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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________ 
FORM 10-Q
_________________________________________________________  
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2021
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-35049  
_________________________________________________________ 
EARTHSTONE ENERGY, INC.
(Exact name of registrant as specified in its charter)
 _________________________________________________________ 
 
Delaware 84-0592823
(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380
(Address of principal executive offices)
Registrant’s telephone number, including area code:  (281) 298-4246
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, $0.001 par value per shareESTENew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes   No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer 
  Accelerated filer 
Non-accelerated filer 
  Smaller reporting company 
Emerging growth company   
    
 


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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  
As of April 29, 2021, 44,106,541 shares of Class A Common Stock, $0.001 par value per share, and 34,429,340 shares of Class B Common Stock, $0.001 par value per share, were outstanding.


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3

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
 March 31,December 31,
ASSETS20212020
Current assets:  
Cash$1,447 $1,494 
Accounts receivable:
Oil, natural gas, and natural gas liquids revenues33,134 16,255 
Joint interest billings and other, net of allowance of $19 and $19 at March 31, 2021 and December 31, 2020, respectively
6,497 7,966 
Derivative asset196 7,509 
Prepaid expenses and other current assets3,204 1,509 
Total current assets44,478 34,733 
Oil and gas properties, successful efforts method:
Proved properties1,253,689 1,017,496 
Unproved properties233,767 233,767 
Land5,382 5,382 
Total oil and gas properties1,492,838 1,256,645 
Accumulated depreciation, depletion and amortization(315,460)(291,213)
Net oil and gas properties1,177,378 965,432 
Other noncurrent assets:
Office and other equipment, net of accumulated depreciation and amortization of $4,392 and $3,675 at March 31, 2021 and December 31, 2020, respectively
1,249 931 
Derivative asset1,495 396 
Operating lease right-of-use assets2,289 2,450 
Other noncurrent assets2,064 1,315 
TOTAL ASSETS$1,228,953 $1,005,257 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$16,891 $6,232 
Revenues and royalties payable25,522 27,492 
Accrued expenses18,688 16,504 
Asset retirement obligation568 447 
Derivative liability25,063 1,135 
Advances2,246 2,277 
Operating lease liabilities777 773 
Finance lease liabilities54 69 
Other current liabilities912 565 
Total current liabilities90,721 55,494 
Noncurrent liabilities:
Long-term debt223,424 115,000 
Deferred tax liability14,189 14,497 
Asset retirement obligation13,448 2,580 
Derivative liability2,566 173 
4

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Operating lease liabilities1,674 1,840 
Finance lease liabilities 5 
Other noncurrent liabilities854 132 
Total noncurrent liabilities256,155 134,227 
Commitments and Contingencies (Note 13)
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; 44,104,541 and 30,343,421 issued and outstanding at March 31, 2021 and December 31, 2020, respectively
44 30 
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,431,340 and 35,009,371 issued and outstanding at March 31, 2021 and December 31, 2020, respectively
34 35 
Additional paid-in capital624,916 540,074 
Accumulated deficit(201,091)(195,258)
Total Earthstone Energy, Inc. equity423,903 344,881 
Noncontrolling interest458,174 470,655 
Total equity882,077 815,536 
TOTAL LIABILITIES AND EQUITY$1,228,953 $1,005,257 
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts) 
Three Months Ended
 March 31,
 20212020
REVENUES 
Oil$60,819 $41,012 
Natural gas5,852 1,086 
Natural gas liquids8,901 3,040 
Total revenues75,572 45,138 
OPERATING COSTS AND EXPENSES
Lease operating expense10,849 9,339 
Production and ad valorem taxes5,027 3,023 
Depreciation, depletion and amortization24,407 24,656 
Impairment expense 60,371 
General and administrative expense8,380 7,132 
Transaction costs2,106 844 
Accretion of asset retirement obligation290 44 
Exploration expense 301 
Total operating costs and expenses51,059 105,710 
Gain on sale of oil and gas properties 204 
Income (loss) from operations24,513 (60,368)
OTHER INCOME (EXPENSE)
Interest expense, net(2,217)(1,736)
(Loss) gain on derivative contracts, net(33,263)99,784 
Other income, net103 126 
Total other (expense) income(35,377)98,174 
(Loss) income before income taxes(10,864)37,806 
Income tax benefit (expense)308 (1,092)
Net (loss) income(10,556)36,714 
Less: Net (loss) income attributable to noncontrolling interest(4,723)20,006 
