8-K

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: June 27, 2023

(Date of earliest event reported)

 

EARTHSTONE ENERGY, INC.

(Exact name of registrant as specified in its charter)

Delaware	001-35049	84-0592823
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

1400 Woodloch Forest Drive, Suite 300

The Woodlands, Texas 77380

(Address of principal executive offices) (Zip Code)

(281) 298-4246

(Registrant’s telephone number, including area code)

(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 obligation 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, $0.001 par value per share	ESTE	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.  ☐

Item 7.01 Regulation FD Disclosure.

Subject to the closing of the Novo Transactions (as defined below), Earthstone Energy Holdings, LLC ("EEH"), a subsidiary of Earthstone Energy, Inc. ("Earthstone"), has commitments from its bank group to increase the borrowing base and elected commitment amounts under its revolving credit facility to $2.0 billion and $1.75 billion, respectively.

Item 8.01 Other Events.

As previously announced, on June 14, 2023, EEH entered into (i) a Securities Purchase Agreement (the “Purchase Agreement”) with Novo Oil & Gas Legacy Holdings, LLC, Novo Intermediate, LLC and Novo Oil & Gas Holdings, LLC (“Novo”), pursuant to which EEH will acquire 100% of the issued and outstanding equity interests 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 has agreed to acquire, immediately after the closing of the Acquisition, an undivided one-third interest in Novo’s oil and gas and related assets (the remaining two-third interest to be retained by EEH, the “Retained Assets”) acquired pursuant to the Purchase Agreement (together with the Novo Acquisition, the “Novo Transactions”).

Attached as Exhibit 99.1 hereto are the unaudited pro forma condensed combined financial statements of Earthstone for the year ended December 31, 2022 and as of and for the three months ended March 31, 2023.

Attached as Exhibit 99.2 hereto are the audited combined consolidated financial statements of Novo as of and for the years ended December 31, 2022 and December 31, 2021.

Attached as Exhibit 99.3 hereto are the unaudited consolidated financial statements of Novo as of and for the three months ended March 31, 2023.

Attached as Exhibit 99.4 hereto is the report of Cawley, Gillespie & Associates, Inc. relating to the Retained Assets’ estimated oil and gas reserves at May 1, 2023 with NYMEX Pricing.

There is no assurance that the transactions contemplated by the Purchase Agreement or Cooperation Agreement will be consummated. Earthstone urges you to read the section entitled “Risk Factors” in Earthstone’s annual report on Form 10-K for the year ended December 31, 2022.

Forward-Looking Statements

This Current Report on Form 8-K contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of 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. The forward-looking statements include statements about the expected benefits of the Novo Transactions to Earthstone and its stockholders, the anticipated completion of the Novo Transactions or the timing thereof, the expected future reserves, production, financial position, business strategy, revenues, earnings, free cash flow, costs, capital expenditures and debt levels of the combined company, and plans and objectives of management for future operations. Forward-looking statements are based on current expectations and assumptions and analyses made by Earthstone and its management in light of their experience and perception of historical trends, current conditions and expected future developments, as well as other factors appropriate under the circumstances. However, whether actual results and developments will conform to expectations is subject to a number of material risks and uncertainties, including but not limited to: the ability to complete the Novo Transactions on anticipated terms and timetable; Earthstone’s ability to integrate its combined operations successfully after the Novo Transactions and achieve anticipated benefits from it; the possibility that various closing conditions for the Novo Transactions may not be satisfied or waived; risks relating to any unforeseen liabilities of Earthstone or Novo; declines in oil, natural gas liquids or natural gas prices; the level of success in exploration, development and production activities; adverse weather conditions that may negatively impact development or production activities; the timing of exploration and development expenditures; inaccuracies of reserve estimates or assumptions underlying them; revisions to reserve estimates as a result of changes in commodity prices; impacts to financial statements as a result of impairment write-downs; risks related to level of indebtedness and periodic redeterminations of the borrowing base and interest rates under Earthstone’s credit agreement; Earthstone’s ability to generate sufficient cash flows from operations to meet the internally funded portion of its capital expenditures budget; Earthstone’s ability to obtain external capital to finance exploration and development operations and acquisitions; the impacts of hedging on

results of operations; uninsured or underinsured losses resulting from oil and natural gas operations; Earthstone’s ability to replace oil and natural gas reserves; any loss of senior management or technical personnel; competition for assets, equipment, materials and qualified people; supply chain disruptions; constraints or downtime on midstream assets servicing Earthstone’s oil and gas production; Earthstone’s ability to replace oil and natural gas reserves; any loss of senior management or technical personnel; regulatory matters, including environmental regulations; social, market and regulatory efforts to address climate change; cybersecurity risks; general domestic and international economic, market and political conditions, including the military conflict between Russia and Ukraine and the global response to such conflict; and the direct and indirect impact on most or all of the foregoing on the continuing COVID-19 pandemic. Earthstone’s annual report on Form 10-K for the year ended December 31, 2022, subsequent reports and filings with the Securities and Exchange Commission discuss some of the important risk factors identified that may affect Earthstone’s business, results of operations, and financial condition. The forward-looking statements included in this Current Report on Form 8-K speak only as of the date of this Current Report on Form 8-K and Earthstone undertakes no obligation to revise or update publicly any forward-looking statements except as required by law.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

The following exhibits are included with this Current Report on Form 8-K:

Exhibit No.	Description
23.1	Consent of Moss Adams LLP.
23.2	Consent of Cawley, Gillespie & Associates, Inc.
99.1	Unaudited pro forma condensed combined financial statements of Earthstone Energy, Inc. for the year ended December 31, 2022 and as of and for the three months ended March 31, 2023.
99.2	Audited combined consolidated financial statements of Novo Oil & Gas Holdings, LLC as of and for the years ended December 31, 2022 and December 31, 2021.
99.3	Unaudited consolidated financial statements of Novo Oil & Gas Holdings, LLC as of and for the three months ended March 31, 2023.
99.4	Report of Cawley, Gillespie & Associates, Inc. (NYMEX Pricing).
104	Cover Page Interactive Data File (embedded within the Inline XBRL document).

SIGNATURE

    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.

		EARTHSTONE ENERGY, INC.
Date:	June 27, 2023	By:	/s/ Tony Oviedo
			Tony Oviedo
			Executive Vice President - Accounting and Administration

EX-23.1

Exhibit 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statements on Form S-3 of Earthstone Energy Inc. (Nos. 333-205466, 333-213543, 333-218277, 333-224334, 333-254099, 333-254106, 333-258455, 333-260824, 333-265982, 333-266020, 333-266164, 333-266165, and 333-267256) and Form S-8 (Nos. 333-210734, 333-221248, 333-227720, 333-240998, and

333-258456) of our report dated March 31, 2022, relating to the combined consolidated financial statements of Novo Oil & Gas Holdings, LLC as of December 31, 2022 and 2021 and for the years then ended, appearing in this Current Report on Form 8-K of Earthstone Energy Inc. dated June 27, 2023.

/s/ Moss Adams LLP

Dallas, Texas

June 27,2023

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

The undersigned hereby consents to the references to our firm in the form and context in which they appear in the Current Report on Form 8-K of Earthstone Energy, Inc. filed on June 27, 2023. We also hereby consent to the incorporation by reference of the references to our firm, in the context in which they appear, and to our reserves report dated June 14, 2023 into the Registration Statements on Form S-3 (File Nos. 333-205466, 333-213543, 333-218277, 333-224334, 333-254099, 333-254106, 333-258455, 333-260824, 333-265982, 333-266020, 333-266164, 333-266165 and 333-267256) and Form S-8 (File Nos. 333-210734, 333-221248, 333-227720, 333-240998 and 333-258456) filed with the U.S. Securities and Exchange Commission.

Sincerely,
/s/ W. Todd Brooker
W. Todd Brooker, P.E. President Cawley, Gillespie & Associates, Inc.
Texas Registered Engineering Firm F-693
June 27, 2023

EX-99.1

Exhibit 99.1

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

(BASIS OF PRESENTATION DESCRIBED IN NOTE 1)

On June 14, 2023, Earthstone Energy Holdings, LLC (“EEH”), a subsidiary of Earthstone Energy, Inc. (“Earthstone”), entered into (i) a Securities Purchase Agreement (the “Agreement”) with Novo Oil & Gas Legacy Holdings, LLC, Novo Intermediate, LLC and Novo Oil & Gas Holdings, LLC (“Novo”), pursuant to which EEH will 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 has agreed to acquire, immediately after the closing of the Acquisition, an undivided one-third interest in Novo’s oil and gas and related assets acquired in the Novo Acquisition for $0.5 billion, resulting in a $1.0 billion purchase price net to Earthstone for the retained two-thirds interest acquired pursuant to the Purchase Agreement (together with the Novo Acquisition, the “Novo Transactions”). The effective date of the Novo Transactions is May 1, 2023. Consideration at closing will be subject to customary purchase price adjustments.

Earthstone is in the process of evaluating the accounting treatment of the Novo Acquisition. For the purposes of the unaudited pro forma condensed combined financial statements presented herein, Earthstone is assuming the Novo Acquisition will be accounted for as an asset acquisition. The fair value of the consideration paid by us and allocation of that amount to the underlying assets acquired and liabilities assumed, on a relative fair value basis, will be recorded on our books as of the date of the closing of the Novo Acquisition. Additionally, costs directly related to the Novo Acquisition will be capitalized as a component of the purchase price.

As previously disclosed in its Current Report on Form 8-K filed on August 11, 2022 with the SEC, on August 10, 2022, EEH completed the acquisition of the assets of Titus Oil & Gas Production, LLC, Titus Oil & Gas Corporation, Lenox Minerals, LLC, Lenox Mineral Title Holdings, Inc., Titus Oil & Gas Production II, LLC, Lenox Minerals II, LLC, and Lenox Mineral Holdings II, LLC (the “Titus Acquisition”). At the closing of the Titus Acquisition, among other things, EEH acquired interests in oil and gas leases and related property located in the Delaware Basin, New Mexico, for a purchase price of approximately $568.5 million in cash, net of customary purchase price adjustments and an aggregate 3,857,015 shares of Class A common stock, par value $0.001 per share, of Earthstone (“Class A Common Stock”).

The Titus Acquisition was accounted for as an asset acquisition in accordance with ASC 805. The fair value of the consideration paid by us and allocation of that amount to the underlying assets acquired, on a relative fair value basis, is recorded on our books as of the date of the closing of the Titus Acquisition. Additionally, costs directly related to the Titus Acquisition are capitalized as a component of the purchase price. The operating results of Titus are consolidated in our financial statements beginning on the date of the closing of the Titus Acquisition. The unaudited pro forma condensed combined financial statements presented herein have been prepared to reflect the transaction accounting adjustments to Earthstone’s historical condensed consolidated financial information in order to account for the Titus Acquisition and include the assumption of liabilities for acquisition-related expenses and the recognition of the estimated tax impact of the pro forma adjustments.

As previously disclosed in its Current Report on Form 8-K filed on April 18, 2022 with the SEC, on April 14, 2022, EEH completed the acquisition of the assets of Bighorn Asset Company, LLC (the “Bighorn Acquisition”). At the closing of the Bighorn Acquisition, among other things, EEH acquired interests in oil and gas leases and related property of Bighorn located in the Midland Basin, Texas, for a purchase price of approximately $628.2 million in cash, net of preliminary and customary purchase price adjustments, and 5,650,977 shares of Class A Common Stock.

