PRE 14A 1 este-pre14a2021annualmeeti.htm PRE 14A Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. )
Filed by the Registrant þ
Filed by a party other than the Registrant o
Check the appropriate box:
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o
Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material under to § 240.14a-12

Earthstone Energy, Inc.
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
þ
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

(1)
Title of each class of securities to which transaction applies:
(2)
Aggregate number of securities to which transaction applies:
(3)
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
(4)
Proposed maximum aggregate value of transaction:
(5)
Total fee paid:

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Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.




(1)
Amount Previously Paid:
(2)
Form, Schedule or Registration Statement No.:
(3)
Filing Party:
(4)
Date Filed:




PRELIMINARY PROXY STATEMENT – SUBJECT TO COMPLETION, DATED MAY 28, 2021

[•], 2021


Dear Fellow Stockholder:

You are cordially invited to attend our Annual Meeting of Stockholders to be held on [•], [•], 2021 at 9:00 a.m., Central Daylight Time, at 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380. The other directors and officers join me in extending this invitation. We are sensitive to the public health and travel concerns our stockholders may have and recommendations that public health officials may issue in light of the evolving coronavirus (COVID-19) situation. As a result, we may impose additional procedures or limitations on meeting attendees (beyond those described herein) or may decide to hold the meeting in a different location or solely by means of remote communication (i.e., a virtual-only meeting). We plan to announce any such updates on our proxy website at www.iproxydirect.com/ESTE, and we encourage you to check this website prior to the meeting if you plan to attend.

It is important that your shares are represented at the meeting. If you are unable to attend the meeting but have questions or comments about our operations, we would like to hear from you.

To assure that your shares will be voted at the meeting, please complete, sign, date and return your proxy card in the postage-paid envelope provided, or submit your proxy electronically via the Internet or by telephone using the instructions on the proxy card. Submitting your proxy will not affect your right to vote in person if you attend the meeting.

We thank you for your continued support.


Sincerely,


FRANK A. LODZINSKI
Executive Chairman


This proxy statement is dated [•], 2021, and is being mailed to stockholders on or about [•], 2021.






Earthstone Energy, Inc.
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380

NOTICE OF THE 2021 ANNUAL MEETING OF STOCKHOLDERS


Date:
[•], 2021
Time:
9:00 a.m. CDT
Place:
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380
Matters to be voted on:
1.
To elect three Class III directors named in the proxy statement to our board of directors to serve for a term expiring in 2024 and until their successors are duly elected and qualified;
2.To amend the Third Amended and Restated Certificate of Incorporation to increase the authorized size of our board of directors from nine members to eleven members;
3.
To approve and adopt an amendment to the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan;
4.
To ratify the selection of Moss Adams LLP as the Company’s independent registered public accounting firm for 2021;

5.
To approve the issuance of 6,200,000 shares of Class A Common Stock pursuant to the rules of the New York Stock Exchange;
6.To authorize one or more adjournments of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to approve and adopt the proposals listed above at the Annual Meeting or any adjournments thereof; and
7.
To transact such other business as may properly come before the Annual Meeting.

We do not expect to transact any other business at the Annual Meeting. Stockholders of record at the close of business on May 24, 2021, will be entitled to notice of and to vote at the Annual Meeting and at any adjournments or postponements thereof. A complete list of our stockholders entitled to vote at the meeting will be available for examination at our offices in The Woodlands, Texas during ordinary business hours for a period of ten (10) days prior to the Annual Meeting.

By Order of the Board of Directors,


WILLIAM A. WIEDERKEHR, JR.
Corporate Secretary
[•], 2021

IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, WE ASK YOU TO COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED OR TO VOTE BY TELEPHONE OR ON THE INTERNET USING THE INSTRUCTIONS ON THE PROXY CARD.





TABLE OF CONTENTS
2021 PROXY STATEMENT SUMMARY
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
PROPOSAL 1 – ELECTION OF THREE CLASS III DIRECTORS
PROPOSAL 2 – THE CHARTER AMENDMENT PROPOSAL
PROPOSAL 3 – THE AMENDMENT TO THE EARTHSTONE ENERGY, INC. AMENDED AND RESTATED 2014 LONG-TERM INCENTIVE PLAN PROPOSAL
PROPOSAL 4 – RATIFICATION OF AUDITORS PROPOSAL
PROPOSAL 5 – THE NYSE STOCK ISSUANCE PROPOSAL
PROPOSAL 6 - THE ADJOURNMENT PROPOSAL
THE TRANSACTION
CORPORATE GOVERNANCE
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
COMPENSATION OF DIRECTORS
MANAGEMENT
EXECUTIVE COMPENSATION
INDEPENDENT PUBLIC ACCOUNTANTS
AUDIT COMMITTEE REPORT
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
GENERAL INFORMATION ABOUT THE ANNUAL MEETING
Annex A – Certificate of Amendment to the Third Amended and Restated Certificate of
Incorporation of Earthstone Energy, Inc.
Annex B – Second Amendment to the Earthstone Energy, Inc. 2014 Amended and Restated Long-Term Incentive Plan
Annex C – Tracker Agreement
Annex D – Sequel Agreement
Annex E – Fairness Opinion
Annex F – Voting Agreement
Annex G – Form of Tracker Registration Rights Agreement
Annex H – Form of Sequel Registration Rights Agreement
Annex I – Form of Lock-up Agreement
Annex J – Glossary of Certain Oil and Natural Gas Terms
Annex K – Form of Proxy




2021 PROXY STATEMENT SUMMARY
This summary highlights selected information contained in this proxy statement and does not contain all the information that may be important to you. Earthstone urges you to read carefully this proxy statement in its entirety, including the annexes. Additional, important information, which Earthstone also urges you to read, is contained in the documents incorporated by reference into this proxy statement. See “Where You Can Find More Information.” Unless stated otherwise, all references in this proxy statement to Earthstone are to Earthstone Energy, Inc., all references to EEH are to Earthstone Energy Holdings, LLC, all references to the Company, us, we, our, are to Earthstone and its consolidated subsidiaries.

Annual Meeting of Stockholders
Time:
9:00 a.m. Central Daylight Time
Date:
[•], 2021
Place:
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380
Record date:
May 24, 2021
Voting:
Stockholders as of the record date are entitled to vote. Each share of Class A Common Stock and Class B Common Stock is entitled to one vote for each director nominee and one vote for each of the proposals to be voted on. The Class A Common Stock and the Class B Common Stock vote together as one class.
Meeting Agenda
Election of three Class III directors for terms expiring in 2024
Approve and adopt an amendment (the “Charter Amendment”) to the Earthstone Energy, Inc. Third Amended and Restated Certificate of Incorporation
Approve and adopt an amendment (the “Plan Amendment”) to the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan (the “2014 Plan”)
Ratify the appointment of Moss Adams LLP as our independent registered public accounting firm for 2021
Approve the issuance of 6.2 million shares of Class A Common Stock (the “Transaction Shares”) pursuant to the rules of the New York Stock Exchange (“NYSE”)
Approve a proposal to authorize one or more adjournments of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to approve and adopt the proposals listed above at the Annual Meeting or any adjournments thereof

Proposal 1: Election of Three Class III Directors

We are asking stockholders to elect three Class III directors.

Proposal 2: Approve and Adopt an Amendment to our Third Amended and Restated Certificate of Incorporation

We are asking stockholders to approve and adopt an amendment to Earthstone’s Third Amended and Restated Certificate of Incorporation to increase the authorized size of the Board of Directors from nine members to eleven members.

Proposal 3: Approve and Adopt an Amendment to the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan

We are asking stockholders to approve and adopt an amendment to the Amended and Restated 2014 Long-Term Incentive Plan, to authorize an additional 2.6 million shares of Class A Common Stock under the plan.

Proposal 4: Ratification of the Auditors

We are asking stockholders to ratify the appointment of Moss Adams LLP as the Company’s independent registered public accounting firm for 2021.

Proposal 5: Approve the Issuance of the Transaction Shares


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We are asking stockholders to approve the issuance of 6.2 million shares of Class A Common Stock to be issued upon the closing of the Purchase Agreements (as discussed below) pursuant to the rules of the NYSE in connection with our acquisition of interests in oil and gas leases and related property located in Irion County, Texas. See “The Transaction” section in this proxy statement.

Proposal 6: Authorize One or More Adjournments

We are asking stockholders to authorize one or more adjournments of the 2021 Annual Meeting of Stockholders (the “Annual Meeting”), if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to approve and adopt the proposals listed above at the Annual Meeting or any adjournments thereof.

Recommendation of the Board of Directors

After careful consideration, our Board unanimously recommends that the stockholders vote “FOR” each of the director nominees, “FOR” the approval and adoption of the Charter Amendment to increase the authorized size of the Board from nine members to eleven members, “FOR” the approval and adoption of the Plan Amendment to the 2014 Plan, “FOR” the ratification of the appointment of Moss Adams as our independent registered public accounting firm for 2021, “FOR” the approval, for purposes of the applicable rules of the NYSE, of the issuance of the Transaction Shares pursuant to the Purchase Agreements, and “FOR” the adjournment proposal at the Annual Meeting. For a more complete description of the proposals, please see proposals set forth in this document.

Summary of the Transaction

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”). At the closing of the Tracker Acquisition, Tracker will receive (the “Tracker Purchase Price”) (i) $29.6 million in cash, subject to customary purchase price adjustments, and (ii) 4.7 million shares of Class A Common Stock (the “Tracker Shares”). 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 “Purchase Agreements”), which provides that EEH will acquire (the “Sequel Acquisition” and with the Tracker Acquisition, the “Transaction”) certain well-bore interests and related equipment held by Sequel that are part of a joint development agreement between Tracker and Sequel involving portions of the acreage covered by the Tracker Agreement (the “Sequel Assets” and collectively with the Tracker Assets, the “Assets”). At the closing of the Sequel Acquisition, Sequel will receive (the “Sequel Purchase Price”) (i) $52.0 million in cash, subject to customary purchase price adjustments, and (ii) 1.5 million shares of Class A Common Stock (the “Sequel Shares” and collectively with the Tracker Shares, the “Transaction Shares”). The Purchase Agreements have an effective time of 12:01 a.m., Central Time, on March 1, 2021. As a result of the Purchase Agreements, Earthstone expects to acquire approximately 20,300 net developed acres located in Irion County, Texas for an aggregate purchase price of approximately $126.5 million (as of the announcement date), consisting of $81.6 million in cash, subject to customary closing adjustments, and 6.2 million shares of Class A Common Stock.

The Parties

Earthstone Energy, Inc.

Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and with its consolidated subsidiaries, the “Company,” “we,” “us” and “our”), is a growth-oriented independent oil and gas company engaged in the acquisition and development of oil and gas reserves through activities that include the acquisition, drilling and development of undeveloped leases, asset and corporate acquisitions and mergers. Our operations are all in the upstream segment of the oil and natural gas industry and all our properties are onshore in the State of Texas.  Our assets are located primarily in the Midland Basin of west Texas and to a lesser extent, in the Eagle Ford Trend of south Texas. Our Class A Common Stock is listed on the NYSE under the trading symbol “ESTE.” Earthstone’s principal executive offices are located at 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380, and its telephone number is (281) 298-4246.

Earthstone is the sole managing member of Earthstone Energy Holdings, LLC, a Delaware limited liability company (“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 consolidated financial statements representing the economic interests of EEH’s members other than Earthstone and Lynden US.

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Earthstone Energy Holdings, LLC

EEH was formed on November 4, 2016. Earthstone is the sole managing member of EEH. EEH is a holding company of operating subsidiaries that own and operate our assets and will own and operate the Assets after the closing of the Transaction. EEH’s principal executive offices are located at 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380, and its telephone number is (281) 298-4246.

Tracker Resource Development III, LLC
TRD III Royalty Holdings (TX), LP

Tracker Resource Development III, LLC, a Delaware limited liability company (“Tracker”), was formed on April 6, 2011, and is owned by an affiliate of EnCap Investments L.P. (“EnCap”), EnCap Energy Capital Fund VIII, L.P., a Texas limited partnership (“EnCap Fund VIII”), and two entities not affiliated with the Company or EnCap, ZIP Ventures I, L.L.C., a Delaware limited liability company (“ZIP”), and Tracker III Holdings, LLC, a Delaware limited liability company (“Tracker Holdings”). TRD III Royalty Holdings (TX), LP, a Delaware limited partnership (“RoyaltyCo”), was formed on July 15, 2014. Tracker’s and RoyaltyCo’s principal executive offices are located at 9155 East Nichols Avenue, Suite 360, Centennial, Colorado 80112, and their telephone number is (303) 534-9513.

SEG-TRD LLC
SEG-TRD II LLC

SEG-TRD LLC, a Delaware limited liability company (“SEG-I”), was formed on June 9, 2017 for the purpose of entering into a drilling financing arrangement with Tracker. SEG-TRD II LLC, a Delaware limited liability company (“SEG-II” and collectively with SEG-I, “Sequel”), was formed on October 19, 2018 for the purpose of entering into a drilling financing arrangement with Tracker. SEG-I and SEG-II have no other operations. Sequel’s principal executive offices are located at 8101 E. Prentice Avenue, Suite 1175, Greenwood Village, Colorado 80111, and its telephone number is (303) 468-2106.

The Audit Committee of the Board of Directors

As a result of the potential conflicts of interest resulting from EnCap’s indirect ownership interests in both Earthstone and Tracker and pursuant to Earthstone’s Covered Transactions Policy, the Earthstone Audit Committee was delegated the responsibility to evaluate a potential transaction between Earthstone and Tracker and make its recommendation thereon to the full Board. The Audit Committee members are Jay F. Joliat (Chairman), Phil D. Kramer and Zachary G. Urban, each an independent and disinterested member of our Board. To assist with the process, the Audit Committee engaged Richards, Layton & Finger, P.A. (“RLF”), as its legal counsel, and Northland Securities, Inc. (“Northland”) as its financial advisor.

For the reasons discussed below, the Audit Committee unanimously: (i) approved the Transaction, the Tracker Agreement, the Sequel Agreement, and the ancillary agreements and documents appended thereto and each of the transactions contemplated therein, and (ii) recommended that the Transaction, the Tracker Agreement and the Sequel Agreement be approved by the full Board and the approval of the issuance of the Transaction Shares be submitted to our stockholders for approval in accordance with the terms of the Tracker Agreement, the Sequel Agreement and the rules of the NYSE. See “The Transaction—Opinion of Northland Securities, Inc. to the Audit Committee.”

Opinion of Northland Securities, Inc. to the Audit Committee

On March 31, 2021, Northland, as financial advisor to the Audit Committee, rendered its oral opinion to the Audit Committee (which was subsequently confirmed in writing by delivery of Northland’s written opinion dated March 31, 2021) that, as of March 31, 2021, the Transaction Consideration (as defined below) to be paid by Earthstone in the Transaction is fair, from a financial point of view, to Earthstone.

Northland’s opinion was directed to the Audit Committee of the Board (in its capacity as such) and only addressed the fairness, from a financial point of view, to Earthstone of the Transaction Consideration to be paid by the Company in the Transaction and did not address any other terms, conditions, aspects or implications of the Transaction. The summary of Northland’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is attached as Annex E to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Northland in preparing its opinion. However, neither Northland’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement is intended to be, and they do not constitute, a recommendation as to, or otherwise address, how any holder of shares of Class A Common Stock and Class B Common Stock should act or vote with respect to the issuance of

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the Transaction Shares or any related matter. See “The Transaction—Opinion of Northland Securities, Inc. to the Audit Committee.”

Related Agreements

Support and Voting Agreement

As a condition and inducement to Tracker’s willingness to enter into the Tracker Agreement and Sequel’s willingness to enter into the Sequel Agreement, the Warburg Entities (as defined below) simultaneously entered into a Support and Voting Agreement (the “Voting Agreement”) with Earthstone, EEH, Tracker, RoyaltyCo, SEG-I and SEG-II, with respect to all of the shares of our Class A Common Stock beneficially owned by the Warburg Entities. The Voting Agreement provides that the Warburg Entities, in their capacity collectively as a significant stockholder of Earthstone, will: (i) appear at any meeting of Earthstone’s stockholders or otherwise cause all securities of Earthstone beneficially owned by the Warburg Entities to be counted as present at such a meeting for purposes of calculating a quorum; and (ii) vote or cause to be voted (including by proxy or written consent, if applicable) all of the securities of Earthstone owned by the Warburg Entities in favor of the issuance of the Transaction Shares and any other matter necessary for the consummation of the transactions contemplated by the Purchase Agreements. In addition, the Warburg Entities agree to vote against any action that could reasonably be expected to impede, interfere with, delay, postpone or adversely affect the Transaction.

The Warburg Entities’ obligations under the Voting Agreement terminate on the earliest to occur of: (i) the consummation of the closing of the Tracker Agreement; (ii) the termination of the Purchase Agreements pursuant to and in compliance with the terms set forth therein; and (iii) the mutual written agreement of the Warburg Parties, Earthstone, EEH, Tracker, RoyaltyCo, SEG-I and SEG-II to terminate the Voting Agreement. As of the record date, 13,238,110 shares of Class A Common Stock, representing approximately 16.9% of the total voting power of the outstanding voting securities of Earthstone, were beneficially owned by the Warburg Entities. See “The Transaction – The Support and Voting Agreement.”

Registration Rights Agreements

Pursuant to the terms of the Tracker Agreement, at the closing of the Tracker Acquisition, Earthstone and the members of Tracker will enter into a registration rights agreement (the “Tracker Registration Rights Agreement”) relating to the Tracker Shares. The Tracker Registration Rights Agreement provides that, within sixty days after the closing date of the Tracker Acquisition, Earthstone will prepare and file a registration statement to permit the public resale of the Tracker Shares. Earthstone shall cause the registration statement to be continuously effective from and after the date it is first declared or becomes effective until the earlier of (i) all such shares of Class A Common Stock have been disposed of in the manner set forth in the registration statement or under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), until the distribution of the Class A Common Stock does not require registration under the Securities Act, or until there are no longer any such registrable shares of Class A Common Stock issued in connection with the Tracker Acquisition outstanding or (ii) four years after the closing of the Tracker Acquisition. See “The Transaction – The Registration Rights Agreements and The Lock-up Agreement.”

Pursuant to the terms of the Sequel Agreement, at the closing of the Sequel Acquisition, Earthstone and Sequel will enter into a registration rights agreement (the “Sequel Registration Rights Agreement”) relating to the Sequel Shares. The Sequel Registration Rights Agreement provides that, within thirty days after the closing date of the Sequel Acquisition, Earthstone will prepare and file a registration statement to permit the public resale of the Sequel Shares. Earthstone shall cause the registration statement to be continuously effective from and after the date it is first declared or becomes effective until the earlier of (i) all such shares of Class A Common Stock have been disposed of in the manner set forth in the registration statement or under Rule 144 of the Securities Act, until the distribution of the Class A Common Stock does not require registration under the Securities Act, or until there are no longer any such registrable shares of Class A Common Stock issued in connection with the Sequel Acquisition outstanding or (ii) four years after the closing of the Sequel Acquisition. See “The Transaction – The Registration Rights Agreements and The Lock-up Agreement.”

Lock-up Agreements

Pursuant to the terms of the Tracker Agreement, at the closing of the Tracker Acquisition, Earthstone and certain members of Tracker will enter into a lock-up agreement (the “Lock-up Agreement”) providing that such parties will not transfer any of the

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shares of Class A Common Stock that they receive at the closing of the Tracker Acquisition for a period of 120 days after the closing of the Tracker Acquisition. See “The Transaction – The Registration Rights Agreements and The Lock-up Agreement.”

Board of Directors and Management of Earthstone Following Completion of the Transaction

Upon closing of the Transaction, Earthstone’s Board and executive management will remain unchanged. Additionally, Earthstone will continue to be headquartered in The Woodlands, Texas.

Treatment of Equity Awards

The Transaction will not affect our outstanding equity awards. All such awards will remain outstanding subject to the same terms and conditions that are applicable prior to the Transaction.

Interests of Directors and Executive Officers in the Transaction

You should be aware that some of the directors and executive officers of Earthstone have interests in the Transaction that may be different from, or are in addition to, the interests of our stockholders generally, including without limitation, that the executive officers and directors of Earthstone have rights to indemnification and directors’ and officers’ liability insurance that will survive the closing of the Transaction.

Accounting Treatment of the Transaction

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Tracker Acquisition and the Sequel Acquisition will be accounted for as asset acquisitions in accordance with Accounting Standards Codification Topic 805, Business Combinations (referred to as “ASC 805”). The fair value of the consideration paid by us and allocation of that amount to the underlying Tracker Assets and Sequel Assets acquired, on a relative fair value basis, will be recorded on our books as of the date of the closing of the Tracker Acquisition and the Sequel Acquisition. Additionally, costs directly related to the transaction will be capitalized as a component of the purchase price. The operating results of Tracker and Sequel will be consolidated in our financial statements beginning on the date of the closing of the Tracker Acquisition and the Sequel Acquisition, respectively. For combined financial information giving effect to the Transaction, see “Unaudited Pro Forma Condensed Combined Financial Information.”

No Appraisal Rights

Our stockholders do not have any rights to appraisal with respect to the issuance of the Transaction Shares or the Charter Amendment under Delaware law.

Conditions to Completion of the Transaction

The Tracker Agreement

The respective obligations of Earthstone, EEH, Tracker and RoyaltyCo to complete the Tracker Acquisition are subject to the satisfaction of the following conditions:
no order restraining or otherwise prohibiting the consummation of the transactions contemplated by the Tracker Agreement shall have been issued and remain in force by any governmental authority;

Earthstone shall have obtained all requisite stockholder approvals;

the Tracker Shares shall have been approved for listing on the NYSE, subject to official notice of issuance;

each party’s representations and warranties regarding organization, capitalization and authority relative to the Tracker Agreement shall be true and correct when made and as of the closing date (other than de minimis inaccuracies) and each party’s other representations and warranties, when read without regard to materiality qualifications, shall be true and correct in all respects, except where such failures of such representations and warranties to be true and correct when made and as of the closing date in all respects, individually or in the aggregate, have not had and would not reasonably be expected to have a material adverse effect (as defined in “The Transaction – The Purchase Agreements – The Tracker Agreement—Representations and Warranties”);

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each party shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by it under the Tracker Agreement prior to or on the closing date;

the aggregate title defect amounts and environmental defect amounts asserted by EEH in good faith shall be less than ten percent (10%) of the unadjusted base purchase price;

the aggregate amount of the allocated value of the affected assets with respect to any preferential rights to purchase any portion of the Tracker Assets that are not set forth in a schedule to the Tracker Agreement, regardless of whether such preferential purchase rights are exercised or unexercised, shall be less than twenty-five percent (25%) of the unadjusted base purchase price; and

each party shall have performed all closing obligations and delivered to the other parties the closing deliverables and certifications stating that certain conditions are satisfied.

For a more complete discussion of the conditions to the Tracker Acquisition, see “The Transaction – The Purchase Agreements – The Tracker Agreement—Conditions to Completion of the Tracker Acquisition.”

The Sequel Agreement

The respective obligations of Earthstone, EEH and Sequel to complete the Sequel Acquisition are subject to the satisfaction of the following conditions:
no order restraining or otherwise prohibiting the consummation of the transactions contemplated by the Sequel Agreement shall have been issued and remain in force by any governmental authority;

Earthstone shall have obtained all requisite stockholder approvals;

the Sequel Shares shall have been approved for listing on the NYSE, subject to official notice of issuance;

the Tracker Acquisition shall have closed or close simultaneously with the Sequel Acquisition;

each party’s representations and warranties regarding organization, capitalization and authority relative to the Sequel Agreement shall be true and correct when made and as of the closing date (other than de minimis inaccuracies) and each party’s other representations and warranties, when read without regard to materiality qualifications, shall be true and correct in all respects, except where such failures of such representations and warranties to be true and correct when made and as of the closing date in all respects, individually or in the aggregate, have not had and would not reasonably be expected to have a material adverse effect (as defined in “The Transaction – The Purchase Agreements – The Sequel Agreement—Representations and Warranties”);

each party shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by it under the Sequel Agreement prior to or on the closing date;

the aggregate title defect amounts and environmental defect amounts asserted by EEH in good faith shall be less than ten percent (10%) of the unadjusted base purchase price;

the aggregate amount of the allocated value of the affected assets with respect to any preferential rights to purchase any portion of the Sequel Assets that are not set forth in a schedule to the Sequel Agreement, regardless of whether such preferential purchase rights are exercised or unexercised, shall be less than twenty-five percent (25%) of the unadjusted base purchase price; and

each party shall have performed all closing obligations and delivered to the other parties the closing deliverables and certifications stating that certain conditions are satisfied.

For a more complete discussion of the conditions to the Sequel Acquisition, see “The Transaction – The Purchase Agreements – The Sequel Agreement—Conditions to Completion of the Sequel Acquisition.”


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Timing of the Transaction

If the requisite stockholder approval is received to approve the issuance of the Transaction Shares, the Transaction is expected to be completed in the third quarter of 2021. However, it is possible that factors outside of each party’s control could require them to complete the Transaction at a later time or not to complete it at all.

Termination of the Purchase Agreements and Termination Fees

The Tracker Agreement

The Tracker Agreement may be terminated in any of the following ways:

•    by mutual written consent of Earthstone, EEH, Tracker and RoyaltyCo;

•    by either Earthstone and EEH or Tracker and RoyaltyCo if:
•    the closing has not occurred on or before August 15, 2021 (the “Outside Date”); provided, the Outside Date shall be automatically extended until October 14, 2021 in the event the filing of the preliminary proxy statement with the SEC shall have occurred on or before June 8, 2021 and the stockholders’ meeting shall not have been held on or before August 1, 2021. However, no party shall be entitled to terminate the Tracker Agreement if the closing has failed to occur as a result of such party’s breach of any closing conditions; and

•    if the Annual Meeting shall have concluded and the approval of our stockholders shall not have been obtained for the issuance of the Transaction Shares.
The Tracker Agreement provides that, upon a termination of the Tracker Agreement under specified circumstances, we are required to pay a termination fee equal to $2.96 million to Tracker. If we do not receive stockholder approval of the issuance of the Transaction Shares, we have agreed to pay Tracker a termination fee of $1.0 million. 

For a more detailed discussion of each party’s termination rights and the related termination fee, see “The Transaction – The Purchase Agreements – The Tracker Agreement—Termination of the Tracker Agreement.”

The Sequel Agreement

The Sequel Agreement may be terminated in any of the following ways:

•    by mutual written consent of Earthstone, EEH and Sequel;

•    by either Earthstone and EEH or Sequel if:
•    the closing has not occurred on or before the Outside Date; provided, the Outside Date shall be automatically extended until October 14, 2021 in the event the filing of the preliminary proxy statement with the SEC shall have occurred on or before June 8, 2021 and the stockholders’ meeting shall not have been held on or before August 1, 2021. However, no party shall be entitled to terminate the Sequel Agreement if the closing has failed to occur as a result of such party’s breach of any closing conditions; and

•    if the Annual Meeting shall have concluded and the approval of our stockholders shall not have been obtained for the issuance of the Transaction Shares;

•    by EEH, if the Tracker Agreement is terminated or the Tracker Acquisition has not closed by the Outside Date.

The Sequel Agreement provides that, upon a termination of the Sequel Agreement under specified circumstances, we are required to pay a termination fee equal to $5.2 million to Sequel. If we do not receive stockholder approval of the issuance of the Transaction Shares, we have agreed to pay Sequel a termination fee of $1.0 million. If the Tracker Agreement is terminated through no fault of Earthstone or EEH and neither Tracker or RoyaltyCo is entitled to a termination fee thereunder, we have agreed to reimburse Sequel for documented out-of-pocket expenses of up to $1.0 million.


