Earthstone Energy, Inc. Reports Second Quarter and Year to Date 2019 Financial Results

Reports Record Production Levels and EBITDAX; Provides Updated Guidance; Announces Wellbore Development Agreement

THE WOODLANDS, Texas--()--Earthstone Energy, Inc. (NYSE: ESTE) (“Earthstone”, the “Company”, “we” or “us”), today announced financial and operating results for the quarter and six months ended June 30, 2019.

Second Quarter 2019 Highlights

  • Average daily production of 12,699 Boepd(1), 61% oil, 13% above the first quarter of 2019 and 44% above the second quarter of 2018, and a Company record level of daily production
  • Adjusted EBITDAX(2) of $33.6 million, a 4% increase over the first quarter of 2019 and 64% above the second quarter of 2018, and a Company record level of quarterly Adjusted EBITDAX
  • Adjusted EBITDAX(2) per Boe of $29.11
  • Generated an Operating Margin(2) of $29.27 per Boe ($33.25 including realized hedge settlements)
  • Capital expenditures of $31.1 million representing 15% of updated guidance with expected 2019 total capital expenditures of $205 million
  • Net income of $19.5 million, or $0.30 per Adjusted Diluted Share(2)
    • Adjusted net income of $14.9 million, or $0.23 per Adjusted Diluted Share(2)
  • Entered into Wellbore Development Agreement (“WDA”) on eight wells in 2019 with an unaffiliated industry partner providing enhanced returns to the Company and accelerating development

Year to Date 2019 Highlights

  • Average daily production of 11,958 Boepd(1), 64% oil, 29% above the six months ended June 30, 2018
  • Adjusted EBITDAX(2) of $66.0 million, a 44% increase over the six months ended June 30, 2018
  • Adjusted EBITDAX(2) per Boe of $30.50
  • Generated an Operating Margin of $30.45 per Boe ($35.04 including realized hedge settlements)(2)
  • Capital expenditures of $73.8 million representing 36% of updated guidance with expected 2019 total capital expenditures of $205 million
  • Net loss of $18.9 million, or $0.29 per Adjusted Diluted Share(2)
    • Adjusted net income of $28.9 million, or $0.45 per Adjusted Diluted Share(2)

(1)

Represents reported sales volumes.

(2)

Adjusted EBITDAX, Operating Margin, Adjusted Net Income and Adjusted Dilutive Shares are non-GAAP financial measures. See “Reconciliation of Non-GAAP Financial Measures” section below.

Management Comments

Robert J. Anderson, President of Earthstone Energy, Inc., commented, “We are pleased with our results so far this year and have geared up for our second half-weighted completions schedule that positions us to continue achieving profitable growth and peer leading margins. We are pleased to announce that we have entered into a Wellbore Development Agreement with an unaffiliated industry partner that will enhance our drilling economics and provide optionality in our future drilling plans as we meet our limited drilling obligations on an accelerated basis. We expect our revised capital program to result in bringing on 14 gross Midland Basin operated wells and 10 gross Eagle Ford operated wells from late in the third quarter through the end of the fourth quarter. Based largely on well performance year to date exceeding our expectations, we are moderately raising our production guidance for 2019. Further, based on both well performance year to date and on our revised capital program, we now expect a significantly higher exit rate of 14,000-15,000 barrels of oil equivalent per day. Between our updated exit rate expectations and the approximately $50 million of our estimated 2019 capital expenditures that will result in 2020 sales volumes, we will be very well positioned to begin 2020.”

Operational Update

Midland Basin - In the Midland Basin, we completed drilling our five-well program in Midland County on our Mid-States project (67% working interest) during the second quarter and began frac’ing in July. We targeted the Wolfcamp A and B intervals with 10,000-foot laterals.

We recently entered into a Wellbore Development Agreement (“WDA”) with an unaffiliated industry partner, which is incorporated into our revised guidance. The industry partner will participate in eight wells in Reagan County in 2019, with an option to participate in up to 11 additional wells in 2020 and will earn 35% of the working interest in these wells by paying a higher portion of the capital costs.

To efficiently execute our revised program, we recently deployed a top performing high-specification rig in the Midland Basin which has already resulted in tangible increases in efficiency. We are currently running both this newly deployed rig and our legacy rig in the Midland Basin, and expect to release the legacy rig by the end of the third quarter.