Also, as previously disclosed in its Current Report on Form 8-K filed on April 18, 2022 with the SEC, on April 14, 2022, Earthstone, EnCap Energy Capital Fund XI, L.P. (“EnCap Fund XI”), an affiliate of EnCap Investments L.P., and Cypress

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Investments, LLC (“Cypress” and collectively with EnCap Fund XI, the “Investors”), a fund managed by Post Oak Energy Capital, L.P., consummated the sale and issuance of 280,000 shares of newly authorized Series A convertible preferred stock, par value $0.001 per share, of Earthstone (the “Preferred Stock”), pursuant to that certain Securities Purchase Agreement dated as of January 30, 2022, by and among Earthstone and the Investors (the “SPA”) that was previously reported on Form 8-K filed on February 2, 2022 with the SEC. At the closing of the SPA, Earthstone issued 280,000 shares of Preferred Stock in exchange for cash proceeds, net of offering costs, of $278.7 million. On July 6, 2022, the Series A Preferred Stock automatically converted into 25,225,225 shares of Class A Common Stock.

The Bighorn Acquisition was accounted for as an asset acquisition in accordance with ASC 805. The fair value of the consideration paid by us and allocation of that amount to the underlying assets acquired, on a relative fair value basis, is recorded on our books as of the date of the closing of the Bighorn Acquisition. Additionally, costs directly related to the Bighorn Acquisition are capitalized as a component of the purchase price. The operating results of Bighorn are consolidated in our financial statements beginning on the date of the closing of the Bighorn Acquisition. The unaudited pro forma condensed combined financial statements presented herein have been prepared to reflect the transaction accounting adjustments to Earthstone’s historical condensed consolidated financial information in order to account for the Bighorn Acquisition and include the assumption of liabilities for acquisition-related expenses and the recognition of the estimated tax impact of the pro forma adjustments.

As previously disclosed in its Current Report on Form 8-K filed on February 18, 2022 with the SEC, on February 15, 2022, EEH completed the acquisition of the assets of Chisholm Energy Holdings, LLC (the “Chisholm Acquisition”). At the closing of the Chisholm Acquisition, among other things, EEH acquired interests in oil and gas leases and related property of Chisholm located in Lea County and Eddy County, New Mexico, for a purchase price consisting of approximately $383.8 million in cash, net of preliminary and customary purchase price adjustments, and 19,311,582 shares of Class A Common Stock.

The Chisholm Acquisition was accounted for as a business combination in accordance with ASC 805 using the acquisition method of accounting, with Earthstone identified as the acquirer. The unaudited pro forma condensed combined financial statements presented herein have been prepared to reflect the transaction accounting adjustments to Earthstone’s historical condensed consolidated financial information in order to account for the Chisholm Acquisition and include the assumption of liabilities for acquisition-related expenses and the recognition of the estimated tax impact of the pro forma adjustments.

The unaudited pro forma condensed combined balance sheet as of March 31, 2023 gives effect to the Novo Transactions as if they had been completed on March 31, 2023. The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2023 gives effect to the Chisholm Acquisition, Bighorn Acquisition and Novo Transactions (collectively, the “Acquisitions”) as if they had been completed on January 1, 2022. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2022 gives effect to the Acquisitions as if they had been completed on January 1, 2022. Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma condensed combined financial statements.

The unaudited pro forma condensed combined balance sheet does not purport to represent what Earthstone’s financial position would have been had the Novo Transactions actually been consummated on March 31, 2023. The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2023 does not purport to represent what Earthstone’s results of operations would have been had the Acquisitions been consummated on January 1, 2022. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2022 does not purport to represent what Earthstone’s results of operations would have been had the Acquisitions been consummated on January 1, 2022. The unaudited pro forma condensed combined financial information may not be indicative of Earthstone’s future financial position or results of operations and does not reflect future events that may occur after the Acquisitions, including, but not limited to, the anticipated realization of ongoing savings from operating efficiencies, or offsetting unforeseen incremental costs.

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The unaudited pro forma condensed combined balance sheet as of March 31, 2023 has been derived from and should be read in conjunction with:

•    the unaudited historical condensed consolidated balance sheet of Earthstone as of March 31, 2023 included in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023.

•    the unaudited historical combined consolidated balance sheet of Novo Oil & Gas Holdings, LLC as of March 31, 2023 included in this report.

The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2023 has been derived from:

•    the unaudited historical condensed consolidated statement of operations of Earthstone for the three months ended March 31, 2023 included in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023;

•    the unaudited historical consolidated statement of operations of Novo Oil & Gas Holdings, LLC for the three months ended March 31, 2023 included in this report;

The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2022 has been derived from:

•    the historical consolidated statement of operations of Earthstone for the year ended December 31, 2022 included in its Annual Report on Form 10-K for year ended December 31, 2022;

•    the historical combined consolidated statement of operations of Novo Oil & Gas Holdings, LLC for the year ended December 31, 2022 included in this report;

•    the unaudited statement of revenues and direct operating expenses of the Titus Properties for the six months ended June 30, 2022 (incorporated by reference from Exhibit 99.2 to Earthstone’s Current Report on Form 8-K/A filed with the SEC on September 30, 2022);

•    the unaudited statement of revenues and direct operating expenses of the Titus Properties for the period July 1, 2022 through August 10, 2022, based on the allocated number of days from the entire period’s results;

•    the unaudited historical condensed consolidated statement of operations of Bighorn Permian Resources, LLC for the three months ended March 31, 2022 (incorporated by reference from Exhibit 99.2 to Earthstone’s Current Report on Form 8-K/A filed with the SEC on June 22, 2022);

•    the unaudited historical condensed consolidated statement of operations of Bighorn Permian Resources, LLC for the period April 1, 2022 through April 14, 2022, based on the allocated number of days from the entire period’s results; and

•    the unaudited historical condensed consolidated statement of operations of Chisholm Energy Holdings, LLC for the period January 1, 2022 through February 15, 2022, based on the allocated number of days from the entire period’s results);

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EARTHSTONE ENERGY, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF MARCH 31, 2023

(In thousands, except share and per share amounts)

ASSETS	Earthstone Historical		Novo Historical		Unacquired Portion of Novo		Novo Portion Sold to NOG		Transaction Accounting Adjustments			Earthstone Pro Forma Combined
Current assets:					(n)
Cash	$	—	$	24,679	$	—	$	500,000	$	(500,000)	(a)	$	24,679
Accounts receivable	161,151		69,773		(14,021)		—		—			216,903
Derivative asset	14,444		36,157		(36,157)		—		—			14,444
Prepaid expenses and other current assets	24,658		1,348		(1,293)		—		—			24,713
Total current assets	200,253		131,957		(51,471)		500,000		(500,000)			280,739
Oil and gas properties, successful efforts method:
Proved properties	4,195,206		1,172,432		(58,576)		(500,000)		393,040		(b)	5,202,102
Unproved properties	282,228		56,688		(21,814)		—		(14,874)		(b)	302,228
Land (surface rights)	5,482		—		—		—		—			5,482
Total oil and gas properties	4,482,916		1,229,120		(80,390)		(500,000)		378,166			5,509,812
Accumulated depreciation, depletion, amortization and impairment	(729,318)		(248,386)		28,014		—		220,372		(b)	(729,318)
Net oil and gas properties	3,753,598		980,734		(52,376)		(500,000)		598,538			4,780,494
Other noncurrent assets:
Office and other equipment, net of accumulated depreciation	5,571		251		(235)		—		—			5,587
Derivative asset	73		3,592		(3,592)		—		—			73
Operating lease right-of-use assets	6,573		86		(86)		—		—			6,573
Other noncurrent assets	17,407		3,183		(3,038)		—		1,266		(c)	18,818
TOTAL ASSETS	$	3,983,475	$	1,119,803	$	(110,798)	$	—	$	99,804		$	5,092,284
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	40,148	$	42,168	$	(11)	$	—	$	12,744	(d)	96,315
									1,266		(c)
Revenues and royalties payable	194,900		44,153		—		—		—			239,053
Accrued expenses	123,704		7,178		(1,287)		—		—			129,595
Asset retirement obligation	881		—		—		—		—			881
Derivative liability	3,864		—		—		—		—			3,864

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Advances	8,242		7		—		—		—			8,249
Operating lease liabilities	890		86		(86)		—		—			890
Finance lease liabilities	880		—		—				—			880
Other current liabilities	11,447		2,333		—		—		—			13,780
Current portion of long-term debt	—								—			—
Total current liabilities	384,956		95,925		(1,384)		—		14,010			493,507
Noncurrent liabilities:
Long-term debt, net	991,855		310,000		(310,000)		—		988,445		(e)	1,967,556
									(12,744)		(d)
Deferred tax liability	156,937		—		—		—		—			156,937
Asset retirement obligation	29,941		2,779		—		—		—			32,720
Deferred revenues	—		21,778		—		—		—			21,778
Derivative liability	3,698		3,392		(3,392)		—		—			3,698
Operating lease liabilities	3,758		—		—		—		—			3,758
Finance lease liabilities	865		—		—		—		—			865
Other noncurrent liabilities	3,735		—		—		—		—			3,735
Total noncurrent liabilities	1,190,789		337,949		(313,392)		—		975,701			2,191,047
Equity:
Members' Equity	—		685,929		203,978		—		(889,907)		(f)	—
Preferred stock	—		—		—		—		—			—
Class A common stock	106		—		—		—		—			106
Class B common stock	34		—		—		—		—			34
Additional paid-in capital	1,343,965		—		—		—		—			1,343,965
Retained earnings	353,259		—		—		—		—			353,259
Total Earthstone Energy, Inc. stockholders’ equity	1,697,364		685,929		203,978		—		(889,907)			1,697,364
Noncontrolling interest	710,366		—		—		—		—			710,366
Total equity	2,407,730		685,929		203,978		—		(889,907)			2,407,730
TOTAL LIABILITIES AND EQUITY	$	3,983,475	$	1,119,803	$	(110,798)	$	—	$	99,804		$	5,092,284

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EARTHSTONE ENERGY, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2023

(In thousands, except share and per share amounts)

	Earthstone Historical		Novo Historical		Unacquired Portion of Novo		Novo Portion Sold to NOG		Transaction Accounting Adjustments			Earthstone Pro Forma Combined
REVENUES					(n)
Oil and natural gas revenues	$	413,136	$	177,519	$	(19,663)	$	(52,619)	$	—		$	518,373
Total revenues	413,136		177,519		(19,663)		(52,619)		—			518,373
OPERATING COSTS AND EXPENSES
Lease operating expense	87,978		21,490		8,813		(10,101)		—			108,180
Production and ad valorem taxes	33,153		13,029		(2,021)		(3,669)		—			40,492
Depreciation, depletion, amortization and accretion	111,379		36,412		(19,935)		(5,492)		20,230		(g)	142,594
General and administrative expense	17,579		1,723		(162)		—		—			19,140
Transaction costs	193		—		—		—		(15)		(h)	178
Exploration expense	466		61		(61)		—		—			466
Total operating costs and expenses	250,748		72,715		(13,366)		(19,262)		20,215			311,050
Loss on sale of oil and gas properties	(3,140)		—		—		—		—			(3,140)
Income from operations	159,248		104,804		(6,297)		(33,357)		(20,215)			204,183
OTHER INCOME (EXPENSE)
Interest expense, net	(22,856)		(5,692)		5,692		—		(21,573)		(i)	(45,352)
									(923)		(j)
Write-off deferred financing costs	(5,109)		—		—		—		752		(k)	(4,357)
(Loss) gain on derivative contracts, net	(26,464)		31,934		(31,934)		—		—			(26,464)
Gain (loss) on disposal of asset	—		8		(8)		—		—			—
Deferred midstream revenue	—		583		—		—		—			583
Other income (expense), net	(7)		76		(4)		—		—			65
Total other income (expense)	(54,436)		26,909		(26,254)		—		(21,744)			(75,525)
Income (loss) before income taxes	104,812		131,713		(32,551)		(33,357)		(41,959)			128,658
Income tax (expense) benefit	(18,601)		(71)		—		24		(5,948)		(l)	(24,596)