Net (loss) income attributable to Earthstone Energy, Inc.$(5,833)$16,708 
Net (loss) income per common share attributable to Earthstone Energy, Inc.:
Basic$(0.14)$0.57 
Diluted$(0.14)$0.57 
Weighted average common shares outstanding:
Basic42,778,916 29,497,428 
Diluted42,778,916 29,497,428 
 
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(In thousands, except share amounts)
 Issued Shares       
 Class A Common StockClass B Common StockClass A Common StockClass B Common StockAdditional Paid-in CapitalAccumulated DeficitTotal Earthstone Energy, Inc. EquityNoncontrolling InterestTotal Equity
At December 31, 202030,343,421 35,009,371 $30 $35 $540,074 $(195,258)$344,881 $470,655 $815,536 
Stock-based compensation expense— — — — 2,605 — 2,605 2,605 
Shares issued in connection with IRM Acquisition12,719,594 — 13 — 76,559 — 76,572 — 76,572 
Vesting of restricted stock units, net of taxes paid463,495 — — — — — — — — 
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings257,764 — — — (2,080)— (2,080)— (2,080)
Cancellation of treasury shares(257,764)— — — — — — — — 
Class B Common Stock converted to Class A Common Stock578,031 (578,031)1 (1)7,758 — 7,758 (7,758) 
Net loss— — — — — (5,833)(5,833)(4,723)(10,556)
At March 31, 202144,104,541 34,431,340 $44 $34 $624,916 $(201,091)$423,903 $458,174 $882,077 
    
 Issued Shares       
 Class A Common StockClass B Common StockClass A Common StockClass B Common StockAdditional Paid-in CapitalAccumulated DeficitTotal Earthstone Energy, Inc. EquityNoncontrolling InterestTotal Equity
At December 31, 201929,421,131 35,260,680 $29 $35 $527,246 $(181,711)$345,599 $490,152 $835,751 
Stock-based compensation expense— — — — 2,694 — 2,694 2,694 
Vesting of restricted stock units, net of taxes paid231,834 — 1 — — — 1 — 1 
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings75,695 — — — (214)— (214)— (214)
Cancellation of treasury shares(75,695)— — — — — — — — 
Class B Common Stock converted to Class A Common Stock199,993 (199,993)— — 2,897 — 2,897 (2,897) 
Net income— — — — — 16,708 16,708 20,006 36,714 
At March 31, 202029,852,958 35,060,687 $30 $35 $532,623 $(165,003)$367,685 $507,261 $874,946 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)  
 For the Three Months Ended
March 31,
 20212020
Cash flows from operating activities: 
Net (loss) income$(10,556)$36,714 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion and amortization24,407 24,656 
Impairment of proved and unproved oil and gas properties 42,751 
Impairment of goodwill 17,620 
Accretion of asset retirement obligations290 44 
Settlement of asset retirement obligations(15) 
(Gain) on sale of oil and gas properties (204)
Total loss (gain) on derivative contracts, net33,263 (99,784)
Operating portion of net cash (paid) received in settlement of derivative contracts(10,905)9,739 
Stock-based compensation3,329 2,694 
Deferred income taxes(308)1,092 
Amortization of deferred financing costs141 80 
Changes in assets and liabilities:
(Increase) decrease in accounts receivable(5,379)13,780 
(Increase) decrease in prepaid expenses and other current assets367 (312)
Increase (decrease) in accounts payable and accrued expenses5,389 2,846 
Increase (decrease) in revenues and royalties payable(2,081)5,640 
Increase (decrease) in advances358 (8,814)
Net cash provided by operating activities38,300 48,542 
Cash flows from investing activities:
Acquisition of oil and gas properties, net of cash acquired(134,641) 
Additions to oil and gas properties(8,913)(39,299)
Additions to office and other equipment(226)(87)
Proceeds from sales of oil and gas properties 409 
Net cash used in investing activities(143,780)(38,977)
Cash flows from financing activities:
Proceeds from borrowings177,114 17,500 
Repayments of borrowings(68,690)(35,500)
Cash paid related to the exchange and cancellation of Class A Common Stock(2,080)(214)
Cash paid for finance leases(20)(72)
Deferred financing costs(891) 
Net cash provided by (used in) financing activities105,433 (18,286)
Net decrease in cash(47)(8,721)
Cash at beginning of period1,494 13,822 
Cash at end of period$1,447 $5,101 
Supplemental disclosure of cash flow information
Cash paid for:
Interest$1,922 $1,676 
Non-cash investing and financing activities:
Class A Common Stock issued in IRM Acquisition$76,572 $— 
Accrued capital expenditures$7,775 $31,011 
Asset retirement obligations$427 $21 
 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with its consolidated subsidiaries, the “Company”), is a growth-oriented independent oil and natural gas development and production company. In addition, the Company is active in corporate mergers and the acquisition of oil and natural gas properties that have production and future development opportunities. The Company's operations are all in the upstream segment of the oil and natural gas industry and all its properties are onshore in the United States.