We began drilling late in the second quarter in central Reagan County on a three-well pad on our TSRH unit (65% working interest net of our WDA), where we are targeting two wells in the Wolfcamp B Upper and one well in the Wolfcamp B Lower, each with anticipated 12,000-foot laterals. Also, in central Reagan County, we recently commenced drilling a two-well pad in our Julie Hughes unit, with both wells targeting the Wolfcamp B Upper (65% working interest net of our WDA) with 10,000-foot laterals.

We are participating in non-operated projects in various stages of drilling and completions across our position in Howard, Martin and Midland counties with working interests ranging from 2.6% to 46%.

In the Midland Basin, our total operated and non-operated production in the 2019 second quarter averaged approximately 11,392 Boepd.

Eagle Ford - In the Eagle Ford, we have initiated drilling on a ten-well project in southern Gonzales County, Texas (51% average working interest). These wells will average approximately 7,200-foot laterals with completion operations anticipated to begin by the end of the third quarter. Total operated and non-operated production in the second quarter averaged approximately 1,308 Boepd.

Guidance Update

The Company has increased its 2019 capital budget from $190 million to $205 million, which includes two temporarily overlapping operated rigs in the Midland Basin and one operated rig in the Eagle Ford. We intend to release one rig in the Midland Basin by the end of the third quarter of 2019 and will continue to run one high-specification rig thereafter. Our budget in the Midland Basin further assumes non-operated activities as currently proposed by operators. In the Eagle Ford, we have extended our 2019 drilling program from seven to ten gross wells, all of which we expect to complete by year-end. This budget is subject to change due to changes in scheduling, service costs and non-operated activity, amongst other factors.

Management currently estimates that approximately $50 million of the Company’s 2019 capital budget, shown below, will be applicable to production growth for 2020 rather than 2019. Further, although we continue to focus on trades and acquisitions that will enhance our existing operated acreage and production, our projected capital expenditures do not include any acquisitions or trades. Capital expenditures, production and operating costs for 2019 are currently estimated to be:

 

 

 

Number of

 

Number of

 

$ millions

 

Gross / Net

 

Gross / Net

2019 Capital Expenditures

(Net)

 

Wells Spudded

 

Wells On Line

Drilling and Completion:

 

 

 

 

 

Operated Midland Basin (1 Rig)

$

135

 

 

19 / 14.7

 

17 / 12.6

Non-Operated Midland Basin

25

 

 

20 / 5.0

 

5 / 2.0

Operated Eagle Ford

30

 

 

10 / 5.1

 

10 / 5.1

Land / Infrastructure

15

 

 

 

 

 

2019 Total Capital Expenditures

$

205

 

(1)

 

 

 

(1)

Management estimates that approximately $50 million of the Company’s total capital budget will be applicable to production growth for 2020 rather than 2019.

2019 Average Daily Production (Boepd)

11,250 - 12,250

% Oil

65%

% Gas

16%

% NGL

19%

2019 Exit Rate (Boepd)

14,000 - 15,000

 

 

2019 Operating Costs

 

Lease Operating and Workover ($/Boe)

$6.25 - $6.75

Production Taxes (% of Revenue)

5.0% - 5.3%

Cash G&A ($/Boe)

$4.50 - $5.00

Note: Guidance is forward-looking information that is subject to considerable change and numerous risks and uncertainties, many of which are beyond Earthstone’s control. See “Forward-Looking Statements” section below.

Selected Financial Data (unaudited)

($000s except where noted)

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

2019

 

2018

 

2019

 

2018

Total Revenues

44,542

 

37,150

 

 

85,270

 

 

78,045

 

 

 

 

 

 

 

 

 

Lease operating expense

8,605

 

5,009

 

 

15,272

 

 

9,666

 

 

 

 

 

 

 

 

 

General and administrative expense (excluding stock-based compensation)

4,767

 

5,213

 

 

9,825

 

 

9,852

 

Stock-based compensation (non-cash)

2,261

 

2,073

 

 

4,473

 

 

4,013

 

General and administrative expense

7,028

 

7,286

 

 

14,298

 

 

13,865

 

 

 

 

 

 

 

 

 

Net income (loss)

19,536

 

1,472

 

 

(18,907

)

 

13,663

 

Less: Net income (loss) attributable to noncontrolling interest

10,759

 

822

 

 

(10,480

)

 

7,692

 

Net income (loss) attributable to Earthstone Energy, Inc.