6

Net income (loss)	$	86,211	$	131,642	$	(32,551)	$	(33,333)	$	(47,907)		$	104,062
Less: Net income (loss) attributable to noncontrolling interests	25,663		—		—		—		(240)		(m)	25,423
Net income (loss) attributable to Earthstone Energy, Inc. common stockholders	$	60,548	$	131,642	$	(32,551)	$	(33,333)	$	(47,667)		$	78,639
Net income per common share:
Basic	$	0.57										$	0.74
Diluted	$	0.56										$	0.73
Weighted average common shares outstanding:
Basic	105,972,734											105,972,734
Diluted	107,525,017											107,525,017

7

EARTHSTONE ENERGY, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2022

(In thousands, except share and per share amounts)

	Earthstone Historical		Chisholm Historical (1/1/22 - 2/15/22)		Bighorn Historical (1/1/22 - 4/14/22)		Titus Historical (1/1/22 - 8/10/22)		Novo Historical		Unacquired Portion of Novo		Novo Portion Sold to NOG		Transaction Accounting Adjustments			Earthstone Pro Forma Combined
REVENUES											(n)
Oil and natural gas revenues	$	1,695,154	$	36,005	$	190,951	$	500,046	$	663,540	$	(71,773)	$	(197,256)	$	—		$	2,816,667
Total revenues	1,695,154		36,005		190,951		500,046		663,540		(71,773)		(197,256)		—			2,816,667
OPERATING COSTS AND EXPENSES
Lease operating expense	230,515		5,503		29,956		35,094		45,326		20,477		(21,934)		—			344,937
Production and ad valorem taxes	123,054		2,948		12,521		37,210		48,969		(7,574)		(13,798)		—			203,330
Depreciation, depletion, amortization and accretion	304,465		7,140		16,769		104,021		102,851		(4,889)		(32,654)		17,245		(g)	514,948
General and administrative expense	74,175		—		7,441		—		8,641		(818)		—		—			89,439
Transaction costs	8,248		—		—		—		—		—		—		1,070		(h)	9,318
Exploration expense	2,492		—		—		—		808		(282)		—		—			3,018
Total operating costs and expenses	742,949		15,591		66,687		176,325		206,595		6,914		(68,386)		18,315			1,164,990
Gain (loss) on sale of oil and gas properties	13,900		—		—		—		(60)		136		—		—			13,976
Income (loss) from operations	966,105		20,414		124,264		323,721		456,885		(78,551)		(128,870)		(18,315)			1,665,653
OTHER INCOME (EXPENSE)
Interest expense, net	(66,821)		—		(1,597)		—		(8,791)		8,792		—		(102,512)		(i)	(175,638)
															(4,709)		(j)
(Loss) gain on derivative contracts, net	(125,107)		—		(63,874)		—		(10,325)		10,325		—		—			(188,981)
Deferred midstream revenue	—		—		—		—		2,333		—		—		—			2,333
Other income (expense), net	856		—		57		—		331		88		—		—			1,332
Total other income (expense)	(191,072)		—		(65,414)		—		(16,452)		19,205		—		(107,221)			(360,954)
Income (loss) before income taxes	775,033		20,414		58,850		323,721		440,433		(59,346)		(128,870)		(125,536)			1,304,699
Income tax (expense) benefit	(124,416)		—		(959)		—		(403)		52		117		(96,106)		(l)	(221,715)
Net income (loss)	$	650,617	$	20,414	$	57,891	$	323,721	$	440,030	$	(59,294)	$	(128,753)	$	(221,642)		$	1,082,984

8

Less: Net income attributable to noncontrolling interests	198,132		—		—		—		—		—		—		74,689		(m)	272,821
Net income (loss) attributable to Earthstone Energy, Inc. common stockholders	$	452,485	$	20,414	$	57,891	$	323,721	$	440,030	$	(59,294)	$	(128,753)	$	(296,331)		$	810,163
Net income per common share:
Basic	$	5.12																$	7.96
Diluted	$	4.83																$	7.39
Weighted average common shares outstanding:
Basic	88,349,088														13,442,289			101,791,377
Diluted	96,328,217														13,373,179			109,701,396

9

EARTHSTONE ENERGY, INC.

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Note 1.Basis of Presentation

The accompanying unaudited pro forma condensed combined financial statements (the “Pro Forma Financial Statements”) were prepared in accordance with Article 11 of Regulation S-X, as amended by SEC Final Rule Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and based on the historical consolidated and combined financial information of Earthstone, Chisholm, Bighorn, Titus and Novo. The Novo Acquisition has been accounted for as an asset acquisition in accordance with ASC 805. The fair value of the consideration paid by us and allocation of that amount to the underlying assets acquired, on a relative fair value basis, is recorded on our books as of the date of the closing of the Novo Acquisition. Additionally, costs directly related to the Novo Acquisition are capitalized as a component of the purchase price.

Presented in the Pro Forma Financial Statements are the combined impact of the Chisholm Acquisition, Bighorn Acquisition, Titus Acquisition and Novo Transactions (the “Acquisitions”). The Bighorn Acquisition, Titus Acquisition and Novo Acquisition were accounted for as asset acquisitions in accordance with ASC 805 and the Chisholm Acquisition was accounted for as a business combination in accordance with ASC 805. Certain transaction accounting adjustments have been made in order to show the effects of the Acquisitions in the Pro Forma Financial Statements. The accounting adjustments related to the Novo Acquisition are preliminary and based on estimates of the purchase consideration and estimates of fair value and useful lives of the assets to be acquired and liabilities to be assumed.

The accounting adjustments are described in the accompanying notes and are based on available information and certain assumptions that Earthstone believes are reasonable; however, actual results may differ from those reflected in these statements. The Pro Forma Financial Statements do not purport to represent what Earthstone’s financial position or results of operations would have been if the Acquisitions had occurred on the dates described in the Pro Forma Financial Statements, and they may not be indicative of Earthstone’s future financial position or results of operations. Certain information normally included in financial statements and the accompanying notes has been condensed or omitted. The Pro Forma Financial Statements should be read in conjunction with the historical financial statements and related notes of Earthstone, Chisholm, Bighorn, Titus and Novo for the periods presented.

The pro forma condensed combined balance sheet as of March 31, 2023 gives effect to the Novo Transactions as if they had been completed on March 31, 2023. The pro forma condensed combined statement of operations for the three months ended March 31, 2023 gives effect to the Acquisitions as if they had been completed on January 1, 2022. The pro forma condensed combined statement of operations for the year ended December 31, 2022 gives effect to the Acquisitions as if they had been completed on January 1, 2022.

Note 2. Accounting Policies and Presentation

The unaudited pro forma condensed combined balance sheet as of March 31, 2023 and the unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2023 and the year ended December 31, 2022 have been compiled in a manner consistent with the accounting policies adopted by Earthstone. Certain reclassifications and adjustments have been made to the historical financial information of Chisholm, Bighorn, Titus and Novo presented herein to conform to Earthstone’s historical presentation.

10

Note 3. Preliminary Purchase Price Allocation

The preliminary allocation of the total purchase price in the Novo Acquisition, on a relative fair value basis, is based upon management’s estimates of and assumptions related to the fair value of assets to be acquired and liabilities to be assumed as of the closing date of the transaction using currently available information. Because the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on financial position and results of operations may differ significantly from the pro forma amounts included herein.

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 assets acquired and liabilities assumed as of the closing date of the transaction, which could result from changes in future oil and natural gas commodity prices, reserve estimates, interest rates, as well as other factors.

The consideration transferred, assets acquired and liabilities assumed by Earthstone are expected to be initially recorded as follows (in thousands, except share amounts and stock price):

Consideration:
Cash consideration (1)	$	985,945
Direct transaction costs (2)	2,500
Total consideration transferred	$	988,445
Assets acquired:
Cash	$	24,679
Accounts receivable - Oil, natural gas, and natural gas liquids revenues	46,789
Accounts receivable - Joint interest billings and other, net of allowance	8,963
Prepaid expenses and other current assets	55
Oil and gas properties	1,026,896
Office and other equipment, net	16
Other noncurrent assets	145
Amount attributable to assets acquired	$	1,107,543
Liabilities assumed:
Accounts payable	$	42,157
Revenues and royalties payable	44,153
Accrued expenses	5,891
Advances	7
Other current liabilities	2,333
Asset retirement obligation, noncurrent	2,779
Deferred revenues, noncurrent	21,778
Amount attributable to liabilities assumed	$	119,098

(1)Includes preliminary customary purchase price adjustments.

(2)Represents $2.5 million of estimated transaction costs associated with the Novo Acquisition which have been capitalized in accordance with ASC 805-50.

The consideration will be allocated to the assets acquired and liabilities assumed on a relative fair value basis. The fair value measurements of assets acquired and liabilities assumed, on a relative fair value basis, 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.

11

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.

Note 4. Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet and Unaudited Pro Forma Condensed Combined Statements of Operations

The following adjustments were made in the preparation of the unaudited pro forma condensed combined balance sheet as of March 31, 2023 and the unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2023 and for the year ended December 31, 2022:

a)Represents cash consideration received from Northern and used to partially fund the Novo Acquisition.

b)Adjustment to reflect the Novo assets acquired, on a relative fair value basis.

c)Adjustment to reflect deferred financing costs related to Earthstone's revolving credit facility to be recorded in connection with the Novo Acquisition, net of amortization.

d)Adjustment to reflect deferred financing costs related to high yield notes payable to be recorded related to the Novo Acquisition.

e)Adjustment to reflect new borrowings related to the cash consideration used in the Acquisitions.

f)Adjustment to reflect the elimination of the Members’ Equity of Novo.

g)Adjustments to reflect the depreciation, depletion and amortization expense that would have been recorded had the Acquisitions occurred on January 1, 2022 and the properties were adjusted in accordance with ASC 805.

h)Represents nonrecurring transaction costs related to the Acquisitions that were incurred, or are expected to be incurred, by Earthstone in 2023 that are assumed to be incurred on January 1, 2022, including advisory, legal, regulatory, accounting, valuation and other professional fees that are not capitalized as part of the Acquisitions.

i)Adjustments to reflect the estimated interest expense that would have been recorded in the periods presented with respect to the incremental borrowings expected to finance the cash consideration for the Acquisitions.

j)Adjustments to reflect the amortization of deferred financing costs related to the financing of the Acquisitions.

k)Adjustment to reduce the write-off of deferred financing costs based on additional amortization that would have occurred had the Acquisitions taken place on January 1, 2022.

l)Adjustments to reflect the estimated incremental Income tax expense that would have been recorded in the period presented if the Acquisitions had occurred on January 1, 2022. The income tax rates used in calculating the tax impact of the adjustments recorded to the pro forma condensed combined statements of operations presented herein included a statutory federal income tax rate of 21%, a statutory Texas Margin tax rate of 0.75%, and a statutory New Mexico income tax rate of 5.9%, which represent the statutory rates in effect in those jurisdictions during the periods presented. The effective federal and New Mexico tax rates are less than the statutory rates as they only apply to taxable income related to the controlling interest of Earthstone.

m)Adjustments to reflect the estimated incremental Net income (loss) attributable to noncontrolling interests that would have been recorded in the period presented if the Acquisitions had occurred on January 1, 2022.

n)Adjustment to reflect the unacquired portion of Novo based on information provided by Novo.