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For a more detailed discussion of each party’s termination rights and the related termination fee, see “The Transaction – The Purchase Agreements – The Sequel Agreement—Termination of the Sequel Agreement.”

Tracker Summary Historical Financial Data
    
Tracker’s consolidated and combined statements of operations information for the years ended December 31, 2020 and 2019 and Tracker’s consolidated and combined balance sheet information at December 31, 2020 and 2019 are derived from Tracker’s audited consolidated and combined financial statements included in this proxy statement. Tracker’s consolidated and combined statements of operations information for the three months ended March 31, 2021 and Tracker’s consolidated and combined balance sheet information at March 31, 2021 are derived from Tracker’s unaudited consolidated and combined financial statements included in this proxy statement. This information is only a summary and you should read it in conjunction with Tracker’s consolidated financial statements and related notes included in this proxy statement. See “Historical Consolidated and Combined Financial Statements of Tracker Resource Development III, LLC and TRD III Royalty Holdings (TX), LP” beginning on page F-1.

As of and for the
Year Ended December 31,
 As of and for the Three Months Ended March 31,
202020192021
(in thousands, except per share data)(unaudited)
Summary of Operations:
Total revenues and other income$25,570 $34,566 $7,532 
Production and operating expenses$7,332 $7,649 $1,374 
Depreciation, depletion and accretion$18,982 $17,046 $3,694 
Impairment expense$273,838 $3,125 $— 
Net loss$(275,925)$(6,670)$(240)
Summary Balance Sheet Data at Period End:
Property, plant and equipment$71,082 $363,593 $68,396 
Total assets$80,843 $385,825 $74,637 
Credit facility$20,300 $33,000 $18,000 
Total equity$42,067 $318,793 $41,493 

Sequel Summary Historical Financial Data
    
Sequel’s revenues and direct operating expenses information for the years ended December 31, 2020 and 2019 are derived from Sequel’s audited statements of revenues and direct operating expenses included in this proxy statement. Sequel’s revenues and direct operating expenses information for the three months ended March 31, 2021 are derived from Sequel’s unaudited statements of revenues and direct operating expenses included in this proxy statement. This information is only a summary and you should read it in conjunction with the Statements of Revenues and Direct Operating Expenses of Sequel and related notes included in this proxy statement. See “Statements of Revenues and Direct Operating Expenses of SEG-TRD LLC and SEG-TRD II LLC Properties” beginning on page F-52. The financial data may not be indicative of future performance.

For the Year Ended December 31,For the Three Months Ended March 31,
202020192021
(in thousands)(unaudited)
Oil and gas revenues$36,793 $37,432 $9,379 
Direct operating expenses9,974 7,991 1,930 
Revenues in excess of direct operating expenses$26,819 $29,441 $7,449 




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Selected Unaudited Pro Forma Condensed Combined Financial Information

The following selected unaudited pro forma condensed combined financial information has been derived from and should be read in conjunction with the historical consolidated financial statements and related notes of Earthstone, Tracker and Sequel for the periods presented and the unaudited pro forma condensed combined financial information and related notes provided under the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.” The information for the year ended December 31, 2020 also includes balance sheet and statements of operations data for Independence Resources Management, LLC (“Independence”) that was acquired by Earthstone on January 7, 2021. The unaudited pro forma condensed combined balance sheet information assumes the Transaction occurred on March 31, 2021. The unaudited pro forma condensed combined statements of operations information for the three months ended March 31, 2021 and for the year ended December 31, 2020 gives effect to the Transaction as if it had occurred on January 1, 2020.

The selected unaudited pro forma condensed combined financial information does not purport to represent what the Company’s financial position or results of operations would have been had the Transaction been consummated on the assumed dates nor is it indicative of the Company’s future financial position or results of operations. The unaudited pro forma condensed combined financial information does not reflect future events that may occur after the Transaction, including, but not limited to, the anticipated realization of ongoing savings from operating efficiencies.

For the Year Ended
December 31, 2020
As of and for the Three Months Ended March 31, 2021
(in thousands, except per share data)(unaudited)(unaudited)
Pro Forma Statement of Operations Data
Total revenues$287,359 $94,179 
Net income (loss)$27,196 $(6,226)
Net income (loss) attributable to noncontrolling interest$11,368 $(2,547)
Net income (loss) attributable to Earthstone Energy, Inc. common stockholders$15,828 $(3,679)
Net loss per common share:
    Basic and diluted$0.32 $(0.08)
Pro Forma Balance Sheet Data
Total assets$1,369,210 
Long-term debt$305,024 
Total Earthstone Energy, Inc. stockholders’ equity$479,765 
Equity attributable to noncontrolling interest $458,174 
Total equity$937,939 

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Historical and Unaudited Pro Forma Condensed Combined Per Share Information

The following table sets forth certain historical net income (loss) per share of Earthstone and per share book value information on an unaudited pro forma condensed combined basis after giving effect to the Transaction.

Historical per share data of Earthstone for the year ended December 31, 2020 and as of and for the three months ended March 31, 2021 was derived from Earthstone’s historical financial statements for the respective periods and for the year ended December 31, 2020. The information includes the acquisition of Independence by Earthstone on January 7, 2021. This information should be read together with the consolidated financial statements and related notes of Earthstone that are incorporated by reference into this proxy statement. See “Where You Can Find More Information.”

Unaudited pro forma condensed combined net income (loss) per share from continuing operations for the year ended December 31, 2020 and for the three months ended March 31, 2021, as well as the book value per share of Common Stock as of March 31, 2021, were derived and should be read in conjunction with the unaudited pro forma condensed combined financial data included under “Unaudited Pro Forma Condensed Combined Financial Information.” The pro forma net income (loss) per share from continuing operations is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the Transaction been completed on January 1, 2020. The pro forma book value per share of Common Stock is presented for illustrative purposes only and is not necessarily indicative of the financial position that would have occurred had the Transaction been completed on March 31, 2021. Shares of Earthstone’s Class B Common Stock have been excluded from the calculation of amounts presented herein as they hold no share in Earthstone’s earnings or equity. The Class B Common Stock share of such amounts are included in Noncontrolling interest in Earthstone’s Consolidated Balance Sheet and Net (loss) income attributable to noncontrolling interest in the Earthstone’s Consolidated Statements of Operations.

As of and for the Year Ended December 31, 2020As of and for the Three Months Ended March 31, 2021
Earthstone — Historical
Net loss per common share attributable to Earthstone Energy, Inc.:
Basic and diluted$(0.45)$(0.14)
Book value per share of Class A Common Stock$11.37 $9.61 
Unaudited Pro Forma Condensed Combined Amounts
Net loss per common share attributable to Earthstone Energy, Inc.:
Basic and diluted$(0.08)
Book value per share of Class A Common Stock (1)
$9.54 
(1)Computed by dividing Total Earthstone Energy, Inc. equity by the number of issued and outstanding shares of Class A Common Stock as of March 31, 2021, adjusted to include the estimated number of shares of Class A Common Stock to be issued in the Transaction.








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Summary Historical and Combined Reserve and Production Data

The following table sets forth information with respect to the historical and combined estimated oil, natural gas and NGL reserves as of December 31, 2020 for Earthstone, Independence, Tracker and Sequel. The Earthstone reserve data presented below was derived from the independent engineering report of Cawley, Gillespie & Associates, Inc. (“CG&A”), Earthstone’s independent reserve engineer. The Independence reserve information was prepared by Earthstone management. The reserve information of Tracker and Sequel was prepared by Tracker management and Sequel management, respectively. Future exploration, exploitation and development expenditures, as well as future commodity prices and service costs, will affect the quantity of reserve volumes. The reserve estimates shown below were determined using the unweighted arithmetic average of the first day of the month price for each of the preceding 12 months for oil, natural gas and NGLs for the year ended December 31, 2020 for Earthstone, Independence, Tracker and Sequel.

 Year Ended December 31, 2020
Earthstone
Historical (1)
Independence Historical (2)
Tracker
Historical
Sequel
Historical
Combined
Estimated Proved Developed Reserves:
  Oil (MBbl)18,876 13,713 1,673 1,398 35,660 
  Natural Gas (MMcf)55,752 49,157 24,237 15,186 144,332 
  Natural Gas Liquids (MBbl)10,123 — 4,009 2,491 16,623 
     Total (MBOE) (3)
38,291 21,906 9,721 6,419 76,337 
Estimated Proved Undeveloped Reserves:
  Oil (MBbl)21,212 19,993 10,641 — 51,846 
  Natural Gas (MMcf)55,450 31,368 97,386 — 184,204 
  Natural Gas Liquids (MBbl)10,123 — 16,598 — 26,721 
     Total (MBOE) (3)
40,577 25,221 43,470 — 109,268 
Estimated Proved Reserves:
  Oil (MBbl)40,088 33,706 12,314 1,398 87,506 
  Natural Gas (MMcf)111,202 80,525 121,623 15,186 328,536 
  Natural Gas Liquids (MBbl)20,246 — 20,607 2,491 43,344 
     Total (MBOE) (3)
78,868 47,127 53,192 6,419 185,606 
(1)As of December 31, 2020, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 41.5% of the estimated proved reserves, as adjusted for the impact of the Transaction and the acquisition of Independence.
(2)The historical results of Independence are presented with natural gas and natural gas liquids combined within Natural Gas (MMcf).
(3)Assumes a ratio of 6 Mcf of natural gas per Boe.

The following table sets forth summary information with respect to historical and combined oil, natural gas and natural gas liquids production for the year ended December 31, 2020 for Earthstone, Independence, Tracker and Sequel. The Earthstone oil, natural gas and NGL production data presented below was derived from Earthstone’s Annual Report on Form 10-K for the year ended December 31, 2020, which is incorporated by reference in this proxy statement. The Independence oil and natural gas production data presented below was derived by Earthstone management from Independence's internal management reports. The Tracker oil, natural gas and NGL production data presented below was derived from Tracker management’s internal reports. The Sequel oil, natural gas and NGL production data presented below was derived from Sequel management’s internal reports.

 Year Ended December 31, 2020
 Earthstone Historical
Independence Historical (1)
Tracker HistoricalSequel
Historical
Combined
Oil (MBbl)3,180 1,993 440 665 6,278 
Natural Gas (MMcf)7,282 4,769 3,089 3,645 18,785 
Natural Gas Liquids (MBbl)1,198 — 495 589 2,282 
     Total (MBOE) (2)
5,592 2,788 1,449 1,862 11,691 
(1)The historical results of Independence are presented with natural gas and natural gas liquids combined within Natural Gas (MMcf).
(2)Assumes a ratio of 6 Mcf of natural gas per Boe.

The following table sets forth summary information with respect to historical and combined oil, natural gas and NGL production for the three months ended March 31, 2021 for Earthstone, Independence, Tracker and Sequel. The Earthstone oil, natural gas and NGL production data presented below was derived from Earthstone’s Quarterly Report on Form 10-Q for the

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period ended March 31, 2021, which is incorporated by reference in this proxy statement. The Independence oil and natural gas production data presented below was derived by Earthstone management from Independence's internal management reports. The Tracker oil, natural gas and NGL production data presented below was derived from Tracker management’s internal reports. The Sequel oil, natural gas and NGL production data presented below was derived from Sequel management’s internal reports.

 Three Months Ended March 31, 2021
 Earthstone
Historical
Independence Historical (1)
Tracker
Historical
Sequel
Historical
Combined
Oil (MBbl)1,057 28 59 81 1,225 
Natural Gas (MMcf)2,445 52 748 886 4,131 
Natural Gas Liquids (MBbl)365 10 109 114 598 
Total (MBOE) (2)
1,830 47 293 343 2,513 
(1)Based on the pro rata allocation of 6 days of January 2021 production from internal reports.
(2)Assumes a ratio of 6 Mcf of natural gas per Boe.

Common Stock and Dividend Information

The closing price of our Class A Common Stock reported on the NYSE on [•], 2021 was $[•] per share. On May 24, 2021, we had 44,138,004 issued and outstanding shares of Class A Common Stock, which were held by approximately 1,800 holders of record and 13 holders of record of our Class B Common Stock. Holders of record do not include owners for whom Class A Common Stock may be held in “street” name.

We have never declared or paid any cash dividends on our Class A Common Stock or our Class B Common Stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate declaring or paying any cash dividends on our Class A Common Stock in the foreseeable future. Any future determination as to the declaration and payment of dividends will be at the discretion of our Board and will depend on then-existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors that our Board considers relevant. In addition, our existing revolving credit agreement places restrictions on our ability to pay cash dividends on our Class A Common Stock and our Class B Common Stock.



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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Any statements in this proxy statement regarding the Transaction, the expected timetable for completing the proposed Transaction, future financial and operating results, future capital structure and liquidity, benefits and synergies of the proposed Transaction, future opportunities for the Company, general business outlook and any other statements about the future expectations, beliefs, goals, plans or prospects of the Board or management of Earthstone constitute “forward-looking statements” within the meaning of the Section 27A of 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,” “potential,” “possible,” or “probable” or statements that certain actions, events or results “may,” “will,” “should,” or “could” be taken, occur or be achieved. The forward-looking statements include statements about the expected benefits of the proposed Transaction to Earthstone and its stockholders, the anticipated completion of the proposed Transaction or the timing thereof, the expected future reserves, production, financial position, business strategy, revenues, earnings, costs, capital expenditures and debt levels of the Company, and plans and objectives of management for future operations. 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. Forward-looking statements may include statements about:

risks and uncertainties relating to the Transaction, including the possibility that the Transaction does not close when expected or at all because conditions to closing are not satisfied on a timely basis or at all;

the possibility that the anticipated benefits of the Transaction are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the Assets with those of the Company;

the possibility that the Tracker Acquisition closes and the Sequel Acquisition does not close;

the possibility that the Transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

business strategy;

oil, natural gas and NGL reserves;

development drilling locations, inventories, projects and programs;

our ability to replace the reserves that we produce through drilling and property acquisitions;

financial strategy, liquidity and capital required for our development program and other capital expenditures;

realized oil and natural gas prices;

timing and amount of future production of oil, natural gas and NGLs;

our hedging and strategy results;

availability of pipeline connections and transportation facilities on economic terms;

competition, government regulations and political developments;

our ability to obtain permits and governmental approvals;

legal, governmental regulatory and environmental matters;

the markets for and our marketing of oil, natural gas and NGLs;

asset, leasehold or business acquisitions on desired terms;


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costs of developing properties;

general economic conditions;

credit markets and interest rates;

impact of new accounting pronouncements on earnings in future periods;

estimates of future income taxes and income tax rates;

our estimates and forecasts of the timing, number, profitability and other results of wells we expect to drill and other oil and natural gas activities;

uncertainty regarding our future operating results and our future revenues and expenses;

plans, objectives, expectations and intentions contained in this proxy statement that are not historical; and

the other factors and financial, operational and legal risks or uncertainties described in Earthstone’s public filings with the SEC, including its Annual Report on Form 10-K and as amended by Form 10-K/A for the year ended December 31, 2020 and subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC.

We disclaim any intention or obligation to update or revise any forward-looking statements as a result of developments occurring after the date of this document except as required by law. We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, failure to find, acquire or gain access to other discoveries and prospects or to successfully develop and produce from our current discoveries and prospects, geologic risk, drilling and other operating risks, well control risk, regulatory changes, the uncertainty inherent in estimating reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures and the other risks discussed in the section entitled “Risk Factors” in Earthstone’s filings with the SEC.

Reserve engineering is a process of estimating underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers or other qualified estimators. In addition, the results of drilling, testing and production activities may justify upward or downward revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil, natural gas and NGLs that are ultimately recovered.

Should one or more of the risks or uncertainties described herein occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this proxy statement are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All forward-looking statements speak only as of the date of this proxy statement. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this proxy statement.


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PROPOSAL 1 - ELECTION OF THREE CLASS III DIRECTORS

Earthstone’s Board of Directors (“Board”) is divided into three classes to allow for staggered three-year terms. The term of office of the Class III directors expires at this Annual Meeting and the election of their successors. Our Board has nominated Jay F. Joliat, Phillip D. Kramer and Robert L. Zorch as the three Class III directors for election at this Annual Meeting to hold office until the 2024 annual meeting and the election of their successors. All of the nominees currently serve as directors. Each of the nominees has agreed to be named in this proxy statement and to serve if elected.

In the election of directors, each proxy will be voted for each of the Class III director nominees unless the proxy withholds authority to vote for any or all of the Class III director nominees.

We have no reason to believe that any of the Class III director nominees will be unable or unwilling for good cause to serve if elected. If any nominee should become unable for any reason or unwilling for good cause to serve, proxies may be voted for another person nominated as a substitute by the Board, or the Board may reduce the number of Class III directors.

Additional information regarding Messrs. Joliat, Kramer and Zorich and all of our other directors, can be found under the “Our Board of Directors” section, the “Security Ownership of Management and Certain Beneficial Owners” section, and the “Compensation of Directors” section of this proxy statement.

Directors are elected by a plurality vote of the shares present in person or represented by proxy at the Annual Meeting, meaning that the director nominees receiving the greatest number of votes for their election at the meeting are elected as directors, up to the maximum number of directors to be elected at the meeting. Any shares not voted (whether by withholding the vote, broker non-vote or otherwise) have no impact in the election of the Class III directors. If you sign your proxy card but do not give instructions with respect to the voting of directors, your shares will be voted for Messrs. Joliat, Kramer and Zorich. However, if you hold your shares in street name and do not instruct your broker how to vote in the election of Class III directors, your shares will constitute a broker non-vote and will not be voted for any of the Class III director nominees. See the section of this proxy statement entitled “General Information about the Annual Meeting – Voting Instructions and Information – Election of Directors.”

The following provides summary information about each of our Class III director nominees:
JAY F. JOLIAT
Age: 64
Director Since: 2014
Board Committees:
☐    Audit
☐    Compensation
Mr. Joliat has served as a director since December 2014. For more than the past 35 years, Mr. Joliat has been an independent investor and developer in commercial, industrial and apartment real estate, residential home building, restaurant ownership and management. He has had direct and extensive experience in placement of venture private equity in generic pharmaceuticals, medical devices or procedures, and for over 30 years, oil and gas E&P in particular. He has been the CEO and CIO of Joliat & Company, Inc. since October 1988. He has been the CEO of Joliat Ventures, LLC since January 1998. Since January 1981, Mr. Joliat has served as Treasurer of Beefcarver Restaurants, Inc., and has been its CEO since 1989. He formed and managed his own registered investment management company early in his career after having held VP and/or SVP positions at E.F. Hutton, Dean Witter Reynolds, and LPL Financial. He holds a Bachelor’s Degree in Management and Finance from Oakland University (1982) and became a Certified Investment Management Analyst (CIMA) in 1983 after completing the requisite IMCA curriculum from the Wharton School of Business at the University of Pennsylvania. From 1996 through 2003, Mr. Joliat served on the Board of Directors of Caraco Pharmaceutical Laboratories Ltd., and served in various capacities on its audit, executive and compensation committees. From 2007 through August 2012, Mr. Joliat served on the Board of Directors of GeoResources, Inc., and served in various capacities on the audit, nominating and compensation committees until its merger with Halcón in August 2012.

SKILLS AND QUALIFICATIONS: The Board of Directors, in reviewing and assessing the contributions of Mr. Joliat to the Board, determined that his business experience in management and investments, as well as previously serving on the boards of directors of SEC-reporting companies, brings a unique perspective as an outside investor in oil and gas entities. His management skills, understanding of public and private capital markets, and financial acumen provide the Board with a valuable resource for planning corporate strategy.

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PHILLIP D. KRAMER
Age: 65
Director Since: 2016
Board Committees:
☐    Audit
☐    Compensation
    Nominating
Mr. Kramer has served as a director since October 2016. He served as an Executive Vice President of Plains All American Pipeline, L.P. (“PAA”), an energy infrastructure and logistics company based in Houston, Texas, from November 2008 until February 2017. He also served as Executive Vice President and Chief Financial Officer of PAA from 1998 until 2008. He was a director and chairman of the audit committee of PetroLogistics GP, the general partner of PetroLogistics LP, from July 2012 until its sale in July 2014. Mr. Kramer has served on the board of directors of Oasis Midstream Partners since their initial public offering in September 2017. He graduated from the University of Oklahoma in 1978 with a degree in accounting and was previously a Certified Public Accountant. He is currently on the board of advisors of Price College of Business at the University of Oklahoma.

SKILLS AND QUALIFICATIONS: The Board of Directors, in reviewing and assessing the contributions of Mr. Kramer to the Board, determined that his management experience, understanding of public and private capital markets, and financial background provide the Board with a valuable resource for planning corporate strategy.


ROBERT L. ZORICH
Age: 71
Director Since: 2014


Mr. Zorich has served as a director since December 2014. Mr. Zorich is a Managing Partner and co-founder of EnCap. He serves on the firm’s upstream investment and management committees and has been actively involved in all aspects of the firm’s management and growth since its inception in 1988. EnCap is a leading private equity firm focused on the upstream and midstream sectors of the oil and gas industry in North America, having raised 19 institutional oil and gas investment funds, totaling in excess of $27 billion of capital. Over its history, the firm has created over 220 oil and gas companies and currently manages capital on behalf of more than 250 U.S. and international investors, including public and private pension funds, insurance companies, sovereign wealth funds, university endowments and foundations. Prior to the formation of EnCap, Mr. Zorich was a Senior Vice President in charge of the Houston office of Trust Company of the West, then a large, privately-held pension manager. Previously, Mr. Zorich co-founded MAZE Exploration, Inc., a private oil and gas company headquartered in Denver. For the first seven years of his career, Mr. Zorich was employed by Republic Bank as a Vice President and Division Manager in the energy group. Mr. Zorich serves on the boards of several EnCap portfolio companies and previously served on the Board of Directors of Montage Resources Corporation (formerly Eclipse Resources Corporation) and Oasis Petroleum Inc. In addition, he serves on the investment committee of EnCap Flatrock Midstream. Mr. Zorich’s community involvement includes serving as a member of the Leadership Cabinet of Texas Children’s Hospital, as well as serving on the boards of the Workfaith Connection and the Memorial Assistance Ministries Endowment. He is a member of the Independent Petroleum Association of America, the Houston Producers’ Forum and Texas Independent Producers and Royalty Owners Association. Mr. Zorich holds a B.A. in Economics from the University of California at Santa Barbara and a Master’s Degree in International Management (with distinction) from the American Graduate School of International Management in Phoenix, Arizona.
SKILLS AND QUALIFICATIONS: The Board of Directors, in reviewing and assessing the contributions of Mr. Zorich to the Board, determined that his significant experience with financing, forming, and guiding numerous oil and gas companies while serving as a co-founder and managing partner of EnCap provides significant contributions to the Board. His insights and relationships have proven valuable towards guiding corporate strategies and pursuing growth opportunities.


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In light of the individual skills and qualifications of each of our Class III director nominees, our Board has concluded that each of our Class III director nominees should be elected to our Board.
Our Board unanimously recommends that stockholders vote FOR each of our Class III director nominees.

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PROPOSAL 2 – THE CHARTER AMENDMENT PROPOSAL

General

We are asking you to approve and adopt an amendment (the “Charter Amendment”) to our Third Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) to increase the authorized size of our Board from nine members to eleven members. The Board regularly reviews Earthstone’s corporate governance policies and procedures. The Board believes that increasing the authorized size of the Board from nine members to eleven members is in the best interests of the Company and its stockholders. The Charter Amendment will facilitate Earthstone’s ability to address and meet evolving corporate governance standards and the rules, regulations and other requirements of the SEC and the NYSE.

In May 2021, our Board adopted a resolution which authorizes, subject to stockholder approval, an amendment to our Certificate of Incorporation, whereby the first paragraph of Section 5.1 of our Certificate of Incorporation is amended and restated in its entirety to read as follows:

“5.1 Authority, Number and Election of Directors. The affairs of the Company shall be conducted by the Board of Directors. The number of directors of the Company shall be fixed from time to time in the manner provided in the bylaws of the Company and may be increased or decreased from time to time in the manner provided in the bylaws; provided, however, that, except as otherwise provided in this Article 5, the number of directors shall not be less than three (3) or more than eleven (11). Election of directors need not be by written ballot except and to the extent provided in the bylaws. Commencing with the election of directors at the 2017 Annual Meeting of Stockholders, the directors shall be divided into three classes designated as Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the number of directors constituting the entire Board of Directors. Initial class assignments shall be determined by the Board of Directors. At each annual meeting of stockholders, successors to the directors whose terms expired at that annual meeting shall be elected for a three-year term except that, initially, the director elected to Class I will be subject to election for a three-year term at the Annual Meeting of Stockholders in 2019; the director elected to Class II will be subject to election for a three-year term at the Annual Meeting of Stockholders in 2017; and the director elected to Class III will be subject to election for a three-year term at the Annual Meeting of Stockholders in 2018. If the number of directors changes, any increase or decrease shall be apportioned among the classes such that the number of directors in each class shall remain as nearly equal as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and qualified, subject, however, to such director’s prior death, resignation, retirement, disqualification or removal from office.”

The Board directed that the Charter Amendment be submitted to a vote of our stockholders at the Annual Meeting and recommended that our stockholders approve and adopt the Charter Amendment. If the proposed Charter Amendment is approved and adopted by our stockholders, our Board will amend our Certificate of Incorporation to reflect the revisions set forth above, and we will file a Certificate of Amendment to the Certificate of Incorporation setting forth the amendment with the Secretary of State of the State of Delaware shortly after the Annual Meeting. Such amendment will be effective upon filing. See “Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation of Earthstone Energy, Inc.” attached hereto as Annex A to this proxy statement. If the Charter Amendment is not approved and adopted by our stockholders, the size of our Board will remain at nine directors.

If the Charter Amendment is approved and adopted by our stockholders, our Board intends to expand the size of the Board to ten members, to expand the size of Class III to four members and to nominate and appoint Robert J. Anderson, our President and Chief Executive Officer, to fill the newly created directorship as a Class III director. For biographical information about Mr. Anderson, please see “Management.”

No Appraisal Rights


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Stockholders are not entitled to appraisal rights with respect to the proposal.

Approval by the Stockholders of the Proposal

Approval and adoption of the Charter Amendment to our Certificate of Incorporation requires the affirmative vote of the holders of 66-2/3% of the issued and outstanding shares of our Class A Common Stock and Class B Common Stock, voting together as a single class. Both broker non-votes and abstentions will have the effect of a vote AGAINST the Charter Amendment to our Certificate of Incorporation.

Our Board unanimously recommends that stockholders vote FOR
the approval and adoption of the Charter Amendment (Proposal 2).

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PROPOSAL 3 – THE AMENDMENT TO THE EARTHSTONE ENERGY, INC. AMENDED AND RESTATED 2014 LONG-TERM INCENTIVE PLAN PROPOSAL

General

At the annual meeting of our stockholders on June 6, 2018, the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan was approved and adopted by our stockholders, and was subsequently amended at the annual meeting of our stockholders on June 3, 2020 (the “2014 Plan”). In May 2021, our Board approved an amendment (the “Plan Amendment”) to the 2014 Plan, subject to stockholder approval, to increase the number of shares of our Class A Common Stock authorized to be issued under the 2014 Plan by 2.6 million shares. See the “Amendment No. 2 to the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan” attached as Annex B to this proxy statement. If the Plan Amendment is approved by stockholders, we intend to file, pursuant to the Securities Act, a registration statement on Form S-8 to register the additional shares available for delivery under the 2014 Plan as soon as practicable after the Annual Meeting.