8,777

 

650

 

 

(8,427

)

 

5,971

 

Net income (loss) per common share(1)

 

 

 

 

 

 

 

Basic

0.30

 

0.02

 

 

(0.29

)

 

0.21

 

Diluted

0.30

 

0.02

 

 

(0.29

)

 

0.21

 

Adjusted EBITDAX(2)

33,637

 

20,503

 

 

66,010

 

(5)

45,796

 

 

 

 

 

 

 

 

 

Production(3):

 

 

 

 

 

 

 

Oil (MBbls)

704

 

505

 

 

1,382

 

 

1,051

 

Gas (MMcf)

1,243

 

892

 

 

2,070

 

 

1,936

 

NGL (MBbls)

245

 

151

 

 

438

 

 

301

 

Total (MBoe)(4)

1,156

 

805

 

 

2,164

 

 

1,675

 

Average Daily Production (Boepd)

12,699

 

8,845

 

 

11,958

 

 

9,252

 

Average Prices:

 

 

 

 

 

 

 

Oil ($/Bbl)

57.92

 

63.16

 

 

55.17

 

 

63.11

 

Gas ($/Mcf)

0.10

 

2.00

 

 

0.59

 

 

2.31

 

NGL ($/Bbl)

14.90

 

22.92

 

 

17.89

 

 

24.11

 

Total ($/Boe)

38.54

 

46.16

 

 

39.40

 

 

46.60

 

Adj. for Realized Derivatives Settlements:

 

 

 

 

 

 

 

Oil ($/Bbl)(5)

61.92

 

53.09

 

 

60.88

 

 

54.14

 

Gas ($/Mcf)(5)

1.54

 

2.10

 

 

1.58

 

 

2.39

 

NGL ($/Bbl)

14.90

 

22.92

 

 

17.89

 

 

24.11

 

Total ($/Boe)(5)

42.52

 

39.95

 

 

43.99

 

 

41.07

 

Operating Margin per Boe

 

 

 

 

 

 

 

Average realized price(5)

38.54

 

46.16

 

 

39.40

 

 

46.60

 

Lease operating expense

7.44

 

6.22

 

 

7.06

 

 

5.77

 

Severance taxes

1.83

 

2.27

 

 

1.89

 

 

2.31

 

Operating margin per Boe

29.27

 

37.67

 

 

30.45

 

 

38.52

 

Realized hedge settlements

3.98

 

(6.21

)

 

4.59

 

 

(5.53

)

Operating margin per Boe (including realized hedge settlements)

33.25

 

31.46

 

 

35.04

 

 

32.99

 

(1)

Net income (loss) per common share attributable to Earthstone Energy, Inc.

(2)

See “Reconciliation of 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).

(5)

Includes $2.1 million of cash proceeds related to hedges unwound during the first quarter of 2019.

Liquidity Update

As of June 30, 2019, we had $5.8 million in cash and $110.0 million of long-term debt outstanding under our credit facility with a borrowing base of $325 million. With the $215 million of undrawn borrowing base capacity and $5.8 million in cash, we had total liquidity of approximately $220.8 million.

Capital Expenditures

During the three months ended June 30, 2019, we incurred capital expenditures of approximately $31.1 million, on an accrual basis, primarily consisting of drilling and completion costs.

Hedging Update

Subsequent to June 30, 2019, we entered into additional hedges consisting of Crude Oil Swaps on 731 MBbls at a price of $54.47/Bbl for 2020 and 2021, WTI Midland Argus Crude Basis Swaps on 366 MBbls at a price of $0.55/Bbl for 2020 and WTI Midland Argus Crude Basis Swaps on 730 MBbls at a price of $0.85/Bbl for 2021.

The following table sets forth our outstanding derivative contracts as of July 1, 2019 updated for contracts entered into through August 1, 2019. When aggregating multiple contracts, the weighted average contract price is disclosed.

