 

$

1,580

 

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

 

 

 

Impairment of proved and unproved oil and gas properties

46,878

 

 

 

Depreciation, depletion and amortization

96,414

 

 

69,243

 

Accretion of asset retirement obligations

307

 

 

214

 

Impairment of Goodwill

17,620

 

 

 

Gain on sale of oil and gas properties, net

(204)

 

 

(3,222)

 

Settlement of asset retirement obligations

(195)

 

 

(374)

 

Total (gain) loss on derivative contracts, net

(59,899)

 

 

43,983

 

Operating portion of net cash received in settlement of derivative contracts

56,044

 

 

15,866

 

Stock-based compensation

10,054

 

 

8,648

 

Deferred income taxes

(657)

 

 

1,665

 

Write-off of deferred financing costs

 

 

1,242

 

Amortization of deferred financing costs

322

 

 

412

 

Changes in assets and liabilities:

 

 

 

(Increase) decrease in accounts receivable

11,914

 

 

(18,035)

 

(Increase) decrease in prepaid expenses and other current assets

(203)

 

 

66

 

Increase (decrease) in accounts payable and accrued expenses

481

 

 

(10,438)

 

Increase (decrease) in revenues and royalties payable

(8,323)

 

 

7,067

 

Increase (decrease) in advances

(9,617)

 

 

8,331

 

Net cash provided by operating activities

131,502

 

 

126,248

 

Cash flows from investing activities:

 

 

 

Additions to oil and gas properties

(88,097)

 

 

(204,268)

 

Additions to office and other equipment

(114)

 

 

(527)

 

Proceeds from sales of oil and gas properties

414

 

 

4,184

 

Net cash used in investing activities

(87,797)

 

 

(200,611)

 

Cash flows from financing activities:

 

 

 

Proceeds from borrowings

136,056

 

 

234,680

 

Repayments of borrowings

(191,056)

 

 

(143,508)

 

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

(836)

 

 

(1,135)

 

Cash paid for finance leases

(130)

 

 

(392)

 

Deferred financing costs

(67)

 

 

(1,836)

 

Net cash (used in) provided by financing activities

(56,033)

 

 

87,809

 

Net increase (decrease) in cash

(12,328)

 

 

13,446

 

Cash at beginning of period

13,822

 

 

376

 

Cash at end of period

$

1,494

 

 

$

13,822

 

Supplemental disclosure of cash flow information

 

 

 

Cash paid for:

 

 

 

Interest

$

4,588

 

 

$

6,405

 

Non-cash investing and financing activities:

 

 

 

Accrued capital expenditures

$

7,328

 

 

$

28,356

 

Lease asset additions - ASC 842

$

 

 

$

3,722

 

Asset retirement obligations

$

762

 

 

$

105

 

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, Free Cash Flow and Operating Margin per Boe, 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,

 

2020

 

2019

 

2020

 

2019

Class A Common Stock - Diluted

30,212,191

 

 

29,278,455

 

 

29,911,625

 

 

29,360,885

 

Class B Common Stock

35,009,371

 

 

35,288,526

 

 

35,077,711

 

 

35,395,021

 

Adjusted Diluted Shares

65,221,562

 

 

64,566,981

 

 

64,989,336

 

 

64,755,906

 

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,

 

2020

 

2019

 

2020

 

2019

Net (loss) income

$

(18,381)

 

 

$

(5,640)

 

 

$

(29,434)

 

 

$

1,580

 

Accretion of asset retirement obligations

170

 

 

54

 

 

307

 

 

214

 

Impairment expense

1,950

 

 

 

 

64,498

 

 

 

Depletion, depreciation and amortization

20,318

 

 

26,962

 

 

96,414

 

 

69,243

 

Interest expense, net

1,025

 

 

1,831

 

 

5,232

 

 

6,566

 

Transaction costs

946

 

 

279

 

 

622

 

 

1,077

 

Gain on sale of oil and gas properties, net

(6)

 

 

(3,668)

 

 

(204)

 

 

(3,222)

 

Rig idle and termination expense

 

 

 

 

426

 