Earthstone is the sole managing member of Earthstone Energy Holdings, LLC, a Delaware limited liability company (together with its wholly-owned consolidated subsidiaries, “EEH”), with a controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Energy Corp., a corporation organized under the laws of British Columbia (“Lynden Corp”), and Lynden Corp’s wholly-owned consolidated subsidiary, Lynden USA Inc., a Utah corporation (“Lynden US”) and also a member of EEH, consolidates the financial results of EEH and records a noncontrolling interest in the Condensed Consolidated Financial Statements representing the economic interests of EEH's members other than Earthstone and Lynden US.
The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying unaudited Condensed Consolidated Financial Statements and notes should be read in conjunction with the financial statements and notes included in Earthstone’s 2020 Annual Report on Form 10-K.
The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for the fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. The Company’s Condensed Consolidated Balance Sheet at December 31, 2020 is derived from the audited Consolidated Financial Statements at that date.
Recently Issued Accounting Standards
Income Taxes - In December 2019, the FASB issued an update that simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and early adoption is permitted. The Company adopted the update effective January 1, 2021 and the impact was not material to the Consolidated Financial Statements.
Reference Rate Reform - In March 2020, the FASB issued an update that provides optional guidance for a limited period of time to ease the transition from LIBOR to an alternative reference rate. The ASU intends to address certain concerns relating to accounting for contract modifications and hedge accounting. These optional expedients and exceptions to applying GAAP, assuming certain criteria are met, are allowed through December 31, 2022. The Company is currently evaluating the provisions of this update and has not yet determined whether it will elect the optional expedients. The Company does not expect the transition to an alternative rate to have a material impact on its business, operations or liquidity.
Note 2. Fair Value Measurements
FASB Accounting Standards Codification (“ASC”) Topic 820, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.
The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC 820 is as follows:
Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
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EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the three months ended March 31, 2021.
Fair Value on a Recurring Basis
Derivative financial instruments are carried at fair value and measured on a recurring basis. The derivative financial instruments consist of swaps for crude oil and natural gas and interest rate swaps. The Company’s commodity price hedges and interest rate swaps are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves and published LIBOR forward curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.
The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.
The following table summarizes the fair value of the Company’s financial assets and liabilities, by level within the fair-value hierarchy (in thousands):
March 31, 2021Level 1Level 2Level 3Total
Financial assets    
Derivative asset - current$ $196 $ $196 
Derivative asset - noncurrent 1,495  1,495 
Total financial assets$ $1,691 $ $1,691 
Financial liabilities
Derivative liability - current$ $25,063 $ $25,063 
Derivative liability - noncurrent 2,566  2,566 
Total financial liabilities$ $27,629 $ $27,629 
December 31, 2020
Financial assets    
Derivative asset - current$ $7,509 $ $7,509 
Derivative asset - noncurrent 396  396 
Total financial assets$ $7,905 $ $7,905 
Financial liabilities
Derivative liability - current$ $1,135 $ $1,135 
Derivative liability - noncurrent 173  173 
Total financial liabilities$ $1,308 $ $1,308 
Other financial instruments include cash, accounts receivable and payable, and revenue royalties. The carrying amount of these instruments approximates fair value because of their short-term nature. The Company’s long-term debt obligation bears interest at floating market rates, therefore carrying amounts and fair value are approximately equal.
