Form 8-K - Current report

PERMIAN RESOURCES CORPORATION

Date: November 8, 2023

/s/ Guy M. Oliphint

Guy M. Oliphint

Executive Vice President and Chief Financial Officer

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 8, 2023

Permian Resources Corporation

(Exact name of registrant as specified in its charter)

Delaware

001-37697

47-5381253

(State or other jurisdiction

of incorporation)

(Commission

File Number)

(I.R.S. Employer

Identification Number)

300 N. Marienfeld St., Ste 1000

Midland, Texas

79701

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (432) 695-4222

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligations of the registrant under any of the following provisions:

☐

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange

on which registered

Class A Common Stock, par value $0.0001 per share

The New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Introductory Note

On November 3, 2023, Permian Resources Corporation (the “Company”) filed a Current Report on Form 8-K with the U.S. Securities and Exchange Commission announcing the consummation of a previously announced acquisition of Earthstone Energy, Inc., a Delaware corporation (“Earthstone”), and its subsidiaries (the “Merger”) pursuant to an Agreement and Plan of Merger, dated as of August 21, 2023, by and among the Company, Smits Merger Sub I Inc., a Delaware corporation and a direct wholly owned subsidiary of the Company, Smits Merger Sub II LLC, a Delaware limited liability company and a direct wholly owned subsidiary of the Company, Permian Resources Operating, LLC, a Delaware limited liability company, Earthstone and Earthstone Energy Holdings, LLC, a Delaware limited liability company. The Merger was completed on November 1, 2023. On September 19, 2023, the Company filed a Current Report on Form 8-K to provide certain historical financial statements and pro forma financial information relating to the Merger. This Current Report on Form 8-K is being filed to provide certain additional pro forma financial information relating to the Merger.

Item 8.01.

Other Events.

The unaudited condensed consolidated financial statements of Earthstone and the unaudited pro forma combined financial statements of the Company, in each case as of and for the nine months ended September 30, 2023, are filed herewith as Exhibits 99.1 and 99.2, respectively, to this Current Report on Form 8-K and incorporated herein by reference.

Item 9.01.

Financial Statements and Exhibits.

(d) Exhibits.


Exhibit Number		Description of Exhibit

99.1		Unaudited Condensed Consolidated Financial Statements of Earthstone.

99.2		Unaudited Pro Forma Combined Financial Statements of the Company.

104		Cover Page Interactive Data File (embedded within the Inline XBRL document).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Exhibit 99.1

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share amounts)


	September 30, 2023			December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	16,592		$	—
Accounts receivable:
Oil, natural gas, and natural gas liquids revenues		177,353			161,531
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2023 and December 31, 2022, respectively		32,574			34,549
Derivative asset		1,542			31,331
Prepaid expenses and other current assets		40,323			18,854

Total current assets		268,384			246,265

Oil and gas properties, successful efforts method:
Proved properties		5,488,844			3,987,901
Unproved properties		305,706			282,589
Land		6,338			5,482

Total oil and gas properties		5,800,888			4,275,972

Accumulated depreciation, depletion and amortization		(955,434	)		(619,196	)

Net oil and gas properties		4,845,454			3,656,776

Other noncurrent assets:
Office and other equipment, net of accumulated depreciation of $6,601 and $5,273 at September 30, 2023 and December 31, 2022, respectively		6,724			5,394
Derivative asset		507			9,117
Operating lease right-of-use assets		6,573			4,569
Other noncurrent assets		18,913			15,280

TOTAL ASSETS	$	5,146,555		$	3,937,401

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	61,995		$	91,815
Revenues and royalties payable		209,589			163,368
Accrued expenses		221,366			80,942
Asset retirement obligation		415			948
Derivative liability		50,369			14,053
Advances		6,338			7,312
Operating lease liabilities		923			842
Finance lease liabilities		1,359			802
Other current liabilities		23,689			16,202

Total current liabilities		576,043			376,284
Noncurrent liabilities:
Long-term debt, net		1,722,066			1,053,879
Deferred tax liability		193,266			138,336


Asset retirement obligation		32,210		29,611
Derivative liability		7,612		—
Operating lease liabilities		3,286		3,889
Finance lease liabilities		1,538		876
Other noncurrent liabilities		28,633		10,509

Total noncurrent liabilities		1,988,611		1,237,100

Commitments and Contingencies (Note 13)
Equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding		—		—
Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 106,443,591 and 105,547,139 issued and outstanding at September 30, 2023 and December 31, 2022, respectively		106		106
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,257,641 and 34,259,641 issued and outstanding at September 30, 2023 and December 31, 2022, respectively		34		34
Additional paid-in capital		1,348,580		1,346,463
Retained earnings		472,659		292,711

Total Earthstone Energy, Inc. equity		1,821,379		1,639,314
Noncontrolling interest		760,522		684,703

Total equity		2,581,901		2,324,017

TOTAL LIABILITIES AND EQUITY	$	5,146,555	$	3,937,401

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
REVENUES
Oil	$	366,574		$	332,036		$	978,949		$	756,420
Natural gas		39,275			113,937			89,942			233,020
Natural gas liquids		69,967			85,522			190,069			210,756

Total revenues		475,816			531,495			1,258,960			1,200,196

OPERATING COSTS AND EXPENSES
Lease operating expense		101,156			75,829			276,736			147,974
Production and ad valorem taxes		38,419			40,219			103,377			87,729
Depreciation, depletion and amortization		123,059			90,880			343,799			191,669
Impairment expense		—			—			854			—
General and administrative expense		26,508			14,188			64,079			40,571
Transaction costs		1,503			1,778			1,904			12,118
Accretion of asset retirement obligation		683			758			1,958			1,863
Exploration expense		488			2,248			7,036			2,340

Total operating costs and expenses		291,816			225,900			799,743			484,264

Gain on sale of oil and gas properties		1,290			14,803			47,404			14,803
Income from operations		185,290			320,398			506,621			730,735
OTHER INCOME (EXPENSE)
Interest expense, net		(34,232	)		(20,988	)		(79,180	)		(42,931	)
Write-off of deferred financing costs		—			—			(5,109	)		—
(Loss) gain on derivative contracts, net		(45,047	)		60,286			(111,820	)		(141,101	)
Other income, net		70			134			882			430

Total other income (expense)		(79,209	)		39,432			(195,227	)		(183,602	)

Income before income taxes		106,081			359,830			311,394			547,133
Income tax expense		(18,930	)		(60,518	)		(55,584	)		(81,673	)

Net income		87,151			299,312			255,810			465,460
Less: Net income attributable to noncontrolling interest		25,793			87,856			75,862			142,597

Net income attributable to Earthstone Energy, Inc.	$	61,358		$	211,456		$	179,948		$	322,863

Net income per common share attributable to Earthstone Energy, Inc.:
Basic	$	0.58		$	2.01		$	1.69		$	3.91

Diluted	$	0.57		$	1.94		$	1.67		$	3.61

Weighted average common shares outstanding:
Basic		106,332,278			105,254,778			106,172,873			82,483,635

Diluted		108,285,229			109,278,661			107,741,704			92,844,854

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(In thousands, except share amounts)


	Issued Shares
	Series A Convertible Preferred Stock		Class A Common Stock			Class B Common Stock			Series A Convertible Preferred Stock		Class A Common Stock		Class B Common Stock		Additional Paid-in Capital			Retained Earnings		Total Earthstone Energy, Inc. Equity			Noncontrolling Interest			Total Equity
At December 31, 2022		—		105,547,139			34,259,641		$	—	$	106	$	34	$	1,346,463		$	292,711	$	1,639,314		$	684,703		$	2,324,017
Stock-based compensation expense		—		—			—			—		—		—		3,844			—		3,844			—			3,844
Vesting of restricted stock units, net of taxes paid		—		756,429			—			—		—		—		—			—		—			—			—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings		—		460,473			—			—		—		—		(6,342	)		—		(6,342	)		—			(6,342	)
Cancellation of Treasury shares		—		(460,473	)		—			—		—		—		—			—		—			—			—
Net income		—		—			—			—		—		—		—			60,548		60,548			25,663			86,211

At March 31, 2023		—		106,303,568			34,259,641			—	$	106	$	34	$	1,343,965		$	353,259	$	1,697,364			710,366		$	2,407,730

Stock-based compensation expense		—		—			—			—		—		—		3,937			—		3,937			—			3,937
Vesting of restricted stock units, net of taxes paid		—		131,381			—			—		—		—		—			—		—			—			—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings		—		56,683			—			—		—		—		(799	)		—		(799	)		—			(799	)
Cancellation of Treasury shares		—		(56,683	)		—			—		—		—		—			—		—			—			—
Class B Common Stock converted to Class A Common Stock		—		2,000			(2,000	)		—		—		—		43			—		43			(43	)		—
Settlement of Chisholm escrow shares		—		(105,894	)		—			—		—		—		(1,489	)		—		(1,489	)		—			(1,489	)
Net income		—		—			—			—		—		—		—			58,042		58,042			24,406			82,448

At June 30, 2023		—		106,331,055			34,257,641			—	$	106	$	34	$	1,345,657		$	411,301	$	1,757,098			734,729		$	2,491,827

Stock-based compensation expense		—		—			—			—		—		—		3,912			—		3,912			—			3,912
Vesting of restricted stock units, net of taxes paid		—		112,536			—			—		—		—		—			—		—			—			—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings		—		48,870			—			—		—		—		(989	)		—		(989	)		—			(989	)
Cancellation of Treasury shares		—		(48,870	)		—			—		—		—		—			—		—			—			—
Net income		—		—			—			—		—		—		—			61,358		61,358			25,793			87,151

At September 30, 2023		—		106,443,591			34,257,641		$	—	$	106	$	34	$	1,348,580		$	472,659	$	1,821,379			760,522		$	2,581,901


	Issued Shares
	Series A Convertible Preferred Stock			Class A Common Stock			Class B Common Stock			Series A Convertible Preferred Stock		Class A Common Stock		Class B Common Stock		Additional Paid-in Capital			(Accumulated Deficit)			Total Earthstone Energy, Inc. Equity			Noncontrolling Interest			Total Equity
At December 31, 2021		—			53,467,307			34,344,532		$	—	$	53	$	34	$	718,181		$	(159,774	)	$	558,494		$	487,767		$	1,046,261
Stock-based compensation expense—equity portion		—			—			—			—		—		—		2,301			—			2,301			—			2,301
Shares issued in connection with Chisholm Acquisition		—			19,417,476			—			—		19		—		249,496			—			249,515			—			249,515
Vesting of restricted stock units, net of taxes paid		—			483,251			—			—		1		—		(1	)		—			—			—			—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings		—			286,892			—			—		—		—		(3,898	)		—			(3,898	)		—			(3,898	)
Cancellation of Treasury shares		—			(286,892	)		—			—		—		—		—			—			—			—			—
Class B Common Stock converted to Class A Common Stock		—			72,766			(72,766	)		—		—		—		1,014			—			1,014			(1,014	)		—
Net loss		—			—			—			—		—		—		—			(33,478	)		(33,478	)		(18,399	)		(51,877	)

At March 31, 2022		—			73,440,800			34,271,766			—	$	73	$	34	$	967,093		$	(193,252	)	$	773,948		$	468,354		$	1,242,302

Stock-based compensation expense—equity portion		—			—			—			—		—		—		2,693			—			2,693			—			2,693
Issuance of Series A Convertible Preferred Stock, net of offering costs of $674		280,000			—			—			—		—		—		279,326			—			279,326			—			279,326
Shares issued in connection with Bighorn Acquisition		—			5,650,977			—			—		6		—		77,751			—			77,757			—			77,757
Vesting of restricted stock units, net of taxes paid		—			115,521			—			—		—		—		—			—			—			—			—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings		—			48,232			—			—		—		—		(719	)		—			(719	)		—			(719	)
Cancellation of Treasury shares		—			(48,232	)		—			—		—		—		—			—			—			—			—
Class B Common Stock converted to Class A Common Stock		—			10,125			(10,125	)		—		—		—		149			—			149			(149	)		—
Net income		—			—			—			—		—		—		—			144,885			144,885			73,140			218,025

At June 30, 2022		280,000			79,217,423			34,261,641			—	$	79	$	34	$	1,326,293		$	(48,367	)	$	1,278,039		$	541,345		$	1,819,384

Stock-based compensation expense—equity portion		—			—			—			—		—		—		2,745			—			2,745			—			2,745
Conversion of Series A Convertible Preferred Stock		(280,000	)		25,225,225			—			—		25		—		(25	)		—			—			—			—
Shares issued in connection with Titus Acquisition		—			3,857,015			—			—		4		—		53,570			—			53,574			—			53,574
Vesting of restricted stock units, net of taxes paid		—			117,263			—			—		—		—		—			—			—			—			—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings		—			48,073			—			—		—		—		(552	)		—			(552	)		—			(552	)
Cancellation of treasury shares		—			(48,073	)		—			—		—		—		—			—			—			—			—
Class B Common Stock converted to Class A Common Stock		—			—			—			—		—		—		(5	)		—			(5	)		5			—
Net income		—			—			—			—		—		—		—			211,456			211,456			87,856			299,312

