Long-Term Debt

9 Months Ended

Sep. 30, 2023

The Company's long-term debt consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Revolving credit facility	$	700,383	$	270,136
Term loan under credit facility due 2027	—		250,000
8.000% Senior notes due 2027	550,000		550,000
9.875% Senior notes due 2031	500,000		—
	1,750,383		1,070,136
Unamortized debt issuance costs on term loan	—		(5,309)
Unamortized debt issuance costs on 8.000% Senior notes	(9,016)		(10,948)
Original issue discount on 9.875% Senior notes	(9,956)		—
Unamortized debt issuance costs on 9.875% Senior notes	(9,345)		—
Long-term debt, net	$	1,722,066	$	1,053,879

Credit Agreement

On November 21, 2019, Earthstone, EEH (the “Borrower”), Wells Fargo Bank, National Association, as Administrative Agent and Issuing Bank (“Wells Fargo”), BOKF, NA dba Bank of Texas, as Issuing Bank with respect to Existing Letters of Credit, Royal Bank of Canada, as Syndication Agent, Truist Bank, as successor by merger to SunTrust Bank, as Documentation Agent, and the Lenders party thereto (collectively, the “Parties”) entered into a credit agreement (together with all amendments or other modifications, the “Credit Agreement”), which replaced the prior credit facility, which was terminated on November 21, 2019.

On March 30, 2023, Earthstone, EEH, Wells Fargo, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amendment (the “Eighth Amendment”) to the Credit Agreement. Among other things, the Eighth Amendment (i) increased elected commitments from $1.2 billion to $1.4 billion, (ii) settled the $250 million term loan tranche under the Credit Agreement (the “Term Loan”) through an elected revolving commitment, (iii) redetermined the borrowing base at $1.65 billion as a part of the regularly scheduled redetermination, (iv) added new banks to the lending group, and (v) made certain administrative changes.

On July 7, 2023, Earthstone, EEH, Wells Fargo, the Lenders and the guarantors party thereto entered into an amendment (the “Ninth Amendment”) to the Credit Agreement. Among other things, the Ninth Amendment (i) added JPMorgan Chase Bank, N.A. and Citibank N.A. as new Lenders, arrangers, and documentation agents for the Lenders under the Credit Agreement, (ii) increased the aggregate elected borrowing base commitments from $1.40 billion to $1.75 billion, and (iii) increased the borrowing base from $1.65 billion to $2.00 billion.

The next regularly scheduled redetermination of the borrowing base is expected to occur on or around December 31, 2023. Subsequent redeterminations are expected to occur on or about each May 1st and November 1st thereafter. The amounts borrowed under the Credit Agreement bear annual interest rates at either (a) the adjusted SOFR Rate (as customarily defined) (the “Adjusted Term SOFR Rate”) plus 2.25% to 3.25% or (b) the sum of (i) the greatest of (A) the prime rate of Wells Fargo, (B) the federal funds rate plus ½ of 1.0%, and (C) the Adjusted Term SOFR Rate for an interest rate period of one month plus

1.0%, (ii) plus 1.25% to 2.25%, depending on the amount borrowed under the Credit Agreement. Principal amounts outstanding under the Credit Agreement are due and payable in full at maturity on June 2, 2027. All of the obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of EEH’s assets. Additional payments due under the Credit Agreement include paying a commitment fee of 0.375% to 0.50% per year, depending on the amount borrowed under the Credit Agreement, to the Lenders in respect of the unutilized commitments thereunder. EEH is also required to pay customary letter of credit fees.

The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, EEH’s ability to incur additional indebtedness, create liens on assets, make investments, pay dividends and distributions or repurchase its limited liability interests, engage in mergers or consolidations, sell certain assets, sell or discount any notes receivable or accounts receivable and engage in certain transactions with affiliates.

In addition, the Credit Agreement requires EEH to maintain the following financial covenants: a current ratio, (as such term is defined in the Credit Agreement) of not less than 1.0 to 1.0 and a consolidated leverage ratio of not greater than 3.5 to 1.0. Consolidated leverage ratio means the ratio of (i) the aggregate debt of EEH and its consolidated subsidiaries as at the last day of the fiscal quarter to (ii) EBITDAX for the applicable period, which was calculated as EBITDAX for the four consecutive fiscal quarters ending on such date. The term “EBITDAX” means, for any period, the sum of consolidated net income (loss) for such period plus (a) the following expenses or charges to the extent deducted from consolidated net income (loss) in such period: (i) interest, (ii) taxes, (iii) depreciation, (iv) depletion, (v) amortization, (vi) certain distributions to employees related to the stock compensation, (vii) certain transaction related expenses, (viii) reimbursed indemnification expenses related to certain dispositions and investments, (ix) non-cash extraordinary, usual, or nonrecurring expenses or losses, (x) other non-cash charges and minus (b) to the extent included in consolidated net income (loss) in such period: (i) non-cash income, (ii) gains on asset dispositions, disposals and abandonments outside of the ordinary course of business and (iii) to the extent not otherwise deducted from consolidated net income (loss), the aggregate amount of any pass-through cash distributions received by Borrower during such period in an amount equal to the aggregate amount of pass-through cash distributions actually made by Borrower during such period.