12

Note 5. Supplemental Unaudited Combined Oil and Natural Gas Reserves and Standardized Measure Information

The following table sets forth information with respect to the historical and combined estimated oil and natural gas reserves as of December 31, 2022 for Earthstone and Novo. The Earthstone reserve data presented below was derived from the independent engineering report of Cawley, Gillespie & Associates, Inc. (“CG&A”), Earthstone’s independent reserve engineer. The reserve information of Novo was prepared by Netherland, Sewell & Associates, Inc. Future exploration, exploitation and development expenditures, as well as future commodity prices and service costs, will affect the quantity of reserve volumes. The reserve estimates shown below were determined using the average first day of the month price for each of the preceding 12 months for oil and natural gas for the year ended December 31, 2022 for Earthstone and Novo.

	Earthstone (1)	Novo (2)	Combined
Estimated Proved Developed Reserves:
Oil (MBbl)	88,759	12,335	101,094
Natural Gas (MMcf)	574,762	143,669	718,431
Natural Gas Liquids (MBbl)	80,168	20,944	101,112
Total (MBoe)(3)	264,721	57,224	321,945
Estimated Proved Undeveloped Reserves:
Oil (MBbl)	49,641	8,197	57,838
Natural Gas (MMcf)	167,404	58,304	225,708
Natural Gas Liquids (MBbl)	25,673	9,694	35,367
Total (MBoe)(3)	103,215	27,608	130,823
Estimated Proved Reserves:
Oil (MBbl)	138,400	20,532	158,932
Natural Gas (MMcf)	742,166	201,973	944,139
Natural Gas Liquids (MBbl)	105,841	30,638	136,479
Total (MBoe)(3)	367,936	84,832	452,768
(1) As of December 31, 2022, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 24.4% of the estimated proved reserves, as adjusted for the impact of the Acquisitions.
(2) Represents the retained two-thirds interest acquired in the Novo Acquisition.
(3) Assumes a ratio of 6 Mcf of natural gas per Boe.

13

The following table sets forth summary information with respect to historical and combined oil and natural gas production for the year ended December 31, 2022 for Earthstone, Chisholm, Bighorn, Titus and Novo. The Earthstone oil and natural gas production data presented below was derived from Earthstone’s Annual Report on Form 10-K for the year ended December 31, 2022. The Chisholm, Bighorn, Titus and Novo oil and natural gas production data presented below was derived from the supplemental oil and gas reserve information (unaudited) included in notes to their audited financial statements for the year ended December 31, 2022.

	Earthstone (1)	Chisholm (2)	Bighorn (3)	Titus (4)	Novo (5)	Combined
Oil (MBbl)	11,866	343	902	4,021	2,259	19,391
Natural Gas (MMcf)	54,392	705	10,417	6,247	18,022	89,783
Natural Gas Liquids (MBbl)	7,599	90	1,338	1,007	2,607	12,641
Total (MBoe)(6)	28,531	551	3,976	6,069	7,870	46,997
(1) As of December 31, 2022, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 24.4% of the estimated proved reserves, as adjusted for the impact of the Acquisitions.
(2) Based on the pro rata allocation of 45 days of January-February 2022 production from internal reports.
(3) Includes the pro rata allocation of 14 days of April 2022 production from internal reports.
(4) Includes the pro rata allocation of 41 days of July-August 2022 production from internal reports.
(5) Represents the retained two-thirds interest acquired in the Novo Acquisition.
(6) Assumes a ratio of 6 Mcf of natural gas per Boe.

The following unaudited combined estimated discounted future net cash flows reflect Earthstone, Chisholm, Bighorn, Titus and Novo as of December 31, 2022. The unaudited combined standardized measure of discounted future net cash flows are as follows (in thousands):

	Earthstone (1)		Novo (2)		Combined
Future cash inflows	$	21,506,026	$	4,013,814	$	25,519,840
Future production costs	(6,362,901)		(1,258,890)		(7,621,791)
Future development costs	(1,207,597)		(195,155)		(1,402,752)
Future income tax expense	(1,910,370)		(4,213)		(1,914,583)
Future net cash flows	12,025,158		2,555,556		14,580,714
10% annual discount for estimated timing of cash flows	(5,300,657)		(925,442)		(6,226,099)
Standardized measure of discounted future net cash flows	$	6,724,501	$	1,630,114	$	8,354,615
(1) As of December 31, 2022, holders of Earthstone's Class B Common Stock owned a non-controlling indirect interest of 24.4% of the estimated proved reserves, as adjusted for the impact of the Acquisitions.
(2) Represents the retained two-thirds interest acquired in the Novo Acquisition.

14

EX-99.2

EXHIBIT 99.2

Report of Independent Auditors and Combined Consolidated Financial Statements

Novo Oil & Gas Holdings, LLC

December 31, 2022 and 2021

Table of Contents

Page

Report of Independent Auditors    1

Consolidated Balance Sheets    3

Combined Consolidated Statements of Operations    5

Combined Consolidated Statements of Changes in Members’ Equity    6

Combined Consolidated Statements of Cash Flows    7

Notes to the Combined Consolidated Financial Statements    8

Report of Independent Auditors

The Board of Managers and Members Novo Oil & Gas Holdings, LLC

Report on the Audit of the Financial Statements

Opinion

We have audited the combined consolidated financial statements of Novo Oil & Gas Holdings, LLC and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2022 and 2021, and the related combined consolidated statements of operations, changes in members’ equity, and cash flows for the years then ended, and the related notes to the combined consolidated financial statements.

In our opinion, the accompanying combined consolidated financial statements present fairly, in all material respects, the financial position of Novo Oil & Gas Holdings, LLC and its subsidiaries as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Novo Oil & Gas Holdings, LLC and its subsidiaries and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the combined consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the combined consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Novo Oil & Gas Holdings, LLC and its subsidiaries’ ability to continue as a going concern within one year after the date that the combined consolidated financial statements are available to be issued.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the combined consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the combined consolidated financial statements.

In performing an audit in accordance with GAAS, we:

•Exercise professional judgment and maintain professional skepticism throughout the audit.

•Identify and assess the risks of material misstatement of the combined consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the combined consolidated financial statements.

•Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Novo Oil & Gas Holdings, LLC and its subsidiaries’ internal control. Accordingly, no such opinion is expressed.

•Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the combined consolidated financial statements.

•Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Novo Oil & Gas Holdings, LLC and its subsidiaries’ ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.

/s/ Moss Adams LLP

Dallas, Texas March 31, 2023

Combined Consolidated Financial Statements

Novo Oil & Gas Holdings, LLC

Consolidated Balance Sheets

December 31, 2022 and 2021

	2022		2021
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	25,387,306	$	17,005,132
Accounts receivable
Oil and gas sales	48,998,017		26,137,534
Joint interest owners	17,628,002		4,537,388
Related party	1,450		10,650
Commodity derivative asset, short term	37,692,443		–
Prepaid expenses and other assets	1,468,000		428,465
Total current assets	131,175,218		48,119,169
PROPERTY AND EQUIPMENT
Oil and gas properties, successful efforts method
Proved	1,083,345,141		587,486,686
Unproved	60,157,459		81,428,206
Right-of-use-asset, net	149,570		–
Furniture, fixtures, and other	2,118,139		1,947,290
Inventory	405,777		271,401
Total property and equipment	1,146,176,086		671,133,583
Accumulated depletion, depreciation, and amortization	(213,914,619)		(111,182,929)
Property and equipment, net	932,261,467		559,950,654
OTHER ASSETS
Debt issuance costs, net	3,313,492		1,059,310
Commodity derivative asset, long term	2,474,020		–
Deposit	20,640		20,640
TOTAL ASSETS	$	1,069,244,837	$	609,149,773

See accompanying notes.

3

Novo Oil & Gas Holdings, LLC

Consolidated Balance Sheets

December 31, 2022 and 2021

	2022		2021
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Trade	$	78,219,906	$	45,147,136
Revenue payable	33,234,352		9,251,552
Accrued liabilities	5,959,428		1,120,378
Operating lease liabilities, current	149,570		–
Advances from joint interest partners	18,986		27,154,896
Commodity derivatives liability, current	5,062,877		9,517,796
Deferred midstream revenue, current	2,333,333		2,333,333
Total current liabilities	124,978,452		94,525,091
NON-CURRENT LIABILITIES	250,000,000		10,000,000
Revolving credit facility
Commodity derivative liability, long-term	4,904,914		3,441,119
Deferred midstream revenue, long-term	22,361,111		24,694,445
Asset retirement obligation	2,705,686		1,034,668
Total liabilities	404,950,163		133,695,323
COMMITMENT AND CONTINGENCIES (Note 8)
MEMBERS’ EQUITY	664,294,674		475,454,450
TOTAL LIABILITIES & MEMBERS' EQUITY	$	1,069,244,837	$	609,149,773

See accompanying notes.

4

Novo Oil & Gas Holdings, LLC

Combined Consolidated Statements of Operations

Years Ended December 31, 2022 and 2021

	2022		2021
REVENUES
Oil sales	$	371,050,382	$	109,828,955
Natural gas sales	153,414,695		55,289,349
Natural gas liquids sales	139,074,955		42,778,233
Total revenues	663,540,032		207,896,537
OPERATING COSTS AND EXPENSES
Lease operating	45,326,041		22,143,457
Production taxes	48,969,260		12,204,787
Exploration	807,751		571,809
General and administrative	8,641,209		6,173,678
Depletion, depreciation, and amortization	102,731,690		40,850,322
Accretion of discount on asset retirement obligations	118,987		71,287
Total operating expenses	206,594,938		82,015,340
OPERATING INCOME	456,945,094		125,881,197
OTHER INCOME (EXPENSE)
Interest expense	(8,795,463)		(741,973)
Interest income	3,635		20,416
Loss on sale of O&G properties	(59,979)		(8,209,375)
Realized commodity derivative loss	(49,741,750)		(22,074,250)
Unrealized commodity derivative gain (loss)	39,416,737		(8,953,305)
Deferred midstream revenue	2,333,333		2,333,333
Other income	330,886		1,665,152
Other expenses	(16,512,601)		(35,960,002)
NET INCOME BEFORE TAXES	$	440,432,493	$	89,921,195
MARGIN TAX EXPENSE	402,624		–
NET INCOME	$	440,029,869	$	89,921,195

See accompanying notes.

5

Novo Oil & Gas Holdings, LLC

Combined Consolidated Statements of Changes in Members’ Equity

Years Ended December 31, 2022 and 2021

	Class A			Class B
	Units	Capital		Units	Capital		Total
BALANCES, January 1, 2021	3,092,175	$	407,428,051	63,106	$	5,608,727	$	413,036,778
Distributions	–	(26,970,952)		–	(532,571)		(27,503,523)
Net income	–	88,122,771		–	1,798,424		89,921,195
BALANCES, December 31, 2021	3,092,175	468,579,870		63,106	6,874,580		475,454,450
Distributions	–	(246,165,853)		–	(5,023,792)		(251,189,645)
Net income	–	431,229,219		–	8,800,650		440,029,869
BALANCES, December 31, 2022	3,092,175	653,643,236		63,106	10,651,438		664,294,674

See accompanying notes.