Description and Text of the Proposed Plan Amendment

Our Board has determined that, to give us the ability to attract and retain the executive and key employee talent necessary for our continued growth and success, the number of shares of our Class A Common Stock available for issuance under the 2014 Plan should be increased by 2.6 million shares, and is proposing an amendment to effect such an increase. In evaluating the amount of the increase in the number of shares available under the 2014 Plan, the Board considered our employee headcount, which has increased due to recently closed and pending acquisitions, and the Board believes that equity incentives, if fully achieved, should be a larger portion of overall compensation. Additionally, the recently closed acquisition, as well as the Transaction discussed below in Proposal 5, have resulted in, and will result in (if Proposal 5 is approved) the issuance of a significant number of shares of Class A Common Stock and the increase in the shares pursuant to the Plan Amendment are commensurate with such shares. In approving and recommending the increase in the number of shares of Class A Common Stock authorized for issuance under the 2014 Plan, the Board concluded such increase was advisable and in our best interests to provide us with maximum flexibility to use equity awards to continue to support our growth strategy and maintain our ability to attract and retain talented executives and employees. Because the amount and timing of specific equity awards in the future is dependent on our employee headcount, management performance, competitive compensation practices, our stock price and a variety of other factors, some of which are beyond our control, it is not possible to determine when or if the currently proposed increase in shares under the 2014 Plan will be exhausted or the amount of subsequent dilution that may ultimately result from such awards.

To effect the increase in the aggregate number of shares of our Class A Common Stock that may be issued under the 2014 Plan, it is proposed that the first sentence of Section 3.1 of the 2014 Plan be deleted in its entirety and replaced with the following:

“Subject to the limitations set forth herein, 12,000,000 shares of Common Stock are reserved for issuance pursuant to Awards made under this Plan.”

Summary of Principal Terms of the 2014 Plan

The following is a summary description of the material features of the 2014 Plan, as proposed to be amended (the “Amended Plan”). The statements made in this proxy statement regarding the Plan Amendment to the 2014 Plan should be read in conjunction with and are qualified in their entirety by reference to the 2014 Plan, a copy of which is available as Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on June 6, 2018 and Amendment No. 1 to the 2014 Plan, a copy of which is available as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 5, 2020. Prior filings with the SEC are available through our website at www.earthstoneenergy.com or in printed form upon request by any stockholder.

The Amended Plan currently is effective until June 6, 2028. The purposes of the Amended Plan are to create incentives which are designed to motivate participants to put forth maximum effort toward our success and growth and to enable us to attract

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and retain experienced individuals who, by their position, ability and diligence are able to make important contributions to our success, and thereby to enhance stockholder value.

Under the Amended Plan, we may grant stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance units, performance bonuses, stock awards and other incentive awards to our employees or those of our subsidiaries or affiliates, subject to the terms and conditions set forth in the Amended Plan. We may also grant nonqualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance units, stock awards and other incentive awards to any persons rendering consulting or advisory services and non-employee directors, subject to the conditions set forth in the Amended Plan. Generally, all classes of our employees are eligible to participate in the Amended Plan. As of [•], 2021, there were approximately [•] full-time employees, [•] part-time employees, [•] consultant, and eight non-employee directors of the Company that are eligible to participate in the Amended Plan.

The Amended Plan provides that a maximum of 12.0 million shares of our Class A Common Stock may be issued in conjunction with awards granted under the Amended Plan. At December 31, 2020, 327,955 shares of our Class A Common Stock remained available for awards to be granted under the Amended Plan. On [•], 2021, the closing price of a share of our Class A Common Stock on the NYSE was $[•]. Shares of Class A Common Stock cancelled, settled in cash, forfeited, withheld, or tendered by the participant to satisfy exercise prices or tax withholding obligations will be available for delivery pursuant to other awards.

The Amended Plan limits the aggregate number of shares of our Class A Common Stock that may be issued pursuant to any awards to any eligible director in any calendar year to 500,000 shares. One of the requirements for the favorable tax treatment available to incentive stock options under the Internal Revenue Code of 1986, as amended (the “Code”), is that the Amended Plan must specify, and our stockholders must approve, the maximum number of shares available for issuance pursuant to incentive stock options. As a result, in order to provide flexibility, the Amended Plan provides that up to 1,000,000 shares of Class A Common Stock may be issued pursuant to incentive stock options. The shares issued under the Amended Plan will be authorized but unissued shares or shares currently held (or subsequently acquired) as treasury shares.

The Amended Plan expires on June 6, 2028, and no awards may be granted under the Amended Plan after that date. However, the terms and conditions of the Amended Plan will continue to apply after that date to all Amended Plan awards granted prior to that date until they are no longer outstanding.

Administration

Our Board has delegated and authorized the compensation committee (the “Compensation Committee”) of the Board to administer the Amended Plan. Except as set forth in the Amended Plan, the Compensation Committee serves at the pleasure of the Board.

With respect to awards to be made to any of our non-employee directors, the Compensation Committee will determine:

•    which of such persons should be granted awards;
•    the terms of proposed grants or awards to those selected to participate;
•    the exercise price for options and stock appreciation rights;
•    any limitations, restrictions and conditions upon any awards; and
•    rules for the administration of the Amended Plan and resolution of any disputes that may arise under the Amended Plan.

In connection with the administration of the Amended Plan, the Compensation Committee, with respect to awards to be made to any officer, employee or consultant who is not one of our non-employee directors, will:

•    determine which employees and other persons will be granted awards under the Amended Plan;
•    grant the awards to those selected to participate;
•    determine the exercise price for options and stock appreciation rights; and
•    prescribe any limitations, restrictions and conditions upon any awards.

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In addition, our Compensation Committee will:

•    interpret the Amended Plan; and
•    make all other determinations and take all other actions that may be necessary or advisable to implement and administer the Amended Plan.

The Compensation Committee may allocate or delegate its responsibilities to the extent permitted by applicable law or stock exchange rules.

Types of Awards

The Amended Plan permits the Compensation Committee to make several types of awards and grants, including awards of shares of restricted stock, awards of restricted stock units, the grant of options to purchase shares of our Class A Common Stock, awards of stock appreciation rights (“SARs”), awards of performance units, awards of performance bonuses, stock awards and other incentive awards.

Restricted Stock. Restricted shares of our Class A Common Stock may be granted under the Amended Plan subject to such terms and conditions, including forfeiture and vesting provisions, time and performance-based restrictions, and restrictions against sale, transfer or other disposition as the Compensation Committee may determine to be appropriate at the time of making the award. In addition to or in lieu of any time vesting conditions determined by the Compensation Committee, vesting and/or the grant of restricted stock awards may be subject to our achievement of specified performance criteria. In addition, the Compensation Committee may direct that share certificates representing restricted stock be inscribed with a legend as to the restrictions on sale, transfer or other disposition, and may direct that the certificates, along with a stock power signed in blank by the participant, be delivered to and held by us until such restrictions lapse. Shares of restricted stock will generally vest upon the occurrence of a change of control.

Restricted Stock Units. A restricted stock unit entitles the recipient to receive a payment from us, following the lapse of restrictions on the award, equal to the fair market value of a share of our Class A Common Stock. The Amended Plan provides for payment in the form of shares of our Class A Common Stock or cash. Restricted stock units may be granted under the Amended Plan subject to such terms and conditions, including forfeiture and vesting provisions, as well as time and performance-based restrictions, as the Compensation Committee may determine to be appropriate at the time of making the award. In addition to or in lieu of any time vesting conditions determined by the Compensation Committee, vesting and/or the grant of restricted stock units may be subject to our achievement of specified performance criteria. Restricted stock units would generally vest upon the occurrence of a change of control.

The Amended Plan also permits the Compensation Committee to grant tandem cash dividend rights or dividend unit rights with respect to restricted stock units. A cash dividend right is a contingent right to receive an amount in cash equal to the cash distributions made by us with respect to a share of our Class A Common Stock during the period the tandem restricted stock unit is outstanding. A grant of cash dividend rights may provide that such cash payments shall be paid directly to the participant at the time of payment of the related dividend, be credited to a bookkeeping account subject to the same vesting and payment provisions as the tandem restricted stock unit award (with or without interest in the discretion of the Compensation Committee), or be subject to such other provisions or restrictions as determined in the discretion of the Compensation Committee. A dividend unit right is a contingent right to have an additional number of restricted stock units credited to a participant in respect of a restricted stock unit award equal to the number of shares of our Class A Common Stock that could be purchased at fair market value with the amount of each cash distribution made by us with respect to a share of our Class A Common Stock during the period the tandem restricted stock unit is outstanding. A grant of dividend unit rights shall be subject to the same vesting and payment provisions as the tandem restricted stock unit award.

Stock Options. Stock options are contractual rights entitling an optionee who has been granted a stock option to purchase a stated number of shares of Class A Common Stock at an exercise price per share determined at the date of the grant. Options are evidenced by stock option agreements with the respective optionees. The exercise price for each stock option granted under the

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Amended Plan will be determined by the Compensation Committee at the time of the grant. The Compensation Committee will also determine the duration of each option; however, no option may be exercisable more than ten years after the date the option is granted. Within the foregoing limitations, the Compensation Committee may, in its discretion, impose limitations on the exercise of all or some options granted under the Amended Plan, such as specifying minimum periods of time after grant during which options may not be exercised. The Amended Plan generally provides for acceleration of the right of a participant to exercise his or her stock option in the event we experience a change of control.

The Amended Plan provides that the stock options may either be incentive stock options within the meaning of Section 422 of the Code, or nonqualified options, which are stock options other than incentive stock options.

Incentive Stock Options. Incentive stock options may be granted only to our employees or employees of our subsidiaries, and must be granted at a per share exercise price not less than the fair market value of Class A Common Stock on the date the incentive stock option is granted. In the case of an incentive stock option granted to a stockholder who owns shares of our outstanding stock of all classes representing more than 10% of the total combined voting power of all of our outstanding stock of all classes entitled to vote in the election of directors, the per share exercise price may not be less than 110% of the fair market value of the Class A Common Stock on the date the incentive stock option is granted and the term of such option may not exceed five years. As required by Section 422 of the Code, the aggregate fair market value, determined at the time an incentive stock option is granted, of Class A Common Stock with respect to which incentive stock options may be exercised by an optionee for the first time during any calendar year under all of our incentive stock option Amended Plans may not exceed $100,000.

Nonqualified Options. Nonqualified options are stock options which do not qualify as incentive stock options under Section 422 of the Code. Nonqualified options may be granted to directors and consultants, as well as to employees, or those directors, consultants, and employees of subsidiaries in which we have a controlling interest. The exercise price for nonqualified options will be determined by the Compensation Committee at the time the nonqualified options are granted, but may not be less than the fair market value of our Class A Common Stock on the date the nonqualified option is granted. Nonqualified options are not subject to any of the restrictions described above with respect to incentive stock options. Incentive stock options and nonqualified options are treated differently for federal income tax purposes as described below under “Tax Treatment.”

The Amended Plan provides that the exercise price of stock options may be paid (1) in cash, (2) subject to the prior approval by the Compensation Committee, in whole shares of Class A Common Stock, (3) subject to the prior approval by the Compensation Committee, by withholding shares of Class A Common Stock which otherwise would be acquired on exercise, or (4) subject to the prior approval by the Compensation Committee, by a combination of the foregoing, equal in value to the exercise price. The Compensation Committee may also permit a stock option to be exercised by a broker-dealer acting on behalf of a participant through procedures approved by the Compensation Committee, as applicable.

Stock Appreciation Rights. Awards of SARs entitle the recipient to receive a payment from us equal to the amount of any increase in the fair market value of the shares of our Class A Common Stock subject to the SAR award between the date of the grant of the SAR award and fair market value of these shares on the exercise date. The Amended Plan provides for payment in the form of shares of our Class A Common Stock or cash. The Amended Plan generally provides for acceleration of the right of a participant to exercise his or her SAR in the event we experience a change of control.

Performance Unit Awards. Performance units entitle the recipient to receive a certain target, maximum or minimum value in cash or Class A Common Stock per unit upon the achievement of performance goals established by the Compensation Committee.

Performance Bonuses. A performance bonus entitles the recipient to receive a cash bonus upon the attainment of one or more performance targets established by the Compensation Committee. The Amended Plan permits payment of performance bonuses in the form of cash or our Class A Common Stock.

Stock Awards. A stock award entitles the recipient to shares of our Class A Common Stock not subject to vesting or forfeiture restrictions. Stock awards are awarded with respect to such number of shares of our Class A Common Stock and at such

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times as the Compensation Committee may determine, and the Compensation Committee may require a participant to pay a stipulated purchase price for each share of our Class A Common Stock covered by a stock award.

Other Incentive Awards. The Amended Plan permits the grant of other incentive awards based upon, payable in or otherwise related to, in whole or in part, shares of our Class A Common Stock if the Compensation Committee determines that such other incentive awards are consistent with the purposes of the Amended Plan. Such other incentive awards may include, but are not limited to, Class A Common Stock awarded as a bonus, dividend equivalents, convertible or exchangeable debt securities, other rights convertible or exchangeable into Class A Common Stock, purchase rights for Class A Common Stock, awards with value and payment contingent upon our performance or any other factors designated by the Compensation Committee, and awards valued by reference to the book value of our Class A Common Stock or the value of securities or the performance of specified subsidiaries. Long-term cash awards are also permitted under the Amended Plan. Cash awards are also permitted as an element of or a supplement to any awards permitted under the Amended Plan. Awards are permitted in lieu of obligations to pay cash or deliver other property under the Amended Plan or under other Amended Plans or compensation arrangements, subject to any applicable provision under Section 16 of the Exchange Act.

Transferability

Awards under the Amended Plan are not transferrable other than by will or by the laws of descent and distribution. Nonqualified Options are transferable on a limited basis, only with prior approval or authorization of the Compensation Committee. In no event may a stock option be exercised after the expiration of its stated term.

Termination

Stock options, restricted stock, restricted stock units, SARs, performance units, performance bonuses and other incentive awards which have not vested will generally terminate immediately upon the holder’s termination of employment with us or any of our subsidiaries or affiliates, unless the Compensation Committee specifies otherwise in an award agreement or elects to accelerate the vesting of the award. Unless the Compensation Committee specifies otherwise in an award agreement, if an employee’s employment with us or any of our subsidiaries or affiliates terminates as a result of death or disability, the employee (or personal representative in the case of death) may exercise any vested incentive stock options for a period of up to one year after such termination and any vested nonqualified option during the remaining term of the option. Unless the Compensation Committee specifies otherwise in an award agreement, if an employee’s employment with us or any of our subsidiaries or affiliates terminates for any other reason, the employee may exercise any vested option for a period of up to three months after such termination. Unless the Compensation Committee specifies otherwise in an award agreement, if a consultant ceases to provide services to us or any of our subsidiaries or affiliates or a director terminates service as our director, the unvested portion of any award will be forfeited unless otherwise accelerated by the Compensation Committee. Unless the Compensation Committee specifies otherwise in an award agreement, a consultant or director may have three years following the date he or she ceases to provide consulting services or ceases to be a director, as applicable, to exercise any nonqualified options which are otherwise exercisable on the date of termination of service. No stock option or SAR may be exercised following the expiration date of the stock option or SAR.

Dilution; Substitution

The Amended Plan provides protection against substantial dilution or enlargement of the rights granted to holders of awards in the event of stock splits, recapitalizations, mergers, consolidations, reorganizations or similar transactions. The Amended Plan provides that, upon the occurrence of a change of control event, the Compensation Committee would have discretion, without the consent of any participant or holder of an award, to the extent permitted by applicable law, to cancel awards and make payments in respect thereof in cash; replace awards with other rights or property selected by the Compensation Committee; provide that awards will be assumed by a successor or survivor entity (or a parent or subsidiary thereof) or be exchanged for similar rights or awards based on the equity of the successor or survivor (or a parent or subsidiary thereof); adjust outstanding awards as appropriate to reflect the change of control event; accelerate any vesting schedule to which an award is subject; provide that awards are payable; and/or provide that awards terminate upon such event.


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Amendment

The Board may amend the Amended Plan, or any part of the Amended Plan, at any time and for any reason. However, without stockholder approval, the Amended Plan may not be amended in a manner that would (i) materially increase the number of shares that may be issued under the Amended Plan, (ii) materially modify the requirements as to eligibility for participation in the Amended Plan, (iii) materially increase the benefits to participants provided by the Amended Plan, (iv) decrease the exercise price for an outstanding stock option or SAR, or (v) must otherwise be approved by the stockholders in order to comply with national securities exchange rules.

Tax Treatment

The following is a brief description of the U.S. federal income tax consequences, under existing law, with respect to awards that may be granted under the Amended Plan. This summary is based on current U.S. federal income tax laws and is not intended to provide or supplement tax advice to eligible employees or other participants. This summary is not intended to be exhaustive and does not describe state, local or foreign consequences, employment withholding tax consequences, or the effect, if any, of gift, estate and inheritance taxes.

Restricted Stock. A recipient of restricted stock generally will not recognize taxable income until the shares of restricted stock become freely transferable or are no longer subject to a substantial risk of forfeiture. At that time, the excess of the fair market value of the restricted stock over the amount, if any, paid for the restricted stock is taxable to the recipient as ordinary income. If a recipient of restricted stock subsequently sells the shares, he or she generally will realize capital gain or loss (long-term or short-term depending on the holding period) in the year of such sale in an amount equal to the difference between the amount realized from the sale and his or her basis in the stock, equal to the price paid for the stock, if any, plus the amount previously included in income as ordinary income with respect to such restricted shares.

A recipient has the opportunity, within certain limits, to fix the amount and timing of the taxable income attributable to a grant of restricted stock. Section 83(b) of the Code permits a recipient of restricted stock, which is not yet required to be included in taxable income, to elect, within 30 days of the award of restricted stock, to include in ordinary income immediately the difference between the fair market value of the shares of restricted stock at the date of the award and the amount paid for the restricted stock, if any. The election permits the recipient of restricted stock to fix the amount of ordinary income that must be recognized by virtue of the restricted stock grant. Subject to Section 162(m) of the Code, we generally will be entitled to a deduction in the year the recipient is required (or elects) to recognize income by virtue of receipt of restricted stock, equal to the amount of taxable income recognized by the recipient.

Restricted Stock Units. A recipient of restricted stock units generally will not recognize taxable income until the recipient receives cash and/or the transfer of shares in settlement of the restricted stock unit award. At that time, an amount equal to the aggregate of any cash and the fair market value of any shares received is taxable to the recipient as ordinary income. If a recipient of restricted stock units subsequently sells any shares so transferred, he or she generally will realize capital gain or loss (at long-term or short-term rates depending on the holding period) in the year of such sale in an amount equal to the difference between the amount realized from the sale and his or her basis equal to the amount previously included in income as ordinary income with respect to such shares received in satisfaction of a restricted stock unit award. Subject to Section 162(m) of the Code, we generally will be entitled to a deduction in the year the recipient is required to recognize income by virtue of receipt of cash or shares, equal to the amount of taxable income recognized by the recipient.

Incentive Stock Options. An optionee will not realize taxable income upon the grant of an incentive stock option. As long as the optionee has been an employee of us or of one of our permissible corporate subsidiaries from the date of grant through the date the incentive stock option is exercised and if the incentive stock option is exercised during his or her period of employment and within three months after termination, the optionee will not recognize taxable income upon exercise. Upon exercise, however, the amount by which the fair market value of the shares with respect to which the incentive stock option is exercised (determined on the date of exercise) exceeds the exercise price paid will be an item of tax preference to which the alternative minimum tax may apply, depending on each optionee’s individual circumstances. If the optionee does not dispose of the shares of Class A Common Stock acquired by exercising an incentive stock option within two years from the date of the grant

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of the incentive stock option or within one year after the shares are transferred to the optionee, when the optionee later sells or otherwise disposes of the stock, any amount realized by the optionee in excess of the exercise price will be taxed as a long-term capital gain and any loss will be recognized as a long-term capital loss. We generally will not be entitled to an income tax deduction with respect to the grant or exercise of an incentive stock option.

If any shares of Class A Common Stock acquired upon exercise of an incentive stock option are resold or disposed of before the expiration of the prescribed holding periods (i.e., two years from grant and one year from exercise), the optionee will realize ordinary income instead of capital gain. The amount of the ordinary income realized will generally be equal to the lesser of (i) the excess of the fair market value of the stock on the exercise date over the exercise price; or (ii) in the case of a taxable sale or exchange, the amount of the gain realized upon the sale over the exercise price. Any additional gain would generally be either long-term or short-term capital gain, depending on whether the applicable capital gain holding period has been satisfied. In the event of a premature disposition of shares of stock acquired by exercising an incentive stock option, subject to Section 162(m) of the Code, we generally would be entitled to a deduction equal to the amount of ordinary income realized by the optionee.

If an optionee uses already owned shares of Class A Common Stock to pay the exercise price under an incentive stock option, the resulting tax consequences will depend upon whether the already owned shares of Class A Common Stock are “statutory option stock,” and, if so, whether the statutory option stock has been held by the optionee for the applicable holding period referred to in Section 424(c)(3)(A) of the Code. In general, “statutory option stock” is any stock acquired through the exercise of an incentive stock option or an option granted pursuant to an employee stock purchase Amended Plan, but not stock acquired through the exercise of a nonqualified stock option. If the stock is statutory option stock with respect to which the applicable holding period has been satisfied, no income will be recognized by the optionee upon the transfer of the stock in payment of the exercise price of an incentive stock option. If the stock used to pay the exercise price is statutory option stock with respect to which the applicable holding period has not been satisfied, the transfer of the stock will be a premature disposition, as described above, which will result in the recognition of ordinary income by the optionee in an amount equal to the excess of the fair market value of the statutory option stock at the time the incentive stock option covering the stock was exercised over the amount paid for the stock.

If an optionee effects a net exercise of an incentive stock option by surrendering a portion of the shares of stock with respect to which the option is exercisable to pay the exercise price, the surrender of the stock will be a premature disposition, as described above, which will result in the recognition of ordinary income by the optionee in an amount equal to the fair market value of the surrendered stock.

Nonqualified Options. An optionee will generally not realize taxable income upon the grant of a nonqualified option. At the time the optionee exercises the nonqualified option, the amount by which the fair market value, at the time of exercise, of the shares with respect to which the nonqualified option is exercised exceeds the exercise price paid upon exercise will constitute ordinary income to the optionee in the year of such exercise. Subject to Section 162(m) of the Code, we generally will be entitled to a corresponding income tax deduction in the year of exercise equal to the ordinary income recognized by the optionee. If the optionee thereafter sells such shares, the difference between any amount realized on the sale and the fair market value of the shares at the time of exercise will be taxed to the optionee as a capital gain or loss, at short-term or long-term rates depending on the length of time the stock was held by the optionee before sale.

If an optionee uses already owned shares of Class A Common Stock to pay the exercise price under a nonqualified option, the number of shares received pursuant to the nonqualified option which is equal to the number of shares delivered in payment of the exercise price will be considered received in a nontaxable exchange, and the fair market value of the remaining shares received by the optionee upon the exercise will be taxable to the optionee as ordinary income. If the already owned shares of Class A Common Stock are not “statutory option stock” or are statutory option stock with respect to which the applicable holding period referred to in Section 424(c)(3)(A) of the Code has been satisfied, the shares received pursuant to the exercise of the nonqualified option will not be statutory option stock. However, if the already owned shares of Class A Common Stock are statutory option stock with respect to which the applicable holding period has not been satisfied, it is not presently clear whether the exercise will be considered a premature disposition of the statutory option stock, whether the shares received upon exercise will be statutory option stock, or how the optionee’s basis will be allocated among the shares received.


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Stock Appreciation Rights. A recipient of SARs generally will not realize taxable income upon the grant of a SAR. At the time the recipient exercises the SAR, an amount equal to the aggregate of any cash and the fair market value of any shares received is taxable to the recipient as ordinary income in the year of such exercise. Subject to Section 162(m) of the Code, we generally will be entitled to a corresponding income tax deduction in the year of exercise equal to the ordinary income recognized by the recipient. If the recipient thereafter sells any shares received upon exercise, the difference between any amount realized on the sale and the fair market value of the shares at the time of exercise will be taxed to the recipient as a capital gain or loss, at short-term or long-term rates depending on the length of time the stock was held by the recipient before sale.

Performance Units and Performance Bonuses. A recipient of performance units or a performance bonus generally will not realize taxable income upon the grant of such award. The recipient will recognize ordinary income upon the receipt of cash and/or the transfer of shares in satisfaction of the award of performance units or performance bonus in an amount equal to the aggregate of any cash and the fair market value of any shares received. Subject to Section 162(m) of the Code, we generally will be entitled to a corresponding income tax deduction equal to the ordinary income recognized by the recipient. If the recipient thereafter sells any shares received in satisfaction of the award, the difference between any amount realized on the sale and the fair market value of the shares at the time of their receipt will be taxed to the recipient as a capital gain or loss, at short-term or long-term rates depending on the length of time the stock was held by the recipient before sale.

Stock Awards. A recipient of a stock award will recognize ordinary income upon the receipt of shares in an amount equal to the fair market value of any shares received over the amount, if any, paid for the shares. Subject to Section 162(m) of the Code, we generally will be entitled to a corresponding income tax deduction equal to the ordinary income recognized by the recipient. If a recipient subsequently sells the shares, he or she generally will realize capital gain or loss (at long-term or short-term rates depending on the holding period) in the year of such sale in an amount equal to the difference between the net proceeds from the sale and the fair market value of the shares at the time of receipt plus the price paid for the stock, if any.

Other Incentive Awards. The specific tax consequences applicable with respect to other incentive awards granted under the Amended Plan will depend on the terms and conditions applicable to the award.

Code Section 162(m). Under Section 162(m) of the Code, no deduction is allowed in any taxable year of the Company for compensation in excess of $1 million paid to our “covered employees.” A “covered employee” is any individual who has served at any time after December 31, 2016 as our chief executive officer, chief financial officer, or other executive officer whose compensation has been reported in our proxy statement, regardless of whether any such individual is still employed by us.

Code Section 409A. The Amended Plan and any awards granted under it are intended to comply with, or otherwise be exempt from, the requirements of Section 409A of the Code and its related Treasury Regulations and guidance. If any provision of the Amended Plan or award granted under the Amended Plan is determined not to comply with Section 409A, the Compensation Committee has authority to take any actions necessary and appropriate for compliance. No payments that would constitute “deferred compensation” upon termination of employment or other service under Section 409A will be made under the Amended Plan unless the termination is also a “separation from service” under Section 409A. If a participant is a “specified employee” under Section 409A, the commencement of any payments or benefits under the award that constitute “deferred compensation” will be deferred until six months plus one day following the date of the participant’s termination or, if earlier, death (or such other period as required to comply with Section 409A). The Company will not be liable for any additional tax, interest or penalties imposed on a participant by Section 409A of the Code or damages for failing to comply with Section 409A.

The foregoing is only a summary of the current effect of certain U.S. federal income taxation upon the participant and us with respect to the grant and exercise of awards or compensation granted under the Amended Plan. Participants are hereby notified that (i) any discussion of U.S. federal tax issues in this proxy statement is not intended to be written or used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Code, and (ii) participants should seek advice based on their particular circumstances from an independent tax advisor.

Equity Compensation Plan Information


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The following table provides information related to our Class A Common Stock which may be issued under our existing equity compensation plans as of December 31, 2020, including the 2014 Plan:
PLAN CATEGORY
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
Weighted-average exercise price of outstanding options, warrants and rights
(b)
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column a)
(c)
Equity compensation plans approved by security holders: (1)
3,575,710(1)$— (2)327,955
Equity compensation plans not approved by security holders:
— — — 
Total
3,575,710$— (2)327,955

(1)
Represents the number of shares of Class A Common Stock underlying outstanding time-vested RSU awards and performance-based Performance Unit awards and assumes a 100% issuance related to the Performance Units which have a range of 0% to 200% based on the results of the performance criteria of the award.
(2)
The outstanding RSU awards do not have an exercise price.