At September 30, 2022		—			108,416,926			34,261,641			—	$	108	$	34	$	1,382,026		$	163,089		$	1,545,257			629,206		$	2,174,463

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	For the Nine Months Ended September 30,
	2023			2022
Cash flows from operating activities:
Net income	$	255,810		$	465,460
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		343,799			191,669
Impairment of oil and gas properties		854			—
Accretion of asset retirement obligations		1,958			1,863
Settlement of asset retirement obligations		(1,727	)		(664	)
Gain on sale of oil and gas properties		(47,404	)		(14,803	)
Gain on sale of office and other equipment		(33	)		(152	)
Total loss on derivative contracts, net		111,820			141,101
Operating portion of net cash paid in settlement of derivative contracts		(29,494	)		(169,708	)
Stock-based compensation—equity and liability awards		26,977			15,112
Deferred income taxes		54,930			77,591
Write-off of deferred financing costs		5,109			—
Amortization of deferred financing costs		5,704			3,723
Changes in assets and liabilities (net of assets and liabilities acquired):
(Increase) decrease in accounts receivable		63,523			(189,504	)
(Increase) decrease in prepaid expenses and other current assets		(11,307	)		(16,546	)
Increase (decrease) in accounts payable and accrued expenses		(43,326	)		92,450
Increase (decrease) in revenues and royalties payable		26,273			94,260
Increase (decrease) in advances		(1,568	)		11,317

Net cash provided by operating activities		761,898			703,169

Cash flows from investing activities:
Acquisition of oil and gas properties, net of cash acquired		(924,482	)		(1,518,269	)
Additions to oil and gas properties		(522,404	)		(325,109	)
Additions to office and other equipment		(840	)		(1,694	)
Proceeds from sales of oil and gas properties		57,353			26,165

Net cash used in investing activities		(1,390,373	)		(1,818,907	)

Cash flows from financing activities:
Proceeds from borrowings under Credit Agreement		3,467,269			2,348,728
Repayments of borrowings under Credit Agreement		(3,037,022	)		(2,276,996	)
Proceeds from issuance of 8.000% Senior Notes due 2027, net		—			537,256
Proceeds from issuance of 9.875% Senior Notes due 2031, net		480,304			—
Proceeds from term loan		—			244,209
Repayment of term loan		(250,000	)		—
Proceeds from issuance of Series A Convertible Preferred Stock, net of offering costs of $674		—			279,326
Cash paid related to the exchange and cancellation of Class A Common Stock		(8,131	)		(5,168	)
Cash paid for finance leases		(599	)		(408	)
Deferred financing costs		(6,754	)		(15,222	)

Net cash provided by financing activities		645,067			1,111,725

Net increase (decrease) in cash and cash equivalents		16,592			(4,013	)
Cash and cash equivalents at beginning of period		—			4,013

Cash and cash equivalents at end of period	$	16,592		$	—

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation and Summary of Significant Accounting Policies

Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with its consolidated subsidiaries, the “Company”), is a growth-oriented independent oil and natural gas development and production company. In addition, the Company is active in corporate mergers and the acquisition of oil and natural gas properties that have production and future development opportunities. The Company’s operations are all in the upstream segment of the oil and natural gas industry and all its properties are onshore in Texas and New Mexico.

Earthstone is the sole managing member of Earthstone Energy Holdings, LLC, a Delaware limited liability company (together with its wholly-owned consolidated subsidiaries, “EEH”), with a controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Energy Corp., a corporation organized under the laws of British Columbia (“Lynden Corp”), and Lynden Corp’s wholly-owned consolidated subsidiary, Lynden USA Inc., a Utah corporation (“Lynden US”), collectively own a 75.7% interest in EEH. The Company consolidates the financial results of EEH and presents a noncontrolling interest in the Condensed Consolidated Financial Statements representing the economic interests of EEH’s members other than Earthstone and Lynden US. Each of the outstanding shares of Class A common stock, $0.001 par value per share of Earthstone (the “Class A Common Stock”), has a corresponding unit of limited liability company interests denominated as a common unit in EEH (an “EEH Unit”). Each of the outstanding shares of Class B common stock, $0.001 par value per share of Earthstone (the “Class B Common Stock” and with the Class A Common Stock, “Common Stock”), has a corresponding EEH Unit and collectively represent the noncontrolling interests in the Condensed Consolidated Financial Statements.

At any time, at the holder’s discretion, a holder of an EEH Unit and a share of Class B Common Stock may receive a share of Class A Common Stock in exchange for an EEH Unit and a corresponding share of Class B Common Stock, resulting in the immediate cancellation of both the EEH Unit and share of Class B Common Stock exchanged. As of September 30, 2023, outstanding common shares of Earthstone, along with the equal number of corresponding outstanding EEH Units, were approximately 140.7 million, consisting of 106.4 million shares of Class A Common Stock and 34.3 million shares of Class B Common Stock.

The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying unaudited Condensed Consolidated Financial Statements and notes should be read in conjunction with the financial statements and notes included in Earthstone’s 2022 Annual Report on Form 10-K.

The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. Any such adjustments are of a normal, recurring nature. The Company’s Condensed Consolidated Balance Sheet as of December 31, 2022 is derived from the audited Consolidated Financial Statements at that date.

For the purposes of these Condensed Consolidated Financial Statements, short-term investments, which have an original maturity of three months or less, are considered cash equivalents.

Permian Resources Merger Agreement

On August 21, 2023, Earthstone entered into an agreement and plan of merger (the “Merger Agreement”) with Permian Resources Corporation, a Delaware corporation (“PR”), and certain of its subsidiaries, pursuant to which, subject to the conditions of the Merger Agreement, PR will acquire the Company in an all-stock transaction (“Merger”). Upon completion of the Merger Agreement, each outstanding share of Class A Common Stock will be converted into the right to receive 1.446 shares of PR’s Class A common stock, par value $0.0001 per share (the “PR Class A Common Stock”), and each share of Class B Common Stock will be converted into the right to receive 1.446 shares of PR’s Class C common stock, par value $0.0001 per share (the “PR Class C Common Stock”). On October 30, 2023, at the special meeting of stockholders of Earthstone, the stockholders of Earthstone approved the Merger Agreement and the transactions contemplated thereby, among other proposals. The parties to the Merger Agreement expect the Merger to close on or about November 1, 2023, subject to other customary closing conditions. The consolidated financial statements and notes presented herein have been prepared under the assumption that the Company will continue as a going concern for the next 12 months.

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 2. Noncontrolling Interest

Earthstone consolidates the financial results of EEH and its subsidiaries and records a noncontrolling interest for the economic interest in Earthstone held by the members of EEH other than Earthstone and Lynden US. Net income attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022 represents the portion of net income attributable to the economic interest in the Company held by the members of EEH other than Earthstone and Lynden US. Noncontrolling interest in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 represents the portion of net assets of the Company attributable to the members of EEH other than Earthstone and Lynden US.

The following table presents the changes in noncontrolling interest for the nine months ended September 30, 2023:


	EEH Units Held By Earthstone and Lynden US			%			EEH Units Held By Others			%			Total EEH Units Outstanding
As of December 31, 2022		105,547,139			75.5	%		34,259,641			24.5	%		139,806,780
EEH Units exchanged for shares of Class A Common Stock		2,000						(2,000	)					—
EEH Units cancelled in connection with the settlement of Chisholm escrow shares		(105,894	)					—						(105,894	)
EEH Units issued in connection with the vesting of restricted stock units and performance units		1,000,346						—						1,000,346

As of September 30, 2023		106,443,591			75.7	%		34,257,641			24.3	%		140,701,232

Note 3. Fair Value Measurements

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.

The three-level fair value hierarchy for disclosure of fair value measurements defined by FASB ASC Topic 820 is as follows:

Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the nine months ended September 30, 2023.

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fair Value on a Recurring Basis

Derivative Financial Instruments

Derivative financial instruments are carried at fair value and measured on a recurring basis. The derivative financial instruments consist of fixed price swaps, basis swaps, costless collars and deferred premium put options. The Company’s commodity price hedges are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.

The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.

Share-based Compensation Liability

Certain of our performance-based stock awards (“PSUs”) and performance-based restricted stock units (“PRSUs” and collectively with the PSUs, “performance units”) may be payable in cash. The Company classifies the awards that may be settled in cash as liability awards. These awards are valued quarterly utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. The inputs for the Monte Carlo model are designated as Level 2 within the valuation hierarchy. The share-based compensation liability related to the performance unit liability awards is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2023.

The following table summarizes the fair value of the Company’s financial assets and liabilities, by level within the fair-value hierarchy (in thousands):


September 30, 2023	Level 1		Level 2		Level 3		Total
Financial assets
Derivative asset—current	$	—	$	1,542	$	—	$	1,542
Derivative asset—noncurrent		—		507		—		507

Total financial assets	$	—	$	2,049	$	—	$	2,049

Financial liabilities
Derivative liability—current	$	—	$	50,369	$	—	$	50,369
Derivative liability—noncurrent		—		7,612		—		7,612
Share-based compensation liability—current		—		20,359		—		20,359
Share-based compensation liability—noncurrent		—		5,153		—		5,153

Total financial liabilities	$	—	$	83,493	$	—	$	83,493

December 31, 2022
Financial assets
Derivative asset—current	$	—	$	31,331	$	—	$	31,331
Derivative asset—noncurrent		—		9,117		—		9,117

Total financial assets	$	—	$	40,448	$	—	$	40,448

Financial liabilities
Derivative liability—current	$	—	$	14,053	$	—	$	14,053
Share-based compensation liability—current		—		14,411		—		14,411
Share-based compensation liability—noncurrent		—		10,357		—		10,357

Total financial liabilities	$	—	$	38,821	$	—	$	38,821

Other financial instruments include cash, accounts receivable and payable, and revenue royalties. The carrying amount of these instruments approximates fair value because of their short-term nature. The Company’s revolving credit facility obligation bears interest at floating market rates, therefore carrying amounts and fair value of any outstanding amounts would be approximately equal. The 2027 Notes and 2031 Notes bear interest at fixed rates.

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fair Value on a Nonrecurring Basis

The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties, business combinations and asset retirement obligations. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if events or changes in certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment were observed during the nine months ended September 30, 2023. See further discussion in Note 6. Oil and Natural Gas Properties.

Items Not Recorded at Fair Value

The carrying amounts reported on the unaudited consolidated balance sheets for cash, accounts receivable, prepaid expenses, other current assets, accounts payable, revenues and royalties payable, accrued expenses and other current liabilities approximate their fair values.

The Company has not elected to account for its debt instruments at fair value. Borrowings under the revolving tranche and term loan tranche of the Company’s credit facility bear interest at floating market rates, therefore the carrying amounts and fair values were approximately equal as of September 30, 2023 and December 31, 2022. The carrying value of the 2027 Notes, net of $9.0 million of deferred financing costs, of $541.0 million and accrued interest of $20.3 million had an estimated fair value of $563.1 million as of September 30, 2023. The carrying value of the 2031 Notes, net of the $10.0 million original issue discount and $9.3 million of deferred financing costs, of $480.7 million and accrued interest of $12.5 million had an estimated fair value of $546.7 million as of September 30, 2023. There were no other debt instruments outstanding at September 30, 2023.

Note 4. Derivative Financial Instruments

Commodity Derivative Instruments

The Company’s hedging activities primarily consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swap agreements, costless collars and deferred premium put options. Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Costless collars set both a maximum (sold ceiling) and a minimum (bought floor) future price. A deferred premium put option represents a bought floor except, unlike a standard put option, the premium is not paid until the expiration of the option. Consistent with its hedging policy, the Company has entered into a series of derivative instruments to hedge a portion of its expected oil and natural gas production through December 31, 2024 and maintains certain natural gas basis swaps through December 31, 2025. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, the Company believes these instruments reduce its exposure to oil and natural gas price fluctuations and, thereby, allow the Company to achieve a more predictable cash flow. The Company does not enter into derivative instruments for trading or other speculative purposes.

The Company’s derivative instruments are cash flow hedge transactions in which it is hedging the variability of cash flow related to a forecasted transaction. These transactions are recorded in the Condensed Consolidated Financial Statements in accordance with FASB ASC Topic 815. The Company has accounted for these transactions using the mark-to-market accounting method. Generally, the Company incurs accounting losses on derivatives during periods where prices are rising and gains during periods where prices are falling which may cause significant fluctuations in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.

The Company nets its derivative instrument fair value amounts executed with each counterparty pursuant to an International Swap Dealers Association Master Agreement (“ISDA”), which provides for net settlement over the term of the contract. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table sets forth the Company’s open crude oil and natural gas derivative contracts as of September 30, 2023. When aggregating multiple contracts, the weighted average contract price is disclosed.