6

Novo Oil & Gas Holdings, LLC

Combined Consolidated Statements of Cash Flows

Years Ended December 31, 2022 and 2021

	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	440,029,869	$	89,921,195
Adjustments to reconcile net income to net cash from operating activities
Depletion, depreciation, and amortization	102,731,690		40,850,322
Deferred financing cost amortization	973,883		386,411
Accretion of discount on asset retirement obligations	118,987		71,287
Deferred midstream revenue	(2,333,333)		(2,333,333)
Unrealized (gain) loss on derivatives	(39,416,737)		8,953,305
Loss on sale of O&G properties	59,979		8,209,375
Change in working capital items
Accounts receivable	(35,941,896)		(10,444,786)
Prepaid expenses and other assets	(1,039,535)		520,611
Accounts payable	12,787,030		11,627,340
Advances from joint interest partners	(27,135,910)		27,154,202
Revenue payables	23,982,800		4,822,424
Accrued liabilities	(9,808,568)		1,117,751
Net cash from operating activities	465,008,259		180,856,104
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of derivative premiums	(3,740,850)		–
Additions to oil and gas properties	(438,402,651)		(142,805,526)
Additions to other property and equipment	(170,849)		(141,743)
Proceeds from sales of oil and gas properties	105,976		603,276
Net cash used for investing activities	(442,208,374)		(142,343,993)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for deferred financing cost	(3,228,066)		(1,174,799)
Borrowings proceeds from credit agreement	240,000,000		10,000,000
Repayment on borrowings	–		(20,166,667)
Distribution to members	(251,189,645)		(27,503,523)
Net cash used for financing activities	(14,417,711)		(38,844,989)
NET CHANGE IN CASH AND CASH EQUIVALENTS	8,382,174		(332,878)
CASH AND CASH EQUIVALENTS, beginning of year	17,005,132		17,338,010
CASH AND CASH EQUIVALENTS, end of year	$	25,387,306	$	17,005,132
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Change in accounts payable related to oil and gas properties	$	32,983,698	$	(1,294,668)
SUPPLEMENTAL DISCLOSURES OF CASH TRANSACTIONS
Cash paid for interest	$	7,217,739	$	281,395
Cash paid for margin tax	$	138,625	$	–

See accompanying notes.

7

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies

Organization – Novo Oil & Gas Holdings, LLC (Novo or the Company), was formed August 29, 2016, as a limited liability company under the laws of the state of Delaware. Its status as a limited liability company will have perpetual existence unless and until it is dissolved in accordance with the provisions of the Limited Liability Company Agreement (the Agreement). Except as otherwise expressly agreed in writing, members of Novo (the Members) are not personally liable for any obligations of the Company. Revenues and costs and expenses of Novo are allocated to the Members based upon the provisions of the Company’s Agreement.

The Company’s principal business is in oil and natural gas acquisition, exploration, development, and production. The Company’s operations are geographically concentrated in west Texas and southeast New Mexico.

As part of a corporate restructuring, in May 2021, Novo received 100% of Scala Energy Assets, LLC; Scala Energy Assets NM, LLC; Scala Energy Operating, LLC; Scala Energy Minerals, LLC; and Scala Energy, LLC (collectively, Scala Entities) from Scala Energy Holdings, LLC, a portfolio company of EnCap Energy Capital Fund X, L.P (Encap). The corporate restructuring represents a transaction from entities under common control due to common ownership by Encap. Accounting principles generally accepted in the United States of America (U.S. GAAP) requires retrospective combination of all of the entities for all of 2021 as if the corporate restructuring had been in effect for the entire period presented in these financial statements and related notes presented herein represent the combined consolidated results of operations and cash flows through December 31, 2021. There was no such transaction for the year ended December 31, 2022, and the entities were consolidated for the entirety of 2022.

A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows.

Consolidation and basis of presentation – The accompanying audited combined consolidated financial statements have been prepared in accordance with U.S. GAAP. The accompanying combined consolidated financial statements include the accounts of the Company and its subsidiaries, which include the following:

•Novo Oil & Gas, LLC

•Novo Fee Mineral, LLC

•Novo Oil and Gas Northern Delaware, LLC

•Novo Oil & Gas Texas, LLC

•Novo Minerals, LP

•Scala Energy Assets, LLC

•Scala Energy Assets NM, LLC

•Scala Energy Operating, LLC

•Scala Energy Minerals, LLC

•Scala Energy, LLC

All significant intercompany balances and transactions have been eliminated in consolidation.

8

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

Cash and cash equivalents – Cash and cash equivalents consist of all demand deposits and funds invested in highly liquid instruments purchased with original maturities of three months or less. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

Oil and natural gas property and equipment – The Company accounts for its oil and gas exploration and production activities using the successful efforts method of accounting. Under this method, costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells which find proved reserves, and to drill and equip development wells are capitalized. At December 31, 2022 and 2021, the Company had $93,087,551 and $74,645,064, respectively, in capitalized development costs that were pending determination of economic reserves. If the Company determines that the wells do not find proved reserves, the costs are charged to expense. The costs of unproved leasehold interests determined to be proved are transferred to proved oil and natural gas properties. Geological and geophysical costs, delay rentals, and costs to drill exploratory wells which do not find proved reserves are expensed as incurred.

Upon the sale or retirement of oil and gas properties, the cost and related accumulated depreciation, depletion, and amortization and impairment are eliminated from the accounts, and the resulting gain or loss is recognized. On the sale of an entire interest in an unproved property for cash or cash equivalents, gain or loss is recognized to the extent of the difference between the proceeds received and the net carrying value of the property. Proceeds from sales of partial interests in unproved properties are accounted for as a recovery of costs unless the proceeds exceed the entire cost of the property. During 2022, the Company sold certain oil and gas properties for $105,976 and recorded a loss on sale of oil and gas properties of $59,979. During 2021, the Company sold certain oil and gas properties for $603,276 and recorded a loss on sale of oil and gas properties of $8,209,375.

Oil and natural gas properties consisted of the following at December 31:

	2022		2021
Unproved mineral interests	$	60,157,459	$	81,428,206
Proved mineral interests	226,375,004		194,173,294
Wells and related equipment	857,375,914		393,584,792
Total oil and gas property and equipment	1,143,908,377		669,186,292
Accumulated depletion, depreciation, and amortization	(212,079,300)		(109,441,335)
Total oil and gas property and equipment, net	$	931,829,077	$	559,744,957

Depletion, depreciation, and amortization – Capitalized costs of proved oil and natural gas properties are depleted based on the unit-of-production method over total estimated proved reserves, and capitalized costs of wells and related equipment and facilities are depleted based on the unit-of-production method over estimated proved developed reserves. Gas is converted to equivalent barrels at the rate of six Mcf of gas to one barrel of oil equivalent. Capitalized drilling and equipment costs of producing oil and gas properties are amortized and charged to operations using the units-of-production method on a geological zone-by-zone basis based on estimated proved oil and gas reserves. Depletion, depreciation, and amortization expense for oil and natural gas properties amounted to $102,637,964 and $40,740,975 for the years ended December 31, 2022 and 2021, respectively.

9

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

The costs attributable to interests in unproved leaseholds, which the Company expects to retain for development or exploration, are classified separately in oil and gas properties. The impairment assessment for unproved leaseholds is affected by factors such as the results of exploration and development activities, commodity price projections, remaining lease terms, and potential shifts in business strategy. There were no such impairments of unproved leaseholds during the years ended December 31, 2022 and 2021.

The Company assesses impairment of its proved oil and gas properties primarily on a geological location and interest type, based on an analysis of undiscounted net cash flows. If undiscounted cash flows are insufficient to recover the net capitalized costs related to proved properties, then an impairment charge is recognized in income from operations equal to the difference between the net capitalized costs related to proved properties and their estimated fair values based on the present value of the related future net cash flows. There were no such impairments indicated during the years ended December 31, 2022 and 2021.

Other property and equipment – Other property and equipment consist primarily of office furniture and computer equipment, which are recorded at cost and are depreciated on the straight-line method over estimated useful lives of three to five years. Depreciation expense related to other property and equipment for the years ended December 31, 2022 and 2021 was $93,726 and $109,347, respectively.

Prepaid expenses and other – Prepaid expenses consist primarily of payments for insurance, rent, and various other items in the current year in exchange for services to be rendered in subsequent periods.

Income taxes – The Company is a nontaxable entity for U.S. federal income tax purposes with tax liabilities and/or benefits being passed on to its members. As such, no provision for federal income tax expense has been provided. Texas margin tax is assessed on a taxable margin apportioned to Texas. As the tax base for computing Texas margin tax is derived from an income-based measure, the Company has determined that the margin tax is an income tax. The Company has determined that the provision for Texas margin tax and the related deferred tax assets and liabilities were inconsequential as of

December 31, 2022 and 2021, and for the years then ended.

Deferred income taxes represent the estimated future tax consequences of temporary differences, at enacted statutory rates, between the carrying amount of assets and liabilities in the Company’s financial statements and tax returns. The Company has reviewed its federal tax exempt status, as well as other tax provisions, and determined no uncertain tax positions exist. No interest and penalties have been accrued or recorded.

Oil and gas operations

Accounts receivable – Oil and gas sales consist of crude oil and natural gas sales proceeds receivable from purchasers. Accounts receivable – joint interest owners consist of amounts due from joint interest partners for drilling, completion, and operating costs. Accounts receivable are due within 30 to 60 days of production. No interest is charged on past-due balances. Payments made on all accounts receivable are applied to the earliest unpaid items. Management reviews accounts receivable periodically and reduces the carrying amount by a valuation allowance that reflects the estimate of the amount that may not be collectible. No such allowance was considered necessary at December 31, 2022 and 2021.

10

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

Undistributed revenues – Undistributed revenues represent amounts collected from purchasers for oil, natural gas liquids, and gas sales due to other revenue interest owners. Generally, the Company is required to remit amounts due under these liabilities within 60 days of the end of the month in which the related production occurred.

Production costs – Production costs, including lease operating expenses, production taxes, and gathering, transportation, and marketing costs, are expensed as incurred and included in operating costs and expenses on the combined consolidated statements of operations.

Advances from joint interest partners – Advances from joint interest partners consist of funds received from working interest owners by the Company to pay for their ownership share of future development of oil and gas properties.

Asset retirement obligations – Asset retirement obligations relate to future plugging and abandonment expenses on oil and gas properties. The Company records such obligations at fair value on the date incurred, using significant unobservable inputs, including estimates of current plugging and abandonment expenses, inflation rates, credit-adjusted, risk-free rates, and anticipated timing of cash flows. At least, annually, the Company reassesses the obligation to determine whether a change in estimated obligation is necessary. The Company evaluates whether there are indicators that suggest that estimated cash flows underlying the obligation have materially changed. Should those indicators suggest the estimated obligation has materially changed, the Company will update its assessment accordingly. As a result of the Company’s assessment in 2022, the estimated asset retirement obligation was increased by $636,756 due to a change in the plugging estimated cost. As a result of the Company’s assessment in 2021, the estimated asset retirement obligation was decreased by $406,901 due to a change in the plugging estimated cost. Given the unobservable nature of the inputs, the initial recognition of an asset retirement obligation is a non-recurring Level 3 fair value measurement.