Approval by the Stockholders of the Proposal

Approval of the proposal to approve and adopt the Plan Amendment requires the affirmative vote of the holders of a majority in voting power of the shares Class A Common Stock and Class B Common Stock represented in person or by proxy at the Annual Meeting and entitled to vote on such matter; provided that a quorum is present. Abstentions will have the effect of a vote AGAINST the proposal and broker non-votes will have no effect on the outcome of the vote on the proposal.

Our Board believes that approval and adoption of the Plan Amendment will promote our interests and the interests of the stockholders and continue to enable us to attract, retain and reward persons important to our success and to provide incentives based on the attainment of corporate objectives and increases in shareholder value. Members of the Board are eligible to participate in the 2014 Plan, and thus, have a personal interest in the approval and adoption of the Plan Amendment.

Our Board unanimously recommends that stockholders vote FOR the Plan Amendment to the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan proposal (Proposal 3).


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PROPOSAL 4 – RATIFICATION OF AUDITORS PROPOSAL

General

The Audit Committee of the Board has selected Moss Adams LLP (“Moss Adams”) as the independent registered public accounting firm of the Company for 2021. Moss Adams has audited the Company’s consolidated financial statements since 2018. The 2020 audit of the Company’s consolidated financial statements and the effectiveness of internal control over financial reporting was completed on March 10, 2020.

The Board is submitting the selection of Moss Adams for ratification at the Annual Meeting. The submission of this matter for approval by stockholders is not legally required, but the Board and the Audit Committee believe the submission provides an opportunity for stockholders through their vote to communicate with the Board and the Audit Committee about an important aspect of corporate governance. If the stockholders do not ratify the selection of Moss Adams, the Audit Committee may reconsider the selection of that firm as the Company’s auditors. Even if the selection is ratified, the Audit Committee in its discretion may select a different registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our stockholders.

The Audit Committee has the sole authority and responsibility to retain, evaluate and replace the Company’s auditors. The stockholders’ ratification of the appointment of Moss Adams does not limit the authority of the Audit Committee to change auditors at any time.

For further information and discussion, see “Independent Public Accountants” in this proxy statement.

The Company does not anticipate that representatives of Moss Adams will be present at the Annual Meeting; however, if they are present, Moss Adams may respond to appropriate questions and make such statements as they may desire.

Approval by the Stockholders of the Proposal

The affirmative vote of the holders of a majority in voting power of the shares of Class A Common Stock and Class B Common Stock represented in person or by proxy at the Annual Meeting and entitled to vote on this Proposal will be required for approval; provided that a quorum is present. Abstentions will have the effect of a vote AGAINST the proposal and broker non-votes will have no effect on the outcome of the vote on the proposal.

Our Board unanimously recommends that stockholders vote FOR ratification of the appointment of Moss Adams as the Company’s independent registered public accounting firm for 2021 (Proposal 4).

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PROPOSAL 5 – THE NYSE STOCK ISSUANCE PROPOSAL


General

On March 31, 2021, Earthstone, EEH, Tracker and RoyaltyCo entered into 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”). At the closing of the Tracker Acquisition, Tracker will receive (the “Tracker Purchase Price”) (i) $29.6 million in cash, subject to customary purchase price adjustments, and (ii) 4.7 million shares of Class A Common Stock (the “Tracker Shares”). Also, on March 31, 2021, Earthstone, EEH, SEG-I and SEG-II entered into the Sequel Agreement which provides that EEH will acquire (the “Sequel Acquisition” and with the Tracker Acquisition, the “Transaction”) certain well-bore interests and related equipment held by Sequel that are part of a joint development agreement between Tracker and Sequel involving well-bores and production covered by the Tracker Agreement (the “Sequel Assets” and collectively with the Tracker Assets, the “Assets”). At the closing of the Sequel Acquisition, Sequel will receive (the “Sequel Purchase Price”) (i) $52.0 million in cash, subject to customary purchase price adjustments, and (ii) 1.5 million shares of Class A Common Stock (the “Sequel Shares” and collectively with the Tracker Shares, the “Transaction Shares”). As a result of the Purchase Agreements, Earthstone expects to acquire approximately 20,300 net developed acres located in Irion County, Texas for an aggregate purchase price of approximately $126.5 million (as of the announcement date), consisting of $81.6 million in cash, subject to customary closing adjustments, and 6.2 million shares of Class A Common Stock.

EnCap Fund VIII, an affiliate of EnCap, owns 49.0% of the outstanding membership interests of Tracker and will receive its proportionate share of the Tracker Purchase Price. Since EnCap is a Related Party (as defined in the NYSE Listed Company Manual) of Earthstone, an affiliate of EnCap owns greater than five percent of the outstanding interests of Tracker and the Tracker Shares represent greater than five percent of the outstanding voting power of Earthstone, the rules of the NYSE require Earthstone to obtain stockholder approval of the issuance of the Transaction Shares. In addition, because an affiliate of EnCap will receive additional shares of Class A Common Stock in the Transaction, the Audit Committee determined that the issuance of the Transaction Shares shall also be subject to the approval of the holders of a majority in voting power of the shares of Class A Common Stock and Class B Common Stock not held by EnCap or the executive officers of Earthstone.

Approval by the Stockholders of the Proposal

Approval of the proposal to approve the issuance of the Transaction Shares requires the affirmative vote of the holders of: (i) a majority in voting power of the shares of Class A Common Stock and Class B Common Stock represented in person or by proxy at the Annual Meeting and entitled to vote on this Proposal (where abstentions will have the effect of a vote AGAINST the proposal and broker non-votes will have no effect on the outcome of the vote on the proposal); provided that a quorum is present; and (ii) a majority in voting power of the issued and outstanding shares of our Class A Common Stock and Class B Common Stock that are not held by EnCap or Earthstone’s executive officers (where abstentions and broker non-votes will have the effect of a vote AGAINST the proposal).

Our Board unanimously recommends that stockholders vote FOR
the approval of the issuance of the Transaction Shares (Proposal 5).


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PROPOSAL 6 – THE ADJOURNMENT PROPOSAL


General

If the Annual Meeting is convened and a quorum is present, but there are not sufficient votes to approve the proposals, our proxy holders may move to authorize one or more adjournments of the Annual Meeting in order to enable the Board to solicit additional proxies.

In this proposal, we are asking our stockholders to authorize one or more adjournments of the meeting to another time and place, if necessary, to solicit additional proxies in the event there are not sufficient votes to approve the proposals. If our stockholders approve this proposal, we could adjourn the Annual Meeting and any adjourned session of the Annual Meeting and use the additional time to solicit additional proxies, including the solicitation of proxies from our stockholders that have previously voted.

If it is necessary to adjourn the Annual Meeting, no notice of the adjourned meeting is required to be given to our stockholders, other than an announcement at the Annual Meeting of the time and place to which the Annual Meeting is adjourned, so long as the meeting is adjourned for 30 days or less and no new record date is fixed for the adjourned meeting. At the adjourned meeting, we may transact any business which might have been transacted at the original meeting.

Approval by the Stockholders of the Proposal

Approval of the proposal to authorize or more adjournments of the Annual Meeting requires the affirmative vote of the holders of a majority in voting power of the shares of Class A Common Stock and Class B Common Stock represented in person or by proxy at the Annual Meeting and entitled to vote on this Proposal; provided that a quorum is present. Abstentions will have the effect of a vote AGAINST the proposal and broker non-votes should have no effect on the outcome of the vote on the proposal.

Our Board unanimously recommends that stockholders vote FOR
the approval of the Adjournment Proposal (Proposal 6).


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THE TRANSACTION

THE PARTIES

Earthstone Energy, Inc.

Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and with its consolidated subsidiaries, the “Company,” “we,” “us” and “our”), 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. Our assets are located primarily in the Midland Basin of west Texas and to a lesser extent, in the Eagle Ford Trend of south Texas. Our Class A Common Stock is listed on the NYSE under the trading symbol “ESTE.” Earthstone’s principal offices are located at 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380, and its telephone number is (281) 298-4246.

Earthstone is the sole managing member of EEH with a controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Corp. and Lynden Corp.’s wholly-owned consolidated subsidiary, Lynden US, and also a member of EEH, consolidates the financial results of EEH and records a noncontrolling interest in the consolidated financial statements representing the economic interests of EEH’s members other than Earthstone and Lynden US.

Earthstone Energy Holdings, LLC

Earthstone Energy Holdings, LLC, a Delaware limited liability company and a subsidiary of Earthstone (“EEH”), was formed on November 4, 2016. Earthstone is the sole managing member of EEH. EEH is a holding company of operating subsidiaries that own and operate our assets and will own and operate the Assets after the closing of the Transaction. EEH’s principal executive offices are located at 1400 Woodloch Forest Drive, Suite 300, The Woodlands, Texas 77380, and its telephone number is (281) 298-4246.

Tracker Resource Development III, LLC
TRD III Royalty Holdings (TX), LP

Tracker Resource Development III, LLC, a Delaware limited liability company (“Tracker”), was formed on April 6, 2011, and is owned by EnCap Energy Capital Fund VIII, L.P., a Texas limited partnership and an affiliate of EnCap (“EnCap Fund VIII”), and two entities not affiliated with the Company or EnCap, ZIP Ventures I, L.L.C., a Delaware limited liability company (“ZIP”), and Tracker III Holdings, LLC, a Delaware limited liability company (“Tracker Holdings”). Tracker is a privately-held company that invests in the energy sector through exploration, development, and production. Tracker has significant acreage in Irion County, Texas. Tracker has previously drilled and completed wells in the Wolfcamp formation. TRD III Royalty Holdings (TX), LP, a Delaware limited partnership (“RoyaltyCo”), was formed on July 15, 2014. Tracker’s and RoyaltyCo’s principal executive offices are located at 9155 East Nichols Avenue, Suite 360, Centennial, Colorado 80112, and their telephone number is (303) 534-9513.

SEG-TRD LLC
SEG-TRD II LLC

SEG-TRD LLC, a Delaware limited liability company (“SEG-I”), was formed on June 9, 2017 for the purpose of entering into a drilling financing arrangement with Tracker. SEG-TRD II LLC, a Delaware limited liability company (“SEG-II” and collectively with SEG-I, “Sequel”), was formed on October 19, 2018 for the purpose of entering into a drilling financing arrangement with Tracker. SEG-I and SEG-II have no other operations. Sequel’s principal executive offices are located at 8101 E. Prentice Avenue, Suite 1175, Greenwood Village, Colorado 80111, and its telephone number is (303) 468-2106.

SUMMARY OF THE TRANSACTION

General

On March 31, 2021, Earthstone, EEH, Tracker and RoyaltyCo entered into 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. Also, on March 31, 2021, Earthstone, EEH, SEG-I and SEG-II entered into the Sequel Agreement, which provides that EEH will acquire (the “Sequel Acquisition” and with the Tracker Acquisition, the “Transaction”) certain well-bore interests and related equipment held by Sequel that are part of a joint development agreement between Tracker and Sequel involving portions of the acreage covered by the Tracker Agreement. As a result of the Tracker Agreement and the Sequel Agreement, Earthstone

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expects to acquire approximately 20,300 net developed acres located in Irion County, Texas for an aggregate purchase price of approximately $126.5 million (as of the announcement date), consisting of $81.6 million in cash, subject to customary closing adjustments, and 6.2 million shares of Class A Common Stock.

The members, managers, and directors, as applicable, of the parties to the Tracker Agreement, the Sequel Agreement and the ancillary agreements contemplated by such agreements have determined that the Tracker Agreement, the Sequel Agreement and the transactions contemplated thereby are fair to, advisable and in the best interests of their respective equity holders, and have unanimously approved the Tracker Agreement, the Sequel Agreement and the transactions contemplated thereby. The issuance of the Transaction Shares pursuant to the Tracker Agreement and the Sequel Agreement are subject to approval of Earthstone’s stockholders at the Annual Meeting and other closing conditions.

Background of the Transaction

Earthstone is actively involved in acquisition and evaluation of oil and natural gas properties throughout the Permian Basin and the Eagle Ford plays in Texas. It conducts an on-going review of results in each area based on publicly-available data and where available, company-specific data, in order to assess relative drilling economics and identify acquisition opportunities. Earthstone management has spent time in the past discussing opportunities with operators and investment banks regarding the southern Midland Basin and specifically Irion County, Texas and producers in that county. Earthstone has either prepared screening material or investment banks have supplied limited public information on both Irion County and producers in the county, including Tracker.

In 2020, Mr. Ray Singleton, an Earthstone outside director, as is his custom, carried on discussions with numerous operators about the status of the oil and gas industry in light of record low commodity prices experienced in April 2020 and the need for companies to consolidate in order to survive. As Earthstone is constantly considering consolidation opportunities, Mr. Robert J. Anderson, President and Chief Executive Officer of Earthstone, and Mr. Singleton often discuss different companies and their assets and whether Earthstone would be able to purchase them on terms acceptable to Earthstone. In early October 2020, Messrs. Anderson and Singleton discussed ongoing evaluation of various announced exploration and production transactions in the E&P space as well as potential transactions, one of which was Tracker and its assets. Mr. Singleton and Jeff Vaughan, President and CEO of Tracker, had known each other for a number of years as both worked in the Denver, Colorado area and in similar oil and natural gas producing basins.

On October 7, 2020, Messrs. Anderson and Singleton received an unsolicited email from Mr. Vaughan, introducing himself to Mr. Anderson and providing an executive summary of the Tracker Assets.

On October 9, 2020, Mr. Anderson sent an email to the Audit Committee (consisting of Messrs. Joliat (Chairman), Kramer and Urban) and other members of the Board not affiliated with EnCap, being Frank A. Lodzinski and Mr. Singleton. Mr. Anderson was aware that EnCap was a significant owner of Tracker and hence any acquisition of Tracker would be considered a related party transaction requiring independent review and approval by the Audit Committee. The email highlighted summary information about Tracker and indicated that Earthstone intended to sign a confidentiality agreement to further evaluate the potential opportunity.

On October 12, 2020, Messrs. Vaughan, Anderson and Singleton held a conference call to generally discuss the Tracker Assets and Tracker’s current plans regarding a potential sale of those assets.

On October 20, 2020, Earthstone and Tracker executed a confidentiality agreement.

On October 22, 2020, Tracker management held a WebEx meeting with Earthstone’s internal technical team to review and discuss the Tracker Assets. Tracker management indicated to Earthstone that Jefferies Group LLC (“Jefferies”) was acting as Tracker’s investment banker with respect to the Tracker Assets. After the meeting was completed, Earthstone was provided with access to Tracker’s virtual data room so Earthstone could begin to evaluate the Tracker Assets in more depth.

On November 4, 2020, Mr. Guy Oliphint and Mr. Greg Chitty from Jefferies contacted Mr. Anderson to discuss the Tracker Assets and the Sequel Assets. Sequel held well-bore interests in certain properties that are operated by Tracker. After a discussion, Jefferies indicated that initial third-party bids regarding the sale of the Tracker Assets and the Sequel Assets would be due on December 9, 2020, with a November 1, 2020 effective date.

On November 13, 2020, Mr. Anderson sent a memorandum and meeting presentation materials to the Board and Earthstone’s outside legal counsel in preparation for a Board meeting to be held on November 18, 2020. Included in the memorandum and presentation were overviews and highlights relating to several potential acquisition opportunities, which also included an overview of preliminary information relating to a potential transaction with Tracker and the purchase of the Sequel Assets, including the following observations by Mr. Anderson:

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Contiguous, position in the Midland Basin of approximately 26,600 net acres with approximately 6,300 acres that would either expire in 2021 or be subject to an option lease
100% operated wells with ~90% leasehold working interest (~80% NRI)
October 2020 net production of 8,400 Boe/d (62% liquids)
72 wells (30 horizontal)
PDP PV10 of ~$107mm (10/30/2020 NYMEX strip pricing)
PDP PV20 of ~$80mm (10/30/2020 NYMEX strip pricing)

On November 13, 2020, Jefferies hosted a management presentation for Earthstone’s technical team relating to the Tracker Assets and the Sequel Assets.

The Board met on November 18, 2020, and discussed, among other items, potential acquisition opportunities, including the Tracker opportunity. Mr. Anderson reported to the Board that Jefferies was running the sales process and Earthstone was currently evaluating the potential opportunity. Mr. Anderson further advised the Board that if this potential opportunity is pursued, the negotiation, review and approval of the opportunity would need to be handled by the Audit Committee.

Shortly thereafter, Earthstone management, after discussions with the Board, determined to not proceed with a bid relating to the Tracker Assets or the Sequel Assets because of another impending transaction. On December 17, 2020, Earthstone announced the entry into an agreement to acquire Independence Resources Management, LLC (“Independence”). Earthstone management did not want any possible transaction with Tracker to interfere with the Independence acquisition.

On January 6, 2020, representatives of Jefferies contacted Mr. Anderson to discuss a potential acquisition of the Tracker Assets and the Sequel Assets. They indicated that no definitive agreement with any third party had been reached with respect to Tracker or Sequel, and inquired whether Earthstone would consider a bid with some component of equity, which could be compelling to Tracker and Sequel.

On January 14, 2021, Mr. Anderson advised the Audit Committee and the non-EnCap related Board members of the potential opportunity to bid on the Tracker Assets and the Sequel Assets and management’s view that the Company should submit a non-binding proposal to acquire the Tracker Assets and Sequel Assets. As a result of EnCap’s indirect ownership interests in both Earthstone and Tracker, the Audit Committee was delegated all of the authority of the Board to evaluate a potential transaction between Earthstone and Tracker consistent with Earthstone’s Covered Transactions Policy. The Audit Committee and the non-EnCap members of the Board discussed in depth the merits of the Transaction. The discussion included the corporate governance requirements associated with a related party transaction and the advisability for a stockholder vote whereby a majority of the dis-interested stockholders would need to approve the issuance of the Transaction Shares. After discussion, the Audit Committee authorized the Company to submit a non-binding proposal for $110 million (to be paid in cash and shares of the Company’s stock) and instructed Mr. Anderson to deliver the proposal to Jeffries. On January 15, 2021, Mr. Anderson delivered the non-binding bid of $110 million with an effective date of November 1, 2020 on behalf of the Company to Jefferies.

On January 26, 2021, Jefferies called Mr. Anderson to discuss the consideration offered in the bid. Jefferies indicated that the total consideration was low compared to other bids.

On February 14, 2021, Jefferies contacted Mr. Anderson to ask for an updated bid that would include cash and Class A Common Stock with an effective date of March 1, 2021.

On February 14, 2021, Mr. Anderson sent out a memorandum and presentation materials to the Board in preparation for the Board meeting to be held on February 18, 2021 (which Board meeting was later postponed due to a winter storm in Texas). The presentation included, among other items, overviews and highlights relating to several potential transactions, including an overview of the highlights of a possible acquisition of the Tracker Assets and the Sequel Assets.

On February 18, 2021, Mr. Anderson sent an email to the Audit Committee providing an update on the proposed Tracker transaction. Included in the email were updated evaluation materials. Mr. Anderson proposed submitting a revised bid on behalf of the Company which provided for consideration of $55 million in cash and 10 million shares of Class A Common Stock (for total consideration of approximately $125 million) for both the Tracker Assets and the Sequel Assets. There were several emails that were exchanged between and among the Audit Committee members, other non-EnCap Board members and management regarding the potential transaction, consideration, and rationale for the transaction. Ultimately, the Audit Committee authorized Mr. Anderson to submit the revised non-binding bid on behalf of the Company to Jefferies.


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On February 19, 2021, pursuant to the express direction of the Audit Committee, Mr. Anderson submitted a revised proposal to Tracker, which included a 50/50 split between Tracker and Sequel, each receiving $27.5 million cash and five million shares of Class A Common Stock.

On February 22, 2021, representatives of Jefferies contacted Mr. Anderson and Mark Lumpkin, Jr., Executive Vice President and Chief Financial Officer of Earthstone, to discuss the proposal. Tracker management orally indicated acceptance of the terms regarding the Tracker Assets and agreed to begin discussions in moving toward a purchase and sale agreement. Later that day, Jefferies distributed an initial draft of the Tracker Agreement to Earthstone with respect to the Tracker Assets. The Sequel Agreement was put on hold pending near finalization of the Tracker Agreement.

On February 23, 2021, Mr. Anderson notified the Audit Committee that the principal deal terms with Tracker as approved by the Audit Committee had been orally agreed to and the Audit Committee was provided with additional evaluation materials prepared by management of Earthstone. Mr. Anderson also prepared and sent out details for a Board meeting in order for the Audit Committee and the non-EnCap members of the Board to discuss the potential transaction. Mr. Anderson and Mr. Joliat held a telephone call to discuss the hiring of legal and financial advisors to the Audit Committee with a list of potential candidates. Mr. Anderson and Mr. Joliat also discussed the need for Mr. Anderson to contact EnCap to confirm it desired to receive shares of Class A Common Stock as part of the consideration in the proposed transaction.

On February 24, 2021, the Audit Committee engaged Richards, Layton & Finger, PA (“RLF”) as its legal adviser. The members of the Audit Committee had previously worked with RLF regarding related-party transactions and the firm was familiar with Earthstone, its Audit Committee and business practices.

On February 25, 2021, the rescheduled Board meeting was held via Zoom with all Board members in attendance, in which several items were discussed, including other potential acquisitions. Before the meeting concluded, EnCap-affiliated Board members were excused from the meeting and the remaining members of the Board discussed in depth the proposed Tracker Acquisition and the Sequel Acquisition. Mr. Joliat was charged with interviewing and selecting a financial advisor to the Audit Committee. Mr. Joliat discussed providing management with the authority to meet with EnCap to ensure that EnCap would require shares of Class A Common Stock as consideration in the Tracker Acquisition rather than additional cash. The Audit Committee and remaining non-EnCap Board members and management discussed the need for a stockholder vote under the then existing rules of the NYSE to approve the issuance of the Transaction Shares in the event that the number of shares to be received by EnCap exceeded the thresholds set by the NYSE requiring a stockholder vote. It was decided that any such stockholder approval should also require a majority of the disinterested shares of Common Stock to approve the issuance of the Transaction Shares.

After the Board meeting concluded, Mr. Anderson spoke with Mr. Thielemann of EnCap regarding its desire to receive shares of Class A Common Stock as consideration in the Tracker Acquisition. Later that afternoon, EnCap confirmed that it wanted to receive its pro-rata share of Class A Common Stock as consideration in the Tracker Acquisition.

On March 1, 2021, Messrs. Joliat and Anderson interviewed financial advisors and discussed the role of the financial advisor to the Audit Committee. Following these interviews, Mr. Joliat, after consulting with other members of the Audit Committee, determined to hire Northland Securities, Inc. (“Northland”) as the financial advisor to the Audit Committee due to Northland’s experience with similar engagements.

On March 3, 2021, Mr. Anderson updated the Audit Committee on the status of the negotiations of the Tracker Agreement, with a draft of the Tracker Agreement being provided, along with detailed descriptions of the various business points as well as the status of current negotiation of legal aspects of the proposed transaction.

On March 8, 2021, Northland was engaged as the financial advisor to the Audit Committee. Earthstone management and representatives of Northland held a call on March 11, 2021, to review the proposed transaction. Earthstone provided Northland with access to a virtual data room.

From March 6, 2021 to March 12, 2021, negotiations occurred between the two selling parties and management of Earthstone acting under the guidance of the Audit Committee. Tracker requested additional cash and a reduced number of shares and the parties discussed changing the consideration to be paid to Tracker to consist of $29.6 million in cash, subject to customary purchase price adjustments, and 4.7 million shares of Class A Common Stock. Sequel requested as much as 100% in cash, but ultimately agreed to $52.0 million in cash, subject to customary purchase price adjustments, and 1.5 million shares of Class A Common Stock. The total consideration was agreed to be $81.6 million in cash and 6.2 million shares of Class A Common Stock. After discussions thereon, the Audit Committee agreed to the final consideration with the increased cash because it had determined that it would not materially impact liquidity or leverage of the Company.

On March 17, 2021, Earthstone management received a draft of the Sequel Agreement based on the version of the Tracker Agreement sent to Earthstone on March 16, 2021.

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On March 18, 2021, Mr. Anderson and Mr. Joliat discussed the timing of the fairness opinion update from Northland and preliminary timing of the Transaction. Several calls occurred between the parties and their respective legal representatives regarding business and legal points of the Purchase Agreements and associated agreements throughout March. These discussions included Warburg Pincus LLC, who, as a significant beneficial owner of Class A Common Stock would provide a support and voting agreement in connection with the Transaction. The parties also discussed a lock-up agreement whereby certain members of Tracker would be prohibited from selling shares of Class A Common Stock for 120 days after the closing of the Tracker Acquisition.

On March 23, 2021, the Audit Committee held a meeting with representatives of Northland, RLF, Jones & Keller, P.C., legal adviser to the Company, and Company management in attendance for Northland to present its preliminary financial analysis with respect to the Transaction. The Audit Committee invited management to attend the call to answer any questions that could give rise to updates on Earthstone or the Transaction.

On March 31, 2021, the Audit Committee held a meeting with representatives of Northland RLF, Jones & Keller and Company management in attendance. The Audit Committee discussed the key terms of the Purchase Agreements. Northland rendered its oral fairness opinion (which was later confirmed in writing) that the Transaction Consideration (as defined below) to be paid by Earthstone in the Transaction is fair, from a financial point of view, to Earthstone. Following further discussion regarding the Transaction and a discussion regarding the fiduciary duties of the Audit Committee, the Audit Committee determined that the Transaction is advisable, fair to and in the best interests of the Company and its public stockholders, approved and declared advisable the Purchase Agreements and the transactions and agreements contemplated thereby (including the Transaction) and recommended that the Board approve the Transaction, the execution, delivery and performance by the Company of the Purchase Agreements, and the transactions and agreements contemplated thereby and recommended approval of the issuance of the Transaction Shares to the Company’s stockholders. Following the meeting, the full Board met telephonically and was presented with the recommendation by the Audit Committee. Following discussion, the Board unanimously approved the Transaction, the Purchase Agreements, the associated agreements, including the Voting Agreement, the form of Lock-up Agreement, the form of Tracker Registration Rights Agreement and the form of Sequel Registration Rights Agreement and recommended approval of the issuance of the Transaction Shares to the stockholders.

On March 31, 2021, the Purchase Agreements with Tracker and Sequel, along with all associated agreements and documents, were executed and delivered by the parties to the Transaction.

On April 1, 2021, Earthstone issued a press release announcing the proposed Transaction.

Recommendation of the Audit Committee and the Board of Directors and their Reasons for the Transaction

The Audit Committee and the Board determined that the Purchase Agreements and the transactions contemplated thereby, including the Transaction, are fair to, advisable and in the best interests of, Earthstone and its stockholders. Specifically, our Audit Committee and Board unanimously adopted resolutions (i) determining and declaring that the Purchase Agreements and the transactions contemplated thereby, including the Transaction, are fair to, advisable and in the best interests of Earthstone and its stockholders, (ii) approving and adopting the Purchase Agreements, and the transactions contemplated thereby, including the Transaction, (iii) directing that the issuance of the Transaction Shares be submitted to a vote of our stockholders at a meeting of the stockholders, and (iv) recommending that the stockholders vote “FOR” the approval of the issuance of the Transaction Shares.

