EX-99.1 2 ex991q42020earningsrelease.htm EX-99.1 Document

Exhibit 99.1
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Earthstone Energy, Inc. Reports
2020 Fourth Quarter and Full Year Results

The Woodlands, Texas, March 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.

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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)
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($000s except where noted)Three Months EndedYears Ended
December 31,December 31,
2020201920202019
Total revenues$36,675 $66,788 $144,523 $191,262 
Lease operating expense7,160 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 expense5.26 5.07 5.21 5.85 
Production and ad valorem taxes1.62 2.39 1.68 2.42 
Operating margin per Boe20.04 33.85 18.96 30.75 
Realized hedge settlements6.23 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).
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(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.
PeriodCommodityVolume
(Bbls / MMBtu)		Price
($/Bbl / $/MMBtu)
2021Crude Oil Swap2,294,000$51.17
2021Crude Oil Basis Swap (1)1,825,000$1.05
2022Crude Oil Swap365,000$47.70
2021Natural Gas Swap4,380,000$2.76
2021Natural Gas Basis Swap (2)4,380,000$(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.

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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.
PeriodCommodityVolume
(Bbls / MMBtu)		Price
($/Bbl / $/MMBtu)
2021Crude Oil Swap3,326,750$48.04
2021Crude Oil Basis Swap (1)2,857,750$0.79
2021Crude Oil Basis Swap (2)1,032,750$(0.26)
2022Crude Oil Swap1,458,500$52.96
2022Crude Oil Basis Swap (1)1,368,750$0.74
2021Natural Gas Swap6,912,000$2.81
2021Natural Gas Basis Swap (3)6,912,000$(0.37)
Q1 2022Natural Gas Swap450,000$2.97
Q1 2022Natural Gas Basis Swap (3)450,000$(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
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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.

Contact

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
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EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
 December 31,
ASSETS20202019
Current assets:  
Cash$1,494 $13,822 
Accounts receivable:
Oil, natural gas, and natural gas liquids revenues16,255 29,047 
Joint interest billings and other, net of allowance of $19 and $83 at December 31, 2020 and 2019, respectively7,966 6,672 
Derivative asset7,509 8,860 
Prepaid expenses and other current assets1,509 1,867 
Total current assets34,733 60,268 
Oil and gas properties, successful efforts method:
Proved properties1,017,496 970,808 
Unproved properties233,767 260,271 
Land5,382 5,382 
Total oil and gas properties1,256,645 1,236,461 
Accumulated depreciation, depletion and amortization(291,213)(195,567)
Net oil and gas properties965,432 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, respectively931 1,311 
Derivative asset396 770 
Operating lease right-of-use assets2,450 3,108 
Other noncurrent assets1,315 1,572 
TOTAL ASSETS$1,005,257 $1,125,543 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$6,232 $25,284 
Revenues and royalties payable27,492 35,815 
Accrued expenses16,504 19,538 
Asset retirement obligation447 308 
Derivative liability1,135 6,889 
Advances2,277 11,505 
Operating lease liability773 570 
Finance lease liability69 206 
Other current liability565 43 
Total current liabilities55,494 100,158 
Noncurrent liabilities:
Long-term debt115,000 170,000 
Asset retirement obligation2,580 1,856 
Derivative liability173 — 
Deferred tax liability14,497 15,154 
Operating lease liability1,840 2,539 
Finance lease liability5 85 
Other noncurrent liabilities132 — 
Total noncurrent liabilities134,227 189,634 
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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, respectively30 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, respectively35 35 
Additional paid-in capital540,074 527,246 
Accumulated deficit(195,258)(181,711)
Total Earthstone Energy, Inc. equity344,881 345,599 
Noncontrolling interest470,655 490,152 
Total equity815,536 835,751 
TOTAL LIABILITIES AND EQUITY$1,005,257 $1,125,543 

