Earthstone Energy, Inc. Reports 2020 Second Quarter and Year-to-Date Financial Results

Achieved Free Cash Flow of $35 Million in Second Quarter

Earthstone Energy, Inc. ESTE ("Earthstone", the "Company", "we", "our" or "us"), today announced financial and operating results for the three months ended June 30, 2020.

Second Quarter 2020 Highlights

• Average daily production of 13,555 Boepd⁽¹⁾
• Adjusted EBITDAX⁽²⁾ of $39.8 million ($32.30 per Boe)
• All-in cash costs⁽²⁾ of $10.11 per Boe
• Operating Margin⁽²⁾ of $11.83 per Boe ($35.64 including realized hedge settlements)
• Free Cash Flow⁽²⁾ of $35.3 million
• Capital expenditures of $3.2 million
• Net loss of $(35.9) million, or $(0.55) per Adjusted Diluted Share⁽²⁾
  • Adjusted net income of $12.8 million, or $0.20 per Adjusted Diluted Share⁽²⁾

Year-to-Date 2020 Highlights

• Average daily production of 14,661 Boepd⁽¹⁾
• Adjusted EBITDAX⁽²⁾ of $78.0 million ($29.25 per Boe)
• All-in cash costs⁽²⁾ of $11.62 per Boe
• Operating Margin⁽²⁾ of $17.75 per Boe ($32.41 including realized hedge settlements)
• Free Cash Flow⁽²⁾ of $30.0 million
• Capital expenditures of $45.1 million
• Net income of $0.8 million, or $0.01 per Adjusted Diluted Share⁽²⁾
  • Adjusted net income of $21.0 million, or $0.32 per Adjusted Diluted Share⁽²⁾

Management Comments

Mr. Robert J. Anderson, President and CEO of Earthstone, commented, "We had a good quarter against a difficult backdrop that was unprecedented in our industry with the second quarter of 2020 being hit with low commodity prices, reduced demand due to COVID-19 and threats of forced curtailments. Due to our strong hedge position and continued focus on reducing cash costs, we achieved both significant Adjusted EBITDAX of almost $40 million, and generated $35 million of Free Cash Flow. We expect to continue to generate Free Cash Flow for the remainder of the year which will be used to reduce our borrowings and, additionally, we expect this reduction to assist us in achieving our target of being below 1x net debt to Adjusted EBITDAX at year-end."

Mr. Anderson continued, "We executed our voluntary shut-in / curtailment program successfully in the second quarter without production complications or additional expense. Our continued focus on operating expense reduction was evident during the quarter as expenses were reduced by 40% compared to the first quarter, which was partially driven by shut-ins during May. All of our wells have been returned to full production and based on our recently announced updated production guidance, we expect to average 13,000 - 14,000 Boepd for the full year and therefore have relatively flat production from 2019 to 2020 with our previously guided capital expenditures of $50-60 million. With the vast majority of our capital program for 2020 completed in the first half of the year, we now have 11 wells drilled but uncompleted. Depending on completion timing, these 11 wells should allow us to maintain production relatively flat in 2021 with net capital expenditures presently estimated at $30 million. For the remainder of 2020 we will continue to focus on cost control and generating Free Cash Flow while considering various consolidation opportunities that are a direct result of the current environment."

Selected Financial Data (unaudited)

Liquidity Update

As of June 30, 2020, we had $1.8 million in cash and $168.6 million of long-term debt outstanding under our senior secured revolving credit facility (our "Credit Facility") with a borrowing base of $275 million. With the $106.4 million of undrawn borrowing base capacity and $1.8 million in cash, we had total liquidity of approximately $108.2 million. Through June 30, 2020, we had incurred $45.1 million of our estimated $50 - $60 million in capital expenditures for 2020.

Through July 31, 2020, we have paid down an additional $14.3 million in outstanding borrowings under our Credit Facility as of June 30, 2020 which is in line with our 2020 expectations to generate Free Cash Flow and further reduce our outstanding borrowings absent any extraordinary events. However, it should be noted that we may borrow temporarily as the timing of our cash flows may fluctuate between reporting periods.

Commodity Hedging

The following table sets forth our outstanding derivative contracts as of June 30, 2020. When aggregating multiple contracts, the weighted average contract price is disclosed.