The Audit Committee and the Board considered a variety of factors in determining its recommendation, including the following material factors:
●    the Audit Committee, assisted by its legal and financial advisers, was active in each phase of the negotiations and the decision making process leading to Purchase Agreements, and unanimously determined that the Purchase Agreements and the transactions contemplated thereby were fair to, advisable and in the best interests of Earthstone and its stockholders, and recommended that the full Board approve the Purchase Agreements and submit to the stockholders for approval in the manner required by the Purchase Agreements and pursuant to Delaware law and the rules of the NYSE;
●    the Audit Committee and Board’s belief that the Transaction will be a complementary step in the Company’s growth strategy;
●    Tracker and Sequel combined have a well-established and high-quality asset base that includes:
approximately 20,300 net developed acres located in a highly contiguous operated position in the Midland Basin;
100% operated working interest in existing horizontal units;

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100% of acreage held by production;
net production for the month of March 2021 of approximately 7,800 Boe/d (21% oil, 59% liquids);
approximately 49 Earthstone-identified horizontal Wolfcamp locations at four wells per section exceeding 25% IRR threshold on a $50/barrel WTI price deck and using Earthstone’s current estimate of capital costs; and    
proved reserves of approximately 19.8 MMBoe with PDP PV-10 of approximately $153 million based on Earthstone management estimates as of March 1, 2021, discounting cash flows at a rate of 10% and utilizing NYMEX strip pricing as of March 29, 2021;
●    the Transaction will significantly enhance the scale and magnitude of our operations, Midland Basin acreage position, and drilling locations. Notably, we expect to have on a combined basis:
an operated position of approximately 87,800 net acres in the core of the Midland Basin;
approximately 681 gross highly prospective, largely de-risked, operated horizontal drilling locations across multiple benches; and    
net daily production of approximately 27,900 Boe/d (49% oil, 73% liquids) based on Earthstone’s first quarter 2021 average daily production, Independence production for 6 days of January 2021 and Tracker’s and Sequel’s first quarter 2021 estimated average daily production;
●    the potential to realize operational synergies and efficiencies resulting from the increased scale of operations;
●    our post-acquisition market capitalization should enhance our access to debt and equity capital markets; and
●    current industry, economic and market conditions, and the present and anticipated environment in the independent upstream sector of the oil and gas industry suggest that attractive potential acquisition and development opportunities will arise in the sector for companies that are able to achieve superior operating efficiencies and are sufficiently capitalized to operate in the current commodity price environment and its volatility from period to period.

The Audit Committee and the Board considered other information and a number of additional factors in reaching their decisions including:
●    the results of business, legal and financial due diligence investigations of the Tracker Assets and the Sequel Assets conducted by our management and legal and financial advisors and the nature and extent of the representations made by Tracker in the Tracker Agreement and Sequel in the Sequel Agreement;
●    the recommendation of our management in favor of the Transaction; and
●    the terms of the Purchase Agreements, including the obligations and rights of the parties under the Purchase Agreements, the conditions to each parties’ obligation to complete the Purchase Agreements, the circumstances in which each party is permitted to terminate such agreements, and the related termination fee payable by us in the event of termination of the Purchase Agreements under special circumstances.

The Audit Committee and the Board also considered, and balanced against the potentially positive aspects of the Transaction, the following material potential risks and other negative factors in connection with its deliberations:
●    the risks relating to the announcement and pendency of the Transaction and the risks and costs to us if the completion of the Transaction is not timely, or does not occur at all, which may be for reasons beyond our control, including the potential impact on the relationships between us and our employees, industry partners, service providers and other third parties, as well as the potential impact on the public trading prices of our Class A Common Stock;
●    the level of obligations and servicing of such obligations related to incremental debt incurred in connection with the Transaction;
●    the risks associated with having a high degree of concentration of our properties, activities and future prospects in the Midland Basin of Texas;
●    a decrease in oil or natural gas prices resulting in the Assets being less desirable from a financial point of view;

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●    the risk that management focus, employee attention and resources available for other strategic opportunities could be diverted for an extended period of time while the parties work to complete the Transaction and the integration process;
●    the challenges inherent in the integration of the Assets, including the attendant risks that the anticipated production and operational synergies and other benefits sought to be obtained from the Transaction might not be achieved in the time frame contemplated by us if at all; and
●    the risks inherent in our, Tracker’s and Sequel’s business and operations, including those identified in our SEC filings, which include the matters described under “Cautionary Statement Concerning Forward-Looking Statements.”

This discussion of the information and factors considered by our Audit Committee and our Board in reaching their decision and recommendation includes the material factors considered by the Audit Committee and the Board, but is not intended to be exhaustive and may not include all of the factors considered by each member of the Audit Committee or the Board. In view of the wide variety of factors considered in connection with their evaluation of the Transaction and the complexity of these matters, the Audit Committee and the Board did not consider it practical, nor did they attempt, to quantify, rank or otherwise assign relative weights to the different factors they considered in reaching their decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to their ultimate determination. Rather, the Audit Committee and the Board viewed their decision as being based on the totality of the information presented to them and the factors they considered, particularly, in the case of the Board, the recommendation of the Audit Committee, its discussion with, and the questioning of, members of management and its outside financial and legal advisors. In addition, individual members of the Audit Committee and the Board may have given different weight to different factors.

In considering the recommendation of our Audit Committee and our Board that the stockholders vote to approve the issuance of the Transaction Shares, stockholders should be aware that the directors and executive officers of Earthstone may have certain interests in the Transaction that may be different from, or in addition to, the interests of Earthstone stockholders generally. Our Board was aware of these interests and considered them when approving the Purchase Agreements and recommending that stockholders vote to approve the issuance of the Transaction Shares, which are described in the section entitled “The Transaction—Interests of Our Directors and Executive Officers in the Transaction.”

The foregoing discussion of the information and factors considered by the Audit Committee and the Board is forward-looking in nature and should be read in light of the factors described in the section entitled “Cautionary Statement Concerning Forward-Looking Statements.”

Opinion of Northland Securities, Inc. to the Audit Committee

The Audit Committee retained Northland Securities, Inc. (“Northland”), to act as its financial advisor in connection with the Transaction. In selecting Northland, the Audit Committee considered, among other things, Northland’s qualifications, expertise, reputation, independence from Tracker, Sequel and EnCap, and knowledge of Earthstone, our track record, our business and the industry in which we operate and that of the Assets.

On March 31, 2021, Northland rendered its oral opinion to the Audit Committee, which was subsequently confirmed in a letter dated as March 31, 2021, stating that, as of the date of the letter and subject to and based on the assumptions made, procedures followed, matters considered, limitations of the review undertaken and qualifications in such letter, the Transaction Consideration is fair, from a financial point of view, to us. Northland’s calculation of the value of the total consideration of $129,030,000 (the “Transaction Consideration”) of the Purchase Agreements is based upon $81.6 million in cash and 6.2 million shares of Class A Common Stock valued at $7.65 per share which was the 30-day volume weighted average price of the Class A Common Stock.

The full text of Northland’s written opinion letter, dated as of March 31, 2021, is attached as Annex E. You should read Northland’s opinion letter carefully and in its entirety for a discussion of, among other things, the scope of the review undertaken and the assumptions made, procedures followed, matters considered and qualifications and limitations upon the review undertaken by Northland in connection with its opinion. This summary is qualified in its entirety by reference to the full text of the opinion letter. Northland’s opinion letter was directed to the Audit Committee, in its capacity as the Audit Committee, and addressed only the fairness from a financial point of view, as of the date of the opinion, to us of the Transaction Consideration to be paid under the Purchase Agreements. The opinion letter does not constitute a recommendation as to how any stockholder should vote with respect to the approval of the issuance of the Transaction Shares or any other matter and does not in any manner indicate the price at which our securities will trade at any time.

In connection with rendering its opinion, Northland has informed us that, among other things, it:

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(i)    reviewed and analyzed the financial terms of the Purchase Agreements;
(ii)    reviewed our Annual Reports on Form 10-K for the last three fiscal years;
(iii)    reviewed certain of our interim reports to stockholders and Quarterly Reports on Form 10-Q;
(iv)    reviewed Earthstone’s estimated proved reserves as of December 31, 2020, as prepared by CGA, which were discussed by Northland with our management;
(v)    reviewed unaudited historical financial statements related to the Assets;
(vi)    reviewed estimated proved reserves of the Assets as of March 1, 2021, provided by us and discussed by Northland with our management;
(vii)    reviewed certain non-public financial and production projections provided by our management;
(viii)    reviewed certain internal financial information, estimates, and financial and operational forecasts for the Assets, prepared by our management;
(ix)    reviewed certain publicly available research analyst reports regarding our future financial performance; and
(x)    reviewed the reported historic price and trading activity for our Class A Common Stock; compared certain of our financial stock market information with similar information for certain other companies the securities of which are publicly traded, and reviewed the financial terms of certain recent business combinations in the oil and gas exploration and production industry specifically and in other industries generally, and other studies and analyses Northland deemed appropriate.

In addition, Northland held numerous discussions with Jay F. Joliat, Chairman of the Audit Committee, and members of our senior management regarding the assessment of the strategic rationale for, and the potential benefits of, the Transaction and the past and current business operations, financial condition, and prospects of the Assets.

In its review and analysis and in arriving at its opinion, Northland assumed and relied on the accuracy and completeness of all of the financial, reserves, and other information provided to or otherwise discussed with Northland or publicly available. Northland was not engaged to, and did not independently attempt to, verify any of such information. Northland also relied upon information provided by our management as to the reasonableness and achievability of the financial and production projections (and the assumptions and bases therefor) provided to Northland, and, with our consent, Northland assumed that the projections were reasonably prepared and reflect the best currently available estimates and judgments of our management. Northland was not engaged to assess the reasonableness or achievability of the projections or the assumptions on which they were based, and Northland expressed no view as to such projections or assumptions. In addition, Northland did not conduct a physical inspection or appraisal of any of the assets, properties or facilities contained in the Assets, and Northland was not furnished with any such evaluation or appraisal. Northland also assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the Transaction would be obtained without any material adverse effect on us or the Transaction.

Northland was not asked to, nor did Northland, offer any opinion as to the material terms of the Purchase Agreements or the form of the Transaction. In rendering its opinion, Northland assumed, with our consent, that the final executed form of the Purchase Agreements would not differ in any material respect from the drafts that Northland examined, and that the conditions to the Transaction in the Purchase Agreements will be satisfied and that the transaction will be consummated on a timely basis in the manner contemplated by the Purchase Agreements.

Northland’s opinion was based on economic and market conditions and other circumstances existing on, and information made available to Northland as of, March 31, 2021 and does not address any matters subsequent to such date. Northland’s opinion was limited to the fairness from a financial point of view, as of the date of the opinion, to us of the Transaction Consideration to be paid under the Purchase Agreements. Northland’s opinion does not address our underlying business decision to effect the Transaction or any other terms of the Purchase Agreements. Although subsequent developments may affect Northland’s opinion, Northland does not have any obligation to update, revise, or reaffirm its opinion. Northland’s opinion was approved by a fairness committee of Northland.

The following is a summary of the material financial analyses performed by Northland in arriving at its opinion. Northland’s opinion letter was only one of many factors considered by the Audit Committee and the Board in evaluating the Transaction. Neither Northland’s opinion nor its financial analyses were determinative of the Transaction Consideration or of the views of the Audit Committee, our Board or our management with respect to the Transaction Consideration or the Transaction. None of the analyses performed by Northland were necessarily assigned a greater significance by Northland than any other, nor does the order of analyses described represent relative importance or weight given to those analyses by Northland. The summary text describing each financial analysis does not constitute a complete description of Northland’s financial analyses, including the methodologies and assumptions underlying the analyses, and if viewed in isolation could create a misleading or incomplete view of

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the financial analyses performed by Northland. The summary text set forth below does not represent and should not be viewed by anyone as constituting conclusions reached by Northland with respect to any of the analyses performed by it in connection with its opinion. Rather, Northland made its determination as to the fairness, from a financial point of view, to us of the Transaction Consideration to be paid under the Purchase Agreements.

Analysis of Comparable Publicly Traded Companies

Northland reviewed and compared certain publicly available financial data, ratios and trading multiples for comparable publicly traded companies that Northland determined, based on its professional judgment that their businesses, financial information, product mix, and operating profiles are reasonably comparable to those of the Assets for purposes of this analysis. Financial data of the selected companies were based on publicly available information such as public filings and third party equity research reports. Northland reviewed data, including Market Capitalization, Enterprise Value (“EV”), fourth quarter 2020 earnings before interest, taxes, depreciation and amortization (“EBITDA”), EV/4Q 2020 EBITDA, 2020 EBITDA, EV/2020 EBITDA, Fourth Quarter 2020 Production, EV/4Q 2020 Production, Fourth Quarter 2020 % Oil, Proved Reserves, EV/Proved Reserves, Proved Reserves PV-10, EV/Proved PV-10, PDP Reserves, EV/PDP Reserves, PDP PV-10, and EV/PDP PV-10 of the Assets and each of the following selected publicly traded companies, the operations of which Northland deemed similar for purposes of this analysis, based on its professional judgement and experience. The multiples for each of the selected companies were calculated using their respective closing prices on March 30, 2021 and were based on the most recent publicly available information and S&P Capital IQ.

The following table reflects the results of these analyses with respect to financial results and production (Market Cap, Enterprise Value, 4Q 2020 EBITDA and 2020 EBITDA in millions):


The following table reflects the results of these analyses with respect to reserves (Market Cap, Enterprise Value, 4Q 2020 EBITDA and 2020 EBITDA in millions):


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Based on its analyses and other considerations that Northland deemed relevant in its professional judgment and experience, Northland selected comparable companies based on similarities in geography of their primary assets, market capitalization and market perception, reserves and production mix. Northland made qualitative judgments based on its experience and professional judgment concerning differences between the business, financial and operating characteristics of the Assets and the selected companies that could affect their public trading values in order to provide a context in which to consider the results of the quantitative analysis.

Northland used reserve data as of December 31, 2020 and production data for the fourth quarter of 2020 unless otherwise noted. In-the-money warrants and options were included in the shares outstanding. Northland made the following assumptions and calculations with respect to the comparable companies for purpose of its analyses:
Shares outstanding of Callon Petroleum Company assumed the exercise of 8.4 million warrants, as noted in the “Subsequent Events” section in its Annual Report on Form 10-K for the year ended December 31, 2020. Upon the exercise of the warrants, Callon Petroleum Company had 621,741 warrants outstanding, which are “net share settled” whereupon the warrants will be converted into shares of common stock pursuant to a cashless exercise.
The enterprise value of Centennial Resource Development, Inc. included pro forma total debt and cash as illustrated in a recently publicly filed prospectus related to the issuance of $150 million of Exchangeable Senior Notes.
Cimarex Energy Co. does not report PDP reserves or PDP PV-10.
The enterprise value of Laredo Petroleum, Inc. was adjusted to incorporate subsequent repayments on Credit Facility, as publicly disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020.
Shares outstanding of Matador Resources Company assumed exercise of 608,000 in-the-money warrants to purchase 608,000 shares of common stock.
Shares outstanding of Penn Virginia Corporation assumed the redemption of 225,481.09 shares of Series A Preferred Stock for 22,548,109 shares of common stock. Enterprise value was adjusted to incorporate a subsequent partnership with JSTX Holdings, LLC. Production and reserves data pro forma included changes as a result of the JSTX Holdings, LLC partnership, with PV-10 being calculated by applying Penn Virginia Corporation’s PV-10 $/BOE to the JSTX Holdings, LLC reserves.
Earthstone shares outstanding included both Class A Common Stock and Class B Common Stock. Our enterprise value was adjusted to incorporate “Liquidity Update” in Earthstone’s Annual Report on Form 10-K for the year ended December 31, 2020, showing cash and total debt as of March 1, 2021. The production and reserves data were adjusted pro forma to incorporate the acquisition of Independence that closed in January 2021.


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    Northland calculated barrels of oil equivalent ("BOE") amounts using the conversion ratio of six thousand cubic feet (6 Mcf) of natural gas to one barrel of oil (1 bbl). Northland annualized EBITDA for the fourth quarter of 2020 for full year. Northland calculated EBITDA by beginning with net income (excluding non-controlling interests), and adding back interest expenses, income taxes, depreciation, amortization and accretion, impairment expenses, dry-hole expenses, losses on exchanges of debt, derivative settlement (both realized and unrealized), stock-based compensation, and sales of long-lived assets. Northland calculated enterprise value using the market capitalization, plus total debt and preferred equity, plus non-controlling interest, minus cash.

Using the first quartile and third quartile as the low and high points of the range resulted in an implied enterprise value range for the Assets of approximately $151.6 million to $289.1 million using the EV/4Q 2020 EBITDA analysis, $158.7 million to $367.2 million using the EV/2020 EBITDA analysis, $216.6 million to $365.9 million using the EV/4Q 2020 Production analysis, $213.9 million to $359.0 million using the EV/2020 Production analysis, $210.3 million to $439.6 million using the EV/Proved Reserved analysis, $269.3 million to $490.8 million using the EV/Proved PV-10 analysis, $212.5 million to $396.9 million using the EV/Proved Developed Producing (“PDP”) Reserves analysis, and $178.0 million to $319.0 million using the EV/PDP PV-10 analysis. The median implied enterprise values for each analysis ranged from $244.2 million to $377.4 million. The mean implied enterprise values for each analysis ranged from $225.8 million to $398.3 million. Northland then compared these ranges to the Transaction Consideration to be paid under the Purchase Agreements.

No company used in the selected publicly traded companies analysis is identical to the Assets. In evaluating selected publicly traded companies, Northland made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters which are beyond our control, such as the impact of competition on us and the industry generally, industry growth and the absence of any adverse material change in our financial conditions and prospects or those of the Assets or the industry or the financial markets in general.

Analysis of Comparable Transactions
Northland performed a precedent transactions analysis, which is designed to imply a value of a company based on publicly available financial terms for selected transactions.

In connection with its analysis, Northland compared publicly available statistics for transactions involving onshore oil and gas exploration and production transactions that were publicly announced with sufficient data to analyze, closed within the last three years, and with assets located primarily in the Irion, Crockett, or Reagan Counties of Texas. The following were the transactions used in the analysis: 
Independence/Earthstone
EP Energy/Undisclosed Buyer
Prime Energy/Undisclosed Buyer
Approach Operating/Zavona Energy

Northland also reviewed and compared certain publicly available transaction valuation metrics that Northland determined, based on its professional judgment, including Total Consideration, Proved Reserves, EV/Proved Reserves, Net Acreage, EV/Net Acreage, Production, and EV/Production. The information was derived from Enverus as of March 30, 2021.

The following table reflects the results of these analyses with respect to comparable transactions (Total Consideration in millions):


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Using the first quartile and third quartile as the high and low points of the range resulted in an implied enterprise value range for the Assets of approximately $131.2 million to $295.6 million using the Transaction EV/Net Acres analysis, $160.4 million to $219.0 million using the Transaction EV/Proved Reserves analysis, and $138.9 million to $289.3 million using the Transaction EV/Current Production analysis. The median implied enterprise values for each analysis ranged from $189.7 million to $225.2 million. The mean implied enterprise values for each analysis ranged from $189.7 million to $213.2 million. Northland then compared these ranges to the Transaction Consideration to be paid under the Purchase Agreements.

No transaction used in the analysis of comparable transactions is identical to the Assets or the Transaction. In evaluating the precedent transactions, Northland made judgments and assumptions with regard to general business, market and financial conditions and other matters, which are beyond our control. These include, among other things, the impact of competition on the business of the Assets or the industry generally, industry growth and the absence of any adverse material change in the financial condition of the Assets or the industry or in the financial markets in general, which could affect the public trading value of the companies and the aggregate value and equity value of the transactions to which they are being compared.

Discounted Cash Flow Analysis

Northland performed a discounted cash flow analysis of the Assets, which was performed to demonstrate an illustrative indication of the implied present value of the Assets as an enterprise value. The illustrative discounted cash flow analysis of the Assets was based on the PDP reserve report provided by us, adjusted for three commodity price sensitivities as well as marketing and transportation costs, as of March 1, 2021:

    SEC price deck as of December 31, 2020, which averages the spot NYMEX price on the first day of the preceding twelve months and holds that price flat throughout the reserve life;
    Northland Capital Market’s (“NCM”) price deck as of March 30, 2021, which has a flat price for all years; and
    NYMEX forward pricing as of March 30, 2021.

Northland noted that that the prevailing industry discount rate in valuations of this type is 10%. The following is an overview of the discounted cash flow analysis at varying discount rates based on PDP reserves:


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Northland also performed an illustrative discounted cash flow analysis of the Assets based on the proved reserve report provided by Earthstone, adjusted for three commodity price sensitivities as well as marketing and transportation costs, as of March 1, 2021, as set forth above. The following is an overview of the DCF analysis with varying discount rates based on proved reserves:


These analyses resulted in resulted in an implied enterprise value range for the Assets of approximately $109.4 million to $158.0 million using the PDP reserves analysis and $200.5 million to $245.4 million using the proved reserves analysis.

Although discounted cash flow analysis is a widely accepted and practiced valuation methodology, it relies on a number of assumptions, including commodity prices and discount rates. The valuation derived from the discounted cash flow analysis is not necessarily indicative of the Assets’ present or future value or results. Discounted cash flow analysis in isolation from other analyses is not an effective method of evaluating transactions.

Miscellaneous

The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to summary description. In arriving at its opinion, Northland did not draw, in isolation, conclusions from or with regard to any factor or analysis that it considered. Rather, Northland made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of the analyses.

In connection with Northland’s services as our financial advisor in connection with the Transaction, we paid Northland a fee of $200,000. No portion of the fee was based upon whether Northland delivered a favorable opinion with respect to the Transaction Consideration to be paid pursuant to the Purchase Agreements. In addition, we have agreed to reimburse Northland for certain of its expenses and to indemnify Northland and related persons against various potential liabilities, including certain liabilities that may arise in connection with Northland’s engagement. Aside from its current engagement by the Audit Committee, Northland had not been engaged to provide financial advisory services to Earthstone, Tracker, Sequel or EnCap during the two years prior to the date of Northland’s opinion.

Interests of Our Directors and Executive Officers in the Transaction

In considering the recommendation of the Board with respect to approving the Transaction, stockholders should be aware that members of the Board and executive officers have interests in the Transaction that may be different from, or in addition to interests they may have as stockholders.


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For example, two of the nine directors on our Board are also officers, directors, partners or members of EnCap or its affiliates. EnCap and its affiliates beneficially own approximately 49.1% of the outstanding voting securities of Earthstone, and 49.0% of the membership interests of Tracker. As a result of the Earthstone Covered Transactions Policy, the Audit Committee, consisting of three independent and disinterested members of the Board, was vested with the power on behalf of Earthstone to negotiate, approve or terminate discussions with respect to a potential transaction with Tracker and had its own financial advisor and legal counsel.

Our executive officers and directors will receive no payments, compensation or other consideration in connection with the Transaction.

Interests of Related Parties in the Transaction

EnCap, which holds approximately 49.1% of the outstanding voting power of Earthstone as of the record date, is the general partner of EnCap Equity Fund VII GP, L.P. and EnCap Equity Fund IX GP, L.P., which are the general partners, or in the case of EnCap Fund V-B and EnCap Fund VI-B indirectly controls the general partner, of the EnCap Funds, and EnCap Fund IX. EnCap Partners is the managing member of EnCap Investments Holdings, LLC, which is the sole member of EnCap Investments GP, L.L.C., which is the general partner of EnCap. Therefore, EnCap Partners and certain of its affiliates through their direct and indirect ownership may be deemed to share the right to direct the disposition of the Class A Common Stock and Class B Common Stock held by the EnCap Funds and EnCap Fund IX’s ownership of Bold Holdings. EnCap is the sole general partner of EnCap Equity Fund VIII GP, L.P. (“EnCap Fund VIII GP”). EnCap Fund VIII GP is the sole general partner of EnCap Fund VIII, which holds 49.0% of the membership interests of Tracker.

Board of Directors and Management of Earthstone Following Completion of the Transaction

Upon closing of the Transaction, Earthstone’s Board and executive management will remain unchanged. Additionally, Earthstone will continue to be headquartered in The Woodlands, Texas.

Regulatory Filings and Approvals Required for Completion of the Transaction

We are not aware of any material government or regulatory approval required for the completion of the Transaction, other than filings and compliance with the applicable corporate law of the State of Delaware.

Treatment of Equity Awards

The Transaction will not affect our outstanding equity awards. All such awards will remain outstanding subject to the same terms and conditions that are applicable prior to the Transaction.

No Appraisal Rights

The stockholders do not have any rights to appraisal with respect to the Transaction or the issuance of the Transaction Shares under Delaware law.

Accounting Treatment of the Transaction

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Tracker Acquisition and the Sequel Acquisition will be accounted for as asset acquisitions in accordance with Accounting Standards Codification Topic 805, Business Combinations (referred to as “ASC 805”). The fair value of the consideration paid by us and allocation of that amount to the underlying Tracker Assets and Sequel Assets acquired, on a relative fair value basis, will be recorded on our books as of the date of the closing of the Tracker Acquisition and the Sequel Acquisition. Additionally, costs directly related to the transaction will be capitalized as a component of the purchase price. The operating results of Tracker and Sequel will be consolidated in our financial statements beginning on the date of the closing of the Tracker Acquisition and the Sequel Acquisition, respectively. For combined financial information giving effect to the Transaction, see “Unaudited Pro Forma Condensed Combined Financial Information.”

Listing of Shares of Class A Common Stock

It is a condition to completion of the Transaction that the Transaction Shares upon the closing of the Purchase Agreements be authorized for listing on the NYSE, subject to official notice of issuance.

RISK FACTORS

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In addition to the other information included and incorporated by reference into this proxy statement, including the matters addressed in the section entitled “Cautionary Statement Concerning Forward-Looking Statements,” you should carefully consider the following risks before deciding whether to vote for the approval of the proposal to approve the issuance of the Transaction Shares. In addition, you should read and consider the risks associated with our business. Descriptions of some of these risks can be found in Earthstone’s Annual Report on Form 10-K and as amended on Form 10-K/A for the year ended December 31, 2020, as updated by any subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, all of which are filed with the SEC and incorporated by reference into this proxy statement. You should also read and consider the other information in this proxy statement and the other documents incorporated by reference into this proxy statement. See the section entitled “Where You Can Find More Information.”

If the Transaction is consummated, we may be unable to successfully integrate the Assets or to realize anticipated cost savings, revenues or other benefits of the Transaction.

Our ability to achieve the anticipated benefits of the Transaction, if consummated, will depend in part upon whether we can successfully integrate the Assets into our existing business in a timely, efficient and effective manner. The beneficial acquisition of producing and non-producing properties and undeveloped acreage that can be economically developed, including the Assets, requires an assessment of several factors, including:
 
recoverable reserves;

future oil and natural gas prices and their appropriate differentials;

availability and cost of transportation of production to markets;

availability and cost of drilling and completion equipment and of skilled personnel;

development and operating costs and potential environmental and other liabilities; and

regulatory, permitting and similar matters.