Fair Value on a Nonrecurring Basis
The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties, goodwill, business combinations, asset retirement obligations and performance units. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if
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EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
events or changes in certain circumstances indicate that adjustments may be necessary. Due to significant declines in commodity prices and global demand for oil and natural gas products resulting from the COVID-19 pandemic, the Company assessed the fair values of its oil and natural gas properties and goodwill resulting in non-cash impairment charges during the three months ended March 31, 2020. No such triggering events that require further assessment were observed during the three months ended March 31, 2021. See further discussion in Note 5. Oil and Natural Gas Properties.
Note 3. Derivative Financial Instruments
Commodity Derivative Instruments
The Company’s hedging activities primarily consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swap agreements. Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Consistent with its hedging policy, the Company has entered into a series of derivative instruments to hedge a significant portion of its expected oil and natural gas production through December 31, 2022. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, the Company believes these instruments reduce its exposure to oil and natural gas price fluctuations and, thereby, allow the Company to achieve a more predictable cash flow.
The Company’s derivative instruments are cash flow hedge transactions in which it is hedging the variability of cash flow related to a forecasted transaction. The Company does not enter into derivative instruments for trading or other speculative purposes. These transactions are recorded in the Condensed Consolidated Financial Statements in accordance with FASB ASC Topic 815. The Company has accounted for these transactions using the mark-to-market accounting method. Generally, the Company incurs accounting losses on derivatives during periods where prices are rising and gains during periods where prices are falling which may cause significant fluctuations in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.
The Company nets its derivative instrument fair value amounts executed with each counterparty pursuant to an International Swap Dealers Association Master Agreement (“ISDA”), which provides for net settlement over the term of the contract. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.
The Company had the following open crude oil and natural gas derivative contracts as of March 31, 2021:    
 Price Swaps
PeriodCommodityVolume
(Bbls / MMBtu)
Weighted Average Price
($/Bbl / $/MMBtu)
Q2 - Q4 2021Crude Oil2,389,910 $48.43 
Q1 - Q4 2022Crude Oil1,458,500 $52.96 
Q2 - Q4 2021Crude Oil Basis Swap (1)739,910 $0.32 
Q2 - Q4 2021Crude Oil Basis Swap (2)1,375,000 $1.05 
Q2 - Q4 2021Crude Oil Roll Swap (3)739,910 $(0.26)
Q1 - Q4 2022Crude Oil Basis Swap (1)1,368,750 $0.74 
Q2 - Q4 2021Natural Gas5,500,000 $2.81 
Q1 - Q4 2022Natural Gas450,000 $2.97 
Q2 - Q4 2021Natural Gas Basis Swap (4)5,500,000 $(0.37)
Q1 - Q4 2022Natural Gas Basis Swap (4)450,000 $(0.23)
(1)The basis differential price is between WTI Midland Crude TMA and the WTI NYMEX.
(2)The basis differential price is between WTI Midland Crude CMA and the WTI NYMEX.
(3)The swap is between WTI Roll and the WTI NYMEX.
(4)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
Interest Rate Swaps
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EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
At times, the Company’s hedging activities include the use of interest rate swaps entered into in order to manage cash flow variability resulting from changes in interest rates. These derivative instruments are not accounted for under hedge accounting.
The Company had the following interest rate swaps as of March 31, 2021:
Effective DatesNotional AmountFixed Rate
May 5, 2020 to May 5, 2022$125,000,0000.286 %
May 5, 2022 to May 5, 2023$100,000,0000.286 %
May 5, 2023 to May 7, 2024$75,000,0000.286 %
The following table summarizes the location and fair value amounts of all derivative instruments in the Condensed Consolidated Balance Sheets as well as the gross recognized derivative assets, liabilities, and amounts offset in the Condensed Consolidated Balance Sheets (in thousands)
  March 31, 2021December 31, 2020
Derivatives not
designated as hedging
contracts under ASC
Topic 815
Balance Sheet LocationGross
Recognized
Assets /
Liabilities
Gross
Amounts
Offset
Net
Recognized
Assets /
Liabilities
Gross
Recognized
Assets /
Liabilities
Gross
Amounts
Offset
Net
Recognized
Assets /
Liabilities
Commodity contractsDerivative asset - current$990 $(794)$196 $11,071 $(3,562)$7,509 
Commodity contractsDerivative liability - current$25,678 $(794)$24,884 $4,492 $(3,562)$930 
Interest rate swapsDerivative liability - current$179 $ $179 $205 $ $205 
Commodity contractsDerivative asset - noncurrent$1,152 $(117)$1,035 $396 $ $396 
Commodity contractsDerivative liability - noncurrent$2,683 $(117)$2,566 $ $ $ 
Interest rate swapsDerivative asset - noncurrent$460  460 $ $ $ 
Interest rate swapsDerivative liability - noncurrent$ $ $ $173 $ $173 
The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivatives instruments in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows (in thousands)
Derivatives not designated as hedging contracts under ASC Topic 815Three Months Ended
March 31,
Statement of Cash Flows LocationStatement of Operations Location20212020
Unrealized (loss) gainNot separately presentedNot separately presented$(22,358)$90,045 
Realized (loss) gainOperating portion of net cash (paid) received in settlement of derivative contractsNot separately presented(10,905)9,739 
Total (loss) gain on derivative contracts, net(Loss) gain on derivative contracts, net$(33,263)$99,784 
Included in Accounts receivable under the subheading of Joint interest billings and other in the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 are $0.01 million and $2.3 million, respectively, related to commodity hedge contracts settled as of that date for which the cash has not been received.