As of June 30, 2020:

Updated 2020 Guidance

The Company's 2020 production, capital budget and Cash G&A guidance remain unchanged. We currently assume no additional operated or non-operated wells will be drilled or completed in 2020 but will continue to monitor market conditions and consider adjusting our plan appropriately. Additional cost guidance for 2020 is provided below.

Conference Call Details

Earthstone is hosting a conference call on Thursday, August 6, 2020 at 12:00 p.m. Eastern (11:00 a.m. Central) to discuss the Company's financial results for the second quarter of 2020 and its outlook for the remainder of 2020. Prepared remarks by Robert J. Anderson, President and Chief Executive Officer, and Mark Lumpkin, Jr., Executive Vice President and Chief Financial Officer, will be followed by a question and answer session.

Investors and analysts are invited to participate in the call by dialing 877-407-6184 for domestic calls or 201-389-0877 for international calls, in both cases asking for the Earthstone conference call. A webcast will also be available through the Company website (www.earthstoneenergy.com). Please select "Events & Presentations" under the "Investors" section of the Company's website and log on at least 10 minutes in advance to register.

A replay of the call and webcast will be available on the Company's website and by telephone until 12:00 p.m. Eastern (11:00 a.m. Central), Thursday, August 20, 2020. The number for the replay is 877-660-6853 for domestic calls or 201-612-7415 for international calls, using Replay ID: 13707795.

About Earthstone Energy, Inc.

Earthstone Energy, Inc. is a growth-oriented, independent energy company engaged in development and operation of oil and natural gas properties. The Company's primary assets are in the Midland Basin of west Texas and the Eagle Ford Trend of south Texas. Earthstone is traded on NYSE under the symbol "ESTE." For more information, visit the Company's website at www.earthstoneenergy.com.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements that are not strictly historical statements constitute forward-looking statements and may often, but not always, be identified by the use of such words such as "expects," "believes," "intends," "anticipates," "plans," "estimates," "forecast," "guidance," "target," "potential," "possible," or "probable" or statements that certain actions, events or results "may," "will," "should," or "could" be taken, occur or be achieved. Forward-looking statements are based on current expectations and assumptions and analyses made by Earthstone and its management in light of experience and perception of historical trends, current conditions and expected future developments, as well as other factors appropriate under the circumstances that involve various risks and uncertainties that could cause actual results to differ materially from those reflected in the statements. These risks include, but are not limited to, those set forth in Earthstone's annual report on Form 10-K for the year ended December 31, 2019, quarterly reports on Form 10-Q, recent current reports on Form 8-K, and other Securities and Exchange Commission ("SEC") filings. Earthstone undertakes no obligation to revise or update publicly any forward-looking statements except as required by law.

Earthstone Energy, Inc.
Non-GAAP Financial Measures
Unaudited

The non-GAAP financial measures of Adjusted Diluted Shares, Adjusted EBITDAX, Adjusted Net Income, All-In Cash Costs and Free Cash Flow, as defined and presented below, are intended to provide readers with meaningful information that supplements our financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). Further, these non-GAAP measures should only be considered in conjunction with financial statements and disclosures prepared in accordance with GAAP and should not be considered in isolation or as a substitute for GAAP measures, such as net income or loss, operating income or loss or any other GAAP measure of financial position or results of operations. Adjusted EBITDAX and Adjusted Net Income are presented herein and reconciled from the GAAP measure of net income (loss) because of their wide acceptance by the investment community as a financial indicator.

I. Adjusted Diluted Shares

We define "Adjusted Diluted Shares" as the weighted average shares of Class A Common Stock - Diluted outstanding plus the weighted average shares of Class B Common Stock outstanding.

Our Adjusted Diluted Shares measure provides a comparable per share measurement when presenting results such as Adjusted EBITDAX and Adjusted Net Income that include the interests of both Earthstone and the noncontrolling interest. Adjusted Diluted Shares is used in calculating several metrics that we use as supplemental financial measurements in the evaluation of our business, none of which should be considered as an alternative to, or more meaningful than, net income as an indicator of operating performance.