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EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
Three Months EndedYears Ended
 December 31,December 31,
 2020201920202019
REVENUES  
Oil$27,338 $60,268 $120,355 $171,925 
Natural gas3,712 1,787 8,567 3,913 
Natural gas liquids5,625 4,733 15,601 15,424 
Total revenues36,675 66,788 144,523 191,262 
OPERATING COSTS AND EXPENSES
Lease operating expense7,160 8,198 29,131 28,683 
Production and ad valorem taxes2,213 3,870 9,411 11,871 
Rig idle and termination expense— — 426 — 
Impairment expense1,950 — 64,498 — 
Depreciation, depletion and amortization20,318 26,962 96,414 69,243 
General and administrative expense8,618 7,664 28,233 27,611 
Transaction costs946 279 622 1,077 
Accretion of asset retirement obligation170 54 307 214 
Exploration expense— 653 298 653 
Total operating costs and expenses41,375 47,680 229,340 139,352 
Gain on sale of oil and gas properties, net6 3,668 204 3,222 
(Loss) income from operations(4,694)22,776 (84,613)55,132 
OTHER INCOME (EXPENSE)
Interest expense, net(1,025)(1,831)(5,232)(6,566)
Write-off of deferred financing costs— (1,242)— (1,242)
(Loss) gain on derivative contracts, net(13,166)(24,311)59,899 (43,983)
Other income (expense), net280 (95)400 (96)
Total other (expense) income(13,911)(27,479)55,067 (51,887)
(Loss) income before income taxes(18,605)(4,703)(29,546)3,245 
Income tax benefit (expense)224 (937)112 (1,665)
Net (loss) income(18,381)(5,640)(29,434)1,580 
Less:  Net (loss) income attributable to noncontrolling interest(9,910)(3,016)(15,887)861 
Net (loss) income attributable to Earthstone Energy, Inc.$(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)$0.02 
Weighted average common shares outstanding:
Basic30,212,191 29,278,455 29,911,625 28,983,354 
Diluted30,212,191 29,278,455 29,911,625 29,360,885 
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EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 For the Years Ended December 31,
 20202019
Cash flows from operating activities: 
Net (loss) income$(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 properties46,878 — 
Depreciation, depletion and amortization96,414 69,243 
Accretion of asset retirement obligations307 214 
Impairment of Goodwill17,620 — 
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 contracts56,044 15,866 
Stock-based compensation10,054 8,648 
Deferred income taxes(657)1,665 
Write-off of deferred financing costs— 1,242 
Amortization of deferred financing costs322 412 
Changes in assets and liabilities:
(Increase) decrease in accounts receivable11,914 (18,035)
(Increase) decrease in prepaid expenses and other current assets(203)66 
Increase (decrease) in accounts payable and accrued expenses481 (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 activities131,502 126,248 
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 properties414 4,184 
Net cash used in investing activities(87,797)(200,611)
Cash flows from financing activities:
Proceeds from borrowings136,056 234,680 
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 period13,822 376 
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 
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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 EndedYears Ended
December 31,December 31,
2020201920202019
Class A Common Stock - Diluted30,212,191 29,278,455 29,911,625 29,360,885 
Class B Common Stock35,009,371 35,288,526 35,077,711 35,395,021 
Adjusted Diluted Shares65,221,562 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)
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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:
($000s)Three Months EndedYears Ended
December 31,December 31,
2020201920202019
Net (loss) income$(18,381)$(5,640)$(29,434)$1,580 
Accretion of asset retirement obligations170 54 307 214 
Impairment expense1,950 — 64,498 — 
Depletion, depreciation and amortization20,318 26,962 96,414 69,243 
Interest expense, net1,025 1,831 5,232 6,566 
Transaction costs946 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 contracts21,611 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.

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The following table provides a reconciliation of Net (loss) income to Adjusted Net Income for the periods indicated:
($000s, except per share data)Three Months EndedYears Ended
December 31,December 31,
2020201920202019
Net (loss) income$(18,381)$(5,640)$(29,434)$1,580 
Unrealized loss (gain) on derivative contracts21,611 26,517 (3,855)59,849 
Impairment expense1,950 — 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 costs946 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 Shares65,221,562 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 EndedYears Ended
December 31,December 31,
2020201920202019
Lease operating expense$7,160 $8,198 $29,131 $28,683 
Production and ad valorem taxes2,213 3,870 9,411 11,871 
Interest expense, net1,025 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

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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 EndedYears Ended
December 31,December 31,
2020201920202019
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.
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