The accuracy of these assessments is inherently uncertain. In connection with these assessments, we have performed, and will continue to perform, a review of the properties of Tracker and Sequel that we believe to be generally consistent with reasonable industry practices. Our review may not reveal all existing or potential problems or permit us to become sufficiently familiar with the properties to fully assess their deficiencies and potential recoverable reserves. Inspections will not always be performed on every well, and environmental problems are not necessarily observable even when an inspection is undertaken. The integration process may be subject to delays or changed circumstances, and we can give no assurance that the acquired properties will perform in accordance with our expectations or that our expectations with respect to integration or cost savings resulting from added scale as a result of the Transaction will materialize. Significant acquisitions, including the Transaction, and other strategic transactions may involve other risks that may cause negative impacts on our business, including:
 
diversion of our management’s attention resulting in the inability to evaluate, negotiate and integrate other significant acquisitions and strategic transactions;

the challenge and cost of integrating the Assets acquired in the Transaction with existing assets and operations while carrying on our ongoing business; and

the failure to realize the full benefit that we expect in estimated proved reserves, production volume, cost savings from operating synergies or other benefits anticipated from an acquisition, or to realize these benefits within the expected time frame.

We will only have limited recourse against Tracker and Sequel regarding the properties acquired in the Transaction for losses and liabilities arising or discovered after closing.

Under the terms of the Purchase Agreements, we will have only limited recourse against Tracker and Sequel for losses and liabilities arising or discovered after the closing of the Tracker Acquisition and the Sequel Acquisition. We have limited indemnification rights in the event of a breach of a representation, warranty or covenant by Tracker and Sequel. We also have limited rights to assert title defects or environmental defects, and any claims for title defects which were not timely asserted by us by May 14, 2021 have been deemed waived. As is customary in oil and gas transactions, we have agreed to assume various

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liabilities associated with the Transaction, including environmental liabilities, plugging and abandonment obligations, and unpaid royalties, regardless of when such liabilities arose.

The representations and warranties provided by Tracker and Sequel are limited as to scope and in many cases, qualified by knowledge and materiality thresholds. We must bring any claims for indemnification for a breach of a representation or warranty not involving title defects within the time period after the closing specified in the Purchase Agreements, and for most representations and warranties, this time period ends on December 1, 2021.

Indemnification claims are subject to an individual claim threshold of $50,000 and Tracker and Sequel are only required to indemnify us for claims totaling in excess of 2.0% of the unadjusted base purchase price. In addition, our right of recovery in most circumstances is limited to $2.96 million for Tracker and $5.2 million for Sequel. We have conducted, and will continue to conduct prior to closing, considerable diligence on the properties to be acquired in the Transaction, but our diligence may not uncover all events or conditions that might negatively affect the value of the Assets within such time periods. The short period for asserting claims for indemnification increases the likelihood that we may incur or uncover liabilities for which we have no recourse.

In addition, we may be obligated to complete the closing of the Tracker Acquisition and the Sequel Acquisition, even if Tracker or Sequel may have breached certain representations, warranties or covenants, as long as the breaches do not result in a material adverse effect with respect to the properties to be acquired as part of the Tracker Acquisition or the Sequel Acquisition, as applicable. In such instance, our post-closing right to indemnification for such breaches by Tracker and Sequel may be very limited, as described above.

Failure to complete the Transaction could negatively affect our stock price, future business and financial results.

Completion of the Tracker Acquisition and the Sequel Acquisition is not assured and are subject to risks, including the risks that approval by our stockholders of the issuance of the Transaction Shares as required by the rules of the NYSE will not be obtained or that certain other closing conditions will not be satisfied. If the Tracker Acquisition or the Sequel Acquisition is not completed, our ongoing business and financial results may be adversely affected and we will be subject to several risks, including:
•    having to pay certain significant transaction costs relating to the Transaction without receiving the benefits of the Transaction;
•    that the share price of our Class A Common Stock may decline to the extent that the current market prices reflect an assumption by the market that the Transaction will be completed; and
•    that we may be subject to litigation related to any failure on our part to complete the Transaction, or litigation resulting from minority stockholder actions.

Delays in completing the Transaction may substantially reduce the expected benefits of the Transaction.

Satisfying the conditions to, and completion of, the Transaction may take longer than, and could cost more than, we expect. Any delay in completing or any additional conditions imposed in order to complete the Transaction may materially adversely affect the synergies and other benefits that we expect to achieve from the Transaction and the integration of our respective assets. In addition, each of us and Tracker and us and Sequel has the right to terminate the respective Purchase Agreements if the Tracker Acquisition or the Sequel Acquisition is not completed by August 15, 2021 (subject to limited circumstances to extend for 60 days).

We will incur substantial fees and costs in connection with the Transaction.

We expect to incur significant non-recurring expenses in connection with the Transaction. Additional unanticipated costs may be incurred, including, without limitation, unexpected costs and other expenses in the course of the integration of the Assets with those of Earthstone. In addition, the companies cannot be certain that the elimination of duplicative costs or the realization of other efficiencies related to the integration of the businesses will offset the integration costs in the near term, or at all.

We will be subject to various uncertainties and contractual restrictions while the Transaction is pending that could adversely affect our financial results.

The pursuit of the Transaction and the preparation for the integration of the Assets with our assets may place a significant burden on our management and internal resources. Any significant diversion of management attention away from ongoing business and any difficulties encountered in the transition and integration process could adversely affect our financial results.

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The market price of our Class A Common Stock may decline in the future as a result of the Transaction.

The market price of our Class A Common Stock may decline in the future as a result of the Transaction for a number of reasons, including the unsuccessful integration of the Assets with our assets or our failure to achieve the perceived benefits of the Transaction, including financial and operating results, as rapidly as or to the extent anticipated by financial or industry analysts. These factors are, to some extent, beyond our control.

Our current stockholders will have a reduced ownership and voting power after the Transaction.

As a result of the Class A Common Stock that we expect to issue as part of the Tracker Acquisition and the Sequel Acquisition, current stockholders are expected to hold approximately 92.7% of Earthstone’s voting power on a fully diluted basis immediately following completion of the Transaction. When the Transaction occurs, each stockholder will have a percentage ownership of Earthstone that will be smaller than the stockholder’s percentage ownership prior to the Transaction. As a result of the reduced ownership percentages, stockholders will have less voting power after the Transaction than they now have now.

The pro forma condensed combined financial information included in this proxy statement is presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the Transaction.

The pro forma condensed combined financial information contained in this proxy statement is presented for illustrative purposes only, is based on various adjustments, assumptions and preliminary estimates and may not be an indication of our financial condition or results of operations following the Transaction. See “Unaudited Pro Forma Condensed Combined Financial Information.” The actual financial condition and results of operations of the Company following the Transaction may not be consistent with, or evident from, these pro forma financial statements. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect the combined company’s financial condition or results of operations following the Transaction. Any potential decline in our financial condition or results of operations may cause significant variations in the market price of our Class A Common Stock.

Following the consummation of the Transaction, most of our producing properties will continue to be located in the Midland Basin, making us vulnerable to risks associated with operating in a limited geographic area.

Following the consummation of the Transaction, most of our producing properties will continue to be geographically concentrated in the Midland Basin. As a result, we may be disproportionately exposed to the impact of regional supply and demand factors, oil and gas price differentials, delays or interruptions of production from wells in the Midland Basin caused by governmental regulation, processing or transportation capacity constraints, market limitations, availability of equipment and personnel, water shortages or other drought related conditions or interruption of the processing or transportation of oil, natural gas or NGLs.

THE PURCHASE AGREEMENTS

The following summarizes material provisions of the Tracker Agreement and the Sequel Agreement (collectively, the “Purchase Agreements”). This summary does not purport to be complete and may not contain all of the information about the Purchase Agreements that is important to you. The rights and obligations of the parties are governed by the express terms and conditions of the Purchase Agreements and not by this summary or any other information contained in this proxy statement. Earthstone stockholders are urged to read the entire Tracker Agreement and the Sequel Agreement carefully, as well as this proxy statement, before making any decisions regarding your vote to approve the issuance of the Transaction Shares. This summary is qualified in its entirety by reference to each of the Tracker Agreement and the Sequel Agreement, a copy of which is attached as Annex C and Annex D, respectively, to this proxy statement.

The Tracker Agreement

In reviewing the Tracker Agreement and this summary, please recognize that they have been included to provide you with information regarding the essential terms of the Tracker Agreement and are not intended to provide any other factual information about Earthstone, EEH, Tracker, RoyaltyCo or any of their subsidiaries or affiliates. The Tracker Agreement contains representations and warranties and covenants by each of the parties thereto, certain of which are itemized below. These representations and warranties have been made solely for the benefit of the other parties to the Tracker Agreement and:
•    were not intended as statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; and

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•    may apply standards of materiality in a way that is different from what may be viewed as material by you or other investors.

Moreover, information concerning the subject matter of the representations and warranties in the Tracker Agreement and described below may have changed since the date of the Tracker Agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this proxy statement. Accordingly, the representations and warranties and other provisions of the Tracker Agreement should not be read alone, but instead should be read together with the information provided elsewhere in this proxy statement and in the documents incorporated by reference into this proxy statement. See “Where You Can Find More Information.”

General

In general, the Tracker Agreement provides for the acquisition by EEH of interests in oil and gas leases, wells, and related property of Tracker located in Irion County, Texas (the “Tracker Assets”). This is referred to below as the “Tracker Acquisition.” At signing, EEH delivered to escrow a deposit of $2.96 million which will be applied toward the cash purchase price at closing. The Tracker Agreement has an effective time of 12:01 a.m., Central Time, on March 1, 2021.

The Tracker Acquisition

The Tracker Agreement provides that:

(a)    EEH will pay to Tracker an aggregate of $29.6 million in cash;

(b)    Earthstone will issue to the members of Tracker 4.7 million shares of its Class A Common Stock; and

(c)    Tracker will assign its interests in the Tracker Assets to EEH.

The cash portion of the purchase price described in clause (a) above is subject to adjustment under the Tracker Agreement by increases or decreases as follows (without duplication):

    (a)    increased by proceeds received by EEH from production and sale of oil and natural gas produced from the Tracker Assets prior to the effective time;

(b)    increased by the value of all inventory (production in storage or line-fill) related to the Tracker Assets as of the effective time;

    (c)    increased by property expenses attributable to periods from and after the effective time that are paid or borne by Tracker and its affiliates;

(d)    increased by prepaid property expenses attributable to the Tracker Assets from and after the effective time that are paid or borne by Tracker or its affiliates;

(e)    increased by expenses related to capital expenditures, incurred or paid by Tracker in connection with capital projects incurred or paid after the effective time;

(f)    increased by the overhead of Tracker for the period from the execution date of the Tracker Agreement to the closing date;

(g)    increased by asset taxes allocable to EEH but paid by Tracker;

(h)    increased by title benefit amounts, if any;

(i)    decreased by an amount equal to all proceeds received and retained by Tracker or its affiliates from the production, transportation, gathering, processing, treating, or sale of hydrocarbons produced from or attributable or credited to the Tracker Assets from and after the effective time, and less any property expenses, burdens, taxes, transportation, quality or other deductions, differentials and post-production costs and expenses;

    (j)    decreased by the amount equal to all property expenses attributable to periods before the effective time that are paid or borne by EHH or its affiliates;

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    (k)    decreased by an amount equal to all asset taxes allocable to Tracker or RoyaltyCo that are paid or borne by EEH or its affiliates;

    (l)    decreased by an amount equal to title defect adjustments, environmental defect adjustments, and certain casualty losses;

    (m)     decreased by an amount equal to the suspense funds; and

    (n)    decreased by an amount equal to the allocated value of any preferential purchase rights exercised prior to the closing and any consents not obtained prior to closing.

Certain Ordinary-Course Costs and Revenues

    (a)    With respect to revenues earned or property costs incurred with respect to the Tracker Assets attributable to the time period prior to the effective time:

    (i)    Tracker shall be entitled to all amounts earned from the sale, during the period up to but excluding the effective time, of hydrocarbons produced from, or attributable to, the Tracker Assets; and

    (ii)    Tracker shall be responsible for (and entitled to any refunds and indemnities with respect to) all property costs incurred prior to the effective time.

    (b)    With respect to revenues earned or property costs incurred with respect to the Tracker Assets from and after the effective time:

    (i)    EEH shall be entitled to all amounts earned from the sale, during the period from and after the effective time, of hydrocarbons produced from, or attributable to, the Tracker Assets; and

    (ii)    EEH shall be responsible for (and entitled to any refunds and indemnities with respect to) all property costs incurred from and after the effective time.

Conditions to Completion of the Tracker Acquisition

Conditions of Tracker to Closing

The obligations of Tracker to consummate the Tracker Acquisition is subject, at the option of Tracker, to the satisfaction on or prior to closing of each of the following conditions:

    (a)    all representations and warranties of Earthstone and EEH shall be true and correct at and as of closing in accordance with their terms as if such representations and warranties were remade at and as of closing (except to the extent such representations and warranties are made as of a specified date, in which case such representations and warranties shall be true and correct as of such specified date), except where the failure to be so true and correct (without giving effect to any limitation or qualification as to materiality or material adverse effect), individually or in the aggregate has not had and would not reasonably be expected to materially impair the ability of EEH to consummate the Tracker Acquisition and perform its obligations under the Tracker Agreement;

    (b)    EEH shall have performed and satisfied all covenants and agreements required by the Tracker Agreement to be performed and satisfied by EEH at or prior to closing in all material respects;

    (c)    no order shall have been entered by any court or governmental authority having jurisdiction over the parties or the subject matter of the Tracker Agreement that restrains or prohibits the Tracker Acquisition and that remains in effect at the time of closing;

    (d)    the aggregate title defect amounts and remediation costs asserted by EEH in good faith less any title benefits shall be less than ten percent (10%) of the unadjusted base purchase price;

    (e)    the Class A Common Stock issuable upon closing of the Tracker Agreement shall have been approved for listing on NYSE, subject only to official notice of issuance thereof; and


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    (f)    Earthstone and EEH shall have delivered or be ready, willing and able to deliver all of the deliverables they are required to deliver pursuant to the Tracker Agreement.

Conditions of Earthstone and EEH to Closing

The obligations of Earthstone and EEH to consummate the Tracker Acquisition is subject, at the option of Earthstone and EEH, to the satisfaction on or prior to closing of each of the following conditions:

    (a)    all representations and warranties of Tracker and RoyaltyCo contained in the Tracker Agreement shall be true and correct at and as of closing in accordance with their terms as if such representations and warranties were remade at and as of closing (except to the extent such representations and warranties are made as of a specified date, in which case such representations and warranties shall be true and correct as of such specified date), except where the failure to be so true and correct (without giving effect to any limitation or qualification as to materiality or material adverse effect), individually or in the aggregate has not had and would not reasonably be expected to result in a material adverse effect;

    (b)    Tracker and RoyaltyCo shall have performed and satisfied all covenants and agreements required by the Tracker Agreement to be performed and satisfied by Tracker and RoyaltyCo at or prior to closing in all material respects;

    (c)    no order shall have been entered by any court or governmental authority having jurisdiction over the parties or the subject matter of the Tracker Agreement that restrains or prohibits the
Tracker Acquisition and that remains in effect at the time of closing;

    (d)    the aggregate title defect amounts and remediation costs asserted by EEH in good faith less any title benefits shall be less than ten percent (10%) of the unadjusted base purchase price;

    (e)    Earthstone shall have received the approval of its stockholders with regard to the NYSE rules described in this proxy statement;

    (f)    the aggregate amount of the allocated value of the affected assets with respect to any preferential rights to purchase any portion of the assets that are not set forth in a schedule to the Tracker Agreement, regardless of whether such preferential purchase rights are exercised or unexercised, shall be less than twenty-five percent (25%) of the unadjusted base purchase price; and

(g)    Tracker and RoyaltyCo shall have delivered or be ready, willing and able to deliver all of the deliverables Tracker and RoyaltyCo are required to deliver pursuant to the Tracker Agreement.

Representations and Warranties

The Tracker Agreement contains certain customary representations and warranties, many of which are qualified by knowledge, materiality or material adverse effect, made by each of Earthstone, EEH, Tracker and RoyaltyCo. The statements embodied in those representations and warranties are made solely for purposes of the Tracker Agreement and are subject to important qualifications and limitations agreed to by Earthstone, EEH, Tracker and RoyaltyCo in connection with negotiating its terms.

The representations and warranties of Earthstone and EEH, and Tracker and RoyaltyCo relate to, among other items (except where only one party has made representations and warranties as indicated below):

organization and qualification;
power and authority to perform its obligations;
capitalization (Earthstone);
authorization for execution and delivery of the Tracker Agreement and its enforceability;
absence of bankruptcy, reorganization and receivership proceedings; solvency (Tracker);
absence of conflicts or defaults under organizational documents, absence of material breach of contracts and violations of applicable laws as a result of the transactions contemplated by the Tracker Agreement;
litigation;
financial statements (Tracker);
governmental approvals (Earthstone);
fairness opinion (Earthstone);
absence of undisclosed liabilities (Tracker);

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absence of certain changes (Earthstone);
environmental matters (Tracker);
compliance with laws (Tracker);
taxes and tax matters (Tracker);
preferential rights and consents (Tracker);
broker fees;
permits (Tracker);
wells and equipment (Tracker);
hedges (Tracker);
records and information (Tracker);
leases (Tracker);
bonds (Tracker);
capital projects (Tracker);
special warranty of title (Tracker);
payments for production; imbalances (Tracker);
plugging obligations (Tracker);
wells and equipment (Tracker);
agreements and contracts (Tracker);
surface rights (Tracker);
NYSE listing and compliance (Earthstone);
SEC compliance (Earthstone);
securities laws compliance;
valid issuance of securities to Tracker (Earthstone); and
internal controls (Earthstone).

As used in the Tracker Agreement, the term “material adverse effect” in relation to a party means, any change, effect, event, development, circumstance, condition, occurrence or combination of the foregoing that, individually or in the aggregate, has had or would reasonably be expected to have (a) a material adverse effect on the ability of such party to perform or comply with any material obligation under the Tracker Agreement or to consummate the Tracker Acquisition contemplated by the Tracker Agreement in accordance with the terms thereof or (b) a material adverse effect on the business, condition (financial or otherwise) or results of operations of such party and its subsidiaries, taken as a whole; provided, however, that any adverse changes, effects, events, developments, circumstances, conditions or occurrences resulting from or due to any of the following shall be disregarded in determining whether there has been a material adverse effect: (1) changes, effects, events or occurrences generally affecting the United States or global economy, the financial, credit, debt, securities or other capital markets or political, legislative or regulatory conditions or changes in the industries in which such party operates; (2) the announcement or pendency of the Tracker Agreement or the transactions contemplated thereby or the performance of the Tracker Agreement; (3) any change in the market price or trading volume of Class A Common Stock (it being understood that any underlying cause of any such decline or change, not otherwise excluded by the exceptions set forth in this definition, may be taken into consideration in determining whether a material adverse effect has occurred or is reasonably likely to occur); (4) acts of war or terrorism (or the escalation of the foregoing) or natural disasters or other force majeure events; (5) any epidemic, disease outbreak, pandemic (including the COVID-19 or SARS-CoV-2 virus or any mutation or variation thereof or related health condition); (6) changes in any applicable laws or regulations applicable to such party or applicable accounting regulations or principles or the interpretation thereof; (7) any legal proceedings commenced by or involving any current or former member, partner or stockholder of such party (on their own or on behalf of such party) arising out of or related to the Tracker Agreement or the transactions contemplated thereby; and (8) changes, effects, events or occurrences generally affecting the prices of oil, gas, natural gas, natural gas liquids or other commodities; provided further, however, that any change, effect, event, development, circumstance, condition or occurrence referred to in clause (1), (4) or (8) shall be taken into account for purposes of determining whether there has been a material adverse effect if and to the extent that such change, effect, event, development, circumstance, condition or occurrence disproportionately adversely affects such party, as compared to other similarly situated persons operating in the industries in which such party operates.

Conduct of Business of the Parties Pending the Tracker Acquisition

Conduct of the Business of Tracker and RoyaltyCo Pending Closing

Until the closing, Tracker and RoyaltyCo shall operate the Tracker Assets in the ordinary course, maintain all leases and contracts in full force and effect, and pay or cause to be paid its proportionate share of all costs and expenses incurred in connection with the operation of the Tracker Assets and notify EEH of any ongoing activities and major capital expenditures in excess of $200,000 (in gross costs) conducted on the Tracker Assets and, except as otherwise expressly contemplated by the Tracker Agreement or except as otherwise consented to in writing by EEH, Tracker and RoyaltyCo shall not:


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(a)     approve any operations on the Tracker Assets that is anticipated to cost the owner of the Tracker Assets more than $200,000 in gross costs per activity or series of activities (excepting (i) emergency operations required to address an immediate threat to health, safety, or the environment, (ii) operations that are required if a well goes down and Tracker believes, acting reasonably, that there is a reasonable likelihood or risk of immediate reservoir or downhole damage or other immediate potential loss of the wellbore of such well provided that such operation is not expected to exceed $250,000 in gross costs, or (iii) operations immediately necessary to avoid material monetary penalty or forfeiture provisions of any applicable contract or order of any governmental authority;

(b)    lease, transfer, sell, convey or dispose of, or grant a lien on or otherwise encumber any, Tracker Assets (other than replacement of equipment, other asset retirement obligations, or sale of hydrocarbons in the ordinary course of business consistent with past practices);

(c)     let lapse any of Tracker’s or RoyaltyCo’s insurance in force as of the execution date with respect to the Tracker Assets;

(d)     modify or terminate or allow to be modified or terminated any material contract or lease or enter into any agreement that, if in effect as of the execution date, would be a material contract;

(e)     waive, release, assign, settle, or compromise any claim, action, or proceeding relating to the Tracker Assets, other than waivers, releases, assignments, settlements, or compromises that involve only the payment of monetary damages not in excess of $50,000 individually or in the aggregate (excluding amounts to be paid under insurance policies); or

    (f)    commit or agree to take or refrain from taking any action that, if so taken or omitted, would result in a violation of the foregoing.
    
Conduct of Earthstone and EEH Pending Closing

Except with the prior written consent of Tracker, from the execution date until the closing, each of Earthstone and EEH shall conduct its business and operations in the ordinary course.

Termination of the Tracker Agreement

The Tracker Agreement may be terminated at any time prior to closing:

    (a)    by the mutual prior written consent of Tracker and Earthstone and EEH;

    (b)    by either Tracker or Earthstone and EEH if:

    (i)    the closing has not occurred on or before 5:00 p.m. Mountain Time on August 15, 2021 (the “Outside Date”); provided that the Outside Date shall automatically be extended until October 14, 2021 in the event the preliminary proxy statement is filed with the SEC on or before June 8, 2021 and the stockholder meeting shall have not been held on or before August 1, 2021. However, no party shall be entitled to terminate the Tracker Agreement if the closing has failed to occur through the fault of such party. The Tracker Agreement may not be extended beyond October 14, 2021 without the mutual written consent of Earthstone, EEH and Tracker;

    (ii)    at or after the date that is the latter to occur of (A) July 16, 2021, (B) such later date as EEH and Tracker may agree, (C) if certain closing conditions have not been met, then the earlier of (x) the date three business days after such conditions have been satisfied or waived and (y) the Outside Date (such applicable date, the “Scheduled Closing Date”), if the conditions set forth above for the other party are not satisfied or are not capable of satisfaction at such time through no fault of the party terminating the Tracker Agreement and not waived by such party; or

(iii)    if the stockholder meeting shall have concluded and the approval of the stockholders with respect to the proposal regarding approval of the issuance of the Transaction Shares shall not have been obtained.

If the Tracker Agreement is terminated pursuant to the above, the Tracker Agreement shall become void and of no further force or effect (except for certain provisions regarding indemnification, confidentiality, injunctive relief, and remedies, all of which shall continue in full force and effect).

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Damages for Failure to Close

In the event that (i) (A) Tracker is entitled to terminate the Tracker Agreement because the conditions precedent to the obligations of Tracker set forth above are not satisfied as of the Scheduled Closing Date (or the Outside Date as applicable) as a result of the breach or failure of Earthstone’s and EEH’s representations, warranties, or covenants under the Tracker Agreement, including, if and when required, Earthstone’s and EEH’s obligations to consummate the transactions contemplated under the Tracker Agreement at closing, and (B) all conditions precedent to the obligations of Earthstone and EEH set forth above have been satisfied or waived in writing by Earthstone and EEH (except for those conditions that by their nature are to be satisfied at closing, all of which Tracker stands ready, willing and able to satisfy), or (ii) Tracker is entitled to terminate the Tracker Agreement because closing has not occurred prior to the Outside Date through no fault of Tracker, then Tracker shall be entitled, to either (x) terminate the Tracker Agreement and receive the deposit of $2.96 million as liquidated damages, or (y) seek specific performance of the Tracker Agreement.

In the event that Tracker or Earthstone terminates the Tracker Agreement because of the failure of Earthstone to obtain stockholder approval with respect to Proposal 5 regarding the Transaction Shares, then within two business days of termination of the Tracker Agreement, Tracker shall be entitled to receive $1.0 million as liquidated damages.

In the event that (i) (A) all conditions precedent to the obligations of Earthstone and EEH set forth above have been satisfied or waived in writing by Earthstone and EEH (except for those conditions that by their nature are to be satisfied at closing, all of which Earthstone and EEH stand ready, willing and able to satisfy) and (B) Earthstone and EEH are entitled to terminate the Tracker Agreement because the conditions precedent to the obligations of Earthstone and EEH are not satisfied as of the Scheduled Closing Date (or the Outside Date as applicable) solely as a result of the breach or failure of Tracker’s representations, warranties, or covenants thereunder, including, if and when required, Tracker’s obligations to consummate the transactions contemplated hereunder at closing, or (ii) EEH is entitled to terminate the Tracker Agreement because closing has not occurred prior to the Outside Date through no fault of Earthstone and EEH, then EEH shall be entitled to elect, in its sole discretion, to either (x) seek specific performance of the Tracker Agreement, or (y) terminate the Tracker Agreement, in which event Earthstone shall be entitled to receive from Tracker reimbursement of expenses of up to $500,000 as liquidated damages.

Other Covenants and Agreements of the Parties

Tracker, Earthstone and EEH have agreed to several obligations under the Tracker Agreement pending the closing of the Tracker Acquisition, including:

access to the Tracker Assets, books, records and files;
prior mutual agreement with respect to press releases and other public disclosures regarding the Tracker Agreement and the contemplated Tracker Acquisition;
Tracker’s cooperation and assistance in providing tax, financial, audit and other information that may be required by Earthstone to meet its public disclosure and SEC filing requirements, including its proxy statement requirements;
non-compete and similar restrictions on certain persons associated with Tracker acquisition activities within the boundaries of the Tracker Assets for a period ending on December 31, 2021; and
mutual post-closing indemnification rights and obligations for breaches of representations, warranties or covenants with customary basket (minimum limit on claims), holdback escrow of $2.96 million, time periods within which claims must be brought and aggregate limits of liability depending on the nature of the claim.

The Sequel Agreement

In reviewing the Sequel Agreement and this summary, please recognize that they have been included to provide you with information regarding the essential terms of the Sequel Agreement and are not intended to provide any other factual information about Earthstone, EEH and Sequel or any of their subsidiaries or affiliates. The Sequel Agreement contains representations and warranties and covenants by each of the parties thereto, certain of which are itemized below. These representations and warranties have been made solely for the benefit of the other parties to the Sequel Agreement and:
•    were not intended as statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; and

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•    may apply standards of materiality in a way that is different from what may be viewed as material by you or other investors.

Moreover, information concerning the subject matter of the representations and warranties in the Sequel Agreement and described below may have changed since the date of the Sequel Agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this proxy statement. Accordingly, the representations and warranties and other provisions of the Sequel Agreement should not be read alone, but instead should be read together with the information provided elsewhere in this proxy statement and in the documents incorporated by reference into this proxy statement. See “Where You Can Find More Information.”