The following table describes the changes in asset retirement obligation for the years ended December 31, 2022 and 2021:

	2022		2021
Asset retirement obligation, beginning of period	$	1,034,668	$	1,030,714
Liabilities incurred	915,276		380,822
Liabilities sold	–		(41,254)
Change of estimate	636,756		(406,901)
Accretion of discount	118,987		71,287
Asset retirement obligation, end of period	$	2,705,687	$	1,034,668

The use of estimates in preparing financial statements – In preparing financial statements, accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Significant assumptions are required in the estimates of proved crude oil and natural gas reserves and related estimates of the present value of future net revenues, asset retirement obligations, and valuation of commodity derivative contracts. It is at least reasonably possible these estimates could be revised in the near term, and these revisions could be material.

11

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

Derivative financial instruments – The Company utilizes commodity derivative contracts to manage risks associated with exposure to fluctuations in commodity price for oil, natural gas, and natural gas liquids, which have historically been volatile. The Company’s derivative activities are conducted with major commercial institutions or investment banks. The Company believes these entities present minimal credit risks. The Company does not enter into derivatives for speculative purposes.

Settlements of gains and losses on derivative financial instruments have been realized monthly and reported as a component of other income and expense in the combined consolidated statements of operations and operating cash flows in the period realized.

The Company records all derivative instruments on the balance sheet at fair value. Changes in the derivative’s fair value are recognized in other income and expense in the combined consolidated statements of operations.

Financial instruments and fair value – The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, undistributed revenues, advances from joint partners, and accrued liabilities approximate fair values as of December 31, 2022 and 2021. The carrying values of our borrowings under the revolving credit facility approximate fair value, as these are subject to short-term floating interest rates that approximate the rates available to us for those periods. Derivative financial instruments are recorded at their fair values.

Financial assets and liabilities, which are recorded at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets of identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates, and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the estimate of fair value of the assets or liabilities and their placement within the fair value hierarchy levels. The following table sets forth by level, within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2022 and 2021:

	December 31, 2022
	Level 1		Level 2		Level 3		Fair Value
Commodity derivative asset, current	$	–	$	37,692,443	$	–	$	37,692,443
Commodity derivative asset, long-term	–		2,474,020		–		2,474,020
Commodity derivative liability, current	–		(5,062,877)		–		(5,062,877)
Commodity derivative liability, long-term	–		(4,904,914)		–		(4,904,914)
Total	$	—	$	30,198,672	$	—	$	30,198,672
	December 31, 2021
	Level 1		Level 2		Level 3		Fair Value
Commodity derivative asset, current (Note 5)	$	–	$	–	$	–	$	–
Commodity derivative liability, current	–		(9,517,796)		–		(9,517,796)
Commodity derivative liability, long-term	–		(3,441,119)		–		(3,441,119)
Total	$	–	$	(12,958,915)	$	–	$	(12,958,915)

12

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

The fair value of the commodity derivatives is valued using Level 2 fair value methodologies. The Partnership is able to value the assets and liabilities based on observable market data for similar instruments. This observable data includes the forward curve for commodity prices based on quoted market prices. Assets and liabilities accounted for at fair value on non-recurring basis in accordance with Level 3 of the fair value hierarchy include the potential impairment of oil and gas properties.

Concentration of credit risk – Three customers accounted for 77% of the Company’s oil and natural gas sales for the year ended December 31, 2022. At December 31, 2021, 72% of the Company’s oil and natural gas sales related to three customers. The Company does not believe that the loss of these purchasers would have a material adverse effect on the Company’s results of operations or cash flows as it believes it could readily locate other purchasers.

The Company’s financial condition, results of operations, and capital resources are highly dependent upon the prevailing market prices of, and supply and demand for, crude oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond the Company’s control. These factors include the level of global and regional supply and demand for the petroleum products, the establishment of and compliance with production quotas by oil exporting countries, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic. The Company cannot predict future oil and natural gas prices with any degree of certainty.

Sustained weakness in oil and natural gas prices may adversely affect the financial condition and results of operations and may also reduce the amount of net oil and natural gas reserves the Company can produce economically. Similarly, any improvement in oil and natural gas prices can have a favorable impact on the Company’s financial condition, results of operations, and capital resources.

Newly adopted accounting pronouncements – In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which, together with its related clarifying ASUs (collectively, Accounting Standards Codification 842 or ASC 842), amended the previous guidance for lease accounting and related disclosure requirements. The new guidance requires the recognition of right-of-use (ROU) assets and lease liabilities on the balance sheet for lease with terms greater than twelve months or leases that contain a purchase option that is reasonably certain to be exercised. Lessees are required to classify leases as either finance or operating leases, which will determine whether lease expense is recognized based on an effective interest method or a straight-line basis over the term of the lease. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees are also required to provide additional qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. Effective January 1, 2022, the Company adopted ASC 842 using the modified retrospective method, meaning it has been applied to leases that existed or have been entered into on or after January 1, 2022. See

Note 9 Leases for further discussion of the adoption and the impact on the Company’s combined consolidated financial statements.

13

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

Note 2 – Revenue Recognition

Oil revenues – The Company sells oil production to customers at the Company’s lease locations or other contractually defined delivery locations. Revenue is recognized when control transfers to the customer upon delivery to the contractually agreed-upon delivery point at which the customer takes custody, title, and risk of loss of the product. Revenue is recorded based on contract pricing terms, which reflect prevailing market prices, net of any contractual pricing differentials. Oil revenues are recognized during the month in which control transfers to the customer, and it is probable the Company will collect the consideration it is entitled to receive. Proceeds from oil sales are generally received within one month after the month in which a sale has occurred.

Natural gas liquids (NGLs) and gas sales – The Company sells the majority of its natural gas and NGLs to midstream customers at the inlet of the midstream entity’s gathering system or other contractual delivery point. The midstream entity gathers, processes, and remits proceeds to the Company for the resulting sale of NGLs and residue gas. Under these arrangements, the midstream customers obtain control of the unprocessed gas stream at the inlet of the gathering system or other contractual delivery point, and revenues from each sale are determined using contractually agreed pricing formulas which contain multiple components. Pricing formulas for sales of gas and NGLs to midstream entities include the volume and BTU content of the gas and liquid products sold, and the midstream customer’s proceeds from the sale of residue gas and NGLs at secondary downstream markets. The Company has concluded that the midstream entities are the customer, and revenues are recognized net of pricing adjustments applied by the midstream customer during the month in which control transfers to the customer at the delivery point, and it is probable the Company will collect the consideration it is entitled to receive. Natural gas sales proceeds are generally received within one month after the month in which a sale has occurred.

Non-operated oil, gas, and NGLs revenue – The Company’s proportionate share of production from properties operated by unrelated third parties is generally marketed at the discretion of the third-party operators. For these properties, the Company receives a net payment from the operator representing its proportionate share of sales proceeds, which is net of costs incurred by the operator, if any. Such

non-operator revenues are recognized at the net amount of proceeds to be received by the Company during the month in which production occurs, and it is probable the Company will collect the consideration it is entitled to receive. Proceeds are generally received by the Company within two to three months after the month in which production occurs.

Deferred upfront proceeds recognition – During 2018, the Company received upfront proceeds of

$35,000,000 for entering into an agreement in which the Company provided acreage dedications to a midstream service provider for gathering, processing, transportation, and the sale and marketing of hydrocarbons (Midstream Proceeds Agreement).

The Company ratably recognized upfront proceeds over the 15-year term of the agreement. For the years ending December 31, 2022 and 2021, the Company recognized $2,333,333 in upfront proceeds related to the Midstream Proceeds Agreement, which has been included in other income and expense in the combined consolidated statements of operations.

At December 31, 2022 and 2021, the Company had $2,333,333 recorded as deferred upfront proceeds, current and $22,361,111 and $24,694,445 recorded as deferred upfront proceeds, non-current, respectively, in the combined consolidated balance sheets.

14

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

Note 3 – Acquisitions

On May 7, 2021, through the issuance of additional membership interests, Novo completed the acquisition of 100% of the outstanding membership interests in the Scala Entities. All entities involved in the acquisition are under common control and the net assets were recorded using the historical book value of the Scala Entities at the date of the acquisition. The excess historical book value acquired is treated as an equity transaction. The following table summarizes the assets, liabilities, and excess historical book value amounts related to the acquisition:

Historical book value of assets acquired
Cash and cash equivalents	$	3,599,671
Accounts receivable	16,653,399
Prepaid expenses and other assets	37,465
Commodity derivative assets	365,197
Oil and gas properties, net	202,007,510
Other property and equipment, net	39,923
Total historical book value of assets acquired	$	222,703,165
Historical book value of liabilities acquired
Accounts payable	$	1,936,794
Accrued liabilities	4,507,893
Revenue payable	4,063,004
Commodity derivative liabilities	4,370,806
Deferred revenue	29,361,111
Long-term debt, net	19,895,745
Asset retirement obligation	949,890
Total historical book value of liabilities acquired	$	65,085,243
Excess historical book value     Contributed capital	$	157,617,922

ASC Section 805-50 addresses accounting for common control transactions. The acquisitions represent acquisitions of entities under common control. The combined consolidated financial statements of the Company report the operations for the year ended December 31, 2021, as though the combination of the Scala Entities had always been in effect.The following table summarizes the revenues and expenses included in the Company’s combined consolidated statements of operations from the acquisitions:

Revenues	$	69,352,097
Operating costs and expenses	(29,241,017)
Other expense, net	(6,801,445)
Net income (loss)	$	33,309,635

15

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

Note 4 – Employee Benefit Plan

In November 2016, the Company established a 401(k) retirement plan for all employees. The Company matches employee contributions 100%, up to the 4% of each employee’s gross wages, limited to eligible compensation. Contributions made by the Company totaled $140,915 and $111,322 for the years ended December 31, 2022 and 2021, respectively. Additionally, the Company awarded discretionary 401(k) bonus contributions of $341,878 and $247,012 and for the years ended December 31, 2022 and 2021, respectively.

Note 5 – Derivatives

The following is a summary of the Company’s crude oil and natural gas commodity derivatives at December 31, 2022 and 2021. Oil derivative volumes are measured in barrels of oil (BBls) and natural gas volumes are measured in million British Thermal Units (MMBTU).