	Price Swaps
Period	Commodity	Volume (Bbls / MMBtu)		Weighted Average Price ($/Bbl / $/MMBtu)
Q4 2023	Crude Oil		653,200	$	74.25
Q1 – Q4 2024	Crude Oil		1,719,600	$	76.28
Q4 2023	Crude Oil Basis Swap (1)		2,346,000	$	0.92
Q4 2023	Natural Gas		1,150,000	$	3.35
Q4 2023	Natural Gas Basis Swap (2)		12,880,000	$	(1.67	)
Q1 – Q4 2024	Natural Gas Basis Swap (2)		36,600,000	$	(1.05	)
Q1 – Q4 2025	Natural Gas Basis Swap (2)		14,600,000	$	(0.74	)

(1)	The basis differential price is between WTI Midland Crude and the WTI NYMEX.

(2)	The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.


	Costless Collars
Period	Commodity	Volume (Bbls / MMBtu)		Bought Floor ($/Bbl /$/MMBtu)		Sold Ceiling ($/Bbl /$/MMBtu)
Q4 2023	Crude Oil Costless Collar		1,122,400	$	62.58	$	84.84
Q1 – Q4 2024	Crude Oil Costless Collar		732,000	$	60.00	$	76.01
Q4 2023	Natural Gas Costless Collar		7,090,400	$	3.00	$	4.91
Q1 – Q4 2024	Natural Gas Costless Collar		14,640,000	$	2.56	$	4.51


	Deferred Premium Puts
Period	Commodity	Volume (Bbls / MMBtu)		$/Bbl (Put Price)		$/Bbl (Net of Premium)
Q4 2023	Crude Oil		395,600	$	70.00	$	64.54
Q1 – Q4 2024	Crude Oil		915,000	$	65.00	$	60.04

The following table summarizes the location and fair value amounts of all derivative instruments in the Condensed Consolidated Balance Sheets as well as the gross recognized derivative assets, liabilities, and amounts offset in the Condensed Consolidated Balance Sheets (in thousands):


		September 30, 2023							December 31, 2022
Derivatives not designated as hedging contracts under ASC Topic 815	Balance Sheet Location	Gross Recognized Assets / Liabilities		Gross Amounts Offset			Net Recognized Assets / Liabilities		Gross Recognized Assets / Liabilities		Gross Amounts Offset			Net Recognized Assets / Liabilities
Commodity contracts	Derivative asset—current	$	5,242	$	(3,700	)	$	1,542	$	51,803	$	(20,472	)	$	31,331
Commodity contracts	Derivative liability—current	$	54,069	$	(3,700	)	$	50,369	$	34,525	$	(20,472	)	$	14,053
Commodity contracts	Derivative asset—noncurrent	$	1,615	$	(1,108	)	$	507	$	9,117	$	—		$	9,117
Commodity contracts	Derivative liability—noncurrent	$	8,720	$	(1,108	)	$	7,612	$	—	$	—		$	—

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivatives instruments in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows (in thousands):


Derivatives not designated as hedging contracts under ASC Topic 815			Three Months Ended September 30,						Nine Months Ended September 30,
	Statement of Cash Flows Location	Statement of Operations Location	2023			2022			2023			2022
Unrealized (loss) gain	Not separately presented	Not separately presented	$	(22,996	)	$	119,209		$	(82,326	)	$	28,607
Realized loss	Operating portion of net cash paid in settlement of derivative contracts	Not separately presented		(22,051	)		(58,923	)		(29,494	)		(169,708	)

	Total (loss) gain on derivative contracts, net	(Loss) gain on derivative contracts, net	$	(45,047	)	$	60,286		$	(111,820	)	$	(141,101	)

Note 5. Acquisitions and Divestitures

Novo Acquisition

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

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

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

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

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


Consideration:
Cash consideration	$	936,929
Direct transaction costs		10,038

Total consideration transferred	$	946,967

Assets acquired:
Cash	$	15,053
Current assets		78,806
Oil and gas properties		983,842
Other noncurrent assets		5,908

Amount attributable to assets acquired	$	1,083,609

Liabilities assumed:
Current liabilities	$	113,895
Asset retirement obligations		1,844
Other noncurrent liabilities		20,903

Amount attributable to liabilities assumed	$	136,642

Titus Acquisition

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

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

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


Consideration:
Shares of Class A Common Stock issued		3,857,015
Class A Common Stock price as of August 10, 2022	$	13.89

Class A Common Stock consideration		53,574
Cash consideration		568,184
Direct transaction costs		1,202

Total consideration transferred	$	622,960

Assets acquired:
Oil and gas properties	$	626,727

Amount attributable to assets acquired	$	626,727

Liabilities assumed:
Current liabilities	$	2,853
Noncurrent liabilities—ARO		914

Amount attributable to liabilities assumed	$	3,767

Bighorn Acquisition

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

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

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


Consideration:
Shares of Class A Common Stock issued		5,650,977
Class A Common Stock price as of April 14, 2022	$	13.76

Class A Common Stock consideration		77,757
Cash consideration		625,887
Direct transaction costs		2,397

Total consideration transferred	$	706,041

Assets acquired:
Current assets	$	769
Oil and gas properties		746,211

Amount attributable to assets acquired	$	746,980

Liabilities assumed:
Suspense payable	$	25,710
Other current liabilities		2,035
Noncurrent liabilities—ARO		13,194

Amount attributable to liabilities assumed	$	40,939

Chisholm Acquisition

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

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

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Chisholm Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):


Consideration:
Shares of Class A Common Stock issued		19,311,582
Class A Common Stock price as of February 15, 2022	$	12.85

Class A Common Stock consideration		248,154
Cash consideration		383,877

Total consideration transferred	$	632,031

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

Amount attributable to assets acquired	$	642,391

Fair value of liabilities assumed:
Other current liabilities	$	4,389
Asset retirement obligation—noncurrent		5,971

Amount attributable to liabilities assumed	$	10,360

The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair value of oil and gas properties and asset retirement obligations were measured using the discounted cash flow technique of valuation.

Significant inputs to the valuation of oil and gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future plugging and abandonment costs, (v) estimated future cash flows, and (vi) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates and are the most sensitive and subject to change.

Divestitures

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

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

Note 6. Oil and Natural Gas Properties

The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, costs to acquire oil and natural gas properties, drill and equip exploratory wells that find proved reserves, and drill and equip development wells are capitalized. Exploration costs, including unsuccessful exploratory wells and geological and geophysical costs, are charged to operations as incurred. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.

Costs incurred to maintain wells and related equipment, lease and well operating costs, and other exploration costs are charged to expense as incurred. Gains and losses arising from the sale of properties are included in Income from operations in the Condensed Consolidated Statements of Operations.

The Company’s lease acquisition costs and development costs of proved oil and natural gas properties are amortized using the units-of-production method, at the field level, based on total proved reserves and proved developed reserves, respectively. For the three and nine months ended September 30, 2023, depletion expense for oil and gas producing property and related equipment was $122.5 million and $342.4 million, respectively For the three and nine months ended September 30, 2022, depletion expense for oil and gas producing property and related equipment was $90.4 million and $190.8 million, respectively.

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Our accrual basis capital expenditures for the three and nine months ended September 30, 2023, were as follows (in thousands):


	Three Months Ended September 30, 2023		Nine Months Ended September 30, 2023
Development costs	$	186,078	$	561,164
Leasehold costs		5,633		7,259

Total capital expenditures	$	191,711	$	568,423

Proved Properties

Proved oil and natural gas properties are reviewed for impairment on a nonrecurring basis. The impairment charge reduces the carrying values to their estimated fair values. These fair value measurements are classified as Level 3 measurements and include many unobservable inputs. Fair value is calculated as the estimated discounted future net cash flows attributable to the assets. The Company’s primary assumptions in preparing the estimated discounted future net cash flows to be recovered from oil and gas properties are based on (i) proved reserves, (ii) forward commodity prices and assumptions as to costs and expenses, and (iii) the estimated discount rate that would be used by potential purchasers to determine the fair value of the assets.

Unproved Properties

Unproved properties consist of costs incurred to acquire undeveloped leases. Unproved oil and gas leases are generally for a primary term of three to five years. In most cases, the term of the unproved leases can be extended by paying a lease renewal fee, meeting contractual drilling obligations, or by the presence of producing wells on the leases. Unproved costs related to successful drilling on unproved leases are reclassified to proved properties.

The Company reviews its unproved properties periodically for impairment. In determining whether an unproved property is impaired, the Company considers numerous factors including, but not limited to, current exploration and development plans, favorable or unfavorable exploration activity on the property being evaluated and/or adjacent properties, the Company’s geologists’ evaluation of the property, and the remaining months in the lease term for the property.

Impairments to Oil and Natural Gas Properties

During the nine months ended September 30, 2023, the Company recorded non-cash impairment charges of $0.9 million to its oil and natural gas properties due to acreage expirations in non-core operating areas. No impairments were recorded to the Company’s oil and natural gas properties during the three months ended September 30, 2023 and 2022.

Note 7. Net Income Per Common Share

Net income per common share—basic is calculated by dividing Net income by the weighted average number of shares of common stock outstanding during the period. Net income per common share—diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing Net income by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net income per common share—diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect.

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

A reconciliation of Net income per common share is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share amounts)	2023		2022		2023		2022
Net income attributable to Earthstone Energy, Inc.	$	61,358	$	211,456	$	179,948	$	322,863

Net income attributable to Earthstone Energy, Inc. from assumed conversion of Series A Convertible Preferred Stock		—		1,068		—		12,388

Net income attributable to Earthstone Energy, Inc.—Diluted	$	61,358	$	212,524	$	179,948	$	335,251

Net income per common share attributable to Earthstone Energy, Inc.:
Basic	$	0.58	$	2.01	$	1.69	$	3.91

Diluted	$	0.57	$	1.94	$	1.67	$	3.61

Weighted average common shares outstanding
Basic		106,332,278		105,254,778		106,172,873		82,483,635

Add potentially dilutive securities:
Unvested restricted stock units		326,041		353,889		313,342		466,453
Unvested performance units		1,626,910		2,024,871		1,255,489		2,133,158
Series A Convertible Preferred Stock		—		1,645,123		—		7,761,608

Diluted weighted average common shares outstanding		108,285,229		109,278,661		107,741,704		92,844,854

The Class B Common Stock has been excluded, as its conversion would eliminate noncontrolling interest and net income attributable to noncontrolling interest of $25.8 million for the three months ended September 30, 2023 and net income attributable to noncontrolling interest of $75.9 million for the nine months ended September 30, 2023 would be added back to Net income attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive effect on Net income per common share attributable to Earthstone Energy, Inc.

The Class B Common Stock has been excluded, as its conversion would eliminate noncontrolling interest and net income attributable to noncontrolling interest of $87.9 million for the three months ended September 30, 2022 and net income attributable to noncontrolling interest of $142.6 million for the nine months ended September 30, 2022 would be added back to Net income attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive effect on Net income per common share attributable to Earthstone Energy, Inc.

Note 8. Common Stock

Class A Common Stock

At September 30, 2023 and December 31, 2022, there were 106,443,591 and 105,547,139 shares of Class A Common Stock issued and outstanding, respectively.

During the three and nine months ended September 30, 2023, as a result of the vesting and settlement of performance units and restricted stock units under the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”), Earthstone issued 161,406 and 1,566,372 shares, respectively, of Class A Common Stock, of which 48,870 and 566,026 shares, respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. For further discussion, see Note 9. Stock-Based Compensation. Additionally, on April 10, 2023, 105,894 shares of Class A Common Stock were released to Earthstone from escrow and canceled in connection with the settlement of the Chisholm Acquisition.

During the three and nine months ended September 30, 2022, as a result of the vesting and settlement of performance units and restricted stock units under the 2014 Plan, Earthstone issued 165,336 and 1,099,232 shares, respectively, of Class A Common Stock, of which 48,073 and 383,197 shares, respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. In connection with the Chisholm Acquisition, on February 15, 2022, Earthstone issued 19,417,476 shares of Class A Common Stock valued at approximately $249.5 million on that date. In connection with the closing of the Bighorn Acquisition, on April 14, 2022, Earthstone issued 5,650,977 shares of Class A Common Stock valued at approximately $77.8 million on that date.

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Class B Common Stock

At September 30, 2023 and December 31, 2022, there were 34,257,641 and 34,259,641 shares of Class B Common Stock issued and outstanding. Each share of Class B Common Stock, together with one EEH Unit, is convertible into one share of Class A Common Stock. During the three and nine months ended September 30, 2023, 0 and 2,000 shares of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock. During the three and nine months ended September 30, 2022, 0 and 82,891 shares, respectively, of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock.

Note 9. Stock-Based Compensation

Restricted Stock Units

The 2014 Plan, allows, among other things, for the grant of restricted stock units (“RSUs”). As of September 30, 2023, the maximum number of shares of Class A Common Stock that may be issued under the 2014 Plan was 12.0 million shares.