General

In general, the Sequel Agreement provides for the acquisition by EEH of interests in certain well-bore interests and related equipment held by Sequel that are part of a joint development agreement between Tracker and Sequel involving portions of the acreage covered by the Tracker Agreement (the “Sequel Assets”). This is referred to below as the “Sequel Acquisition.” At signing, EEH delivered to escrow the deposit of $5.2 million which will be applied toward the cash purchase price at closing. The Sequel Agreement has an effective time of 12:01 a.m., Central Time, on March 1, 2021.

The Sequel Acquisition

The Sequel Agreement provides that:

(a)    EEH will pay to Sequel an aggregate of $52.0 million in cash;

(b)    Earthstone will issue to Sequel 1.5 million shares of its Class A Common Stock; and

(c)    Sequel will assign its interests in the Sequel Assets to EEH.

The cash portion of the purchase price described in clause (a) above is subject to adjustment under the Sequel Agreement by increases or decreases as follows (without duplication):

    (a)    increased by proceeds received by EEH from production and sale of oil and natural gas produced from the Sequel Assets prior to the effective time;

(b)    increased by the value of all inventory (production in storage or line-fill) related to the Sequel Assets as of the effective time;

    (c)    increased by property expenses attributable to periods from and after the effective time that are paid or borne by Sequel and its affiliates;

(d)    increased by prepaid property expenses attributable to the Sequel Assets from and after the effective time that were paid or borne by Sequel or its affiliates;

(e)    increased by expenses related to capital expenditures, incurred or paid by Sequel in connection with capital projects incurred or paid after the effective time;

(f)    increased by asset taxes allocable to EEH but paid by Sequel;

(g)    increased by title benefit amounts, if any;

    (h)    decreased by an amount equal to all proceeds received and retained by Sequel or its affiliates from the production, transportation, gathering, processing, treating, or sale of hydrocarbons produced from or attributable or credited to the Sequel Assets from and after the effective time, and less any property expenses, burdens, taxes, transportation, quality or other deductions, differentials and post-production costs and expenses;

    (i)    decreased by the amount equal to all property expenses attributable to periods before the effective time that are paid or borne by EHH or its affiliates;

    (j)    decreased by an amount equal to all asset taxes allocable to Sequel that are paid or borne by EEH or its affiliates;

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    (k)    decreased by an amount equal to title defect adjustments, environmental defect adjustments, and certain casualty losses; and

    (l)    decreased by an amount equal to the allocated value of any preferential purchase rights exercised prior to the closing and any consents not obtained prior to closing.

Certain Ordinary-Course Costs and Revenues

    (a)    With respect to revenues earned or property costs incurred with respect to the Sequel Assets attributable to the time period prior to the effective time:

    (i)    Sequel shall be entitled to all amounts earned from the sale, during the period up to but excluding the effective time, of hydrocarbons produced from, or attributable to, the Sequel Assets; and

    (ii)    Sequel shall be responsible for (and entitled to any refunds and indemnities with respect to) all property costs incurred prior to the effective time.

    (b)    With respect to revenues earned or property costs incurred with respect to the Sequel Assets from and after the effective time:

    (i)    EEH shall be entitled to all amounts earned from the sale, during the period from and after the effective time, of hydrocarbons produced from, or attributable to, the Sequel Assets; and

    (ii)    EEH shall be responsible for (and entitled to any refunds and indemnities with respect to) all property costs incurred from and after the effective time.

Conditions to Completion of the Sequel Acquisition

Conditions of Sequel to Closing

The obligations of Sequel to consummate the Sequel Acquisition is subject, at the option of Sequel, to the satisfaction on or prior to closing of each of the following conditions:

    (a)    all representations and warranties of Earthstone and EEH shall be true and correct at and as of closing in accordance with their terms as if such representations and warranties were remade at and as of closing (except to the extent such representations and warranties are made as of a specified date, in which case such representations and warranties shall be true and correct as of such specified date), except where the failure to be so true and correct (without giving effect to any limitation or qualification as to materiality or material adverse effect), individually or in the aggregate has not had and would not reasonably be expected to materially impair the ability of EEH to consummate the Sequel Acquisition and perform its obligations under the Sequel Agreement;

    (b)    EEH shall have performed and satisfied all covenants and agreements required by the Sequel Agreement to be performed and satisfied by EEH at or prior to closing in all material respects;

    (c)    no order shall have been entered by any court or governmental authority having jurisdiction over the parties or the subject matter of the Sequel Agreement that restrains or prohibits the
Sequel Acquisition and that remains in effect at the time of closing;

    (d)    the aggregate title defect amounts and remediation costs asserted by EEH in good faith less any title benefits shall be less than ten percent (10%) of the unadjusted base purchase price;

    (e)    the Class A Common Stock issuable upon closing of the Sequel Agreement shall have been approved for listing on NYSE, subject only to official notice of issuance thereof; and

    (f)    Earthstone and EEH shall have delivered or be ready, willing and able to deliver all of the deliverables they are required to deliver pursuant to the Sequel Agreement.

Conditions of Earthstone and EEH to Closing


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The obligations of Earthstone and EEH to consummate the Sequel Acquisition is subject, at the option of Earthstone and EEH, to the satisfaction on or prior to closing of each of the following conditions:

    (a)    all representations and warranties of Sequel contained in the Sequel Agreement shall be true and correct at and as of closing in accordance with their terms as if such representations and warranties were remade at and as of closing (except to the extent such representations and warranties are made as of a specified date, in which case such representations and warranties shall be true and correct as of such specified date), except where the failure to be so true and correct (without giving effect to any limitation or qualification as to materiality or material adverse effect), individually or in the aggregate has not had and would not reasonably be expected to result in a material adverse effect;

    (b)    Sequel shall have performed and satisfied all covenants and agreements required by the Sequel Agreement to be performed and satisfied by Sequel at or prior to closing in all material respects;

    (c)    no order shall have been entered by any court or governmental authority having jurisdiction over the parties or the subject matter of the Sequel Agreement that restrains or prohibits the Sequel Acquisition and that remains in effect at the time of closing;

    (d)    the aggregate title defect amounts and remediation costs asserted by EEH in good faith less any title benefits shall be less than ten percent (10%) of the unadjusted base purchase price;

    (e)    Earthstone shall have received the approval of its stockholders with regard to the NYSE rules described in this proxy statement;

    (f)    EEH shall have closed the Tracker Acquisition;

(g)    the aggregate amount of the allocated value of the affected assets with respect to any preferential rights to purchase any portion of the assets that are not set forth in a schedule to the Sequel Agreement, regardless of whether such preferential purchase rights are exercised or unexercised, shall be less than twenty-five percent (25%) of the unadjusted base purchase price; and

(h)    Sequel shall have delivered or be ready, willing and able to deliver all of the deliverables Sequel is required to deliver pursuant to the Sequel Agreement.

Representations and Warranties

The Sequel Agreement contains certain customary representations and warranties, many of which are qualified by knowledge, materiality or material adverse effect, made by each of Earthstone, EEH and Sequel. The statements embodied in those representations and warranties are made solely for purposes of the Sequel Agreement and are subject to important qualifications and limitations agreed to by Earthstone, EEH and Sequel in connection with negotiating its terms.

The representations and warranties of Earthstone and EEH, and Sequel relate to, among other items (except where only one party has made representations and warranties as indicated below):

organization and qualification;
power and authority to perform its obligations;
capitalization (Earthstone);
authorization for execution and delivery of the Sequel Agreement and its enforceability;
absence of bankruptcy, reorganization and receivership proceedings (Sequel);
absence of conflicts or defaults under organizational documents, absence of material breach of contracts and violations of applicable laws as a result of the transactions contemplated by the Sequel Agreement;
litigation;
financial statements (Sequel);
governmental approvals (Earthstone);
fairness opinion (Earthstone);
absence of certain changes (Earthstone);
environmental matters (Sequel);
compliance with laws (Sequel);
taxes and tax matters (Sequel);
preferential rights and consents (Sequel);
broker fees;

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hedges (Sequel);
records and information (Sequel);
leases (Sequel);
capital projects (Sequel);
special warranty of title (Sequel);
imbalances (Sequel);
agreements and contracts (Sequel);
NYSE listing and compliance (Earthstone);
SEC compliance (Earthstone);
securities laws compliance;
valid issuance of securities to Sequel (Earthstone); and
internal controls (Earthstone).

As used in the Sequel Agreement, the term “material adverse effect” in relation to a party means, any change, effect, event, development, circumstance, condition, occurrence or combination of the foregoing that, individually or in the aggregate, has had or would reasonably be expected to have (a) a material adverse effect on the ability of such party to perform or comply with any material obligation under the Sequel Agreement or to consummate the Sequel Acquisition contemplated by the Sequel Agreement in accordance with the terms thereof or (b) a material adverse effect on the business, condition (financial or otherwise) or results of operations of such party and its subsidiaries, taken as a whole; provided, however, that any adverse changes, effects, events, developments, circumstances, conditions or occurrences resulting from or due to any of the following shall be disregarded in determining whether there has been a material adverse effect: (1) changes, effects, events or occurrences generally affecting the United States or global economy, the financial, credit, debt, securities or other capital markets or political, legislative or regulatory conditions or changes in the industries in which such party operates; (2) the announcement or pendency of the Sequel Agreement or the transactions contemplated thereby or the performance of the Sequel Agreement; (3) any change in the market price or trading volume of Class A Common Stock (it being understood that any underlying cause of any such decline or change, not otherwise excluded by the exceptions set forth in this definition, may be taken into consideration in determining whether a material adverse effect has occurred or is reasonably likely to occur); (4) acts of war or terrorism (or the escalation of the foregoing) or natural disasters or other force majeure events; (5) any epidemic, disease outbreak, pandemic (including the COVID-19 or SARS-CoV-2 virus or any mutation or variation thereof or related health condition); (6) changes in any applicable laws or regulations applicable to such party or applicable accounting regulations or principles or the interpretation thereof; (7) any legal proceedings commenced by or involving any current or former member, partner or stockholder of such party (on their own or on behalf of such party) arising out of or related to the Sequel Agreement or the transactions contemplated thereby; and (8) changes, effects, events or occurrences generally affecting the prices of oil, gas, natural gas, natural gas liquids or other commodities; provided further, however, that any change, effect, event, development, circumstance, condition or occurrence referred to in clause (1), (4) or (8) shall be taken into account for purposes of determining whether there has been a material adverse effect if and to the extent that such change, effect, event, development, circumstance, condition or occurrence disproportionately adversely affects such party, as compared to other similarly situated persons operating in the industries in which such party operates.

Conduct of Business of the Parties Pending the Sequel Acquisition

Conduct of the Business of Sequel Pending Closing

Until the closing, Sequel shall maintain all leases and contracts in full force and effect, to the extent that it has the ability to do so, pay or cause to be paid its proportionate share of all costs and expenses incurred in connection with the operation of the Sequel Assets and Sequel will not elect to terminate any lease or contract, and notify EEH of any ongoing activities and major capital expenditures in excess of $200,000 (in gross costs) conducted on the Sequel Assets and, except as otherwise expressly contemplated by the Sequel Agreement or except as otherwise consented to in writing by EEH, Sequel shall not:

(a)     approve any operations on the Sequel Assets that is anticipated to cost the owner of the Sequel Assets more than $200,000 in gross costs per activity or series of activities (excepting (i) emergency operations required to address an immediate threat to health, safety, or the environment, (ii) operations that are required if a well goes down and Sequel believes, acting reasonably, that there is a reasonable likelihood or risk of immediate reservoir or downhole damage or other immediate potential loss of the wellbore of such well provided that such operation is not expected to exceed $250,000 in gross costs, or (iii) operations immediately necessary to avoid material monetary penalty or forfeiture provisions of any applicable contract or order of any governmental authority;

(b)    lease, transfer, sell, convey or dispose of, or grant a lien on or otherwise encumber any, Sequel Assets (other than replacement of equipment, other asset retirement obligations, or sale of hydrocarbons in the ordinary course of business consistent with past practices);


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(c)     let lapse any of Sequel’s insurance in force as of the execution date with respect to the Sequel Assets;

(d)     modify or terminate or allow to be modified or terminated any material contract or lease or enter into any agreement that, if in effect as of the execution date, would be a material contract;

(e)     waive, release, assign, settle, or compromise any claim, action, or proceeding relating to the Sequel Assets, other than waivers, releases, assignments, settlements, or compromises that involve only the payment of monetary damages not in excess of $50,000 individually or in the aggregate (excluding amounts to be paid under insurance policies); or

    (f)    commit or agree to take or refrain from taking any action that, if so taken or omitted, would result in a violation of the foregoing.
    
Conduct of Earthstone and EEH Pending Closing

Except with the prior written consent of Sequel, from the execution date until the closing, each of Earthstone and EEH shall conduct its business and operations in the ordinary course.

Termination of the Sequel Agreement

The Sequel Agreement may be terminated at any time prior to closing:

    (a)    by the mutual prior written consent of Sequel and Earthstone and EEH;

    (b)    by either Sequel or Earthstone and EEH if:

    (i)    the closing has not occurred on or before 5:00 p.m. Mountain Time on August 15, 2021 (the “Outside Date”); provided that the Outside Date shall automatically be extended until October 14, 2021 in the event the preliminary proxy statement is filed with the SEC on or before June 8, 2021 and the stockholder meeting shall have not been held on or before August 1, 2021. However, no party shall be entitled to terminate the Sequel Agreement if the closing has failed to occur through the fault of such party. The Sequel Agreement may not be extended beyond October 14, 2021 without the mutual written consent of Earthstone, EEH and Sequel;

    (ii)    at or after the date that is the latter to occur of (A) July 16, 2021, (B) such later date as EEH and Sequel may agree, (C) if certain closing conditions have not been met, then the earlier of (x) the date three business days after such conditions have been satisfied or waived and (y) the Outside Date (such applicable date, the “Scheduled Closing Date”), if the conditions set forth above for the other party are not satisfied or are not capable of satisfaction at such time through no fault of the party terminating the Sequel Agreement and not waived by such party; or

(iii)    if the stockholder meeting shall have concluded and the approval of the stockholders with respect to the proposal regarding approval of the issuance of the Transaction Shares shall not have been obtained; or

    (c)    by EEH, if the Tracker Acquisition has not closed by the Outside Date or the Tracker Agreement is terminated.

If the Sequel Agreement is terminated pursuant to the above, the Sequel Agreement shall become void and of no further force or effect (except for certain provisions regarding confidentiality, injunctive relief, and remedies, all of which shall continue in full force and effect).

Damages for Failure to Close

In the event that (i) (A) Sequel is entitled to terminate the Sequel Agreement because the conditions precedent to the obligations of Sequel set forth above are not satisfied as of the Scheduled Closing Date (or the Outside Date as applicable) as a result of the breach or failure of Earthstone’s and EEH’s representations, warranties, or covenants under the Sequel Agreement, including, if and when required, Earthstone’s and EEH’s obligations to consummate the transactions contemplated under the Sequel Agreement at closing, and (B) all conditions precedent to the obligations of Earthstone and EEH set forth above have been satisfied or waived in writing by Earthstone and EEH (except for those conditions that by their nature are to be satisfied at closing,

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all of which Sequel stands ready, willing and able to satisfy), or (ii) Sequel is entitled to terminate the Sequel Agreement because closing has not occurred prior to the Outside Date through no fault of Sequel, then Sequel shall be entitled, to either (x) terminate the Sequel Agreement and receive the deposit of $5.2 million as liquidated damages, or (y) seek specific performance of the Sequel Agreement.

In the event that EEH or Sequel terminates the Sequel Agreement because of the failure of Earthstone to obtain stockholder approval with respect to Proposal 5 regarding the Transaction Shares, then within two business days of termination of the Sequel Agreement, Sequel shall be entitled to receive $1.0 million as liquidated damages.

In the event that EEH terminates the Sequel Agreement because the Tracker Acquisition is not consummated by the Outside Date or the Tracker Agreement is terminated and Tracker or RoyaltyCo is entitled to receive the entire deposit under the Tracker Agreement, then within two business days of termination of the Sequel Agreement, Sequel shall be entitled to receive the deposit of $5.2 million as liquidated damages.

In the event that EEH terminates the Sequel Agreement because the Tracker Acquisition is not consummated by the Outside Date or the Tracker Agreement is terminated and neither Tracker nor RoyaltyCo is entitled to receive a termination fee under the Tracker Agreement, then within two business days of termination of the Sequel Agreement, Sequel shall be entitled to receive from EEH reimbursement of expenses of up to $1.0 million as liquidated damages.

In the event that (i) (A) all conditions precedent to the obligations of Earthstone and EEH set forth above have been satisfied or waived in writing by Earthstone and EEH (except for those conditions that by their nature are to be satisfied at closing, all of which Earthstone and EEH stand ready, willing and able to satisfy) and (B) Earthstone and EEH are entitled to terminate the Sequel Agreement because the conditions precedent to the obligations of Earthstone and EEH are not satisfied as of the Scheduled Closing Date (or the Outside Date as applicable) solely as a result of the breach or failure of Sequel’s representations, warranties, or covenants thereunder, including, if and when required, Sequel’s obligations to consummate the transactions contemplated hereunder at closing, or (ii) EEH is entitled to terminate the Sequel Agreement because closing has not occurred prior to the Outside Date through no fault of Earthstone and EEH, then EEH shall be entitled to elect, in its sole discretion, to either (x) seek specific performance of the Sequel Agreement, or (y) terminate the Sequel Agreement, in which event Earthstone shall be entitled to receive from Sequel reimbursement of expenses of up to $1.0 million as liquidated damages.

Other Covenants and Agreements of the Parties

Sequel, Earthstone and EEH have agreed to several obligations under the Sequel Agreement pending the closing of the Sequel Acquisition, including:

access to the Sequel Assets, books, records and files;
prior mutual agreement with respect to press releases and other public disclosures regarding the Sequel Agreement and the contemplated Sequel Acquisition;
Sequel’s cooperation and assistance in providing tax, financial, audit and other information that may be required by Earthstone to meet its public disclosure and SEC filing requirements, including its proxy statement requirements; and
mutual post-closing indemnification rights and obligations for breaches of representations, warranties or covenants with customary basket (minimum limit on claims), holdback escrow of $2.6 million (with a cap for some claims of $5.2 million), time periods within which claims must be brought and aggregate limits of liability depending on the nature of the claim.

THE SUPPORT AND VOTING AGREEMENT

The following summary describes specific aspects of the Voting Agreement entered into in connection with the Purchase Agreements and the proposed Transaction. This discussion does not purport to be complete and is qualified in its entirety by reference to the Voting Agreement, which is attached as Annex F. We urge you to read the Voting Agreement carefully and in its entirety.

As a condition and inducement to Tracker’s willingness to enter into the Tracker Agreement and Sequel’s willingness to enter into the Sequel Agreement, the Warburg Entities simultaneously entered into a Support and Voting Agreement (the “Voting Agreement”) with Earthstone, EEH, Tracker, RoyaltyCo, SEG-I and SEG-II, with respect to all of the shares of our Class A Common Stock beneficially owned by the Warburg Entities. The Voting Agreement provides that the Warburg Entities, in their capacity collectively as a significant stockholder of Earthstone, will: (i) appear at any meeting of Earthstone’s stockholders or otherwise cause all securities of Earthstone beneficially owned by the Warburg Entities to be counted as present at such a meeting

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for purposes of calculating a quorum; and (ii) vote or cause to be voted (including by proxy or written consent, if applicable) all of the securities of Earthstone owned by the Warburg Entities in favor of the issuance of the Transaction Shares and any other matter necessary for the consummation of the transactions contemplated by the Purchase Agreements. In addition, the Warburg Entities agree to vote against any action that could reasonably be expected to impede, interfere with, delay, postpone or adversely affect the Transaction.

The Warburg Entities’ obligations under the Voting Agreement terminate on the earliest to occur of: (i) the consummation of the closing of the Tracker Agreement; (ii) the termination of the Purchase Agreements pursuant to and in compliance with the terms set forth therein; and (iii) the mutual written agreement of the Warburg Parties, Earthstone, EEH, Tracker, RoyaltyCo, SEG-I and SEG-II to terminate the Voting Agreement.

THE REGISTRATION RIGHTS AGREEMENTS AND THE LOCK-UP AGREEMENT

The following summary describes specific aspects of the Tracker Registration Rights Agreement and the Sequel Registration Rights Agreement to be entered into at the closing of the Tracker Acquisition and the Sequel Acquisition, respectively. The following summary also describes specific aspects of the Lock-up Agreement that certain members of Tracker will enter into at the closing of the Tracker Agreement. This discussion does not purport to be complete and is qualified in its entirety by reference to the form of Tracker Registration Rights Agreement, the form of Sequel Registration Rights Agreement and the form of Lock-up Agreement, which are attached as Annex G, Annex H and Annex I, respectively. We urge you to read the form of Tracker Registration Rights Agreement, the form of Sequel Registration Rights Agreement and the form of Lock-up Agreement carefully and in their entirety.

Tracker Registration Rights Agreement

Pursuant to the terms of the Tracker Agreement, at the closing of the Tracker Acquisition, Earthstone and the members of Tracker will enter into a registration rights agreement (the “Tracker Registration Rights Agreement”) relating to the shares of Class A Common Stock issuable upon the closing of the Tracker Acquisition. The Tracker Registration Rights Agreement provides that, within sixty days after the closing of the Tracker Acquisition, Earthstone will prepare and file a registration statement to permit the public resale of the shares of Class A Common Stock issued by Earthstone to Tracker in connection with the closing of the Tracker Acquisition. Earthstone shall cause the registration statement to be continuously effective from and after the date it is first declared or becomes effective until the earlier of (i) all such shares of Class A Common Stock have been disposed of in the manner set forth in the registration statement or under Rule 144 of the Securities Act, until the distribution of the Class A Common Stock does not require registration under the Securities Act, or until there are no longer any such registrable shares of Class A Common Stock issued in connection with the Tracker Acquisition outstanding; and (ii) four years after the closing of the Tracker Acquisition.

In addition, in the event that Earthstone proposes to engage in an underwritten offering in which shares of Class A Common Stock are to be sold to an underwriter on a firm commitment basis for reoffering to the public, or an offering that is a “bought deal” with one or more investment banks, Earthstone will give at least ten business days’ prior written notice of the proposed underwritten offering to the parties to the Tracker Registration Rights Agreement and offering such parties the right to include in the underwritten offering such number of shares of Class A Common Stock as they may request in writing, subject to certain limitations contained therein. If the underwritten offering is to be structured as an overnight underwritten offering, such that the offering would be launched after the close of trading on one trading day and priced before the open of trading on the next succeeding trading day, Earthstone will notify the parties to the Tracker Registration Rights Agreement no later than one business day after Earthstone engages a managing underwriter and offer such parties the right to include in the overnight underwritten offering such number of shares of Class A Common Stock as they may request in writing, subject to certain limitations contained therein.

Finally, in the event that holders of at least $10 million of shares of Class A Common Stock registrable under the Tracker Registration Rights Agreement elect to dispose of such Class A Common Stock under the shelf registration statement filed by Earthstone as required by the Tracker Registration Rights Agreement pursuant to an underwritten offering or overnight underwritten offering, Earthstone will notify the parties to the Tracker Registration Rights Agreement of the proposed underwritten offering or overnight underwritten offering and offer such parties the opportunity to include in the underwritten offering or underwritten overnight offering such number of shares of Class A Common Stock as they may request in writing.

Earthstone will pay all registration expenses incident to the performance of its obligations under the Tracker Registration Rights Agreement other than: (i) transfer taxes and fees of transfer agents and registrars; (ii) fees and expenses of counsel engaged by the selling stockholders; and (iii) commissions and discounts of brokers, dealers and underwriters.

Sequel Registration Rights Agreement


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Pursuant to the terms of the Sequel Agreement, at the closing of the Sequel Acquisition, Earthstone and Sequel will enter into a registration rights agreement (the “Sequel Registration Rights Agreement”) relating to the shares of Class A Common Stock issuable upon the closing of the Sequel Acquisition. The Sequel Registration Rights Agreement provides that, within thirty days after the closing of the Sequel Acquisition, Earthstone will prepare and file a registration statement to permit the public resale of the shares of Class A Common Stock issued by Earthstone to Sequel in connection with the closing of the Sequel Acquisition. Earthstone shall cause the registration statement to be continuously effective from and after the date it is first declared or becomes effective until the earlier of (i) all such shares of Class A Common Stock have been disposed of in the manner set forth in the registration statement or under Rule 144 of the Securities Act, until the distribution of the Class A Common Stock does not require registration under the Securities Act, or until there are no longer any such registrable shares of Class A Common Stock issued in connection with the Sequel Acquisition outstanding; and (ii) four years after the closing of the Sequel Acquisition.

In addition, in the event that Earthstone proposes to engage in an underwritten offering in which shares of Class A Common Stock are to be sold to an underwriter on a firm commitment basis for reoffering to the public, or an offering that is a “bought deal” with one or more investment banks, Earthstone will give at least ten business days’ prior written notice of the proposed underwritten offering to the parties to the Sequel Registration Rights Agreement and offering such parties the right to include in the underwritten offering such number of shares of Class A Common Stock as they may request in writing, subject to certain limitations contained therein. If the underwritten offering is to be structured as an overnight underwritten offering, such that the offering would be launched after the close of trading on one trading day and priced before the open of trading on the next succeeding trading day, Earthstone will notify the parties to the Sequel Registration Rights Agreement no later than one business day after Earthstone engages a managing underwriter and offer such parties the right to include in the overnight underwritten offering such number of shares of Class A Common Stock as they may request in writing, subject to certain limitations contained therein.

Finally, in the event that holders of at least $10 million of shares of Class A Common Stock registrable under the Sequel Registration Rights Agreement elect to dispose of such Class A Common Stock under the shelf registration statement filed by Earthstone as required by the Sequel Registration Rights Agreement pursuant to an underwritten offering or overnight underwritten offering, Earthstone will notify the parties to the Sequel Registration Rights Agreement of the proposed underwritten offering or overnight underwritten offering and offer such parties the opportunity to include in the underwritten offering or underwritten overnight offering such number of shares of Class A Common Stock as they may request in writing.

Earthstone will pay all registration expenses incident to the performance of its obligations under the Sequel Registration Rights Agreement other than: (i) transfer taxes and fees of transfer agents and registrars; (ii) fees and expenses of counsel engaged by the selling stockholders; and (iii) commissions and discounts of brokers, dealers and underwriters.

Lock-up Agreement

Pursuant to the terms of the Tracker Agreement, at the closing of the Tracker Acquisition, Earthstone and certain members of Tracker will enter into a lock-up agreement (the “Lock-up Agreement”) providing that such parties will not transfer any of the shares of Class A Common Stock that they receive at the closing of the Tracker Acquisition for a period of 120 days after the closing of the Tracker Acquisition.

INFORMATION ABOUT TRACKER

General

Tracker Resource Development III, LLC, a Delaware limited liability company (“Tracker”), and TRD III Royalty Holdings (TX), LP, a Delaware limited partnership (“RoyaltyCo”), are privately-held companies that invest in the energy sector through exploration, development and production of oil, natural gas and natural gas liquids. These entities are collectively referred to as Tracker below. Tracker holds significant acreage in Irion County, Texas. Tracker had previously drilled and completed horizontal wells in the Wolfcamp formation.

As of December 31, 2020, Tracker’s estimated proved reserves totaled 53,192 MBoe. For the year ended December 31, 2020, Tracker had oil and natural gas revenues of approximately $25.6 million and net loss of approximately $275.9 million. For the three months ended March 31, 2021, Tracker had oil and natural gas revenues of approximately $7.5 million and net loss of approximately $0.2 million.

Properties
The following sets forth information about Tracker’s properties and operations.