The Credit Agreement contains customary affirmative covenants and defines events of default to include failure to pay principal or interest, breach of covenants, breach of representations and warranties, insolvency, judgment default and a change in control. Upon the occurrence and continuance of an event of default, the Lenders have the right to accelerate repayment of the loans and exercise their remedies with respect to the collateral. As of September 30, 2023, EEH was in compliance with the covenants under the Credit Agreement.

As of September 30, 2023, $700.4 borrowings were outstanding under the Credit Agreement, resulting in $1.0 billion of borrowing base availability. At December 31, 2022, $270.1 million and $250.0 million of borrowings were outstanding under the revolving tranche and the term loan tranche of the Credit Agreement, respectively.

For the three and nine months ended September 30, 2023, the interest rate on borrowings under the revolving tranche of the Credit Agreement averaged 8.28% and 7.82% per annum, respectively, which excluded commitment fees of $1.2 million and $2.8 million, respectively, and amortization of deferred financing costs of $1.2 million and $3.2 million, respectively. For the three and nine months ended September 30, 2022, the interest rate on borrowings under the Credit Agreement averaged 4.75% and 4.29% per annum, respectively, which excluded commitment fees of $1.0 million and $1.1 million, respectively, and amortization of deferred financing costs of $0.8 million and $2.4 million, respectively.

$3.7 million of costs associated with the revolving tranche of the Credit Agreement were capitalized during the three months ended September 30, 2023. During the nine months ended September 30, 2023, the Company capitalized $6.8 million of costs associated with the revolving tranche of the Credit Agreement. There were no costs associated with the term loan tranche of the Credit Agreement to capitalize during the three and nine months ended September 30, 2023. During the three and nine months ended September 30, 2022, the Company capitalized $3.6 million and $15.2 million, respectively, of costs associated with the Credit Agreement. The Company’s policy is to capitalize the financing costs associated with its debt and amortize those costs on a straight-line basis over the term of the associated debt, which approximates the effective interest method over the term of the related debt.

8.000% Senior Notes

As of September 30, 2023, there were $550.0 million in outstanding senior notes due 2027 (the “2027 Notes”). The 2027 Notes will mature on April 15, 2027 with interest accruing at a rate of 8.000% per annum payable semi-annually in cash in arrears on April 15 and October 15 of each year. The 2027 Notes are guaranteed on a senior unsecured basis by Earthstone and four subsidiaries of EEH (the “Guarantors”) and the 2027 Notes may be guaranteed by certain of EEH’s future restricted subsidiaries. The 2027 Notes are unsecured, rank equally in right of payment with all existing and future senior unsecured indebtedness of EEH and the Guarantors, including the 2031 Notes, and rank senior in right of payment to any future subordinated indebtedness of EEH and the Guarantors. The 2027 Notes will rank effectively junior to all secured indebtedness of EEH and the Guarantors, including indebtedness under the Credit Agreement, to the extent of the value of the assets securing such indebtedness. The 2027 Notes will rank structurally junior in right of payment to all indebtedness and other liabilities, including trade payables, of any future subsidiary of EEH that are not guarantors. The indenture dated April 12, 2022 under which the 2027 Notes were issued also contains certain restrictive covenants, redemption rights, events of default and other customary provisions.

As of September 30, 2023, accrued interest of $20.3 million associated with the 2027 Notes was included in Accrued expenses in the Condensed Consolidated Balance Sheets.

9.875% Senior Notes

On June 30, 2023, EEH completed an offering of $500.0 million aggregate principal amount of EEH’s 9.875% senior notes due 2031 (the “2031 Notes”). The 2031 Notes will mature on July 15, 2031 with interest accruing at a rate of 9.875% per annum payable semi-annually in cash in arrears on January 15 and July 15 of each year, commencing January 15, 2024. The 2031 Notes are guaranteed on a senior unsecured basis by the Guarantors and the 2031 Notes may be guaranteed by certain of EEH’s future restricted subsidiaries. The 2031 Notes are unsecured, rank equally in right of payment with all existing and future senior unsecured indebtedness of EEH and the Guarantors, including the 2027 Notes, and rank senior in right of payment to any future subordinated indebtedness of EEH and the Guarantors. The 2031 Notes will rank effectively junior to all secured indebtedness of EEH and the Guarantors, including indebtedness under the Credit Agreement, to the extent of the value of the assets securing such indebtedness. The 2031 Notes will rank structurally junior in right of payment to all indebtedness and other liabilities, including trade payables, of any future subsidiary of EEH that are not guarantors. The indenture dated June 30, 2023 under which the 2031 Notes were issued (the “Indenture”) also contains certain restrictive covenants, redemption rights, events of default and other customary provisions.

As of September 30, 2023, accrued interest of $12.5 million associated with the 2031 Notes was included in Accrued expenses in the Condensed Consolidated Balance Sheets.