Each RSU represents the contingent right to receive one share of Class A Common Stock. The holders of outstanding RSUs do not have voting rights prior to vesting and settlement. Holders of outstanding RSUs granted prior to December 1, 2022 do not have dividend rights prior to vesting and settlement. Holders of outstanding RSUs granted subsequent to December 1, 2022 do have dividend rights. The Company determines the fair value of granted RSUs based on the market price of the Class A Common Stock on the date of the grant. Compensation expense for granted RSUs is recognized on a straight-line basis over the vesting period and is net of forfeitures, as incurred. Stock-based compensation is included in General and administrative expense in the Condensed Consolidated Statements of Operations and is recorded with a corresponding increase in Additional paid-in capital within the Condensed Consolidated Balance Sheets.

The table below summarizes RSU award activity for the nine months ended September 30, 2023:


	Shares			Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2022		869,978		$	11.40
Granted		426,655		$	13.38
Forfeited		(25,526	)	$	12.22
Vested		(522,572	)	$	11.00

Unvested RSUs at September 30, 2023		748,535		$	12.78

As of September 30, 2023, there was $9.3 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of 0.98 years.

For the three and nine months ended September 30, 2023, Stock-based compensation related to RSUs was $1.7 million and $5.3 million, respectively. For the three and nine months ended September 30, 2022, Stock-based compensation related to RSUs was $1.5 million and $4.2 million, respectively.

Performance Units

Performance units include both performance-based stock units (“PSUs”) and performance-based restricted stock units (“PRSUs”). The table below summarizes performance unit activity for the nine months ended September 30, 2023:


	Shares			Weighted-Average Grant Date Fair Value
Unvested Performance Units at December 31, 2022		2,616,085		$	10.21
Granted		559,325		$	18.86
Vested		(1,043,800	)	$	5.36

Unvested Performance Units at September 30, 2023		2,131,610		$	14.85

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On January 6, 2023, the Board of Directors of Earthstone (the “Board”) granted 258,150 PRSUs (the “2023 RTSR PRSUs”) to certain officers pursuant to the 2014 Plan. The 2023 RTSR PRSUs are payable in cash or shares of Class A Common Stock upon the achievement by Earthstone over a period commencing on January 1, 2023 and ending on December 31, 2025 (the “2023 Performance Period”) of certain performance criteria established by the Board. The Company classifies these awards that will be settled in cash as liability awards. PRSU grants to be settled in shares are classified as equity awards. The holders of 2023 RTSR PRSUs do not have any voting rights with respect to such PRSUs until vesting and settlement; however, such holders do have dividend rights.

The number of shares of Class A Common Stock that may be earned will be determined based on the TSR (as defined below) achieved by Earthstone relative to the TSR of each of the companies in the predetermined peer group during the Performance Period. Between 0x to 2.0x of the PRSUs are eligible to be earned based on Earthstone’s ranking relative to the companies in the predetermined peer group. In the event that greater than 1.0x of the 2023 RTSR PRSUs are earned, such additional PRSUs may be paid in cash rather than the issuance of shares of Class A Common Stock

Total shareholder return is generally determined by dividing (A) the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on and including the last calendar day of the applicable performance period minus the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on and including the first day of the applicable performance period plus cash dividends paid over the applicable performance period by (B) the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on and including the first day of the applicable performance period (“TSR”).

The Company accounts for the 2023 RTSR PRSU awards as market-based awards which are valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. For the 2023 RTSR PRSUs, assuming a risk-free rate of 3.89% and volatilities ranging from 40.6% to 142.5%, the Company calculated the weighted average grant date fair value per PRSU to be $20.06.

On January 6, 2023, the Board granted 301,175 PRSUs (the “2023 ATSR PRSUs”) to certain officers pursuant to the 2014 Plan. The 2023 ATSR PRSUs are payable in cash or shares of Class A Common Stock upon the achievement by Earthstone over the 2023 Performance Period of certain performance criteria established by the Board. The Company classifies these awards that will be settled in cash as liability awards. PRSU grants to be settled in shares are classified as equity awards. The holders of 2023 ATSR PRSUs do not have any voting rights with respect to such PRSUs until vesting and settlement; however, such holders do have dividend rights.

The 2023 ATSR PRSUs are eligible to be earned based on the annualized TSR of the Class A Common Stock during the 2023 Performance Period. Between 0x to 2.0x of the Performance Units are eligible to be earned based on Earthstone achieving an annualized TSR based on the following pre-established goals:


Earthstone’s Annualized TSR	TSR Multiplier
23.9% or greater		2.0
14.5%		1.0
8.4%		0.5
Less than 8.4%		0.0

In the event that greater than 1.0x of the 2023 ATSR PRSUs are earned, such additional PRSUs may be paid in cash rather than the issuance of shares of Class A Common Stock.

The Company accounts for the 2023 ATSR PRSUs as market-based awards which are valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. For the 2023 ATSR PRSUs, assuming a risk-free rate of 3.89% and volatility of 77%, the Company calculated the weighted average grant date fair value per PRSU to be $17.84.

On January 30, 2020, the Board granted 1,043,800 PSUs (the “2020 PSUs”) to certain officers pursuant to the 2014 Plan (the “2020 Grant”).

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The 2020 PSUs were settled on January 31, 2023 resulting in the issuance of 1,043,800 shares of Class A Common Stock and cash payments totaling approximately $14.5 million.

As of September 30, 2023, there was $17.7 million of unrecognized compensation expense related to all PSU awards which will be amortized over a weighted average period of 0.86 years.

For the three and nine months ended September 30, 2023, Stock-based compensation related to all performance units was approximately $12.8 million and $21.7 million, respectively. For the three and nine months ended September 30, 2022, Stock-based compensation related to all performance units was approximately $1.8 million and $10.9 million, respectively.

The Company classifies awards that will be settled in cash as liability awards. PSU grants to be settled in shares are classified as equity awards. Corresponding liabilities of $20.4 million and $14.4 million related to the performance units were included in Other current liabilities and Accrued expenses, respectively, in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, respectively. Additionally, corresponding liabilities of $5.2 million and $10.4 million related to the performance units were included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, respectively.

Note 10. Long-Term Debt

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


	September 30, 2023			December 31, 2022
Revolving credit facility	$	700,383		$	270,136
Term loan under credit facility due 2027		—			250,000
8.000% Senior notes due 2027		550,000			550,000
9.875% Senior notes due 2031		500,000			—

		1,750,383			1,070,136
Unamortized debt issuance costs on term loan		—			(5,309	)
Unamortized debt issuance costs on 8.000% Senior notes		(9,016	)		(10,948	)
Original issue discount on 9.875% Senior notes		(9,956	)		—
Unamortized debt issuance costs on 9.875% Senior notes		(9,345	)		—

Long-term debt, net	$	1,722,066		$	1,053,879

Credit Agreement

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

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

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

The next regularly scheduled redetermination of the borrowing base is expected to occur on or around December 31, 2023. Subsequent redeterminations are expected to occur on or about each May 1st and November 1st thereafter. The amounts borrowed under the Credit Agreement bear annual interest rates at either (a) the adjusted SOFR Rate (as customarily defined) (the “Adjusted Term SOFR Rate”) plus 2.25% to 3.25% or (b) the sum of (i) the greatest of (A) the prime rate of Wells Fargo, (B) the federal funds rate plus ¹⁄₂ of 1.0%, and (C) the Adjusted Term SOFR Rate for an interest rate period of one month plus

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

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

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

8.000% Senior Notes

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

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

9.875% Senior Notes

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

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

Note 11. Asset Retirement Obligations

The Company has asset retirement obligations associated with the future plugging and abandonment of oil and gas properties and related facilities. Revisions to the liability typically occur due to changes in the estimated abandonment costs, well economic lives, and the discount rate.

The following table summarizes the Company’s asset retirement obligation transactions recorded during the nine months ended September 30, 2023 (in thousands):


	2023
Beginning asset retirement obligations	$	30,559
Liabilities incurred		222
Liabilities settled		(1,727	)
Acquisitions		1,844
Accretion expense		1,958
Divestitures		(843	)
Revision of estimates		612

Ending asset retirement obligations	$	32,625

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 12. Related Party Transactions

FASB ASC Topic 850, Related Party Disclosures, requires that information about transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance. The Audit Committee of the Board independently reviews and approves all related party transactions.

Earthstone has two significant shareholders that consist of various investment funds managed by each of the two private equity firms who may manage other investments in entities with which the Company interacts in the normal course of business (the “Significant Shareholders” or separately, each a “Significant Shareholder”).

As discussed in Note 5. Acquisitions and Divestitures, the Chisholm Acquisition was consummated on February 15, 2022, whereby the Company acquired the Chisholm Assets for a purchase price of $383.9 million in cash, net of customary purchase price adjustments, and approximately 19.4 million shares of Class A Common Stock. A Significant Shareholder was the majority owner of Chisholm as of the closing of the Chisholm Acquisition. The deferred payment of $70 million as of March 31, 2022 was paid on April 15, 2022 and included in Deferred acquisition payment – Chisholm in the Condensed Consolidated Balance Sheet as of March 31, 2022. The issuance of approximately 19.4 million shares of Class A Common Stock in connection with the closing of the Chisholm Acquisition was (1) approved by a majority of the voting power of all outstanding disinterested shares of the Common Stock and (2) increased the Significant Shareholder’s beneficial ownership of Class A Common Stock from approximately 25% to 36% as of February 15, 2022. On April 10, 2023, 105,894 shares of Class A Common Stock were released to Earthstone from escrow and canceled in connection with the settlement of the Chisholm Acquisition.

As discussed in Note 5. Acquisitions and Divestitures, on June 14, 2023, EEH entered into the Novo Purchase Agreement. A Significant Shareholder is the majority owner of the Sellers.

Note 13. Commitments and Contingencies

Legal

George Assad, et al. v. EnCap Investments L.P., et al.: On September 12, 2022, a complaint (the “Complaint”) styled as a “derivative action” was filed in the Delaware Court of Chancery (the “Court”) by George Assad (the “plaintiff”) a purported holder of a small number of shares of Class A Common Stock against Earthstone, six of its 10 directors and EnCap Investments L.P. (“EnCap”), a principal stockholder. The Complaint alleges that a majority of Earthstone’s directors were conflicted and, along with EnCap, breached their fiduciary duties in approving the sale of shares of Series A Convertible Preferred Stock that is convertible into Class A Common Stock pursuant to the Securities Purchase Agreement dated as of January 30, 2022, by and among Earthstone and the Investors. The plaintiff requested the Court to declare that the defendants breached their fiduciary duties, award of unspecified monetary damages, including interest and costs, and/ or rescind the stock purchase transaction. On October 14, 2022, the defendants filed a motion to dismiss the amended Complaint. Oral argument with respect to defendants’ motion to dismiss occurred on July 18, 2023. On August 22, 2023, in response to Earthstone’s announcement that it had entered into a definitive merger agreement with Permian Resources Corporation, the Plaintiff filed an emergency motion to expedite the Plaintiff’s derivative suit. On August 29, 2023 a hearing was held and the Court denied Plaintiff’s motion to expedite. Earthstone believes the Complaint is completely without merit and intends to contest vigorously the allegations made therein and to seek reimbursement for its costs and expenses in so doing. Earthstone carries insurance for the claims asserted against it and the officer and director defendants in the Complaint, and the carrier has accepted coverage subject to applicable self-retentions and limits of liability. The Company does not expect this case to have a material adverse effect on the results of operations, financial position or cash flows of the Company.

From time to time, the Company may be involved in other various legal proceedings and claims in the ordinary course of business, none of which are reasonably expected to result in a material liability to the Company as of September 30, 2023.

Environmental and Regulatory

As of September 30, 2023, there were no known environmental or other regulatory matters related to the Company’s properties or operations that are reasonably expected to result in a material liability to the Company.

Note 14. Income Taxes

The Company’s corporate structure requires the filing of two separate U.S. Federal income tax returns and one Canadian income tax return which include Lynden US, Earthstone, and Lynden Corp, respectively. As such, taxable income of Earthstone cannot be offset by tax attributes, including net operating losses, of Lynden US, nor can taxable income of Lynden US be offset by tax attributes of Earthstone. Earthstone and Lynden US record a tax provision, respectively, for their share of the book income or loss of EEH, net of the non-controlling interest. As EEH is treated as a partnership for U.S. Federal income tax purposes, it is not subject to income tax at the federal level and only recognizes the Texas Margin Tax.

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On February 15, 2022, the Company completed the Chisholm Acquisition which included the issuance of 19,311,582 shares of Class A Common Stock, which resulted in an ownership change within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). As a result of the ownership change, the Company’s ability to utilize net operating losses (“NOLs”) and credits generated prior to the ownership change date may be limited to offset taxable income incurred after the ownership change date (the “382 Limitation”).

As of September 30, 2023 and December 31, 2022, current liabilities of $1.0 million and $1.8 million, respectively, are included in Other current liabilities in the Condensed Consolidated Balance Sheets related solely to current Texas Margin Tax payable.

During the nine months ended September 30, 2023, the Company recorded income tax expense of approximately $55.6 million comprised of (1) deferred federal income tax expense for Earthstone of $47.3 million resulting from its share of the distributable income from EEH, (2) a deferred federal income tax expense for Lynden US of $2.8 million as a result of its share of the distributable income from EEH and (3) income tax expense of $5.5 million related to both current and deferred state income taxes. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the nine months ended September 30, 2023.

