Acquisitions and Divestitures

9 Months Ended

Sep. 30, 2023

Business Combination and Asset Acquisition [Abstract]

Novo Acquisition

On June 14, 2023, EEH, as purchaser, entered into (i) a Securities Purchase Agreement (the “Novo Purchase Agreement”) with Novo Oil & Gas Legacy Holdings, LLC (“Holdings”), Novo Intermediate, LLC (“Intermediate,” and together with Holdings, collectively, the “Sellers”) and Novo Oil & Gas Holdings, LLC (“Novo”), pursuant to which EEH would acquire 100% of the issued and outstanding equity interests (the “Subject Securities”) of Novo (the “Novo Acquisition”) and (ii) an Acquisition and Cooperation Agreement (the “Cooperation Agreement”) with Northern Oil and Gas, Inc. (“NOG”), pursuant to which NOG agreed to acquire, immediately after the closing of the Novo Acquisition, an undivided 1/3 interest in Novo’s oil and natural gas properties and related assets (the “Novo Assets”) acquired pursuant to the Novo Purchase Agreement (the “Novo Divestiture” and, together with the Novo Acquisition, the “Novo Transactions”).

On August 15, 2023, the transactions contemplated in the Novo Purchase Agreement were consummated whereby EEH acquired the Subject Securities for aggregate cash consideration of approximately $1.4 billion net of customary preliminary purchase price adjustments and subject to final post-closing settlement between EEH and the Sellers (which included a $112.5 million cash deposit previously paid into escrow by EEH and NOG upon execution of the Novo Purchase Agreement and the Cooperation Agreement), which was funded with a combination of cash on hand (including cash proceeds received pursuant to the Novo Divestiture) and borrowings under the Credit Agreement.

Prior to the Novo Acquisition, EnCap Investments L.P. and certain of its affiliates (collectively, “EnCap”) owned all of the Subject Securities and, as of the date of the closing of the Acquisition, EnCap beneficially owned approximately 39.9% of the outstanding voting power of Earthstone. Three of Earthstone’s directors are employed by EnCap. The Novo Purchase Agreement and the Novo Acquisition contemplated thereby were previously evaluated and approved by the conflicts committee of the board of directors of Earthstone. See Note 12. Related Party Transactions for further discussion.

Additionally, on August 15, 2023, immediately after the completion of the Novo Acquisition, the Novo Divestiture was completed whereby EEH received approximately $468.4 million in cash, net of customary preliminary purchase price adjustments and subject to final post-closing settlement between EEH and NOG (which included a $37.5 million cash deposit previously paid into escrow by NOG upon the execution of the Cooperation Agreement) from NOG pursuant to the Cooperation Agreement in exchange for the transfer to NOG of an undivided one-third interest in the Novo Assets.

The Novo Acquisition was accounted for as an asset acquisition. The consideration paid by the Company and allocation of that amount to the underlying assets acquired, on a relative fair value basis, was recorded on the Company's books as of the date of the closing of the Novo Acquisition. Additionally, costs directly related to the Novo Acquisition were capitalized as a component of the purchase price. The consideration transferred, assets acquired and liabilities assumed by the Company were recorded as follows (in thousands):


Consideration:
Cash consideration	$	936,929
Direct transaction costs	10,038
Total consideration transferred	$	946,967

Assets acquired:
Cash	$	15,053
Current assets	78,806
Oil and gas properties	983,842
Other noncurrent assets	5,908
Amount attributable to assets acquired	$	1,083,609

Liabilities assumed:
Current liabilities	$	113,895
Asset retirement obligations	1,844
Other noncurrent liabilities	20,903
Amount attributable to liabilities assumed	$	136,642

Titus Acquisition

On June 27, 2022, Earthstone and EEH, as buyer, and Titus Oil & Gas Production, LLC, a Delaware limited liability company, Titus Oil & Gas Corporation, a Delaware corporation, Lenox Minerals, LLC, a Delaware limited liability company and Lenox Mineral Title Holdings, Inc., a Delaware corporation (collectively, “Titus I”), as seller, entered into a purchase and sale agreement (the “Titus I Purchase Agreement”) which provided that EEH or its designated wholly-owned subsidiary would acquire (the “Titus I Acquisition”) interests in oil and gas leases and related property of Titus I located in the Northern Delaware Basin of New Mexico (the “Titus I Assets”). Also on June 27, 2022, Earthstone and EEH, as buyer, and Titus Oil & Gas Production II, LLC, a Delaware limited liability company, Lenox Minerals II, LLC, a Delaware limited liability company and Lenox Mineral Holdings II, Inc., a Delaware limited liability company (collectively, “Titus II” and together with Titus I, “Titus”), as seller, entered into a purchase and sale agreement (the “Titus II Purchase Agreement” and together with the Titus I Purchase Agreement, the “Titus Purchase Agreements”) which provided that EEH or its designated wholly-owned subsidiary would acquire (the “Titus II Acquisition” and together with the Titus I Acquisition, the “Titus Acquisition”) interests in oil and gas leases and related property of Titus II located in the Northern Delaware Basin of New Mexico (the “Titus II Assets” and together with the Titus I Assets, the “Titus Assets”).

On August 10, 2022, the transactions contemplated in the Titus Purchase Agreements were consummated whereby EEH acquired the Titus Assets for aggregate consideration of approximately $568.5 million in cash, net of customary purchase price adjustments, and 3,857,015 shares of Class A Common Stock.