December 31, 2022
Period	Instrument	Commodity	Total Volumes	Floor		Ceiling		Fair Value
Jan 2023 - June 2023	Swap	WTI	269,000	$	88.28	$	–	$	2,929,647
Mar 2023 - Dec 2023	Swap	WTI	132,000	$	79.95	$	–	$	561,159
Jan 2023 - Dec 2023	Swap	WTI	1,450,500	$	77.69	$	–	$	10,971,675
Jan 2023 - Dec 2024	Swap	WTI	720,000	$	71.35	$	–	$	995,685
Jan 2024 - June 2024	Swap	WTI	293,000	$	83.72	$	–	$	4,148,064
Jan 2024 - Dec 2024	Swap	WTI	173,000	$	74.08	$	–	$	439,263
Jan 2024 - Mar 2024	Swap	NG	450,000	$	5.46	$	–	$	267,088
April 2023 - Dec 2025	Swap	NG	5,755,000	$	4.71	$	–	$	2,601,513
Jan 2023 - June 2023	Collar	WTI	312,000	$	52.00	$	64.00	$	(5,710,198)
Jan 2023 - Feb 2023	Put	WTI	248,000	$	82.00	$	–	$	1,177,575
Jan 2023 - Mar 2023	Collar	NG	5,403,000	$	3.50	$	13.25	$	10,361,734
Jan 2023 - June 2023	Collar	NG	2,030,000	$	2.40	$	3.44	$	(2,147,840)
April 2023 - Oct 2023	Collar	NG	3,940,000	$	4.00	$	6.20	$	1,865,012
April 2023 - June 2024	Collar	NG	2,870,000	$	4.00	$	6.42	$	1,178,925
Nov 2023 - June 2024	Collar	NG	4,110,000	$	4.00	$	6.43	$	962,269
Jan 2024 - Mar 2024	Collar	NG	1,800,000	$	4.00	$	10.00	$	138,790
April 2023 - Dec 2025	Collar	NG	5,755,000	$	4.00	$	5.75	$	1,721,172
Total
Period	Instrument	Commodity	Total Volumes	Price				Fair Value
Jan-23	Basis Swap	NG	1,085,000	$	(0.22)			$	(232,344)
Jan 2023 - Mar 2023	Basis Swap	NG	135,000	$	(0.79)			$	56,934
Jan 2023 - Mar 2023	Basis Swap	NG	518,000	$	(1.34)			$	(88,865)
Jan 2023 - Mar 2023	Basis Swap	NG	1,493,250	$	(1.05)			$	191,878
Jan 2023 - Mar 2023	Basis Swap	NG	1,430,000	$	(1.36)			$	(314,944)
Jan 2023 - Mar 2023	Basis Swap	NG	876,750	$	(1.07)			$	97,682
Jan 2023 - Dec 2025	Basis Swap	NG	9,309,625	$	(2.14)			$	(1,377,479)
Jan 2023 - Dec 2025	Basis Swap	NG	9,309,625	$	(2.05)			$	(580,274)
Jan 2023 - June 2023	Basis Swap	WTI	312,000	$	0.45			$	(15,449)
Total								$	30,198,672

16

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

December 31, 2021
Period	Instrument	Commodity	Total Volumes	Floor		Ceiling		Fair Value
Jan 2022 - Dec 2022	Swap	WTI	96,000	$	60.77	$	–	$	(1,125,600)
Jan 2022 - Dec 2022	Collar	WTI	514,000	$	58.43	$	64.86	$	(4,413,865)
Jan 2022 - June 2023	Collar	WTI	312,000	$	54.34	$	62.18	$	(2,379,049)
Jan 2022 - Dec 2022	Collar	NG	6,928,000	$	2.62	$	3.18	$	(3,978,331)
Jan 2022 - June 2023	Collar	NG	2,030,000	$	2.48	$	3.21	$	(1,062,070)
Total								$	(12,958,915)

The Company realized a commodity derivative loss of $49,741,750 and $22,074,250 as of December 31, 2022 and 2021, respectively. Because the Company does not apply hedge accounting treatment to its derivative contracts, the changes in fair value of these contracts are recognized in income in the period of change. The Company recorded an unrealized gain of $39,416,737 as of December 31, 2022 and an unrealized loss of $8,953,305 as of December 31, 2021, from changes in fair market value. Unrealized gains and losses, at fair value, are recorded on the Company’s consolidated balance sheets as current or non-current asset and liabilities based on the anticipated timing of settlements under the related contracts, under the caption “commodity derivatives.”

Note 6 – Revolving Credit Facility

On June 20, 2018, Scala Energy Holdings, LLC and Subsidiaries entered into a $750,000,000 credit facility. The credit facility was extinguished at the time of the restructure and the full outstanding balance of $20,166,667, plus accrued interest of $14,509 was paid off.

On July 13, 2021, the Company entered into a senior secured revolving credit facility with a bank with a maximum commitment of $500,000,000 and with an initial borrowing base of $95,000,000. The revolving credit facility has semi-annual borrowing base redeterminations on May 1 and November 1 each year commencing on November 1, 2021. On May 20, 2022, the borrowing base was increased to

$125,000,000 and on September 20, 2022, the borrowing base increased to $400,000,000. As of December 31, 2022, the Company had $250,000,000 of outstanding borrowings out of a borrowing base of $400,000,000. The Company pledged substantially all of its oil and gas properties and other assets as collateral to secure amounts outstanding under the revolving credit facility.

Interest on the revolving credit facility is either (i) Base Rate, plus a margin between 2% and 3% or

(ii) the adjusted London Inter-Bank Offered Rate (LIBOR), plus a margin between 3% and 4%. The annual commitment fee on the unused portion of the revolving credit facility is between 0.375% to 0.50%. At December 31, 2022 and 2021, the interest rate on the revolving credit facility was 6.95% and 3.50%, respectively. The revolving credit facility contains representations, warranties, covenants, conditions, and defaults customary for transactions of this type, including but not limited to (i) limitations on liens and incurrence of debt covenants; (ii) limitations on the sale of property, mergers, consolidations, and other similar transactions covenants; (iii) limitations on investments, loans and advances covenants; and

(iv) limitations on dividends, distributions, redemptions, and restricted payments covenants. The revolving credit facility also contains financial covenants requiring the Company to comply with a consolidated leverage ratio, as of the last day of any fiscal quarter commencing June 30, 2021, to be greater than 3.25 to 1.0 and a current ratio, as of the last day of any fiscal quarter commencing June 30, 2021, to not be less than 1.0 to 1.0. Novo was in compliance with terms and covenants of the revolving credit facility as of December 31, 2022.

17

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

Note 7 – Members’ Equity

At the inception of the Company, the Company authorized three classes of membership interests consisting of Class A units, Class B units, and Class C units. These membership interests are differentiated by ownership, voting rights, capital contribution requirements, and payout treatment. Income and loss allocations and dividend distributions are payable first to Class A Members and Class B Members in proportion to their aggregate capital contributions until they have received an amount equal to their aggregate capital contribution, plus a return on those capital contributions. Any remaining income or distributions are made in accordance with the Agreement of the Company. There have been

$251,189,645 and $27,503,523 in distributions through December 31, 2022 and 2021, respectively. On May 29, 2019, the Company amended the LLC and Unit Purchase Agreements, which increased Encap’s equity commitment from $196,000,000 to $294,000,000 and management’s equity commitment from

$4,000,000 to $6,000,000 and increased Class A units from 1,960,000 to 2,940,000 and Class B units from 40,000 to 60,000, respectively.

On May 7, 2021, Novo issued 250,000 Series A units to Encap in exchange for 100% of the membership interests in the Scala Entities. Additionally, Novo entered into the 2nd amendment of its LLC agreement, which increased Encap’s commitment amount from $294,000,000 to $417,000,000 and increased Class A units from 2,940,000 to 4,170,000. At this time, management also contributed an additional $510,204 for 5,102 Class B units.

As of December 31, 2022 and 2021, 4,170,175 Class A units, 80,000 Class B units, and 100,000 Class C units were authorized. The Class A and Class B units are authorized to be issued at $100 per unit. Class C units are non-voting units and to date have been granted to certain members of management.

Founding management members’ units have a vesting period of four years from the grant date, and other Class C unit holders fully vest immediately prior to the consummation of a transaction that will result in an exit event. In all cases, the Class C unit grants were determined to have a minimal value on grant date. At December 31, 2022 and 2021, the Company had issued 3,092,175 Class A units, 63,106 Class B units, and 100,000 Class C units.

Note 8 – Commitments and Contingencies

As of December 31, 2021, the Company was a party to a noncancelable lease for office space in Oklahoma City, Oklahoma, which expires on July 31, 2022. Rent expense for the year ended December 31, 2021, was approximately $242,986. For the year 2022, under ASC 840, the approximate future minimum lease payment under the lease is approximately $144,480.

Due to the nature of the oil and natural gas business, the Company is exposed to possible environmental risks. The Company has implemented various policies and procedures to avoid environmental contamination and risks from environmental contamination. The Company has historically not experienced any significant environmental liability and is not aware of any potential material environmental issues or claims that existed at December 31, 2022 and 2021.

During March and April of 2022, the Company entered into two drilling agreements with third party providers for a one-year period which included early termination penalties.

18

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

Note 9 – Leases

On January 1, 2022, the Company adopted ASU 2016-02, which requires the recognition of right-of-use assets and lease liabilities on the balance sheet for leases with terms greater than 12 months. The Company elected to utilize the package of practical expedients in ASC 842-10-65-1(f) that, upon adoption of ASU 2016-02, allowed entities to (1) not reassess whether any expired or existing contracts are or contain leases, (2) retain the classification of leases (e.g., operating or finance lease) existing as of the date of adoption, and (3) not reassess initial direct costs for any existing lease. Accordingly, adoption of the new standard resulted in recording an operating lease ROU asset and operating lease liability of

$393,286 on the balance sheet as of January 1, 2022. Adoption of the standard did not have an impact on the Company’s beginning members’ capital, results from operations, or cash flows.

Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. The operating lease ROU asset also includes any upfront lease payments made and excludes lease incentives and initial direct costs incurred. The Company has elected the practical expedients allowing (1) the short-term lease recognition exemption whereby ROU assets and lease liabilities will not be recognized for leasing arrangements with terms less than one year and

(2) the combination of lease and non-lease components and expensing variable payments as rent/lease expense in the period incurred.

The Company leases office space under a non-cancelable operating lease with an original lease term of four years. The lease has one renewal option at the election of the Company to extend the lease for an additional year. The lease renewal option is included in the expected lease term as the Company determined it was reasonably certain to exercise the renewal option upon adoption. The Company does not have any finance leases.

Lease expenses are included in general and administrative expense on the combined consolidated statements of operations and include the following components for the year ended December 31, 2022:

Lease Expenses	Year Ended December 31, 2022
Operating lease cost	$	252,480
Variable lease cost	–
Short-term lease costs	2,080,849
Lease costs capitalized in proved oil & gas properties	14,120,441
Total lease cost	$	16,453,770

19

Novo Oil & Gas Holdings, LLC

Notes to the Combined Consolidated Financial Statements

Supplemental information related to the Company’s leases for the year ended December 31, 2022 was as follows:

Cash paid for operating leases	$	252,480
Right-of-use assets obtained in exchange for new operating lease liabilities	$	393,286
Weighted-average remaining lease term - operating leases	0.58 years
Weighted-average discount rate - operating leases	3.50%

The total future minimum lease payments under non-cancelable operating leases as of December 31, 2022 were as follows:

Year Ended December 31,	Operating Leases
2023	$	151,321
2024	–
2025	–
Total future minimum lease payments	151,321
Less imputed interest	(1,751)
Present value of lease liabilities	$	149,570

Note 10 – Subsequent Events

Management has evaluated the effects of subsequent events for inclusion and disclosure in the accompanying combined consolidated financial statements through March 31, 2023, the date the accompanying combined consolidated financial statements were available to be issued and is not aware of any subsequent events that would have a material impact on the accompanying combined consolidated financial statements, other than those which have already been disclosed.

During January, February, and March 2023, the Company made distributions to members for a total of

$110,000,000 and made additional borrowings on its revolving credit facility of $60,000,000.