During the nine months ended September 30, 2022, the Company recorded income tax expense of approximately $81.7 million comprised of (1) income tax expense for Earthstone of $70.0 million which included a deferred income tax expense of $74.5 million and a current income tax expense of $2.0 million, resulting from its share of the distributable income from EEH, offset by a $6.5 million release of valuation allowance, (2) a deferred income tax expense for Lynden US of $5.5 million as a result of its share of the distributable loss from EEH and (3) income tax expense of $6.2 million related to state taxes, which included a deferred income tax expense of $4.1 million and a current income tax expense of $2.1 million. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the nine months ended September 30, 2022.

Note 15. Supplemental Disclosures

Accounts Payable

The following table summarizes the Company’s current accounts payable at September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023		December 31, 2022
Accounts payable related to vendors	$	35,036	$	76,044
Accounts payable related to severance taxes		14,317		10,380
Other		12,642		5,391

Total accounts payable	$	61,995	$	91,815

Revenue and Royalties Payable

The following table summarizes the Company’s revenues held in suspense and royalties payable at September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023		December 31, 2022
Revenue held in suspense	$	119,652	$	101,838
Revenue and royalties payable		89,937		61,530

Total revenue and royalties payable	$	209,589	$	163,368

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Accrued Expenses

The following table summarizes the Company’s current accrued expenses at September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023		December 31, 2022
Accrued capital expenditures	$	84,353	$	38,482
Accrued lease operating expenses		23,919		14,173
Accrued interest		37,864		10,995
Accrued general and administrative expense		10,114		7,351
Accrued ad valorem taxes		30,255		4,243
Other		34,861		5,698

Total accrued expenses	$	221,366	$	80,942

Supplemental Cash Flow Information

The following table provides supplemental disclosures of cash flow information for the nine months ended September 30, 2023 and 2022 (in thousands):


	For the Nine Months Ended September 30,
	2023			2022
Cash paid for:
Interest	$	47,206		$	17,485
Income taxes	$	2,518		$	625
Non-cash investing and financing activities:
Class A Common Stock issued in Chisholm Acquisition	$	(1,361	)	$	249,515
Class A Common Stock issued in Bighorn Acquisition	$	—		$	77,757
Class A Common Stock issued in Titus Acquisition	$	—		$	53,574
Accrued capital expenditures	$	102,039		$	40,969
Lease asset additions—ASC 842	$	1,818		$	3,111
Asset retirement obligations	$	833		$	722

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 16. Subsequent Events

On October 23, 2023, the Board declared a cash dividend (the “Special Dividend”) of $0.1446 per share of Class A Common Stock and Class B Common Stock. The Special Dividend is payable on November 6, 2023, to shareholders of record as of October 31, 2023 who hold their shares through the closing of the Merger Agreement.

The Special Dividend is conditioned upon the closing of the Merger Agreement and is being declared in accordance with the terms of the Merger Agreement, which provides that (a) the record date of the Special Dividend will be the close of business on the business day immediately preceding the closing date of the Merger Agreement and (b) the Special Dividend will be paid three business days after the closing date of the Merger Agreement. Accordingly, the record date and payment date may change based on the actual closing date of the Merger Agreement.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statement Regarding Forward-Looking Information

This discussion and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,” “will,” “project,” “forecast,” “plan,” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to numerous risks, uncertainties and assumptions. Certain of these risks are summarized in this report and under “Item 1A. Risk Factors” in our 2022 Annual Report on Form 10-K and “Part II, Item 1A—Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 that were filed with the Securities and Exchange Commission (“SEC”), which you should read carefully in connection with our forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. We undertake no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

You should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the corresponding sections and our audited Consolidated Financial Statements for the year ended December 31, 2022, which are included in our 2022 Annual Report on Form 10-K.

Overview

Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with its consolidated subsidiaries, the “Company,” “our,” “we,” “us,” or similar terms), 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 United States. At present, our assets are located primarily in the Delaware Basin in New Mexico and in the Midland Basin in West Texas.

As of September 30, 2023, outstanding common shares of Earthstone, along with the equal number of corresponding outstanding EEH Units, were approximately 140.7 million, consisting of 106.4 million shares of Class A common stock, par value $0.001 per share of Earthstone (“Class A Common Stock”), and 34.3 million shares of Class B common stock, par value $0.001 per share of Earthstone (“Class B Common Stock”). The following diagram indicates our simplified ownership structure as of the date of this report. This diagram is provided for illustrative purposes only and does not represent all legal entities affiliated with us.

Exhibit 99.2

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

On November 1, 2023, Permian Resources Corporation (“Permian Resources” or the “Company”) and Earthstone Energy, Inc. (“Earthstone”) completed the previously announced acquisition of Earthstone by Permian Resources (the “Merger”) as contemplated by the merger agreement, dated August 21, 2023 (the “Merger Agreement”).

In connection with the closing of the Merger, (i) each share of Earthstone Class A common stock was converted into the right to receive 1.446 shares (the “Exchange Ratio”) of Permian Resources Class A common stock (the “Permian Resources Class A common stock”), (ii) each share of Earthstone Class B common stock was converted into the right to receive a number of shares of Permian Resources Class C common stock (the “Permian Resources Class C common stock,” and together with the Permian Resources Class A common stock, the “common stock”) equal to the Exchange Ratio, (iii) each common unit of Earthstone Energy Holdings, LLC (“Earthstone OpCo”), a subsidiary of Earthstone, representing limited liability company membership interests in Earthstone OpCo (the “Earthstone OpCo Units”) was converted into the right to receive a number of common units representing limited liability company interests in Permian Resources Operating, LLC (“Permian Resources OpCo”), a subsidiary of Permian Resources, and (such units the “Permian Resources OpCo Units”) equal to the Exchange Ratio, and (iv) all existing shares of Permian Resources common stock remained outstanding.

The following unaudited pro forma combined financial statements of the Company (which we refer to as the “pro forma combined financial statements”) have been prepared from the respective historical consolidated financial statements of Permian Resources and Earthstone and have been adjusted to reflect (i) the completion of the Merger, (ii) Earthstone’s completion of the Novo Transactions on August 15, 2023 (defined in Note 5 below and collectively referred to in these pro forma combined financial statements as, “Earthstone’s Novo Transactions”) and (iii) Permian Resources’ completion of its acquisition of Colgate Energy Partners III, LLC (“Colgate”) on September 1, 2022 (the “Colgate Merger” and collectively referred to in these pro forma combined financial statements as, the “Transactions”). The unaudited pro forma combined balance sheet as of September 30, 2023, gives effect to the Merger as if it had been completed on September 30, 2023. The unaudited pro forma combined statements of operations for the year ended December 31, 2022, and the nine months ended September 30, 2023, give effect to the Transactions as if they had been completed on January 1, 2022.

The Merger is being accounted for as a business combination using the acquisition method of accounting, with Permian Resources as the accounting acquirer. The pro forma combined financial statements have been prepared to reflect transaction accounting adjustments to Permian Resources’ historical financial information that management believes are factually supportable and that are expected to have a continuing impact on results of operations, with the exception of certain nonrecurring items incurred in connection with the Merger.

The pro forma merger consideration and purchase price allocation are preliminary and are based upon estimates of the fair market values of (i) the Company’s common stock as of November 1, 2023, which makes up the entirety of the merger consideration, and (ii) the assets and liabilities of Earthstone as of September 30, 2023, both of which utilize currently available information. Assumptions and estimates underlying the pro forma adjustments, preliminary merger consideration and preliminary purchase price allocations are described in the accompanying notes, which should be read in conjunction with the pro forma combined financial statements.

As of the date of this filing, the Company has not completed the necessary valuations of the Merger in order to arrive at the required final estimates of fair value and related allocations of purchase price, nor has it identified all adjustments necessary to conform Earthstone’s accounting policies to those of the Company. The pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analysis is performed. Therefore, the final purchase price allocation and merger consideration will be performed at a later date and may be materially different than that reflected herein.

The pro forma combined financial statements and related notes are presented to reflect the Transactions for illustrative purposes only. If the Transactions had occurred in the past, the operating results might have been materially different from those presented in the pro forma combined financial statements. The pro forma combined statements of operations should not be relied upon as an indication of operating results that would have been achieved if the Transactions contemplated herein had taken place on the specified date. In addition, future results may vary significantly from the results reflected in the pro forma combined statements of operations and should not be relied on as an indication of the future results of the combined company following the Transactions. The pro forma combined financial statements do not reflect projected synergies (including the benefits of expected cost savings or the associated costs to achieve such savings), opportunities to earn additional revenue, or other factors that may result after the Merger and, accordingly, do not attempt to predict or suggest future results.

PERMIAN RESOURCES CORPORATION

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

As of September 30, 2023, (in thousands)


	Historical						Transaction Accounting Adjustments				Pro forma Combined
	Permian Resources			Earthstone			Transaction Accounting Adjustments				Pro forma Combined
ASSETS					(a)
Current assets
Cash and cash equivalents	$	211,703		$	16,592		$	(228,295	)	(c)	$	—
Accounts receivable, net		339,495			209,927			—				549,422
Derivative instruments		2,662			1,542			—				4,204
Prepaid and other current assets		11,330			40,323			—				51,653

Total current assets		565,190			268,384			(228,295	)			605,279
Property and Equipment
Oil and natural gas properties, successful efforts method
Unproved properties		1,373,138			305,706			351,102		(d)		2,029,946
Proved properties		10,112,084			5,488,844			(762,694	)	(d)		14,838,234
Accumulated depreciation, depletion and amortization		(3,037,676	)		(955,434	)		955,434		(d)		(3,037,676	)

Total oil and natural gas properties, net		8,447,546			4,839,116			543,842				13,830,504
Other property and equipment, net		39,271			13,062			—				52,333

Total property and equipment, net		8,486,817			4,852,178			543,842				13,882,837
Noncurrent assets
Operating lease right-of-use assets		58,446			6,573			—				65,019
Other noncurrent assets		99,345			19,420			(18,858	)	(d)		99,907

TOTAL ASSETS	$	9,209,798		$	5,146,555		$	296,689			$	14,653,042

LIABILITIES AND EQUITY
Current liabilities
Accounts payable and accrued expenses	$	665,359		$	492,950		$	118,713		(e)	$	1,277,022
Operating lease liabilities		34,266			923			—				35,189
Derivative instruments		35,748			50,369			—				86,117
Other current liabilities		24,638			31,386			(20,359	)	(f)		35,665

Total current liabilities		760,011			575,628			98,354				1,433,993
Noncurrent liabilities
Long-term debt, net		2,254,178			1,722,066			(228,295	)	(c)		3,836,060
								88,111		(d)
Asset retirement obligations		44,393			32,625			27,420		(d)		104,438
Deferred income taxes		83,416			193,266			—				276,682
Operating lease liabilities		26,156			3,286			—				29,442
Other noncurrent liabilities		74,708			37,783			(5,153	)	(f)		107,338

Total liabilities		3,242,862			2,564,654			(19,563	)			5,787,953
Shareholders’ equity
Common stock
Class A		35			106			(106	)	(d)		51
								16		(g)
Class C		22			—			5		(g)		27
Class B		—			34			(34	)	(d)		—
Additional paid-in capital		3,278,846			1,348,580			(1,348,580	)	(d)		5,585,045
								2,306,199		(g)
Retained earnings (accumulated deficit)		375,933			472,659			(472,659	)	(d)		257,220
								(118,713	)	(e)

Total shareholders’ equity		3,654,836			1,821,379			366,128				5,842,343
Noncontrolling interest		2,312,100			760,522			(760,522	)	(d)		3,022,746
								710,646		(g)

Total equity		5,966,936			2,581,901			316,252				8,865,089

TOTAL LIABILITIES AND EQUITY	$	9,209,798		$	5,146,555		$	296,689			$	14,653,042

The accompanying notes are an integral part of the pro forma combined financial statements.