As of July 1, 2019 (Updated through August 1, 2019):

 

 

Price Swaps

Period

 

Commodity

 

Volume
(Bbls / MMBtu)

 

Weighted Average Price
($/Bbl / $/MMBtu)

Q3 - Q4 2019

 

Crude Oil

 

1,177,600

 

$65.63

Q1 - Q4 2020

 

Crude Oil

 

2,196,000

 

$62.25

Q1 - Q4 2021

 

Crude Oil

 

730,000

 

$55.00

Q3 - Q4 2019

 

Crude Oil Basis Swap(1)

 

1,012,000

 

$(5.29)

Q3 - Q4 2019

 

Crude Oil Basis Swap(2)

 

184,000

 

$4.50

Q1 - Q4 2020

 

Crude Oil Basis Swap(1)

 

2,196,000

 

$(1.69)

Q1 - Q4 2021

 

Crude Oil Basis Swap(1)

 

730,000

 

$0.85

Q3 - Q4 2019

 

Natural Gas

 

1,564,000

 

$2.85

Q1 - Q4 2020

 

Natural Gas

 

2,562,000

 

$2.85

Q3 - Q4 2019

 

Natural Gas Basis Swap(3)

 

1,564,000

 

$(1.16)

Q1 - Q4 2020

 

Natural Gas Basis Swap(3)

 

2,562,000

 

$(1.07)

(1)

The basis differential price is between WTI Midland Argus Crude and the WTI NYMEX.

(2)

The basis differential price is between LLS Argus Crude 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 Wednesday, August 7, 2019 at 12:00 p.m. Eastern (11:00 a.m. Central) to discuss the Company’s financial results for the second quarter 2019 and its outlook for the remainder of 2019. Prepared remarks by Robert J. Anderson, President, and Mark Lumpkin, Jr., Executive Vice President and Chief Financial Officer will be followed by a question and answer session. The Company intends to file its earnings press release for the period ended June 30, 2019, prior to the conference call.

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 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 and webcast will be available on the Company’s website and by telephone until 12:00 p.m. Eastern (11:00 a.m. Central), Wednesday, August 21, 2019. The number for the replay is 877-660-6853 for domestic calls or 201-612-7415 for international calls, using Replay ID: 13693070.

About Earthstone Energy, Inc.

Earthstone Energy, Inc. is a growth-oriented, independent energy company engaged in development and operation of oil and natural gas properties. The Company’s primary assets are in the Midland Basin of west Texas and the Eagle Ford Trend of south Texas. Earthstone is traded on 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 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, 2018, quarterly reports on Form 10-Q, recent current reports on Form 8-K, and other Securities and Exchange Commission (“SEC”) filings. Earthstone undertakes no obligation to revise or update publicly any forward-looking statements except as required by law.

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share amounts)

 

 

 

June 30,

 

December 31,

ASSETS

 

2019

 

2018

Current assets:

 

 

 

 

Cash

 

$

5,785

 

 

$

376

 

Accounts receivable:

 

 

 

 

Oil, natural gas, and natural gas liquids revenues

 

13,464

 

 

13,683

 

Joint interest billings and other, net of allowance of $133 and $134 at June 30, 2019 and December 31, 2018, respectively

 

8,870

 

 

4,166

 

Derivative asset

 

8,578

 

 

43,888

 

Prepaid expenses and other current assets

 

6,692

 

 

1,443

 

Total current assets

 

43,389

 

 

63,556

 

 

 

 

 

 

Oil and gas properties, successful efforts method:

 

 

 

 

Proved properties

 

823,266

 

 

755,443

 

Unproved properties

 

272,007

 

 

266,140

 

Land

 

5,382

 

 

5,382

 

Total oil and gas properties

 

1,100,655

 

 

1,026,965

 

 

 

 

 

 

Accumulated depreciation, depletion and amortization

 

(155,085

)

 

(127,256

)

Net oil and gas properties

 

945,570

 

 

899,709

 

 

 

 

 

 

Other noncurrent assets:

 

 

 

 

Goodwill

 

17,620

 

 

17,620

 

Office and other equipment, net of accumulated depreciation and amortization of $2,857 and $2,490 at June 30, 2019 and December 31, 2018, respectively

 

1,350

 

 