Note 4. Acquisitions
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
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EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 issued12,719,594 
Earthstone Class A Common Stock price as of January 7, 2021$6.02 
Class A Common Stock consideration76,572 
Cash consideration (1)
137,302 
Total consideration transferred$213,874 
Fair value of assets acquired:
Cash$2,992 
Other current assets10,925 
Oil and gas properties225,905 
Other non-current assets258 
Amount attributable to assets acquired$240,080 
Fair value of liabilities assumed:
Derivative liability - current$10,177 
Other current liabilities5,742 
Asset retirement obligation - noncurrent10,287 
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
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EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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,
 20212020
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. The Acquisitions are subject to shareholder approval.
Note 5. Oil and Natural Gas Properties
The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, costs to acquire oil and natural gas properties, drill and equip exploratory wells that find proved reserves, and drill and equip development wells are capitalized. Exploration costs, including unsuccessful exploratory wells and geological and geophysical costs, are charged to operations as incurred. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.
Costs incurred to maintain wells and related equipment, lease and well operating costs, and other exploration costs are charged to expense as incurred. Gains and losses arising from the sale of properties are included in Income from operations in the Condensed Consolidated Statements of Operations.
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EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company’s lease acquisition costs and development costs of proved oil and natural gas properties are amortized using the units-of-production method, at the field level, based on total proved reserves and proved developed reserves, respectively. For the three months ended March 31, 2021, depletion expense for oil and gas producing property and related equipment was $24.2 million. For the three months ended March 31, 2020, depletion expense for oil and gas producing property and related equipment was $24.5 million.
Proved Properties
Proved oil and natural gas properties are reviewed for impairment on a nonrecurring basis. The impairment charge reduces the carrying values to their estimated fair values. These fair value measurements are classified as Level 3 measurements and include many unobservable inputs. Fair value is calculated as the estimated discounted future net cash flows attributable to the assets. The Company’s primary assumptions in preparing the estimated discounted future net cash flows to be recovered from oil and gas properties are based on (i) proved reserves, (ii) forward commodity prices and assumptions as to costs and expenses, and (iii) the estimated discount rate that would be used by potential purchasers to determine the fair value of the assets.
Unproved Properties
Unproved properties consist of costs incurred to acquire undeveloped leases. Unproved oil and gas leases are generally for a primary term of three to five years. In most cases, the term of the unproved leases can be extended by paying a lease renewal fee, meeting contractual drilling obligations, or by the presence of producing wells on the leases. Unproved costs related to successful drilling on unproved leases are reclassified to proved properties.
The Company reviews its unproved properties periodically for impairment. In determining whether an unproved property is impaired, the Company considers numerous factors including, but not limited to, current exploration and development plans, favorable or unfavorable exploration activity on the property being evaluated and/or adjacent properties, the Company’s geologists' evaluation of the property, and the remaining months in the lease term for the property.
Impairments to Oil and Natural Gas Properties
During the three months ended March 31, 2021, the Company did not record any impairments to its oil and natural gas properties.
During the three months ended March 31, 2020, as a result of the decline in crude oil price futures at the time, the Company recorded the following non-cash impairment charges:
(In thousands)Eagle Ford TrendMidland BasinCorporateTotal
Proved properties$25,252 $ $ $25,252 
Unproved properties11,311   11,311 
Acreage expirations (1)394 5,794  6,188 
Goodwill  17,620 17,620 
$36,957 $5,794 $17,620 $60,371 
(1)Impairments in unproved properties resulting from acreage deemed expired (not planned to be renewed).