Proved Reserves

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Substantially all of Tracker’s oil and gas reserves are in the Midland Basin of west Texas. Unaudited information concerning the estimated net quantities of Tracker’s proved reserves and the standardized measure of future net cash flows from the reserves is presented in Note 13, Supplemental Oil and Natural Gas Information (Unaudited), in the Historical Consolidated and Combined Financial Statements of Tracker included elsewhere in this proxy statement. Tracker’s reserve estimates have been prepared internally by Tracker management. Set forth below is a summary of Tracker’s oil, natural gas and natural gas liquids reserves as of December 31, 2020. Tracker does not have any long-term supply or similar agreements with foreign governments or authorities.
 
Estimated Proved Reserves Quantities and Standardized Measure
 
 OilNatural Gas LiquidsNatural GasTotalStandardized Measure of Discounted Future Net Cash Flows ($ in thousands)
 (MBbl)(MBbl)(MMcf)
(MBOE) (1)
Proved developed1,673 4,009 24,237 9,721 $34,915 
Proved undeveloped10,641 16,598 97,386 43,471 12,035 
Total proved12,314 20,607 121,623 53,192 $46,950 
(1)Barrels of oil equivalent have been calculated on the basis of six Mcf of natural gas equal to one Boe.

 OilNatural Gas LiquidsNatural GasTotal
 (MBbl)(MBbl)(MMcf)
(MBOE) (1)
Proved reserves at December 31, 201932,923 33,691 195,329 99,169 
Revisions(20,169)(12,589)(70,617)(44,528)
Production(440)(495)(3,089)(1,449)
Proved reserves at December 31, 202012,314 20,607 121,623 53,192 
Proved developed reserves:
December 31, 20192,492 3,942 23,419 10,338 
December 31, 20201,673 4,009 24,237 9,721 
(1)Barrels of oil equivalent have been calculated on the basis of six Mcf of natural gas equal to one Boe.
Uncertainties are inherent in estimating quantities of proved reserves, including many risk factors beyond Tracker’s control. Reserve engineering is a subjective process of estimating subsurface accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and the interpretation thereof. Thus, estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production after the date of the estimates, as well as economic factors such as change in commodity prices and drilling, completion and operating costs, may require revision of such estimates. Accordingly, oil and natural gas quantities ultimately recovered will vary from reserve estimates.
 
Proved Undeveloped Reserves
At December 31, 2020, Tracker had 42 proved undeveloped (“PUD”) locations with 43,471 MBoe of reserves, which were a result of Tracker’s 2020 successful drilling results and those of offset operators.

Preparation of Reserve Estimates

The proved reserves estimates shown herein have been prepared by Tracker management which has historically prepared annual internal reserve estimates. Proved reserves were estimated in accordance with guidelines established by the SEC, which require that reserve estimates be prepared under existing economic and operating conditions based upon the 12-month unweighted average of the first-day-of -the month prices. The primary inputs to the reserve estimation process are technical information, financial data, ownership interest and production data. Current revenue and expense information is obtained from Tracker’s accounting records, which are subject to annual audits. All current financial data such as commodity prices, lease operating expenses, production taxes and field-level commodity price differentials are updated in the reserve database which is prepared by Tracker’s internal reserve engineer, and then analyzed to ensure that they have been entered accurately and that all updates are complete and accurate. In addition, Tracker’s current ownership of mineral interests and well production data are incorporated in the reserve database and verified by Tracker’s personnel to ensure their accuracy and completeness.


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Gross and Net Productive Wells

As of December 31, 2020, Tracker’s total gross and net productive wells were as follows:

 
Oil(1)
Natural Gas(1)
Total(1)
Gross WellsNet WellsGross WellsNet WellsGross WellsNet Wells
Operated47 30.3 53 36.3 
Non-operated— — — — — — 
    
(1)A gross well is a well in which a working interest is owned. The number of net wells represents the sum of fractions of working interests Tracker owns in gross wells. Productive wells are those that produce commercial quantities of hydrocarbons.

Acreage

The following table summarizes Tracker’s gross and net developed and undeveloped acreage in the Midland Basin as of December 31, 2020. Net acreage represents Tracker’s percentage ownership of gross acreage.

 DevelopedUndevelopedTotal
GrossNetGrossNetGrossNet
Midland Basin12,477 12,477 14,728 14,116 27,205 26,593 
                                                                                    

The following table summarizes, as of December 31, 2020, the portion of Tracker’s gross and net acreage subject to expiration over the next three years if not successfully developed or renewed.

 Expiring Acreage
 202120222023Total
 GrossNetGrossNetGrossNetGrossNet
Midland Basin6,236 6,236 652 40 — — 6,888 6,276 
                                                                                    
Exploratory Wells and Development Wells

Set forth below for the two years ended December 31, 2020 is information concerning the number of wells Tracker completed during the years indicated.
Net Exploratory
Wells Drilled
Net Development
Wells Drilled
Total Net Productive and Dry Wells Drilled
YearProductiveDryProductiveDry
2020— — 0.3 — 0.3 
2019— — 3.8 — 3.8 
                                                                                
Drilling Commitments

Tracker is the operator of 100% of its acreage in Irion County, Texas. Tracker began drilling operations in 2017 and has been developing this acreage with the last completions occurring in January 2020. Tracker has no future drilling obligations in order to maintain its acreage.

Management’s Discussion and Analysis of Tracker Operations

Critical Accounting Policies

Critical accounting policies are those that reflect significant judgments and uncertainties and that could potentially result in materially different results under different assumptions and conditions. For a detailed description of Tracker’s accounting policies, see Note 2 – Significant Accounting Policies in the Notes to the Historical Consolidated and Combined Financial Statements of Tracker included in this proxy statement.


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Results of Operations

Year ended December 31, 2020 compared to the year ended December 31, 2019
 Years Ended December 31, 
 20202019Change
   
Sales volumes (MBoe) (1)
1,449 1,313 10 %
Average daily production (Boe per day)3,970 3,597 10 %
Average prices realized (per Boe)$17.65 $26.33 (33)%
Average prices adjusted for realized derivatives settlements (per Boe)$22.79 $26.96 (15)%
(In thousands) 
Oil and natural gas revenues$25,570 $34,566 (26)%
Lease operating expense$5,378 $5,254 %
Production taxes$1,381 $1,723 (20)%
Marketing expense$573 $672 (15)%
Depreciation, depletion and amortization$18,982 $17,046 11 %
Impairment expense$273,838 $3,124 NM
Exploration expense$130 $2,815 (95)%
General and administrative expense$4,940 $5,837 (15)%
Interest expense$(1,907)$(2,345)(19)%
Unrealized loss on derivative contracts$(1,497)$(3,187)(53)%
Realized gain on derivative contracts$7,459 $839 789 %
Gain (loss) on derivative contracts, net$5,962 $(2,348)(354)%
(1) Barrels of oil equivalent have been calculated on the basis of six Mcf of natural gas equals one Boe.

NM – Not meaningful

Oil and natural gas revenues

For the year ended December 31, 2020, oil and natural gas revenues decreased by $9.0 million or 26% compared to 2019. The average realized price per Boe decreased 33% from $26.33 for the year ended December 31, 2019 to $17.65 for the year ended December 31, 2020. The total volume of oil and natural gas produced and sold increased 136 MBoe or 10% primarily due to new wells brought online in 2020.

Lease operating expense (“LOE”)

LOE includes all costs incurred to operate wells and related facilities for both operated and non-operated properties. In addition to direct operating costs such as labor, repairs and maintenance, re-engineering and workovers, equipment rentals, materials and supplies, fuel and chemicals, LOE includes insurance and overhead charges provided for in operating agreements.

LOE remained relatively flat, increasing by $0.1 million or 2% for the year ended December 31, 2020 compared to 2019, primarily due to costs reduction efforts, offset by increased production in 2020.

Production taxes

Production taxes for the year ended December 31, 2020 decreased by $0.3 million or 20% compared to 2019, as the impact of increased volume was more than offset by the impact of decreased commodity prices. As a percentage of revenues from oil, natural gas, and natural gas liquids, production taxes remained relatively flat in 2020 compared to the prior year.

Marketing expense

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Marketing expense for the year ended December 31, 2020 decreased by $0.1 million or 15% compared to 2019 primarily due to improvements in contractual arrangements.

Depreciation, depletion and amortization (“DD&A”)
DD&A increased for the year ended December 31, 2020 by $1.9 million, or 11% compared to 2019, primarily due to reserve reductions resulting from depressed commodity prices (lower reserve quantities leads to higher DD&A per Boe).

Impairment expense

During the year ended December 31, 2020, we recorded non-cash impairments totaling $273.8 million which consisted of $103.0 million to proved oil and natural gas properties and $170.8 million to unproved oil and natural gas properties. We recorded non-cash impairments totaling $3.1 million during the year ended December 31, 2019.

Exploration expense

Exploration expense for the year ended December 31, 2020 decreased by $2.7 million or 95% compared to 2019 primarily due to recording a dry hole in 2019.

General and administrative expense (“G&A”)

These expenses consist primarily of employee remuneration, professional and consulting fees and other overhead expenses. G&A decreased by $0.9 million for the year ended December 31, 2020 relative to the comparable period in 2019, primarily due to cost reduction efforts implemented in 2020.

Interest expense, net

Interest expense includes commitment fees, amortization of deferred financing costs, and interest on outstanding indebtedness. Interest expense decreased from $2.3 million for the year ended December 31, 2019, to $1.9 million for the year ended December 31, 2020 primarily due to lower effective interest rates, as well as lower outstanding borrowings compared to the prior year.

Gain (loss) on derivative contracts, net

For the year ended December 31, 2020, we recorded a net gain on derivative contracts of $6.0 million, consisting of net realized gains on settlements of $7.5 million offset by unrealized mark-to-market losses of $1.5 million. For the year ended December 31, 2019, we recorded a net loss on derivative contracts of $2.3 million, consisting of unrealized mark-to-market losses of $3.2 million, partially offset by net realized gains on settlements of $0.9 million.

Contractual Obligations

Tracker had the following contractual obligations and commitments as of December 31, 2020:
                                                                                            
(in thousands)20212022202320242025Thereafter
Office leases$373 $132 $— $— $— $— 
    


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Three months ended March 31, 2021 compared to the Three Months Ended March 31, 2020

 Three Months Ended
March 31,
 
 20212020Change
   
Sales volumes (MBoe) (1)
293 429 (32)%
Average daily production (Boe per day)3,256 4,767 (32)%
Average prices realized (per Boe)$25.71 $20.31 27 %
Average prices adjusted for realized derivatives settlements (per Boe)$22.98 $24.19 (5)%
(In thousands) 
Oil and natural gas revenues$7,532 $8,713 (14)%
Lease operating expense$903 $1,382 (35)%
Production taxes$472 $418 13 %
Marketing expenses$— $176 NM
Depreciation, depletion and amortization$3,694 $5,348 (31)%
Exploration expense$11 $96 (89)%
General and administrative expense$938 $1,586 (41)%
Interest expense$(302)$(543)(44)%
Unrealized (loss) gain on derivative contracts$(590)$7,925 (107)%
Realized (loss) gain on derivative contracts$(798)$1,664 (148)%
(Loss) gain on derivative contracts, net$(1,388)$9,589 (114)%
(1) Barrels of oil equivalent have been calculated on the basis of six Mcf of natural gas equals one Boe.

NM – Not meaningful

Oil and natural gas revenues

For the three months ended March 31, 2021, oil and natural gas revenues decreased by $1.2 million or 14% compared to 2020. Our average realized price per Boe increased 27% from $20.31 for the three months ended March 31, 2020 to $25.71 for the three months ended March 31, 2021. The total volume of oil and natural gas produced and sold decreased 136 MBoe or 32% primarily due to natural decline from new wells brought online in the first quarter of 2020.

Lease operating expense (“LOE”)

LOE includes all costs incurred to operate wells and related facilities for both operated and non-operated properties. In addition to direct operating costs such as labor, repairs and maintenance, re-engineering and workovers, equipment rentals, materials and supplies, fuel and chemicals, LOE includes insurance and overhead charges provided for in operating agreements.

LOE decreased by $0.5 million or 35% for the three months ended March 31, 2021 compared to 2020, primarily due to cost reduction efforts.

Production taxes

Production taxes for the three months ended March 31, 2021 increased by $0.1 million or 13% relative to the comparable period in 2020 due to improved commodity prices, partially offset by decreased volume. As a percentage of revenues from oil, natural gas, and natural gas liquids, production taxes remained relatively flat in 2020 compared to the prior year.

Marketing expense

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Marketing expense was $0.2 million for the three months ended March 31, 2020. We incurred no such changes during the three months ended March 31, 2021 as Tracker sold the wells which incurred the marketing expense effective November 1, 2020.

Depreciation, depletion and amortization (“DD&A”)
DD&A for the three months ended March 31, 2021 decreased by $1.7 million, or 31% relative to the comparable period in 2020, primarily due to the decreased depletable oil and natural gas properties base resulting from impairment charges recorded in 2020.

General and administrative expense (“G&A”)

These expenses consist primarily of employee remuneration, professional and consulting fees and other overhead expenses. G&A decreased by $0.6 million for the three months ended March 31, 2021 relative to the comparable period in 2020, primarily due to a decrease in employees compared to the same period in 2020.

Interest expense, net

Interest expense includes commitment fees, amortization of deferred financing costs, and interest on outstanding indebtedness. Interest expense decreased from $0.5 million for the three months ended March 31, 2020, to $0.3 million for the three months ended March 31, 2021 primarily due to lower outstanding borrowings compared to the same period in the prior year.

(Loss) gain on derivative contracts, net

For the three months ended March 31, 2021, we recorded a net loss on derivative contracts of $1.4 million, consisting of net realized losses on settlements of $0.8 million and unrealized mark-to-market losses of $0.6 million. For the three months ended March 31, 2020, we recorded a net gain on derivative contracts of $9.6 million, consisting of unrealized mark-to-market gains of $7.9 million and net realized gains on settlements of $1.7 million.


INFORMATION ABOUT SEQUEL

General

SEG-TRD LLC, a Delaware limited liability company (“SEG-I”), was formed on June 9, 2017, for the purpose of entering into a drilling financing arrangement with Tracker. SEG-TRD II LLC, a Delaware limited liability company (“SEG-II” and collectively with SEG-I, “Sequel”), as formed on the October 19, 2018, for the purpose of entering into a drilling financing arrangement with Tracker. SEG-I and SEG-II have no other operations.

As of December 31, 2020, Sequel’s estimated proved reserves totaled 6,419 MBoe. For the year ended December 31, 2020, Sequel had total revenues of approximately $36.8 million and revenues in excess of direct operating expenses of approximately $26.8 million. For the three months ended March 31, 2021, Sequel had total revenues of approximately $9.4 million and revenues in excess of direct operating expenses of approximately $7.4 million.

Properties

The following sets forth information about Sequel’s properties and operations.

Proved Reserves

All of Sequel’s oil and gas reserves are in the Midland Basin of west Texas. Unaudited information concerning the estimated net quantities of Sequel’s proved reserves and the standardized measure of future net cash flows from the reserves is presented in Note 6, Supplemental Oil and Gas Reserve Information (Unaudited), in the Statements of Revenues and Direct Operating Expenses of SEG-TRD LLC and SEG-TRD II LLC Properties included elsewhere in this proxy statement. Sequel’s reserve estimates have been prepared internally by Sequel management. Set forth below is a summary of Sequel’s oil and natural gas reserves as of December 31, 2020. Sequel does not have any long-term supply or similar agreements with foreign governments or authorities.
 
Estimated Proved Reserves Quantities and Standardized Measure

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 OilNatural Gas LiquidsNatural GasTotalStandardized Measure of Discounted Future Net Cash Flows ($ in thousands)
 (MBbl)(MBbl)(MMcf)
(MBOE) (1)
Proved developed1,398 2,491 15,186 6,419 $34,977 
Proved undeveloped— — — — — 
Total proved1,398 2,491 15,186 6,419 $34,977 
(1)Barrels of oil equivalent have been calculated on the basis of six Mcf of natural gas equal to one Boe.

 OilNatural Gas LiquidsNatural GasTotal
 (MBbl)(MBbl)(MMcf)
(MBOE) (1)
Proved reserves at December 31, 20192,247 2,413 14,341 7,050 
Revisions(184)667 4,490 1,231 
Production(665)(589)(3,645)(1,862)
Proved reserves at December 31, 20201,398 2,491 15,186 6,419 
Proved developed reserves:
December 31, 20201,398 2,491 15,186 6,419 
(1)Barrels of oil equivalent have been calculated on the basis of six Mcf of natural gas equal to one Boe.
Uncertainties are inherent in estimating quantities of proved reserves, including many risk factors beyond Sequel’s control. Reserve engineering is a subjective process of estimating subsurface accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and the interpretation thereof. Thus, estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production after the date of the estimates, as well as economic factors such as change in commodity prices and drilling, completion and operating costs, may require revision of such estimates. Accordingly, oil and natural gas quantities ultimately recovered will vary from reserve estimates.
 
Proved Undeveloped Reserves

At December 31, 2020, Sequel had no proved undeveloped locations.

Preparation of Reserve Estimates

Sequel management prepares its annual reserve estimates. Proved reserves were estimated in accordance with guidelines established by the SEC, which require that reserve estimates be prepared under existing economic and operating conditions based upon the 12-month unweighted average of the first-day-of -the month prices. The primary inputs to the reserve estimation process are provided by Tracker and include relevant technical information, financial data, ownership interest and production data. Sequel owns well-bore interests in certain properties that are operated by Tracker.

Gross and Net Productive Wells

As of December 31, 2020, Sequel’s total gross and net productive wells were as follows:

 
Oil(1)
Natural Gas(1)
Total(1)
Gross WellsNet WellsGross WellsNet WellsGross WellsNet Wells
Operated— — — — — — 
Non-operated(2)
28 15.9 — — 28 15.9 
                                                                                                                                                         
(1)A gross well is a well in which a working interest is owned. The number of net wells represents the sum of fractions of working interests Sequel owns in gross wells. Productive wells are those that produce commercial quantities of hydrocarbons.
(2)All wells are operated by Tracker.
Acreage

Sequel does not hold any acreage as it holds only well-bore interests.

Exploratory Wells and Development Wells


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Set forth below for the two years ended December 31, 2020 is information concerning the number of wells Sequel completed during the years indicated.
 
Net Exploratory
Wells Drilled
Net Development
Wells Drilled
Total Net Productive and Dry Wells Drilled
YearProductiveDryProductiveDry
2020— — 0.7 — 0.7 
2019— — 8.2 — 8.2 

Drilling Commitments

Tracker is the operator of 100% of the Sequel wells. Tracker began drilling operations in Irion County, Texas, in 2017 and has been developing the acreage with the last completion occurring in January 2020. Sequel began participation in Tracker-operated properties in 2017 and completed this participation program in January 2020 and has no further drilling commitments.

Management’s Discussion of Sequel

Sequel’s revenues and direct operating expenses information for the years ended December 31, 2020 and 2019 are derived from Sequel’s audited statements of revenues and direct operating expenses included in this proxy statement. Sequel’s revenues and direct operating expenses information for the three months ended March 31, 2021 are derived from Sequel’s unaudited statements of revenues and direct operating expenses that are included in this proxy statement. This information is only a summary and you should read it in conjunction with the Statements of Revenues and Direct Operating Expenses of Sequel and related notes included in this proxy statement. See “Statements of Revenues and Direct Operating Expenses of SEG-TRD LLC and SEG-TRD II LLC Properties” beginning on page F-52. The financial data may not be indicative of future performance.

Year Ended December 31,Three Months Ended
20202019March 31, 2021
(In thousands)(unaudited)
Oil and gas revenues$36,793 $37,432 $9,379 
Direct operating expenses9,974 7,991 1,930 
Revenues in excess of direct operating expenses$26,819 $29,441 $7,449 

Average oil prices received were approximately $38.42 per barrel and $53.80 per barrel, respectively, for the years ended December 31, 2020 and 2019. Average natural gas prices were approximately $1.13 per Mcf and $1.36 per Mcf, respectively for the years ended December 31, 2021 and 2020. Average natural gas liquids prices received were $12.09 per Bbl and $13.50 per Bbl, respectively, during the years ended December 31, 2020 and 2019. Average oil prices received were approximately $56.80 per barrel for the three months ended March 31, 2021. Average natural gas prices were approximately $2.25 per Mcf for the three months ended March 31, 2021. Average natural gas liquids prices received were $24.56 per Bbl during the three months ended March 31, 2021.

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On March 31, 2021, Earthstone, EEH, Tracker and RoyaltyCo entered into the Tracker Agreement. Also, on March 31, 2021, Earthstone, EEH, SEG-I and SEG II entered into the Sequel Agreement.

Pursuant to the Tracker Agreement, EEH will acquire (the “Tracker Acquisition”) interests in oil and gas leases and related property of Tracker located in Irion County, Texas, for a purchase price (the “Tracker Purchase Price”) of $29.6 million in cash, subject to customary purchase price adjustments, and 4.7 million shares (the “Tracker Shares”) of Class A Common Stock. The cash portion of the Tracker Purchase Price is subject to adjustments with an effective date of March 1, 2021. Upon execution of the Tracker Agreement, EEH deposited $2.96 million in cash into a third-party escrow account as a deposit, which will be credited against the purchase price upon closing of the Tracker Acquisition.

Pursuant to the Sequel Agreement, EEH will acquire (the “Sequel Acquisition” and with the Tracker Acquisition, the “Transaction”) certain well-bore interests and related equipment held by Sequel that are part of a joint development agreement between Tracker and Sequel involving portions of the acreage covered by the Tracker Agreement for a purchase price (the “Sequel Purchase Price”) of $52.0 million in cash, subject to customary purchase price adjustments, and 1.5 million shares (the “Sequel Shares” and with the Tracker Shares, the “Acquisition Shares”) of Class A Common Stock. The cash portion of the Sequel Purchase Price is subject to adjustments with an effective date of March 1, 2021. Upon execution of the Sequel Agreement, EEH deposited $5.2 million in cash into a third-party escrow account as a deposit, which will be credited against the purchase price upon closing of the Sequel Acquisition.

Each of the Tracker Agreement and the Sequel Agreement contains customary representations and warranties for transactions of this nature. The Tracker Agreement and the Sequel Agreement also contain customary pre-closing covenants of the parties, including the obligation of the Tracker and Sequel to conduct their business in the ordinary course consistent with past practice and to refrain from taking certain specified actions, subject to certain exceptions.

The Tracker Acquisition and the Sequel Acquisition will be accounted for as asset acquisitions in accordance with Accounting Standards Codification Topic 805, Business Combinations (referred to as “ASC 805”). The fair value of the consideration paid by us and allocation of that amount to the underlying Tracker Assets and Sequel Assets acquired, on a relative fair value basis, will be recorded on our books as of the date of the closing of the Tracker Acquisition and the Sequel Acquisition. Additionally, costs directly related to the transaction will be capitalized as a component of the purchase price. The operating results of Tracker and Sequel will be consolidated in our financial statements beginning on the date of the closing of the Tracker Acquisition and the Sequel Acquisition, respectively. The pro forma financial statements have been prepared to reflect the transaction accounting adjustments to Earthstone’s historical condensed consolidated financial information in order to account for the Transaction and will include the assumption of liabilities for acquisition-related expenses and the recognition of the estimated tax impact of the pro forma adjustments.

As previously disclosed in its Current Report on Form 8-K filed on January 13, 2021 with the SEC, on January 7, 2021, Earthstone completed the acquisition (the “IRM Acquisition”) of all of the issued and outstanding limited liability company interests in Independence and certain wholly owned subsidiaries as contemplated in a purchase and sale agreement dated December 17, 2020. On February 24, 2021, Earthstone filed a Current Report on Form 8-K/A for the purpose of providing unaudited pro forma condensed combined financial statements giving effect to the IRM Acquisition, as required by Item 9.01(b) of Form 8-K. The IRM Acquisition was accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer.

The unaudited pro forma condensed combined balance sheet as of March 31, 2021 gives effect to the Transaction as if it had been completed on March 31, 2021. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 and the three months ended March 31, 2021 give effect to IRM Acquisition and the Transaction (collectively, the “Acquisitions”) as if they had been completed on January 1, 2020. Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the pro forma condensed combined financial statements. As of the date of issuance of the unaudited pro forma condensed combined financial information, Earthstone has not completed the detailed valuation study necessary to arrive at the required final estimates of the fair value of the assets to be acquired and liabilities assumed.

The unaudited pro forma condensed combined balance sheet does not purport to represent what Earthstone’s financial position would have been had the Transaction actually been consummated on March 31, 2021. The unaudited pro forma condensed combined statements of operations do not purport to represent what Earthstone’s results of operations would have been had the Acquisitions actually been consummated on January 1, 2020. The unaudited pro forma condensed combined financial information is not indicative of Earthstone’s future financial position or results of operations and does not reflect future events that may occur after the Acquisitions, including, but not limited to, the anticipated realization of ongoing savings from operating efficiencies, or offsetting unforeseen incremental costs.

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The unaudited pro forma condensed combined balance sheet as of March 31, 2021 has been derived from and should be read in conjunction with:
the unaudited historical condensed consolidated balance sheet of Earthstone as of March 31, 2021 included in its Quarterly Report on Form 10-Q for quarter ended March 31, 2021; and
the unaudited historical condensed consolidated balance sheet of Tracker as of March 31, 2021 included in this proxy statement.
The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2021 has been derived from:
the unaudited historical condensed consolidated statement of operations of Earthstone for the three months ended March 31, 2021 included in its Quarterly Report on Form 10-Q for quarter ended March 31, 2021;
the unaudited historical condensed consolidated statement of operations of Independence for the period January 1, 2021 through January 7, 2021, based on the allocated number of days from the entire month’s results;

the unaudited historical condensed consolidated statement of operations of Tracker for the three months ended March 31, 2021 included in this proxy statement; and
the unaudited historical statements of revenues and direct expenses of Sequel for the three months ended March 31, 2021 included in this proxy statement.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020 has been derived from:
the audited historical consolidated statement of operations of Earthstone for the year ended December 31, 2020 included in its 2020 Annual Report on Form 10-K for the year ended December 31, 2020;
the audited historical consolidated statement of operations of Independence for the year ended December 31, 2020 included in this proxy statement;
the audited historical consolidated statement of operations of Tracker for the year ended December 31, 2020 included in this proxy statement; and
the audited historical statements of revenues and direct expenses of Sequel for the year ended December 31, 2020 included in this proxy statement.


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EARTHSTONE ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2021
(In thousands, except share and per share amounts)
ASSETSEarthstone HistoricalTracker HistoricalTransaction Accounting AdjustmentsNotesEarthstone Pro Forma as Adjusted
Current assets:
Cash$1,447 $4,677 $(4,677)(a)$1,447 
Accounts receivable:
Oil and natural gas revenues33,134 3,086 (3,086)(a)33,134 
Joint interest billings and other, net of allowance6,497 — — 6,497 
Inventory— 195 (195)(a)— 
Derivative asset196 — — 196 
Prepaid expenses and other current assets3,204 112 (112)(a)3,204 
Total current assets44,478 8,070 (8,070)44,478 
Oil and gas properties, successful efforts method:
Proved properties1,253,689 127,083 (54,178)(b)1,393,946 
66,149 (c)
1,203 (d)
Unproved properties233,767 4,900 (4,900)(b)233,767 
Land (surface rights)5,382 — — 5,382 
Total oil and gas properties1,492,838 131,983 8,274 1,633,095 
Accumulated depreciation, depletion and amortization(315,460)(65,601)65,601