 

 

Exploration expense

 

 

653

 

 

298

 

 

653

 

Unrealized loss (gain) on derivative contracts

21,611

 

 

26,517

 

 

(3,855)

 

 

59,849

 

Stock-based compensation (non-cash)(1)

2,389

 

 

1,968

 

 

10,054

 

 

8,648

 

Income tax (benefit) expense

(224)

 

 

937

 

 

(112)

 

 

1,665

 

Adjusted EBITDAX

$

29,798

 

 

$

49,893

 

 

$

144,246

 

 

$

146,273

 

(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,

 

2020

 

2019

 

2020

 

2019

Net (loss) income

$

(18,381)

 

 

$

(5,640)

 

 

$

(29,434)

 

 

$

1,580

 

Unrealized loss (gain) on derivative contracts

21,611

 

 

26,517

 

 

(3,855)

 

 

59,849

 

Impairment expense

1,950

 

 

 

 

64,498

 

 

 

Gain on sale of oil and gas properties

(6)

 

 

(3,668)

 

 

(204)

 

 

(3,222)

 

Write-off of deferred financing costs

 

 

1,242

 

 

 

 

1,242

 

Transaction costs

946

 

 

279

 

 

622

 

 

1,077

 

Income tax effect of the above

(298)

 

 

(500)

 

 

(1,611)

 

 

(1,210)

 

Adjusted Net Income

$

5,822

 

 

$

18,230

 

 

$

30,016

 

 

$

59,316

 

Adjusted Diluted Shares

65,221,562

 

 

64,566,981

 

 

64,989,336

 

 

64,755,906

 

Adjusted Net Income per Adjusted Diluted Share

$

0.09

 

 

$

0.28

 

 

$

0.46

 

 

$

0.92

 

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,

 

2020

 

2019

 

2020

 

2019

Lease operating expense

$

7,160

 

 

$

8,198

 

 

$

29,131

 

 

$

28,683

 

Production and ad valorem taxes

2,213

 

 

3,870

 

 

9,411

 

 

11,871

 

Interest expense, net

1,025

 

 

1,831

 

 

5,232

 

 

6,566

 

General and administrative expense (excluding stock-based compensation)

6,229

 

 

5,696

 

 

18,179

 

 

18,963

 

All-In Cash Costs

$

16,627

 

 

$

19,595

 

 

$

61,953

 

 

$

66,083

 

Total production (MBoe)(1)(2)

1,362

 

 

1,617

 

 

5,591

 

 

4,902

 

All-In Cash Costs per Boe

$

12.20

 

 

$

12.12

 

 

$

11.08

 

 

$

13.48

 

(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. 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.

($000s)

Three Months Ended

 

Years Ended

 

December 31,

 

December 31,

 

2020

 

2019

 

2020

 

2019

Adjusted EBITDAX

$

29,798

 

 

$

49,893

 

 

$

144,246

 

 

$

146,273

 

Interest expense, net

(1,025)

 

 

(1,831)

 

 

(5,232)

 

 

(6,566)

 

Capital expenditures (accrual basis)

(20,346)

 

 

(58,032)

 

 

(66,788)

 

 

(210,430)

 

Free Cash Flow

$

8,427

 

 

$

(9,970)

 

 

$

72,226

 

 

$

(70,723)

 

VI. Operating Margin per Boe and Operating Margin per Boe (including realized hedge settlements)

Operating Margin per Boe is a non-GAAP financial measure that we use to evaluate our operating performance on a per Boe basis. We define Operating Margin per Boe as average realized price per Boe minus lease operating expense per BOE and production and ad valorem taxes per Boe. Operating Margin per Boe (including realized hedge settlements) is calculated as the sum of Operating Margin per Boe and Realized hedge settlements per Boe.

Our Operating Margin per Boe measure provides additional information that may be used to further understand our operating margins. We use Operating Margin per Boe 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 per Boe should not be considered as an alternative to, or more meaningful than, net (loss) income as an indicator of operating performance. Operating Margin per Boe, as used by us, may not be comparable to similarly titled measures reported by other companies.

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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