Adjusted Diluted Shares for the periods indicated:

II. Adjusted EBITDAX

The non-GAAP financial measure of Adjusted EBITDAX (as defined below), as calculated by us below, is intended to provide readers with meaningful information that supplements our financial statements prepared in accordance with GAAP. Further, this non-GAAP measure should only be considered in conjunction with financial statements and disclosures prepared in accordance with GAAP and should not be considered in isolation or as a substitute for GAAP measures, such as net income or loss, operating income or loss or any other GAAP measure of financial position or results of operations. Adjusted EBITDAX is presented herein and reconciled from the GAAP measure of net (loss) income because of its wide acceptance by the investment community as a financial indicator.

We define "Adjusted EBITDAX" as net (loss) income plus, when applicable, accretion of asset retirement obligations; impairment expense; depreciation, depletion and amortization; interest expense, net; transaction costs; loss (gain) on sale of oil and gas properties, net; rig termination expense; exploration expense; unrealized loss (gain) on derivative contracts; stock-based compensation (non-cash); and income tax (benefit) expense.

Our Adjusted EBITDAX measure provides additional information that may be used to better understand our operations. Adjusted EBITDAX is one of several metrics that we use as a supplemental financial measurement in the evaluation of our business and should not be considered as an alternative to, or more meaningful than, net (loss) income as an indicator of operating performance. Certain items excluded from Adjusted EBITDAX are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic cost of depreciable and depletable assets. Adjusted EBITDAX, as used by us, may not be comparable to similarly titled measures reported by other companies. We believe that Adjusted EBITDAX is a widely followed measure of operating performance and is one of many metrics used by our management team and by other users of our consolidated financial statements. For example, Adjusted EBITDAX can be used to assess our operating performance and return on capital in comparison to other independent exploration and production companies without regard to financial or capital structure and to assess the financial performance of our assets and our company without regard to capital structure or historical cost basis.

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

III. Adjusted Net Income

We define "Adjusted Net Income" as net (loss) income plus, when applicable, unrealized loss (gain) on derivative contracts; impairment expense; loss (gain) on sale of oil and gas properties; write-off of deferred financing costs; transaction costs; and the associated changes in estimated income tax.

Our Adjusted Net Income measure provides additional information that may be used to further understand our operations. Adjusted Net Income is one of several metrics that we use as a supplemental financial measurement in the evaluation of our business and should not be considered as an alternative to, or more meaningful than, net (loss) income as an indicator of operating performance. Certain items excluded from Adjusted Net Income are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic cost of depreciable and depletable assets. Adjusted Net Income, as used by us, may not be comparable to similarly titled measures reported by other companies. We believe that Adjusted Net Income is a widely followed measure of operating performance and is one of many metrics used by our management team and by other users of our consolidated financial statements. For example, Adjusted Net Income can be used to assess our operating performance and return on capital in comparison to other independent exploration and production companies without regard to financial or capital structure and to assess the financial performance of our assets and our company without regard to capital structure or historical cost basis.

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

IV. All-In Cash Costs

We define "All-In Cash Costs" as lease operating expenses plus production and ad valorem taxes, interest expense, net, and general and administrative expense (excluding stock-based compensation).

Our All-In Cash Costs measure provides additional information that may be used to further understand our total cost of production. We use All-In Cash Costs as a supplemental financial measurement in the evaluation of our operational performance. We believe that investors benefit from having access to the same financial measures that our management uses in evaluating our results. All-In Cash Costs should not be considered as an alternative to, or more meaningful than, net (loss) income as an indicator of operating performance. All-In Cash Costs, as used by us, may not be comparable to similarly titled measures reported by other companies.

All-In Cash Costs for the periods indicated:

V. Free Cash Flow

Free Cash Flow is a measure that we use as an indicator of our ability to fund our development activities. We define Free Cash Flow as Adjusted EBITDAX (defined above), less interest expense, less accrual-based capital expenditures.

Management believes that Free Cash Flow, which measures our ability to generate additional cash from our business operations, is an important financial measure for use in evaluating the Company's financial performance. Free Cash Flow should be considered in addition to, rather than as a substitute for, consolidated net income as a measure of our performance and net cash provided by operating activities as a measure of our liquidity.

Free Cash Flow for the periods indicated:

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