Acquisitions and Divestitures

The initial accounting for acquisitions and divestitures may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as additional information is obtained about the facts and circumstances that existed as of the acquisition dates.

Exchange Involving Monetary Consideration

On October 5, 2018, the Company closed a transaction in the Midland Basin that included producing properties and undeveloped acreage (the “Exchange”). GAAP required the assets received by the Company to be treated as a business combination, under ASC 805, and the assets conveyed to the other party to be treated as a disposition of assets (discussed in Divestitures below).

An allocation of the purchase price was prepared using, among other things, a reserve report prepared by qualified reserve engineers and priced as of the acquisition date. The market assumptions as to the future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of the future development and operating costs, projections of future rates of production, expected recovery rate and risk adjusted discount rates used by the Company to estimate the fair value of the oil and natural gas properties represent Level 3 inputs; see Note 5. Fair Value Measurements, below.

As a result, the Company, in exchange for cash of $25.9 million and value for the assets conveyed of $37.1 million, the Company recorded $65.8 million in Oil and gas properties, as well as $2.8 million in accounts payable related known purchase price adjustments, in its Consolidated Balance Sheet as of December 31, 2018. The effective date of the Exchange was September 1, 2018

Bold Transaction

On May 9, 2017, Earthstone completed the Bold Transaction described in Note 1. Organization and Basis of Presentation.

An allocation of the purchase price was prepared using, among other things, a reserve report prepared by qualified reserve engineers and priced as of the acquisition date.

The following table summarizes the consideration transferred, fair value of assets acquired and liabilities assumed (in thousands, except share and share price amounts):



Consideration:
Shares of Class A Common Stock issued pursuant to the Bold Contribution Agreement to certain employees of Bold	150,000
EEH Units issued to Bold Holdings	36,070,828

Total equity interest issued in the Bold Transaction	36,220,828
Closing per share price of Class A Common Stock as of May 9, 2017	$	13.58

Total consideration transferred (1) (2)	$	491,879

Fair value of assets acquired:
Cash and cash equivalents	$	2,355
Other current assets	10,078
Oil and gas properties (3)	557,704
Amount attributable to assets acquired	$	570,137

Fair value of liabilities assumed:
Long-term debt (4)	$	58,000
Current liabilities	17,042
Deferred tax liability	2,857
Noncurrent asset retirement obligations	359
Amount attributable to liabilities assumed	$	78,258


(1)	Consideration included 150,000 shares of Class A Common Stock recorded above based upon its fair value which was determined using the closing price of $13.58 per share on May 9, 2017.

(2)

Consideration was 36,070,828 EEH Units. Additionally, Bold Holdings purchased 36,070,828 shares of Class B Common Stock for $36,071. Each EEH Unit, together with one share of Class B Common Stock, is convertible into one share of Class A Common Stock. The fair value of the consideration was determined using the closing price of the Company’s Class A Common Stock of $13.58 per share on May 9, 2017.

(3)

The market assumptions as to the future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of the future development and operating costs, projections of future rates of production, expected recovery rate and risk adjusted discount rates used by the Company to estimate the fair value of the oil and natural gas properties represent Level 3 inputs; see Note 5. Fair Value Measurements, below.


(4)	Concurrent with the closing of the Bold Transaction, EEH repaid Bold’s outstanding borrowings of $58.0 million under its credit agreement.

The following unaudited supplemental pro forma condensed results of operations present consolidated information as though the Bold Transaction and the Bakken Sale (discussed below) had been completed as of January 1, 2017. The unaudited supplemental pro forma financial information was derived from the historical consolidated and combined statements of operations for Bold and Earthstone and adjusted to include: (i) depletion expense applied to the adjusted basis of the properties acquired and (ii) to eliminate non-recurring transaction costs directly related to the Bold Transaction that do not have a continuing impact on the Company’s operating results. These unaudited supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. Future results may vary significantly from the results reflected in this unaudited pro forma financial information (in thousands, except per share amounts):



	Year Ended
	December 31, 2017
	(Unaudited)
Revenue	$	126,839
Loss before taxes	$	(44,461	)
Net loss	$	(35,617	)
Less: Net loss attributable to noncontrolling interest	$	(22,005	)
Net loss attributable to Earthstone Energy, Inc.	$	(13,612	)
Pro forma net loss per common share attributable to Earthstone Energy, Inc.:
Basic and diluted	$	(0.57	)

The Company has included in its Consolidated Statements of Operations, revenues of $50.2 million and direct operating expenses of $23.8 million for the period from May 9, 2017 to December 31, 2017 related to the properties acquired in the Bold Transaction.

Divestitures

During the year ended December 31, 2018, the Company sold certain non-core properties for total cash consideration of approximately $6.0 million, while eliminating approximately $0.8 million of future abandonment obligations. The sales resulted in net gains of approximately $4.7 million recorded in Gain on sale of oil and gas properties, net in the Consolidated Statements of Operations.

In association with the Exchange, the Company received value of $37.1 million for Net oil and gas properties conveyed of $39.9 million and recognized a $2.8 million loss on sale of oil and gas properties recorded in Gain on sale of oil and gas properties, net for the year ended December 31, 2018.

On December 20, 2017, the Company sold all of its oil and natural gas leases, oil and natural gas wells and associated assets located in the Williston Basin in North Dakota (the “Bakken Sale”) for a net cash consideration of approximately $26.4 million after normal and customary purchase price adjustments of $0.9 million to account for net cash flows from the effective date to the closing date. The sale resulted in a net gain of approximately $3.0 million recorded in Gain on sale of oil and gas properties, net in the Consolidated Statements of Operations. The effective date of the sale was December 1, 2017.

For the year ended December 31, 2017, the Company sold certain non-core properties for a total cash consideration of approximately $7.5 million, while eliminating approximately $4.0 million of future abandonment obligations. The sales resulted in a net gain of approximately $6.1 million recorded in Gain on sale of oil and gas properties in the Consolidated Statements of Operations.