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Acquisitions & Divestitures

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Earthstone Energy, Inc. (NYSE: ESTE) (“Earthstone” or the “Company”) today announced that it has entered into a definitive agreement to acquire Independence Resources Management, LLC (“IRM”), a privately held independent E&P company backed by Warburg Pincus, LLC and its affiliates (“Warburg”), and operating in the Midland Basin (the “Transaction”). The aggregate purchase price of the Transaction is expected to be approximately $185.9 million consisting of an estimated amount of $135.2 million in cash as of November 30, 2020 (but expected to be lower on the closing date based on current forecasts) and approximately 12.7 million shares of Earthstone’s Class A common stock valued at $50.8 million based on a closing share price of $3.99 on December 16, 2020. The Transaction is expected to close in the first quarter of 2021.

Highlights of IRM’s asset base and operations include:

  • Average Production of 8,780 (1) Boepd (66% oil) for the third quarter of 2020
  • LTM Adjusted EBITDAX (2) of $81.3 million as of 9/30/20
  • Large PDP base with estimated PV-10 (3) as of 12/1/20 of approximately $173 million from 16.3 MMBoe of reserves (4)
  • Approximately 4,900 core net acres (100% HBP, 93% operated) in Midland and Ector counties
    • Inventory of 70 high-quality undeveloped horizontal locations with an average IRR of 45% at strip pricing as of 11/30/20
    • Inventory targeting the Middle Spraberry, Lower Spraberry and Wolfcamp A zones
    • Additional potential locations in the Jo Mill, Wolfcamp B and Wolfcamp D zones
  • Additional 38,500 net acres (100% HBP, 100% operated) in the eastern Midland Basin

Pro forma impact on Earthstone includes:

  • 52% increase to pro forma 3Q20 production from ~17,000 Boepd to ~25,700 Boepd
  • 50% increase to pro forma LTM Adjusted EBITDAX as of 9/30/20 from $164 million to $246 million
  • Pro forma net debt to LTM Adjusted EBITDAX of 1.1x at 9/30/20
  • Borrowing base increase of 50%, from $240 million to $360 million, under the Company’s senior secured revolving credit facility (“Credit Facility”) upon closing
  • Existing Earthstone shareholders retain 83.7% of common equity
  • Expected to be accretive on all key financial metrics
  • Targeted 25% reduction in go forward Cash G&A (5) per unit costs

Management Comments

Mr. Robert J. Anderson, President and CEO of Earthstone, commented, “This Transaction is another important step in the execution of our growth strategy to further increase our scale with high-quality accretive acquisitions. This is consistent with our stated strategy to be a consolidator in the Permian Basin and positions us well for additional value-enhancing transactions. We will maintain strict financial discipline as we consider future transactions, both as it relates to valuation and to maintaining our balance sheet strength.”

“The addition of these complementary Midland Basin assets increases our production and Adjusted EBITDAX by approximately 50% with minimal impact to leverage. Additionally, we will be adding 70 gross high-graded drilling locations from IRM’s core acreage that carry a similar return profile to our highly economic Midland Basin wells and will compete with our existing inventory for future development capital. With the large majority of IRM’s production coming from its core acreage in Midland and Ector counties, the acquired assets have a very similar and complementary low operating cost, high margin profile as our existing assets, allowing us to maintain our peer-leading cash margin operating profile. With a minimal need for incremental general and administrative costs, we expect to improve cash margins further by targeting an approximately 25% decrease in our go forward Cash G&A (5) per unit costs. This added scale and quality inventory enhances our development options and free cash flow (6) generating capacity. We target resuming drilling activity in the first half of 2021 through a one-rig program that we expect to be fully funded well within our operating cash flows.”

The Transaction has been unanimously approved by the Board of Directors of Earthstone and by the members of IRM. No further approvals are required. In conjunction with the Transaction, Warburg will have the right to appoint one director to Earthstone’s Board of Directors. EnCap Investments, L.P. (“EnCap”) will maintain the three existing EnCap-affiliated directors, resulting in a Board of Directors consisting of nine members. No changes to Earthstone management will occur in connection with the Transaction.

Advisors

RBC Capital Markets, LLC and Wells Fargo Securities, LLC acted as financial advisors to Earthstone. Jefferies LLC acted as financial advisor to IRM. Legal advisors included Jones & Keller, P.C. for Earthstone, and Latham & Watkins, L.L.P. for IRM.

About Earthstone Energy, Inc.

Earthstone Energy, Inc. is a growth-oriented, independent energy company engaged in the development and operation of oil and natural gas properties. Its primary assets are located in the Midland Basin of west Texas and the Eagle Ford Trend of south Texas. Earthstone is listed on the New York Stock Exchange under the symbol “ESTE.” For more information, visit the Company’s website at www.earthstoneenergy.com.


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