PERMIAN RESOURCES CORPORATION

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2023

(in thousands, except per share data)


	Historical						Earthstone’s Novo Transactions			Transaction Accounting Adjustments				Pro forma
	Permian Resources			Earthstone			Earthstone’s Novo Transactions			Transaction Accounting Adjustments				Combined
Operating revenues					(a)			(b)
Oil and gas sales	$	1,998,207		$	1,258,960		$	261,875		$	—			$	3,519,042
Operating expenses
Lease operating expenses		243,333			196,952			40,790			—				481,075
Severance and ad valorem taxes		156,378			103,377			19,753			—				279,508
Gathering, processing and transportation expenses		57,966			79,784			—			—				137,750
Depreciation, depletion, and amortization		640,149			345,757			51,669			(46,006	)	(h)		991,569
General and administrative expenses		122,729			64,079			17,241			(26,977	)	(f)		177,072
Merger and integration expense		28,071			1,904			—			(1,904	)	(i)		18,385
											(9,686	)	(e)
Impairment and abandonment expense		734			854			—			—				1,588
Exploration and other expenses		14,668			7,036			—			—				21,704

Total operating expenses		1,264,028			799,743			129,453			(84,573	)			2,108,651
Net gain (loss) on sale of long-lived assets		129			47,404			—			(47,404	)	(i)		129

Income (loss) from operations		734,308			506,621			132,422			37,169				1,410,520
Other income (expense)
Interest expense		(114,185	)		(84,289	)		—			(2,605	)	(j)		(201,079	)
Net gain (loss) on derivative instruments		(76,668	)		(111,820	)		—			—				(188,488	)
Other income (expense)		685			882			(1,766	)		—				(199	)

Total other income (expense)		(190,168	)		(195,227	)		(1,766	)		(2,605	)			(389,766	)

Income (loss) before income taxes		544,140			311,394			130,656			34,564				1,020,754
Income tax (expense) benefit		(77,056	)		(55,584	)		(107	)		(5,103	)	(k)		(137,850	)

Net income (loss)		467,084			255,810			130,549			29,461				882,904
Less: Net (income) loss attributable to noncontrolling interest		(246,132	)		(75,862	)		—			(26,054	)	(l)		(348,048	)

Net income (loss) attributable to Class A common stock	$	220,952		$	179,948		$	130,549		$	3,407			$	534,856

Income (loss) per share of Class A common stock:
Basic	$	0.71												$	1.13
Diluted	$	0.64												$	0.98
Weighted average common shares outstanding:
Basic		312,015									162,008		(m)		474,023
Diluted		351,417									461,560		(m)		812,977

The accompanying notes are an integral part of the pro forma combined financial statements.

PERMIAN RESOURCES CORPORATION

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2022

(in thousands, except per share data)


	Permian Resources Pro Forma			Historical Earthstone			Earthstone’s Novo Transactions			Transaction Accounting Adjustments				Pro forma Combined
		(n)			(a)			(b)
Operating revenues
Oil and gas sales	$	3,233,675		$	1,695,154		$	380,860		$	—			$	5,309,689
Operating expenses
Lease operating expenses		271,732			162,801			30,217			—				464,750
Severance and ad valorem taxes		235,847			123,054			27,597			—				386,498
Gathering, processing and transportation expenses		109,754			67,714			—			—				177,468
Depreciation, depletion and amortization		618,688			304,465			65,308			(39,992	)	(h)		948,469
General and administrative expenses		200,869			74,175			7,823			53,977		(f)		336,844
Merger and integration expense		77,424			8,248			—			(8,248	)	(i)		205,823
											128,399		(e)
Impairment and abandonment expense		3,875			—			—			—				3,875
Exploration and other expenses		15,110			2,492			526			—				18,128

Total operating expenses		1,533,299			742,949			131,471			134,136				2,541,855
Net gain (loss) on sale of long-lived assets		(1,314	)		13,900			76			(13,976	)	(i)		(1,314	)

Income (loss) from operations		1,699,062			966,105			249,465			(148,112	)			2,766,520
Other income (expense)
Interest expense		(156,855	)		(66,821	)		—			(47,139	)	(j)		(270,815	)
Net gain (loss) on derivative instruments		(428,426	)		(125,107	)		—			—				(553,533	)
Other income (expense)		619			856			2,752			—				4,227

Total other income (expense)		(584,662	)		(191,072	)		2,752			(47,139	)			(820,121	)

Income (loss) before income taxes		1,114,400			775,033			252,217			(195,251	)			1,946,399
Income tax (expense) benefit		(112,824	)		(124,416	)		(234	)		28,823		(k)		(208,651	)

Net income (loss)		1,001,576			650,617			251,983			(166,428	)			1,737,748
Less: Net (income) loss attributable to noncontrolling interest		(537,990	)		(198,132	)		—			72,455		(l)		(663,667	)

Net income (loss) attributable to Class A common stock	$	463,586		$	452,485		$	251,983		$	(238,883	)		$	1,074,081

Income (loss) per share of Class A common stock:
Basic	$	1.62												$	2.40
Diluted	$	1.45												$	1.82
Weighted average common shares outstanding:
Basic		286,160									160,955		(m)		447,115
Diluted		323,579									506,140		(m)		829,719

The accompanying notes are an integral part of the pro forma combined financial statements.

NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation

The pro forma combined financial statements were prepared utilizing the historical financial information of Permian Resources and Earthstone in accordance with Article 11 of the SEC Regulation S-X, and they incorporate the acquisition method of accounting in accordance with GAAP. Certain transaction accounting adjustments have been computed in order to show the effects of the Merger on the combined historical financial information of Permian Resources and Earthstone. These adjustments are preliminary and based upon the estimated fair value of merger consideration and management’s estimates of fair value of the assets acquired and liabilities assumed.

The Permian Resources and Earthstone historical financial information have been derived from each respective company’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2023 and each respective company’s Annual Report on Form 10-K for the year ended December 31, 2022. The unaudited pro forma adjustments related to Earthstone’s Novo Transactions are derived from Earthstone’s Current Report on Form 8-K/A filed on September 5, 2023, which also include the audited financial statements of Novo for the year ended December 31, 2022; refer to Note 5 below for further information on the Novo Transactions and their associated financial results. The unaudited pro forma adjustments related to the Colgate Merger are derived from Permian Resources’ Current Report on Form 8-K filed on September 8, 2022, which also include the audited financial statements of Colgate for the years ended December 31, 2021 and 2020; refer to Note 4 below for further information on the Colgate Merger and its related financial results. These pro forma combined financial statements should be read in conjunction with the historical financial statements and related notes thereto of Permian Resources, Earthstone and Novo, as well as the pro forma financial information included in the Permian Resources and Earthstone Current Reports on Form 8-K that were referenced above.

The unaudited pro forma combined balance sheet as of September 30, 2023, gives effect to the Merger as if it had been completed on September 30, 2023. The unaudited pro forma combined statements of operations for the year ended December 31, 2022, and the nine months ended September 30, 2023 each give effect to the Transactions as if they had been completed on January 1, 2022.

The pro forma combined financial statements herein reflect pro forma adjustments that are described in the accompanying notes and are based on currently available information. The pro forma combined financial statements do not represent what the combined business’ financial position or results of operations would have been if the Transactions had actually occurred on the dates indicated, nor are they indicative of future financial position or results of operations. Actual results may differ materially from the assumptions and estimates reflected in these pro forma combined financial statements.

Note 2 - Preliminary Purchase Price Allocation

The Merger is being accounted for as a business combination using the acquisition method of accounting in accordance with Accounting Standards Codification Topic 805, Business Combinations, with Permian Resources being identified as the accounting acquirer. The allocation of the preliminary purchase price of the Merger is based upon management’s estimates and assumptions related to the fair value of assets acquired and liabilities assumed as of September 30, 2023 using currently available information. As the pro forma combined financial statements have been prepared based on these preliminary estimates, the final purchase price allocation may be materially different from the pro forma amounts included herein.

Adjustments to the estimated amounts or recognition of additional assets acquired or liabilities assumed may occur as additional information is obtained and as more detailed analyses are completed. The purchase price allocation will be finalized as soon as reasonably practicable.

The preliminary purchase price allocation is subject to change due to several factors, including, but not limited to:

•

changes in the estimated fair value of the identifiable assets acquired and liabilities assumed as of the closing date, which could result from changes in future oil and gas commodity prices, reserve estimates, discount rates, cost assumptions and other factors; and/or

•

changes to the acquired tax bases of Earthstone’s assets and liabilities as of the closing date.

The following table presents the preliminary merger consideration and purchase price allocation of the assets acquired and liabilities assumed in the Merger:


(in thousands, expect per share amounts)	Preliminary Merger Consideration
Consideration:
Shares of Earthstone Class A common stock issued and outstanding		111,338
Shares of Earthstone Class B common stock issued and outstanding⁽¹⁾		34,256

Total shares of Earthstone common stock issued and outstanding to be exchanged⁽²⁾		145,594

Exchange Ratio		1.446
Shares of Permian Resources Class A common stock to be issued as merger consideration		160,994
Shares of Permian Resources Class C common stock to be issued as merger consideration⁽¹⁾		49,534

Total Shares of Permian Resources common stock to be issued as merger consideration		210,528

Permian Resources Class A common stock price on November 1, 2023	$	14.33

Total Consideration	$	3,016,866


(in thousands)	Preliminary Purchase Price Allocation
Fair value of assets acquired:
Cash and cash equivalents	$	16,592
Accounts receivable, net		209,927
Prepaid and other current assets		40,378
Derivative instruments		2,049
Leases		6,573
Unproved oil and natural gas properties		656,808
Proved oil and natural gas properties		4,726,151
Other property and equipment		13,062

Total assets acquired	$	5,671,540

Fair value of liabilities assumed:
Accounts payable and accrued expenses	$	492,950
Derivative instruments		57,981
Long-term debt, net		1,810,178
Asset retirement obligations		60,045
Deferred income taxes		193,266
Leases		7,106
Other liabilities, net		33,148

Total liabilities assumed	$	2,654,674

Net assets acquired	$	3,016,866

⁽¹⁾

Each share of Earthstone’s Class B common stock was converted into Permian Resources Class C common stock (with the underlying Earthstone OpCo Units also being converted into a number of Permian Resource OpCo Units equal to the Exchange Ratio), which collectively represent a noncontrolling interest in the Company.

The Permian Resources Class C common stock is not publicly traded but can be exchanged, together with its underlying Permian Resources OpCo Unit, for an equal number of shares of Permian Resources Class A common stock. As such, we have utilized the Permian Resources Class A common stock trading price as a proxy for the estimated fair value of Permian Resources Class C common stock (and their underlying Permian Resources OpCo Units) for this pro forma preliminary merger consideration.

⁽²⁾

Represents shares of Earthstone common stock issued and outstanding as of October 31, 2023, which includes Earthstone’s unvested restricted and performance stock units that were fully vested and converted into the right to receive shares of Permian Resources Class A common stock (as included in merger consideration) upon closing of the Merger.

Note 3 - Preliminary Accounting and Pro forma Adjustments

The following adjustments included in the column labeled “Transaction Accounting Adjustments” have been made to the accompanying unaudited pro forma financial statements:

(a)

Certain reclassifications have been made to adjust and conform Earthstone’s historical financial information to Permian Resources’ financial statement classification as follows:

•

reclassification of $6.3 million from land and to other property and equipment, net;

•

reclassification of $0.5 million from noncurrent derivative asset to other noncurrent assets;

•

reclassification of $7.7 million from advances and finance lease liabilities to other current liabilities;

•

reclassification of $9.2 million from derivative liabilities and finance lease liabilities to other noncurrent liabilities; and

•

reclassification of $79.8 million for the nine months ended September 30, 2023, and $67.7 million for the year ended December 31, 2022 from lease operating expenses to gathering, processing and transportation expense.

(b)

Represents pro forma adjustments related to Earthstone’s Novo Transactions, that were determined to be significant to the pro forma combined financial statements. Refer to Note 5 below for further information on these transactions.

(c)

Reflects pro forma adjustments made to reduce cash and cash equivalents by $228.3 million to reflect the usage of such amounts to pay down borrowings outstanding under Earthstone’s credit facility that was assumed as a part of the Merger.

(d)

Reflects the preliminary purchase price allocation to adjust Earthstone’s assets acquired and liabilities assumed to their estimated fair values as follows:

•

an increase in unproved oil and natural gas properties of $351.1 million and a decrease in proved oil and natural gas properties of $762.7 million to reflect their estimated fair values;

•

the elimination of Earthstone’s historical accumulated depreciation, depletion, and amortization (“DD&A”) balance of $955.4 million;

•

reduction to other noncurrent assets of $18.9 million to eliminate historical unamortized debt issuance costs related to Earthstone’s credit facility;

•

an increase of $88.1 million to long-term debt to reflect Earthstone’s outstanding senior notes at their estimated fair value;

•

an increase of $27.4 million to reflect the asset retirement obligations assumed at their estimated fair value; and

•

the elimination of Earthstone’s historical shareholders’ equity and noncontrolling interest balance in accordance with the acquisition method of accounting.

(e)

For the year ended December 31, 2022, reflects estimated nonrecurring transaction costs of approximately $128.4 million related to the Merger that are expected to be incurred for advisory, legal, accounting and other professional fees, estimated severance costs, employee retention costs and other transaction related fees. As of September 30, 2023, $9.7 million in transaction costs had been incurred related to the Merger and were thereby included in the historical financial statements of Permian Resources. Therefore, with respect to the pro forma balance sheet as of September 30, 2023, $118.7 million of estimated transaction costs were incrementally reflected as an increase to accounts payable and accrued expenses, with a corresponding decrease to retained earnings. However, the $9.7 million of actual transaction costs incurred were eliminated from the combined statement of operations for the nine months ended September 30, 2023, to give effect to the Merger as if it had been completed on January 1, 2022.