662

 

Derivative asset

 

6,934

 

 

21,121

 

Operating lease right-of-use assets

 

870

 

 

 

Other noncurrent assets

 

1,615

 

 

1,640

 

TOTAL ASSETS

 

$

1,017,348

 

 

$

1,004,308

 

LIABILITIES AND EQUITY

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

 

$

21,497

 

 

$

26,452

 

Revenues and royalties payable

 

24,904

 

 

28,748

 

Accrued expenses

 

21,260

 

 

22,406

 

Asset retirement obligation

 

410

 

 

557

 

Advances

 

9,647

 

 

3,174

 

Derivative liability

 

176

 

 

528

 

Operating lease liabilities

 

507

 

 

 

Finance lease liabilities

 

318

 

 

 

Total current liabilities

 

78,719

 

 

81,865

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

Long-term debt

 

110,000

 

 

78,828

 

Deferred tax liability

 

13,642

 

 

13,489

 

Asset retirement obligation

 

1,771

 

 

1,672

 

Derivative liability

 

1,099

 

 

1,891

 

Operating lease liabilities

 

394

 

 

 

Finance lease liabilities

 

160

 

 

 

Other noncurrent liabilities

 

 

 

71

 

Total noncurrent liabilities

 

127,066

 

 

95,951

 

 

 

 

 

 

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; 29,031,504 and 28,696,321 issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

29

 

 

29

 

Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 35,416,446 and 35,452,178 issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

35

 

 

35

 

Additional paid-in capital

 

521,361

 

 

517,073

 

Accumulated deficit

 

(190,857

)

 

(182,497

)

Total Earthstone Energy, Inc. equity

 

330,568

 

 

334,640

 

Noncontrolling interest

 

480,995

 

 

491,852

 

Total equity

 

811,563

 

 

826,492

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,017,348

 

 

$

1,004,308

 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2019

 

2018

 

2019

 

2018

REVENUES

 

 

 

 

Oil

 

$

40,767

 

 

$

31,903

 

 

$

76,214

 

 

$

66,320

 

Natural gas

 

129

 

 

1,783

 

 

1,223

 

 

4,467

 

Natural gas liquids

 

3,646

 

 

3,464

 

 

7,833

 

 

7,258

 

Total revenues

 

44,542

 

 

37,150

 

 

85,270

 

 

78,045

 

 

 

 

 

 

 

 

 

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Lease operating expense

 

8,605

 

 

5,009

 

 

15,272

 

 

9,666

 

Severance taxes

 

2,109

 

 

1,824

 

 

4,097

 

 

3,861

 

Depreciation, depletion and amortization

 

14,197

 

 

10,812

 

 

28,202

 

 

20,520

 

General and administrative expense

 

7,028

 

 

7,286

 

 

14,298

 

 

13,865

 

Transaction costs

 

 

 

 

 

175

 

 

 

Accretion of asset retirement obligation

 

54

 

 

43

 

 

108

 

 

84

 

Total operating costs and expenses

 

31,993

 

 

24,974

 

 

62,152

 

 

47,996

 

 

 

 

 

 

 

 

 

 

(Loss) gain on sale of oil and gas properties

 

(201

)

 

63

 

 

(326

)

 

512

 

 

 

 

 

 

 

 

 

 

Income from operations

 

12,348

 

 

12,239

 

 

22,792

 

 

30,561

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Interest expense, net

 

(1,677

)

 

(610

)

 

(3,126

)

 

(1,223

)

Gain (loss) on derivative contracts, net

 

9,496

 

 

(10,850

)

 

(38,398

)

 

(16,125

)

Other (expense) income, net

 

(18

)

 

391

 

 

(22

)

 

397

 

Total other income (expense)

 

7,801

 

 

(11,069

)

 

(41,546

)

 

(16,951

)

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

20,149

 

 

1,170

 

 

(18,754

)

 

13,610

 

Income tax (expense) benefit

 

(613

)

 

302

 

 

(153

)

 

53

 

Net income (loss)

 

19,536

 

 

1,472

 

 

(18,907

)

 

13,663

 

 

 

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest

 

10,759

 

 

822

 

 

(10,480

)

 

7,692

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Earthstone Energy, Inc.