Note 6. Noncontrolling Interest
Earthstone consolidates the financial results of EEH and its subsidiaries and records a noncontrolling interest for the economic interest in Earthstone held by the members of EEH other than Earthstone and Lynden US. Net (loss) income attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 represents the portion of net (loss) income attributable to the economic interest in the Company held by the members of EEH other than Earthstone and Lynden US. Noncontrolling interest in the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 represents the portion of net assets of the Company attributable to the members of EEH other than Earthstone and Lynden US.
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EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the changes in noncontrolling interest for the three months ended March 31, 2021: 
 EEH Units Held
By Earthstone
and Lynden US
%EEH Units Held
By Others
%Total EEH
Units
Outstanding
As of December 31, 202030,343,421 46.4 %35,009,371 53.6 %65,352,792 
EEH Units issued in connection with the IRM Acquisition12,719,594  12,719,594 
EEH Units and Class B Common Stock converted to Class A Common Stock578,031 (578,031) 
EEH Units issued in connection with the vesting of restricted stock units463,495  463,495 
As of March 31, 202144,104,541 56.2 %34,431,340 43.8 %78,535,881 

Note 7. Net (Loss) Income Per Common Share
Net (loss) income per common share—basic is calculated by dividing Net (loss) income by the weighted average number of shares of common stock outstanding during the period. Net (loss) income per common share—diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing Net (loss) income by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net (loss) income per common share—diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect.
A reconciliation of Net (loss) income per common share is as follows:
 Three Months Ended
March 31,
(In thousands, except per share amounts)20212020
Net (loss) income attributable to Earthstone Energy, Inc.$(5,833)$16,708 
Net (loss) income per common share attributable to Earthstone Energy, Inc.:
Basic$(0.14)$0.57 
Diluted$(0.14)$0.57 
Weighted average common shares outstanding
Basic42,778,916 29,497,428 
Add potentially dilutive securities:
Unvested restricted stock units (1)  
Unvested performance units (1)  
Diluted weighted average common shares outstanding42,778,916 29,497,428 
(1)For the three months ended March 31, 2021, the Company had no dilutive effect related to unvested restricted stock units or performance units due to the loss for the period. For the three months ended March 31, 2020, the Company had no dilutive effect related to unvested restricted stock units or performance units as, under the treasury stock method, the proceeds from the average unrecognized expense for the period were in excess of the weighted average outstanding fair value for the unvested shares for the same period.
The Class B common stock, $0.001 par value per share of Earthstone (the “Class B Common Stock”), has been excluded, as its conversion would eliminate noncontrolling interest and net loss attributable to noncontrolling interest of $4.7 million for the three months ended March 31, 2021 and net income attributable to noncontrolling interest of $20.0 million for the three months ended March 31, 2020 would be added back to Net (loss) income attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive effect on Net (loss) income per common share attributable to Earthstone Energy, Inc.
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EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 8. Common Stock
Class A Common Stock
At March 31, 2021 and December 31, 2020, there were 44,104,541 and 30,343,421 shares of Class A Common Stock issued and outstanding, respectively. In connection with the IRM Acquisition, on January 7, 2021, Earthstone issued 12,719,594 shares of Class A Common Stock valued at approximated $76.6 million on that date. During the three months ended March 31, 2021, as a result of the vesting and settlement of restricted stock units under the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”), Earthstone issued 721,259 shares of Class A Common Stock, of which 257,764 shares of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. During the three months ended March 31, 2020, as a result of the vesting and settlement of restricted stock units under the 2014 Plan, Earthstone issued 307,529 shares of Class A Common Stock, of which 75,695 shares of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. Additionally, as discussed below, shares of Class A Common Stock were issued as the result of conversions of Class B Common Stock.
Class B Common Stock
At March 31, 2021 and December 31, 2020, there were 34,431,340 and 35,009,371 shares of Class B Common Stock issued and outstanding, respectively. Each share of Class B Common Stock, together with one EEH Unit, is convertible into one share of Class A Common Stock. During the three months ended March 31, 2021, 578,031 shares of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock. During the three months ended March 31, 2020, 199,993 shares of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock.
Note 9. Stock-Based Compensation