(f)

Reflects pro forma adjustments for Earthstone’s outstanding restricted stock awards and performance stock units that, upon closing of the Merger were fully vested and converted into Permian Resources Class A common stock (as included in merger consideration), as follows:

•

the removal of a portion of Earthstone’s current and noncurrent liabilities for performance stock units that were classified as liability based awards but which were settled in Permian Resources Class A common stock;

•

a decrease in general and administrative expenses (“G&A”) of $27.0 million for the nine months ended September 30, 2023 as stock-based compensation expense for these Earthstone awards would not be recognized during this period assuming the Merger closed on January 1, 2022; and

•

an increase in G&A of $54.0 million for the year ended December 31, 2022 to recognize additional stock based compensation expense for the accelerated vesting of these Earthstone awards assuming the Merger closed on January 1, 2022.

(g)

Reflects the issuance of 161.0 million shares of Permian Resources Class A common stock and 49.5 million shares of Permian Resources Class C common stock (including underlying Permian Resources OpCo Units) to Earthstone’s stockholders as purchase consideration from Permian Resources to effect the Merger. The issuance of Permian Resources Class A common stock resulted in an increase to additional paid in capital and the issuance of Permian Resources Class C common stock resulted in an increase to the noncontrolling interest. Following these issuances, the noncontrolling interest ownership of Permian Resources OpCo is estimated to be 34%.

(h)

Reflects pro forma DD&A expense calculated in accordance with the successful efforts method of accounting for oil and gas properties utilizing the combined company’s production, combined company’s estimated proved reserves, and the preliminary estimated fair value ascribed to the oil and natural gas properties acquired in the Merger as follows:

•

a decrease in DD&A expense of $46.0 million in the pro forma combined statement of operations for the nine months ended September 30, 2023 consisting of (i) the elimination of $345.8 million of Earthstone’s historical DD&A expense, (ii) the elimination of $51.7 million of Novo’s historical DD&A expense, and (iii) pro forma incremental DD&A expense for the combined companies of $351.5 million for the first nine months of 2023; and

•

a decrease in DD&A expense of $40.0 million in the pro forma combined statement of operations for the year ended December 31, 2022 consisting of (i) the elimination of $304.5 million of Earthstone’s historical DD&A expense, (ii) the elimination of $65.3 million of Novo’s historical DD&A expense, and (iii) pro forma incremental DD&A expense for the combined companies of $329.8 million for the year ended December 31, 2022.

(i)

Reflects the elimination of Earthstone and Novo’s historical gains on sale of long-lived assets and related transaction costs, which would not have been incurred giving effect to the Merger as if it had been completed on January 1, 2022.

(j)

Reflects pro forma interest expense resulting from (i) giving effect to Earthstone’s senior notes assumed by Permian Resources in connection with the Merger, as if these notes had been in place and outstanding as of January 1, 2022, (ii) the assumption of Earthstone’s borrowings outstanding under its existing credit facility, and (iii) the adjustment to debt premium amortization to reflect Earthstone’s senior notes at fair value as of the assumed January 1, 2022 closing date of the Merger, which in the aggregate resulted in the following adjustments:

•

an increase in interest expense of $2.6 million in the pro forma combined statement of operations for the nine months ended September 30, 2023 consisting of (i) the elimination of $84.3 million of Earthstone’s historical interest expense, (ii) pro forma interest expense of $64.3 million for Earthstone’s assumed senior notes, as if

these notes had been outstanding since January 1, 2022 incorporating debt premium amortization based on the notes’ fair value as of the assumed January 1, 2022 closing date of the Merger, (iii) pro forma interest expense of $25.2 million for additional borrowings under the credit facility, and (iv) the elimination of $2.6 million of Permian Resources’ interest expense related to a commitment fee that would have been expensed on January 1, 2022 given the assumed date of the Merger; and

•

an increase in interest expense of $47.1 million in the pro forma combined statement of operations for the year ended December 31, 2022 consisting of (i) the elimination of $66.8 million of Earthstone’s historical interest expense, (ii) pro forma interest expense of $86.0 million for Earthstone’s assumed senior notes, as if these notes had been outstanding since January 1, 2022, incorporating debt premium amortization based on the notes’ fair value as of the assumed January 1, 2022 closing date of the Merger, (iii) pro forma interest expense of $23.2 million for additional borrowings under the credit facility, and (iv) pro forma interest expense of $4.7 million related to a commitment fee paid by Permian Resources in conjunction with the Merger.

Pro forma interest expense for the additional borrowings under the Company’s credit facility was calculated using the weighted average effective interest rate under the Company’s credit facility of 7.0% for the nine months ended September 30, 2023 and 4.5% for the year ended December 31, 2022. The Company’s credit facility interest rate is based on a market-based benchmark interest rate plus an applicable margin that is dependent on the percentage of the borrowing base utilized. As a result, the Company’s credit facility interest rate is subject to market fluctuations.

The impact on net income attributable to Permian Resources Class A common stock of a 0.125% increase or decrease in the interest rate would be approximately $0.4 million for the nine months ended September 30, 2023 and approximately $0.6 million for the year ended December 31, 2022.

(k)

Reflects the income tax effects of the transaction accounting adjustments and Earthstone’s Novo Transactions pro forma adjustments, where presented (which have been reduced by the corresponding net income attributable to noncontrolling interest that is not taxable to the c-corporation) at the statutory tax rate of 22.4%, for the year ended December 31, 2022 and nine months ended September 30, 2023. The blended tax rate of 22.4% is calculated at the federal statutory rate of 21% plus the Company’s state-apportioned statutory rate, net of federal benefit, of 1.4%.

(l)

Reflects net income attributable to noncontrolling interest owners discussed in item (g) above, which is not subject to U.S. federal or state income tax within the c-corporation.

(m)

Reflects the adjustment to basic and diluted weighted average shares outstanding to reflect the issuance of Permian Resources common stock issued for merger consideration as if it was issued and outstanding as of January 1, 2022. The effect of potentially dilutive securities from the issuance of Permian Resources Class C common stock was determined using the “if-converted” method.

(n)

Incorporates pro forma adjustments related to the Colgate Merger completed by Permian Resources during the year ended December 31, 2022. Refer to Note 4 below for further information on these transactions.

Note 4 - Permian Resources Historical Merger

The Company completed its merger with Colgate, and all results of the acquired assets are included in the consolidated financial statements of Permian Resources as of September 1, 2022, the closing date of the Colgate Merger. The Colgate Merger has been accounted for as a business combination using the acquisition method of accounting, with the Company being identified as the accounting acquirer. Refer to Note 2—Business Combination under Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for further information regarding the Colgate Merger as well as merger consideration and purchase price allocation.

Due to the closing date of the Colgate Merger occurring on September 1, 2022, the financial results of Colgate are not included in the historical financial information of Permian Resources from January 1, 2022 through August 31, 2022. As a result, pro forma financial information has been prepared for the statement of operations of Permian Resources for the year ended December 31, 2022, giving effect to the Colgate Merger as if it had been completed on January 1, 2022.

The pro forma combined financial statements have been prepared from the respective historical consolidated financial statements of the Company and Colgate to reflect transaction accounting adjustments to the Company’s historical financial information that management believes are factually supportable and that are expected to have a continuing impact on results of operations, with the exception of certain nonrecurring items incurred in connection with the Colgate Merger.

PERMIAN RESOURCES CORPORATION HISTORICAL MERGER

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2022

(in thousands, except per share data)


	Historical						Colgate					Permian
	Permian			Colgate			Merger					Resources Pro
	Resources			(1/1/22-8/31/22)			Adjustments					Forma
Operating revenues		(a)			(b)
Oil and gas sales	$	2,131,265		$	1,102,410		$	—				$	3,233,675
Operating expenses
Lease operating expenses		171,867			99,865			—					271,732
Severance and ad valorem taxes		155,724			80,123			—					235,847
Gathering, processing and transportation expenses		97,915			11,839			—					109,754
Depreciation, depletion, and amortization		444,678			167,644			6,366		(c	)		618,688
General and administrative expenses		159,554			23,179			18,136		(d	)		200,869
Merger and integration expense		77,424			—			—					77,424
Profit sharing by affiliates		—			22,346			(22,346	)	(e	)		—
Impairment and abandonment expense		3,875			—			—					3,875
Exploration and other expenses		11,378			3,732			—					15,110

Total operating expenses		1,122,415			408,728			2,156					1,533,299
Net gain (loss) on sale of long-lived assets		(1,314	)		53,718			(53,718	)	(f	)		(1,314	)

Income (loss) from operations		1,007,536			747,400			(55,874	)				1,699,062
Other income (expense)
Interest expense		(95,645	)		(53,196	)		(8,014	)	(g	)		(156,855	)
Net gain (loss) on derivative instruments		(42,368	)		(386,058	)		—					(428,426	)
Other income (expense)		609			10			—					619

Total other income (expense)		(137,404	)		(439,244	)		(8,014	)				(584,662	)

Income (loss) before income taxes		870,132			308,156			(63,888	)				1,114,400
Income tax (expense) benefit		(120,292	)		—			7,468		(h	)		(112,824	)

Net income (loss)		749,840			308,156			(56,420	)				1,001,576
Less: Net (income) loss attributable to noncontrolling interest		(234,803	)		—			(303,187	)	(i	)		(537,990	)

Net income (loss) attributable to Class A common stock	$	515,037		$	308,156		$	(359,607	)			$	463,586

Income (loss) per share of Class A common stock:
Basic	$	1.80											1.62
Diluted	$	1.61											1.45
Weighted average common shares outstanding:
Basic		286,160						—					286,160
Diluted		322,816						763		(j	)		323,579

The following adjustments included in the column labeled “Colgate Merger Adjustments” have been made to the unaudited pro forma financial statements of Permian Resources:

(a)

Permian Resources’ historical financial results for the year ended December 31, 2022 include the results of operations for assets acquired and liabilities assumed in the Colgate Merger from September 1, 2022 through December 31, 2022.

(b)

Colgate’s historical financial results include its results of operations for the eight months from January 1, 2022 through August 31, 2022, the closing of the Colgate Merger.

(c)

Reflects an increase in DD&A expense of $6.4 million in the pro forma combined statement of operations for the year ended December 31, 2022 consisting of (i) the elimination of $167.6 million of Colgate’s historical DD&A expense and (ii) pro forma incremental DD&A expense for the combined companies of $174.0 million for the year ended December 31, 2022.

(d)

Reflects the expected incremental stock compensation expense related to equity-based restricted stock and performance stock units granted to employees in connection with and on the closing date of the Colgate Merger.

(e)

Colgate’s historical profit sharing by affiliates expense represents cash payments made directly by affiliates of Colgate to members of its management team for profit interests that they were granted and then subsequently now own at CEP III Holdings, LLC and affiliated entities. These payments are not made directly by Colgate and in the future will not be made by the combined Company. Therefore, $22.3 million for the year end December 31, 2022, was eliminated from the statement of operations as these payments would not have been incurred giving effect to the Colgate Merger as if it had been completed on January 1, 2022.

(f)

Reflects the elimination of Colgate’s historical gain on sale of long-lived assets that would not have been incurred giving effect to the Colgate Merger as if it had been completed on January 1, 2022.

(g)

Reflects pro forma interest expense resulting from (i) additional borrowings under the Company’s credit facility for the cash consideration paid to Colgate unitholders, (ii) the assumption of Colgate’s borrowings outstanding under its credit facility as of the Colgate Merger closing date, as if the assumed borrowings had been outstanding since January 1, 2022, and (iii) the adjustment to debt discount amortization to reflect Colgate’s senior notes at fair value, which in the aggregate resulted in the following adjustments:

•

an increase in interest expense of $8.0 million in the pro forma combined statement of operations for the year ended December 31, 2022 consisting of (i) the elimination of $53.2 million of Colgate’s historical interest expense, (ii) pro forma interest expense of $47.3 million for the senior notes, incorporating debt discount amortization based on the notes fair value as of the merger closing date, and (iii) additional pro forma interest expense of $13.9 million assumed for borrowings under the credit facility as of January 1, 2022.

(h)

Reflects the income tax effects of the transaction accounting adjustments, where presented (which have been reduced by the corresponding net loss attributable to noncontrolling interest that is not taxable to the c-corporation) at the statutory tax rate of 22.6%, for the year ended December 31, 2022. The blended tax rate of 22.6% is calculated at the federal statutory rate of 21% plus the Company’s state-apportioned statutory rate of 1.6%.

(i)

Reflects net income (loss) attributable to noncontrolling interest owners, which is not subject to U.S. federal or state income tax within the c-corporation. In connection with the Colgate Merger, 269.3 million shares of Permian Resources Class C common stock were issued for the share consideration to Colgate unitholders including underlying Permian Resources OpCo Units. The issuance of these units creates a noncontrolling interest in the Company, which is equal to approximately 48% of Permian Resources common stock issued and outstanding as of December 31, 2022.

(j)

Considers the effect of potentially dilutive securities from (i) the Permian Resources Class C common stock issued for the Colgate Merger consideration using the “if-converted” method assuming the Colgate Merger was completed on January 1, 2022; and (ii) unvested equity-based restricted stock and performance stock units granted in connection with the Colgate Merger using the treasury stock method.