 

$

8,777

 

 

$

650

 

 

$

(8,427

)

 

$

5,971

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share attributable to Earthstone Energy, Inc.:

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

 

$

0.02

 

 

$

(0.29

)

 

$

0.21

 

Diluted

 

$

0.30

 

 

$

0.02

 

 

$

(0.29

)

 

$

0.21

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

28,895,893

 

 

27,987,509

 

 

28,808,205

 

 

27,886,220

 

Diluted

 

29,228,886

 

 

28,036,052

 

 

28,808,205

 

 

27,967,421

 

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

 

 

For the Six Months Ended
June 30,

 

 

2019

 

2018

Cash flows from operating activities:

 

 

Net (loss) income

 

$

(18,907

)

 

$

13,663

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

Depreciation, depletion and amortization

 

28,202

 

 

20,520

 

Accretion of asset retirement obligations

 

108

 

 

84

 

Settlement of asset retirement obligations

 

(179

)

 

(79

)

Loss (gain) on sale of oil and gas properties

 

326

 

 

(512

)

Total loss on derivative contracts, net

 

38,398

 

 

16,125

 

Operating portion of net cash received (paid) in settlement of derivative contracts

 

9,956

 

 

(9,267

)

Stock-based compensation

 

4,473

 

 

4,013

 

Deferred income taxes

 

153

 

 

(53

)

Amortization of deferred financing costs

 

215

 

 

143

 

Changes in assets and liabilities:

 

 

 

 

(Increase) decrease in accounts receivable

 

(1,257

)

 

4,475

 

(Increase) decrease in prepaid expenses and other current assets

 

(537

)

 

(992

)

Increase (decrease) in accounts payable and accrued expenses

 

(5,222

)

 

(17,287

)

Increase (decrease) in revenues and royalties payable

 

(3,845

)

 

8,437

 

Increase in advances

 

3,400

 

 

14,159

 

Net cash provided by operating activities

 

55,284

 

 

53,429

 

Cash flows from investing activities:

 

 

 

 

Additions to oil and gas properties

 

(79,760

)

 

(68,516

)

Additions to office and other equipment

 

(202

)

 

(53

)

Proceeds from sales of oil and gas properties

 

2

 

 

210

 

Net cash used in investing activities

 

(79,960

)

 

(68,359

)

Cash flows from financing activities:

 

 

 

 

Proceeds from borrowings

 

128,087

 

 

25,000

 

Repayments of borrowings

 

(96,915

)

 

(27,500

)

Cash paid related to the exchange and cancellation of Class A Common Stock

 

(661

)

 

(1,116

)

Cash paid for finance leases

 

(237

)

 

 

Deferred financing costs

 

(189

)

 

(213

)

Net cash provided by (used in) financing activities

 

30,085

 

 

(3,829

)

Net increase (decrease) in cash

 

5,409

 

 

(18,759

)

Cash at beginning of period

 

376

 

 

22,955

 

Cash at end of period

 

$

5,785

 

 

$

4,196

 

Supplemental disclosure of cash flow information

 

 

 

 

Cash paid for:

 

 

 

 

Interest

 

$

2,760

 

 

$

986

 

Non-cash investing and financing activities:

 

 

 

 

Accrued capital expenditures

 

$

16,714

 

 

$

25,791

 

Lease asset additions - ASC 842

 

$

1,573

 

 

$

 

Asset retirement obligations

 

$

23

 

 

$

(141

)

Earthstone Energy, Inc.
Reconciliation of Non-GAAP Financial Measures
Unaudited

The non-GAAP financial measures of Adjusted EBITDAX and Adjusted Net Income, as defined and calculated by us 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 income (loss) because of its wide acceptance by the investment community as a financial indicator.

I. Adjusted Diluted Shares

We define “Adjusted Diluted Shares” as diluted shares plus outstanding shares of Class B Common Stock.

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 (loss) as an indicator of operating performance.

