Acquisitions

3 Months Ended

Mar. 31, 2021

IRM Acquisition

As part of the execution of its growth strategy to further increase its scale, on January 7, 2021, the Company completed the acquisition (the “IRM Acquisition”) of all of the issued and outstanding limited liability company interests in Independence Resources Management, LLC (“IRM”) and certain wholly owned subsidiaries for consideration consisting of the following: (i) net cash of approximately $134.3 million (the “Cash Consideration”) and (ii) 12,719,594 shares of the Company’s Class A

common stock, $0.001 par value per share (“Class A Common Stock”), issued to Independence Resources Holdings, LLC. The fair value of each share of Class A Common Stock was determined using the closing price of $6.02 per share on January 7, 2021. The purchase agreement contains customary representations and warranties for transactions of this nature. The Company has obtained representation and warranty insurance to provide coverage in the event of certain breaches of representations and warranties of the seller contained in the purchase agreement, which will be subject to various exclusions, deductibles and other terms and conditions set forth therein.

The IRM Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The preliminary allocation of the total purchase price in the IRM Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s oil and natural gas properties. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):


Consideration:
Shares of Earthstone Class A Common Stock issued	12,719,594
Earthstone Class A Common Stock price as of January 7, 2021	$	6.02
Class A Common Stock consideration	76,572
Cash consideration (1)	137,302

Total consideration transferred	$	213,874

Fair value of assets acquired:
Cash	$	2,992
Other current assets	10,925
Oil and gas properties	225,905
Other non-current assets	258
Amount attributable to assets acquired	$	240,080

Fair value of liabilities assumed:
Derivative liability - current	$	10,177
Other current liabilities	5,742
Asset retirement obligation - noncurrent	10,287
Amount attributable to liabilities assumed	$	26,206

(1)Net cash consideration of $134.3 million consists of $137.3 million gross cash remitted at closing less $3.0 million of cash acquired.

The following unaudited supplemental pro forma condensed results of operations present consolidated information as though the IRM Acquisition had been completed as of January 1, 2020. The unaudited supplemental pro forma financial information was derived from the historical consolidated and combined statements of operations for IRM and Earthstone and adjusted to include depletion expense applied to the adjusted basis of the properties acquired. 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):


	Three Months Ended
	March 31,
		2021		2020
Revenue		$	77,268	$	65,533
Loss before taxes		(12,506)		148,296
Net loss		(12,188)		146,791
Less: Net loss attributable to noncontrolling interest		(5,453)		66,294
Net loss attributable to Earthstone Energy, Inc.		(6,735)		80,497
Pro forma net (loss) income per common share attributable to Earthstone Energy, Inc.:
Basic and diluted		$	(0.14)	$	1.91

The Company has included in its Condensed Consolidated Statements of Operations, revenues of $20.3 million and operating expenses of $13.5 million for the period January 7, 2021 to March 31, 2021 related to the IRM Acquisition. During the three months ended March 31, 2021, the Company recorded $3.3 million of legal and professional fees, and employee severance costs related to the IRM Acquisition which are included in Transaction costs in the Condensed Consolidated Statements of Operations.

The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair value of oil and gas properties and asset retirement obligations were measured using the discounted cash flow technique of valuation.

Significant inputs to the valuation of oil and gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future plugging and abandonment costs, (v) estimated future cash flows, and (vi) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates and are the most sensitive and subject to change.

Other Acquisitions

On March 31, 2021, Earthstone, EEH, Tracker Resource Development III, LLC, a Delaware limited liability company (“Tracker”), and TRD III Royalty Holdings (TX), LP, a Delaware limited partnership (“RoyaltyCo”), entered into a purchase and sale agreement (the “Tracker Agreement”), which provides that EEH will acquire (the “Tracker Acquisition”) interests in oil and gas leases and related property of Tracker located in Irion County, Texas (the “Tracker Assets”). It is expected that, upon closing the Tracker Acquisition, Tracker would receive $29.6 million in cash and 4.7 million shares of the Company’s Class A Common Stock. Also on March 31, 2021, Earthstone, EEH, SEG-TRD LLC, a Delaware limited liability company (“SEG-I”), and SEG-TRD II LLC, a Delaware limited liability company (“SEG-II” and collectively with SEG-I, “Sequel”) entered into a purchase and sale agreement (the “Sequel Agreement” and collectively with the Tracker Agreement, the “Tracker/Sequel Purchase Agreements”), which provides that EEH will acquire (the “Sequel Acquisition” and collectively with the Tracker Acquisition, the “Acquisitions”) certain well-bore interests and related equipment for a purchase price of $52.0 million in cash and 1.5 million shares of the Company’s Class A Common Stock. The Tracker/Sequel Purchase Agreements contain customary representations and warranties for transactions of this nature.