Note 5 - Earthstone’s Novo Transactions

On June 14, 2023, Earthstone OpCo entered into (i) a Securities Purchase Agreement with Novo Oil & Gas Legacy Holdings, LLC, Novo Intermediate, LLC and Novo Oil & Gas Holdings, LLC (collectively “Novo”), pursuant to which Earthstone agreed to acquire 100% of the issued and outstanding equity interests of Novo (the “Novo Acquisition”) and (ii) an Acquisition and Cooperation Agreement with Northern Oil and Gas, Inc. (“NOG”), pursuant to which NOG agreed to acquire, immediately after the closing of the Novo Acquisition, an undivided and one-third interest in Novo’s oil and gas assets acquired in the Novo Acquisition for net proceeds of $468.4 million (the “Novo Divestiture” together with the Novo Acquisition, “Earthstone’s Novo Transactions”).

The Novo Acquisition was deemed to be material to an investor’s understanding of Earthstone’s business that is being acquired by Permian Resources in the Merger and has therefore been included in the pro forma combined financial statements. Due to the closing date of Earthstone’s Novo Transactions occurring on August 15, 2023, the financial results of Novo are not included in the historical information of Earthstone from January 1, 2022 through August 15, 2023. As a result, pro forma financial information for Earthstone’s Novo Transactions have been prepared as if the transactions occurred on January 1, 2022 for the pro forma combined statements of operations. Earthstone’s Novo Transactions pro forma information is presented below and was determined as follows:

(i) Novo Historical - derived from Novo’s historical unaudited interim financial information for the six months ended June 30, 2023 and from Novo’s audited financial information for the year ended December 31, 2022. Financial information for the interim period from July 1, 2023 to August 15, 2023, the closing date of the Novo Transactions, was based upon management’s estimates and included in the pro forma financial statements below;

(ii) Unacquired Portion of Novo - reflects the unacquired portion of Novo based upon information provided by Earthstone and assumptions made by the Company that management believes are reasonable based upon information available at the time of this filing; and

(iii) Novo Portion Sold to NOG - reflects adjustments to remove the oil and gas property interests sold to NOG in the Novo Divestiture.

This information is based on historical results of operations, adjusted for certain estimated accounting adjustments, and certain assumptions that management believes are reasonable, and does not represent the actual results of operations if the transactions would have occurred on January 1, 2022, nor is it necessarily indicative of future results.

EARTHSTONE’S NOVO TRANSACTIONS

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2023


(in thousands)	Novo Historical			Unacquired Portion of Novo			Novo Portion Sold to NOG			Earthstone’s Novo Transactions
Operating revenues		(i)			(ii)			(iii)
Oil and gas sales	$	432,670		$	(64,663	)	$	(106,132	)	$	261,875
Operating expenses
Lease operating expenses		57,657			—			(16,867	)		40,790
Severance and ad valorem taxes		32,441			(4,749	)		(7,939	)		19,753
Depreciation, depletion, and amortization		81,668			(4,164	)		(25,835	)		51,669
General and administrative expenses		19,128			(1,887	)		—			17,241
Exploration and other expenses		123			(123	)		—			—

Total operating expense		191,017			(10,923	)		(50,641	)		129,453
Net gain (loss) on sale of long-lived assets		16			(16	)		—			—

Income (loss) from operations	$	241,669		$	(53,756	)	$	(55,491	)	$	132,422
Other income (expense)
Interest expense		(13,298	)		13,298			—			—
Gain (loss) on commodity derivatives		28,912			(28,912	)		—			—
Other income (expense)		(1,760	)		(6	)		—			(1,766	)

Total other income (expense)		13,854			(15,620	)		—			(1,766	)

Income before income taxes		255,523			(69,376	)		(55,491	)		130,656
Income tax expense		(160	)		—			53			(107	)

Net Income	$	255,363		$	(69,376	)	$	(55,438	)	$	130,549

EARTHSTONE’S NOVO TRANSACTIONS

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2022


(in thousands)	Novo Historical			Unacquired Portion of Novo			Novo Portion Sold to NOG			Earthstone’s Novo Transactions
Operating revenues		(i)			(ii)			(iii)
Oil and gas sales	$	663,540		$	(92,250	)	$	(190,430	)	$	380,860
Operating expenses
Lease operating expenses		45,326			—			(15,109	)		30,217
Severance and ad valorem taxes		48,969			(7,574	)		(13,798	)		27,597
Gathering, processing and transportation expenses
Depreciation, depletion, and amortization		102,851			(4,889	)		(32,654	)		65,308
General and administrative expenses		8,641			(818	)		—			7,823
Exploration and other expenses		808			(282	)		—			526

Total operating expense		206,595			(13,563	)		(61,561	)		131,471
Net gain (loss) on sale of long-lived assets		(60	)		136			—			76

Income (loss) from operations	$	456,885		$	(78,551	)	$	(128,869	)	$	249,465
Other income (expense)
Interest expense		(8,791	)		8,791			—			—
Gain (loss) on commodity derivatives		(10,325	)		10,325			—			—
Other income (expense)		2,664			88			—			2,752

Total other income (expense)		(16,452	)		19,204			—			2,752

Income before income taxes		440,433			(59,347	)		(128,869	)		252,217
Income tax expense		(403	)		52			117			(234	)

Net Income	$	440,030		$	(59,295	)	$	(128,752	)	$	251,983

Note 6 - Supplemental Pro Forma Information About Oil and Natural Gas Producing Activities

The following tables present estimated pro forma combined proved oil and gas reserve information as of and for the year ended December 31, 2022. The amounts included below represent the respective estimates made as of December 31, 2022 by Permian Resources, Earthstone, and Novo while they were separate companies. These estimates have not been updated for changes in development plans or other factors, which may have occurred subsequent to December 31, 2022, including the Merger. This pro forma information has been prepared for illustrative purposes and is not intended to be a projection of future results. Future results may vary significantly from the results presented.

Estimated Quantities of Proved Oil and Gas Reserves

The following tables present the estimated pro forma combined net estimated proved developed and undeveloped oil and gas reserves information as of December 31, 2022, along with a summary of changes in quantities of proved oil and gas reserves:


	Crude Oil (MBbls)
	Permian Resources Historical			Earthstone Historical			Earthstone’s Novo Transactions⁽¹⁾			Pro Forma Combined
Total proved reserves:
Balance - December 31, 2021		153,453			61,075			20,200			234,728
Extensions and discoveries		51,906			13,430			4,652			69,988
Revisions to previous estimates		(22,181	)		(7,432	)		(2,131	)		(31,744	)
Purchases of reserves in place		124,072			85,237			70			209,379
Divestitures of reserves in place		(1,983	)		(2,044	)		—			(4,027	)
Production		(18,235	)		(11,866	)		(2,259	)		(32,360	)

Balance - December 31, 2022		287,032			138,400			20,532			445,964

Proved developed reserves:
December 31, 2021		77,973			35,824			4,364			118,161
December 31, 2022		156,941			88,759			12,335			258,035
Proved undeveloped reserves:
December 31, 2021		75,480			25,251			15,836			116,567
December 31, 2022		130,091			49,641			8,197			187,929


	Natural Gas (MMcf)
	Permian Resources Historical			Earthstone Historical			Earthstone’s Novo Transactions⁽¹⁾			Pro Forma Combined
Total proved reserves:
Balance - December 31, 2021		577,005			284,881			224,893			1,086,779
Extensions and discoveries		144,316			51,346			20,743			216,405
Revisions to previous estimates		(111,405	)		37,316			(26,620	)		(100,709	)
Purchases of reserves in place		494,221			429,646			979			924,846
Divestitures of reserves in place		(10,874	)		(6,631	)		—			(17,505	)
Production		(59,692	)		(54,392	)		(18,022	)		(132,106	)

Balance - December 31, 2022		1,033,571			742,166			201,973			1,977,710

Proved developed reserves:
December 31, 2021		326,223			190,999			58,861			576,083
December 31, 2022		652,270			574,762			143,669			1,370,701
Proved undeveloped reserves:
December 31, 2021		250,782			93,882			166,032			510,696
December 31, 2022		381,301			167,404			58,304			607,009


	Natural Gas Liquids (MBbls)
	Permian Resources Historical			Earthstone Historical			Earthstone’s Novo Transactions⁽¹⁾			Pro Forma Combined
Total proved reserves:
Balance - December 31, 2021		55,583			39,031			24,473			119,087
Extensions and discoveries		19,387			7,895			3,837			31,119
Revisions to previous estimates		(9,279	)		11,663			4,787			7,171
Purchases of reserves in place		66,437			56,268			148			122,853
Divestitures of reserves in place		(2,527	)		(1,417	)		—			(3,944	)
Production		(6,750	)		(7,599	)		(2,607	)		(16,956	)

Balance - December 31, 2022		122,851			105,841			30,638			259,330

Proved developed reserves:
December 31, 2021		30,318			25,917			6,242			62,477
December 31, 2022		74,940			80,168			20,944			176,052
Proved undeveloped reserves:
December 31, 2021		25,265			13,114			18,231			56,610
December 31, 2022		47,911			25,673			9,694			83,278

⁽¹⁾	Represents reserves acquired as a part of Earthstone’s Novo Transactions discussed in Note 5, which have been adjusted to reflect solely the portion of Novo’s oil and gas reserves retained by Earthstone.

Standardized Measure of Discounted Future Net Cash Flows

The pro forma combined standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves as of December 31, 2022 is as follows:


	Year Ended December 31, 2022
(in thousands)	Permian Resources Historical			Earthstone Historical			Earthstone’s Novo Transactions⁽¹⁾			Pro Forma Combined
Future cash inflows	$	36,444,649		$	21,506,026		$	4,013,814		$	61,964,489
Future development costs		(3,051,047	)		(1,207,597	)		(195,155	)		(4,453,799	)
Future production costs		(9,381,857	)		(6,362,901	)		(1,258,890	)		(17,003,648	)
Future income tax expenses		(4,821,696	)		(1,910,370	)		(4,213	)		(6,736,279	)

Future net cash flows		19,190,049			12,025,158			2,555,556			33,770,763
10% discount to reflect timing of cash flows		(9,764,471	)		(5,300,657	)		(925,442	)		(15,990,570	)

Standardized measure of discounted future net cash flows	$	9,425,578		$	6,724,501		$	1,630,114		$	17,780,193

The changes in the pro forma combined standardized measure of discounted future net cash flows relating to proved reserves for the year ended December 31, 2022 are as follows:


	Year Ended December 31, 2022
(in thousands)	Permian Resources Historical			Earthstone Historical			Earthstone’s Novo Transactions⁽¹⁾			Pro Forma Combined
Standardized measure of discounted future net cash flows, beginning of period	$	3,396,320		$	1,818,372		$	941,569		$	6,156,261
Sales of oil, natural gas and NGLs, net of production costs		(1,705,759	)		(1,341,586	)		(317,711	)		(3,365,056	)
Purchase of minerals in place		5,555,649			2,011,980			8,760			7,576,389
Divestiture of minerals in place		(103,030	)		(76,570	)		—			(179,600	)
Extensions and discoveries, net of future development costs		1,789,830			1,178,521			303,632			3,271,983
Previously estimated development costs incurred during the period		369,088			246,705			103,008			718,801
Net change in prices and production costs		2,508,583			3,838,439			489,293			6,836,315
Change in estimated future development costs		85,931			(295,553	)		(32,632	)		(242,254	)
Revisions of previous quantity estimates		(1,127,536	)		3,283			(25,082	)		(1,149,335	)
Accretion of discount		387,747			345,642			94,330			827,719
Net change in income taxes		(1,807,957	)		(866,805	)		(818	)		(2,675,580	)
Net change in timing of production and other		76,712			(137,927	)		65,765			4,550

Standardized measure of discounted future net cash flows, end of period	$	9,425,578		$	6,724,501		$	1,630,114		$	17,780,193

⁽¹⁾	Represents reserves acquired as a part of Earthstone’s Novo Transactions discussed in Note 5, which have been adjusted to reflect solely the portion of Novo’s oil and gas reserves retained by Earthstone.

Document and Entity Information	Nov. 08, 2023
Cover [Abstract]
Entity Registrant Name	Permian Resources Corp
Amendment Flag	false
Entity Central Index Key	0001658566
Document Type	8-K
Document Period End Date	Nov. 08, 2023
Entity Incorporation State Country Code	DE
Entity File Number	001-37697
Entity Tax Identification Number	47-5381253
Entity Address, Address Line One	300 N. Marienfeld St.
Entity Address, Address Line Two	Ste 1000
Entity Address, City or Town	Midland
Entity Address, State or Province	TX
Entity Address, Postal Zip Code	79701
City Area Code	(432)
Local Phone Number	695-4222
Written Communications	false
Soliciting Material	false
Pre Commencement Tender Offer	false
Pre Commencement Issuer Tender Offer	false
Security 12b Title	Class A Common Stock, par value $0.0001 per share
Trading Symbol	PR
Security Exchange Name	NYSE
Entity Emerging Growth Company	false