Earthstone Energy Announces Midland Basin Asset Acquisition

Earthstone Energy, Inc. (NYSE: ESTE) (“Earthstone” or the “Company”) today announced that it has entered into definitive agreements to acquire privately held operated assets located in the Midland Basin (the “Tracker Acquisition”) from Tracker Resource Development III, LLC and an affiliate (“Tracker”) and from affiliates of Sequel Energy Group LLC (“Sequel”), which hold well-bore interests in certain of the producing wells operated by Tracker. Tracker is backed by 1901 Partners Management LP and EnCap Investments L.P. (“EnCap”), with each holding a 49% ownership interest and Tracker management holding the remainder. The aggregate purchase price of the Tracker Acquisition is approximately $126.5 million consisting of $81.6 million in cash, subject to customary closing adjustments, and 6.2 million shares of Earthstone’s Class A common stock valued at $44.9 million based on a closing share price of $7.24 on March 30, 2021. The effective date of the Tracker Acquisition will be March 1, 2021, with closing anticipated early in the third quarter of 2021.

Asset highlights:

• Current net production of ~7,800 ⁽¹⁾ Boepd (21% oil, 59% liquids) from 71 wells (30 horizontal / 41 vertical)
• $153 million PDP PV-10 ⁽²⁾ as of 3/1/21 with reserves of approximately 19.8 MMBoe ⁽³⁾
• Low-cost, stable producing assets in complementary location to Earthstone operated assets
• Approximately 20,300 net acres (100% HBP, 100% operated) in Irion County
  • No drilling commitments required on the acreage
  • Inventory of 49 Earthstone-identified horizontal Wolfcamp locations at four wells per section exceeding 25% IRR threshold on a $50/barrel WTI price deck and using Earthstone’s current estimate of capital costs
  • Further upside to drilling economics based on reduction of drilling and completion costs and reserve impact with up-spaced locations versus historical well spacing

Impact on Earthstone:

• Purchase price implies PV-16 discount rate on PDP ⁽⁴⁾
• Significant production and cash flow contribution to existing Earthstone asset base
• Complements Earthstone’s focus on low-cost, high-margin operations with expected impact of lowering per unit of production lease operating expense and G&A expense
• Cash portion of consideration to be funded with cash on hand and borrowings under the Company’s senior secured revolving credit facility (“Credit Facility”)
• Minimal impact on pro forma year-end 2021 leverage with ESTE targeting sub-1.25x Debt/Adjusted EBITDAX ⁽⁵⁾
• Existing Earthstone shareholders retain 93% of common equity
• Expected to be accretive on all key financial metrics
• Expected second half of 2021 production increase of ~5,800-6,000 Boepd (~19% oil, ~59% liquids) prior to adjustments for date of closing

Management Comments

Mr. Robert J. Anderson, President and CEO of Earthstone, commented, “This acquisition, on the heels of closing the IRM acquisition in early January, is a complementary next step in what we view as continued progress of our consolidation strategy. We paid an attractive price for this producing asset, and while the inventory may not fit into our capital plans this year, the 49 drilling locations represent low-risk and repeatable upside value not included in our purchase price valuation. These low-cost assets will continue our efforts to reduce overall per unit cash costs and deliver high operating margins. We intend to continue seeking other value-enhancing transactions that increase our operational and corporate cost efficiencies while maintaining financial discipline, ultimately benefitting our shareholders via stock price appreciation.”

Transaction Consideration and Sources

The total consideration for the Tracker Acquisition consists of $81.6 million in cash, subject to customary closing adjustments, and approximately 6.2 million shares of Earthstone’s Class A common stock, which represents 7.4% of total Class A and Class B common stock on a pro forma basis. Earthstone intends to fund the cash portion of the consideration and fees and expenses with cash on hand and new borrowings under its Credit Facility. Earthstone expects to complete a redetermination of the borrowing base under its Credit Facility in the near term that will serve as the regularly scheduled redetermination and will also incorporate the impact of the Tracker Acquisition conditional upon closing of the acquisition.

The total consideration of $126.5 million is allocated ~50% to Tracker and ~50% to Sequel. EnCap, a current beneficial owner of ~49.4% of Earthstone’s total Class A and Class B common stock, will indirectly receive an additional 2.3 million shares of Class A common stock through its minority ownership of Tracker. Adjusted for the equity consideration to the respective parties, EnCap’s beneficial ownership of Earthstone’s total Class A and Class B common stock will be reduced to 48.5%.

Approvals

The Audit Committee of the board of directors of Earthstone approved and recommended the Tracker Acquisition to the board of directors of Earthstone, which has approved the Tracker Acquisition. The Tracker Acquisition is further subject to the approval of Earthstone stockholders, including a majority of the shares held by stockholders other than EnCap and executive management. Warburg Pincus LLC has provided a support agreement pledging to vote its ~13.2 million shares of Class