The Titus Acquisition was accounted for as an asset acquisition. The consideration paid by the Company and allocation of that amount to the underlying assets acquired, on a relative fair value basis, was recorded on the Company's books as of the date of the closing of the Titus Acquisition. Additionally, costs directly related to the Titus Acquisition were capitalized as a component of the purchase price. The consideration transferred, assets acquired and liabilities assumed by the Company were recorded as follows (in thousands, except share amounts and stock price):


Consideration:
Shares of Class A Common Stock issued	3,857,015
Class A Common Stock price as of August 10, 2022	$	13.89
Class A Common Stock consideration	53,574
Cash consideration	568,184
Direct transaction costs	1,202
Total consideration transferred	$	622,960

Assets acquired:
Oil and gas properties	$	626,727
Amount attributable to assets acquired	$	626,727

Liabilities assumed:
Current liabilities	$	2,853
Noncurrent liabilities - ARO	914
Amount attributable to liabilities assumed	$	3,767

Bighorn Acquisition

On January 30, 2022, Earthstone, EEH, as buyer, and Bighorn Asset Company, LLC, a Delaware limited liability company (“Bighorn”), as seller, entered into a purchase and sale agreement (the “Bighorn Agreement”). Pursuant to the Bighorn Agreement, EEH acquired (the “Bighorn Acquisition”) interests in oil and gas leases and related property of Bighorn located in the Midland Basin, Texas (the “Bighorn Assets”).

On April 14, 2022, Earthstone, EEH and Bighorn consummated the transactions contemplated in the Bighorn Agreement whereby EEH acquired the Bighorn Assets for aggregate consideration of approximately $628.3 million in cash, net of customary purchase price adjustments, and 5,650,977 shares Class A Common Stock.

The Bighorn Acquisition was accounted for as an asset acquisition. The consideration paid by the Company and allocation of that amount to the underlying assets acquired, on a relative fair value basis, was recorded on the Company's books as of the date of the closing of the Bighorn Acquisition. Additionally, costs directly related to the Bighorn Acquisition were capitalized as a component of the purchase price. The consideration transferred, assets acquired and liabilities assumed by the Company were recorded as follows (in thousands, except share amounts and stock price):


Consideration:
Shares of Class A Common Stock issued	5,650,977
Class A Common Stock price as of April 14, 2022	$	13.76
Class A Common Stock consideration	77,757
Cash consideration	625,887
Direct transaction costs	2,397
Total consideration transferred	$	706,041

Assets acquired:
Current assets	$	769
Oil and gas properties	746,211
Amount attributable to assets acquired	$	746,980

Liabilities assumed:
Suspense payable	$	25,710
Other current liabilities	2,035
Noncurrent liabilities - ARO	13,194
Amount attributable to liabilities assumed	$	40,939

Chisholm Acquisition

On December 15, 2021, Earthstone, EEH, as buyer, Chisholm Energy Operating, LLC (“OpCo”) and Chisholm Energy Agent, Inc. (“Agent” and collectively with OpCo, “Chisholm”), collectively as seller, entered into a Purchase and Sale Agreement (the “Chisholm Agreement”), which provided that EEH would acquire (the “Chisholm Acquisition”) interests in oil and gas leases and related property of Chisholm located in Lea County and Eddy County, New Mexico (the “Chisholm Assets”).

On February 15, 2022, Earthstone, EEH and Chisholm consummated the transactions contemplated in the Chisholm Agreement whereby EEH acquired the Chisholm Assets for aggregate consideration consisting of: (i) approximately $313.9 million in cash, net of customary purchase price adjustments, paid at the closing of the Chisholm Acquisition, (ii) $70 million in cash paid on April 15, 2022 and (iii) 19,417,476 shares of Class A Common Stock. The fair value of each share of Class A Common Stock was determined using the closing sales price of $12.85 per share on February 15, 2022. On April 10, 2023, 105,894 shares of Class A Common Stock were released to Earthstone from escrow and canceled in connection with the settlement of the Chisholm Acquisition. A Significant Shareholder, as identified below, was the majority owner of Chisholm as of the closing of the Chisholm Acquisition. See Note 12. Related Party Transactions for further discussion.

The Chisholm Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. 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 Class A Common Stock issued	19,311,582
Class A Common Stock price as of February 15, 2022	$	12.85
Class A Common Stock consideration	248,154
Cash consideration	383,877

Total consideration transferred	$	632,031

Fair value of assets acquired:
Oil and gas properties	$	642,391
Amount attributable to assets acquired	$	642,391

Fair value of liabilities assumed:
Other current liabilities	$	4,389
Asset retirement obligation - noncurrent	5,971
Amount attributable to liabilities assumed	$	10,360

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.

Divestitures

During the three and nine months ended September 30, 2023, the Company sold certain non-core properties for approximately $1.3 million and $57.4 million, respectively, in cash, resulting in net gains of approximately $1.3 million and $47.4 million, respectively, recorded in Gain on sale of oil and gas properties, net in the Condensed Consolidated Statements of Operations for each of the periods then ended.

During both the three and nine months ended September 30, 2022, the Company sold certain non-core properties for approximately $26.2 million in cash, resulting in a net gain of approximately $14.8 million recorded in Gain on sale of oil and gas properties, net in the Condensed Consolidated Statements of Operations for the period then ended.