Weighted average common shares outstanding for the periods indicated:

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2019

 

2018

 

2019

 

2018

Class A Common Stock - Diluted

29,228,886

 

28,036,052

 

28,808,205

 

27,967,421

Class B Common Stock

35,423,551

 

35,850,988

 

35,437,786

 

35,877,214

Adjusted Diluted Shares

64,652,437

 

63,887,040

 

64,245,991

 

63,844,635

II. Adjusted EBITDAX

We define “Adjusted EBITDAX” as net income (loss) plus, when applicable, accretion of asset retirement obligations; impairment expense; depletion, depreciation and amortization; interest expense, net; transaction costs; loss (gain) on sale of oil and gas properties; unrealized (gain) loss on derivatives; stock-based compensation; and income tax expense (benefit).

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 income (loss) 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 income (loss) to Adjusted EBITDAX for the periods indicated:

($000s)

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2019

 

2018

 

2019

 

2018

Net income (loss)

19,536

 

 

1,472

 

 

(18,907

)

 

13,663

 

Accretion of asset retirement obligations

54

 

 

43

 

 

108

 

 

84

 

Depletion, depreciation and amortization

14,197

 

 

10,812

 

 

28,202

 

 

20,520

 

Interest expense, net

1,677

 

 

610

 

 

3,126

 

 

1,223

 

Transaction costs

 

 

 

 

175

 

 

 

Loss (gain) on sale of oil and gas properties

201

 

 

(63

)

 

326

 

 

(512

)

Unrealized (gain) loss on derivative contracts

(4,902

)

 

5,858

 

 

48,354

 

 

6,858

 

Stock based compensation (non-cash)(1)

2,261

 

 

2,073

 

 

4,473

 

 

4,013

 

Income tax expense (benefit)

613

 

 

(302

)

 

153

 

 

(53

)

Adjusted EBITDAX

33,637

 

 

20,503

 

 

66,010

 

 

45,796

 

Total production (MBoe)(2)(3)

1,156

 

 

805

 

 

2,164

 

 

1,675

 

Adjusted EBITDAX per Boe

29.11

 

 

25.47

 

 

30.50

 

 

27.34

 

(1)

Included in General and administrative expense in the Condensed Consolidated Statements of Operations.

(2)

Represents reported sales volumes.

(3)

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).

III. Adjusted Net Income

We define “Adjusted Net Income” as net income (loss) plus, when applicable, unrealized (gain) loss on derivative contracts; impairment expense; loss (gain) on sale of oil and gas properties; 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 income (loss) 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.

The following table provides a reconciliation of Net income (loss) to Adjusted Net Income for the periods indicated:

($000s)

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2019

 

2018

 

2019

 

2018

Net income (loss)

19,536

 

 

1,472

 

 

(18,907

)

 

13,663

 

Unrealized (gain) loss on derivative contracts

(4,902

)

 

5,858

 

 

48,354

 

 

6,858

 

Loss (gain) on sale of oil and gas properties

201

 

 

(63

)

 

326

 

 

(512

)

Transaction costs

 

 

 

 

175

 

 

 

Income tax effect of the above

96

 

 

(110

)

 

(1,003

)

 

(120

)

Adjusted Net Income

14,931

 

 

7,157

 

 

28,945

 

 

19,889

 

Adjusted Dilutive Shares

64,652,437

 

 

63,887,040

 

 

64,245,991

 

 

63,844,635

 

Adjusted Net Income per Adjusted Diluted Share

0.23

 

 

0.11

 

 

0.45

 

 

0.31

 

IV. Operating Margin

We define “Operating Margin” as total revenues less lease operating expenses and severance taxes.

Our Operating Margin measure provides additional information that may be used to further understand our operations. We use Operating Margin 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 should not be considered as an alternative to, or more meaningful than, net income (loss) as an indicator of operating performance. Operating Margin, as used by us, may not be comparable to similarly titled measures reported by other companies.

Operating Margin for the periods indicated:

(000's)

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2019

 

2018

 

2019

 

2018

Total revenues

44,542

 

37,150

 

85,270

 

78,045

Less: Lease operating expense

8,605

 

5,009

 

15,272

 

9,666

Less: Severance taxes

2,109

 

1,824

 

4,097

 

3,861

Operating Margin

33,828

 

30,317

 

65,901

 

64,518

Total production (MBoe)(1)(2)

1,156

 

805

 

2,164

 

1,675

Operating Margin per Boe

29.27

 

37.67

 

30.45

 

38.52

(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).

 

Contacts

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

Contacts

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