20

EX-99.3

Exhibit 99.3

Condensed Consolidated Financial Statements

NOVO OIL & GAS HOLDINGS, LLC

As of March 31, 2023 and December 31, 2022 and

For the Three Months Ended March 31, 2023 and 2022

Table of Contents

Page

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets    2

Condensed Consolidated Statements of Operations    3

Condensed Consolidated Statements of Equity    4

Condensed Consolidated Statements of Cash Flows    5

Notes to the Condensed Consolidated Financial Statements (Unaudited)    6

NOVO OIL & GAS HOLDINGS, LLC

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands)

			March 31, 2023			December 31, 2022
ASSETS
Current assets:
	Cash and cash equivalents		$	24,679		$	25,387
	Accounts receivable, net				69,773			66,628
	Prepaid expenses and other assets				1,348			1,468
	Commodity derivative assets				36,157			37,692
Total current assets					131,957			131,175
Property and equipment:
	Oil and gas property and equipment, based on     successful efforts method of accounting, net				980,734			929,671
	Other property and equipment, net				251			2,035
	Right-of-use-asset, net				86			150
	Inventory				225			406
Total property and equipment					981,296			932,262
Other assets:
	Debt issuance costs, net				2,937			3,313
	Commodity derivative asset, long term				3,592			2,474
	Deposit				21			21
Total assets			$	1,119,803		$	1,069,245
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
	Accounts payable
		Trade	$	42,168		$	78,220
		Revenue payable			44,153			33,234
	Accrued liabilities				7,178			5,959
	Operating lease liabilities, current				86			150
	Advances from joint interest partners				7			19
	Commodity derivatives liability current				―			5,063
	Deferred midstream revenue, current				2,333			2,333
Total current liabilities					95,925			124,978
Noncurrent liabilities:
	Revolving credit facility				310,000			250,000
	Commodity derivative liability, long term				3,392			4,905
	Deferred midstream revenue, long-term				21,778			22,361
	Asset retirement obligation				2,779			2,706
Total noncurrent liabilities					337,949			279,972
Commitments and contingencies (Note 11)
Members' equity					685,929			664,295
Total liabilities and members' equity			$	1,119,803		$	1,069,245

See notes to the unaudited Condensed Consolidated financial statements.

2

NOVO OIL & GAS HOLDINGS, LLC

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands)

		Three Months Ended March 31,
		2023			2022
REVENUES:
	Crude oil, natural gas, and NGL sales	$	177,519		$	114,550
OPERATING COSTS AND EXPENSES:
	Lease operating			21,490			6,885
	Production taxes			13,029			8,232
	Exploration			61			88
	General and administrative			1,723			1,795
	Depletion, depreciation, and amortization			36,338			18,244
	Accretion of discount on asset retirement obligations			74			28
	Total operating expenses			72,715			35,272
OPERATING INCOME				104,804			79,278
OTHER INCOME (EXPENSE):
	Interest income			98			1
	Interest expense			(5,790)			(320)
	Gain on sale of oil and gas properties			8			―
	Commodity derivative gain (loss), net			31,934			(51,621)
	Deferred midstream revenue			583			583
	Other income			76			2
	Total other income (expense)			26,909			(51,355)
NET INCOME BEFORE TAXES				131,713			27,923
MARGIN TAX EXPENSE				(71)			(152)
NET INCOME		$	131,642		$	27,771

See notes to the unaudited Condensed Consolidated financial statements.

3

NOVO OIL & GAS HOLDINGS, LLC

Condensed Consolidated Statements of Equity (Unaudited)

(in thousands, except unit amounts)

		Class A				Class B
		Units	Capital			Units	Capital			Total
January 1, 2022		3,092,175	$	468,580		63,106	$	6,874		$	475,454
	Distributions	―			(24,988)	―			(510)			(25,498)
	Net income	―			27,216	―			555			27,771
March 31, 2022		3,092,175	470,808			63,106	6,919			477,727
January 1, 2023		3,092,175	$	653,643		63,106	$	10,652		$	664,295
	Distributions	―			(107,808)	―			(2,200)			(110,008)
	Net income	―			129,009	―			2,633			131,642
March 31, 2023		3,092,175	674,844			63,106	11,085			685,929

See notes to the unaudited Condensed Consolidated financial statements.

4

NOVO OIL & GAS HOLDINGS, LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

		Three Months Ended March 31,
		2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income	$	131,642		$	27,771
	Adjustments to reconcile net income to net cash from     operating activities
	Depletion, depreciation, and amortization			36,338			18,244
	Accretion of discount on asset retirement obligations			74			28
	Deferred midstream revenue			(583)			(583)
	Deferred financing cost amortization			414			90
	Unrealized net derivative (gain) loss			(2,844)			40,613
	Gain on sale of oil and gas properties			(8)			―
	Change in working capital items
	Accounts receivable			(3,146)			(16,118)
	Prepaid expenses and other assets			121			15
	Accounts payable			(3,436)			(3,223)
	Advances from joint interest partners			(12)			(7,270)
	Revenue payables			10,919			7,056
	Accrued liabilities			1,219			1,372
Net cash provided by operating activities				170,698			67,995
CASH FLOWS FROM INVESTING ACTIVITIES:
	Additions to oil and gas properties			(119,863)			(66,744)
	Additions to other property and equipment			―			(24)
	Purchase of derivative premiums			(1,505)			―
	Proceeds from sales and oil and gas properties			8			―
Net cash used in investing activities				(121,360)			(66,768)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Distributions to members			(110,008)			(25,498)
	Payments for deferred financing costs			(38)			(34)
	Borrowings from revolving credit facility			60,000			20,000
Net cash used in financing activities				(50,046)			(5,532)
NET CHANGE IN CASH AND CASH EQUIVALENTS				(708)			(4,305)
CASH AND CASH EQUIVALENTS, beginning of quarter				25,387			17,005
CASH AND CASH EQUIVALENTS, end of quarter		$	24,679		$	12,700

See notes to the unaudited Condensed Consolidated financial statements.

5

NOVO OIL & GAS HOLDINGS, LLC

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Note 1 - Organization and Summary of Significant Accounting Policies

Description - Novo Oil & Gas Holdings, LLC (the “Company”), was formed on August 29, 2016, as a limited liability company under the laws of the state of Delaware. The Company’s principal business is in oil and natural gas acquisition, exploration, development and production. The Company’s operations are concentrated in the Northern Delaware Basin of Southeast New Mexico and West Texas, a region of high-quality, liquids rich, stacked pay zones.

On June 14, 2023, the Company signed a definitive agreement with Earthstone Energy, Inc. (“Earthstone”) to sell substantially all of its oil and gas assets. As of March 31, 2023, any contemplated sale transaction was not deemed to be probable, and these condensed consolidated financial statements do not present assets held for sale.

Basis of Presentation of Unaudited Condensed Consolidated Financial Statements – The unaudited condensed consolidated financial statements (“Condensed Consolidated Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the Company’s combined consolidated financial statements as of and for the years ended December 31, 2022 and 2021. The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated.

Note 2 - Accounts Receivable

Components of accounts receivable include the following (in thousands):

		March 31, 2023			December 31, 2022
Crude oil, natural gas and NGL sales		$	56,602		$	48,998
Joint interest billings				13,168			17,628
Related Party				3			2
	Gross accounts receivable			69,773			66,628
Allowance for doubtful accounts				―			―
	Net accounts receivable	$	69,773		$	66,628

As of December 31, 2022, the accounts receivable balance representing amounts due or billable under the terms of contracts with purchasers was $49.0 million. The Company reviews accounts receivable periodically and reduces the carrying amount by a valuation allowance that reflects the estimate of the amount that may not be collectible. No such allowance was considered necessary at March 31, 2023 and December 31, 2022.

6

NOVO OIL & GAS HOLDINGS, LLC

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Note 3 - Oil and Natural Gas Properties

Capitalized Costs - The following table reflects the aggregate capitalized costs (in thousands):

			March 31, 2023			December 31, 2022
Oil and natural gas properties:
	Proved properties			$	1,172,432	$	1,083,345
	Unproved properties			56,688				60,158
		Total oil and gas properties		1,229,120				1,143,503
	Less: Accumulated depreciation, depletion and amortization			(248,386)				(212,079)
		Oil and gas properties, net		$	980,734	$	931,424

No lease expirations were included as exploration costs in the Condensed Consolidated statements of operations for the three months ended March 31, 2023 and 2022. In addition, there were no such impairments of unproved leaseholds during the three months ended March 31, 2023 and 2022.

Note 4 - Other Property and Equipment, Net

Other property and equipment, net consists of the following (in thousands):

	March 31, 2023			December 31, 2022
Furniture, fixtures and other	$		2,118	$	2,118
Less: accumulated depreciation			(1,867)			(1,835)
Other property and equipment, net	$	251		$	283

Note 5 - Revenue

Disaggregation of Revenue - The following table presents the disaggregation of crude oil, natural gas and NGL revenue (in thousands):

	Three Months Ended March 31,
	2023			2022
Crude oil	$		138,551		$	74,393
Natural gas			10,542				17,400
Natural gas liquids ("NGL")			28,426				22,757
Total crude oil, natural gas and NGL sales, net	$	177,519			$	114,550

7

NOVO OIL & GAS HOLDINGS, LLC

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Note 6 - Derivative Financial Instruments

Commodity Derivatives - As of March 31, 2023, the Company had the following open crude oil derivative positions:

	Price Swaps			Price Collars
Period	Volume (Bbls)	Weighted Average Price ($/Bbl)		Volume (Bbls)	Weighted Average Floor Price ($/Bbl)		Weighted Average Ceiling Price ($/Bbl)
April 2023 -   December 2023	1,837,500	$	84.75	—	$	—	$	—
January 2024 -   December 2024	723,000	$	76.39	—	$	—	$	—
April 2023 -   December 2023	—	$	—	1,134,000	$	70.56	$	78.75

	Oil Basis Swaps
Period	Index	Volume (Bbls)	Weighted Average Basis Differential ($/Bbl)
April 2023 -        December 2023	ARGUS	157,000	$	0.45

	Deferred Premium Put Oil Options
Period	Volume (Bbls)	Price Per Bbl (Put Price)		Weighted Average Price Per Bbl (Net of Premium)
April 2023 -   June 2023	590,000	$	75.00	$	71.04

8

NOVO OIL & GAS HOLDINGS, LLC

Notes to the Condensed Consolidated Financial Statements (Unaudited)

As of March 31, 2023, the Company had the following open natural gas derivative positions:

	Price Swaps			Price Collars
Period	Volume (MMBtu)	Weighted Average Price ($/MMBtu)		Volume (MMBtu)	Weighted Average Floor Price ($/MMBtu)		Weighted Average Ceiling Price ($/MMBtu)
April 2023 -   December 2023	2,395,000	$	4.71	—	$	—	$	—
January 2024 -        December 2024	2,025,000	$	4.88	—	$	—	$	—
January 2025 -   December 2025	1,785,000	$	4.71	—	$	—	$	—
April 2023 -   December 2023	—	$	—	11,895,000	$	3.79	$	5.83
January 2024 -   December 2024	—	$	—	7,465,000	$	3.83	$	6.25
January 2025 -   December 2025	—	$	—	1,785,000	$	4.00	$	5.75

	Natural Gas Basis Swaps
Period	Index	Volume (Bbls)	Weighted Average Basis Differential ($/Bbl)
April 2023 -   December 2023	WAHA	12,835,000	$	(1.82)
January 2024 -        December 2024	WAHA	9,950,000	$	(1.61)
January 2025 -   December 2025	WAHA	5,077,500	$	(1.53)

As of March 31, 2023, the Company had the following open natural gas liquids basis swap derivative positions:

	Natural Gas Liquids Basis Swaps
Period	Index	Volume (Bbls)	Weighted Average Basis Differential ($/Bbl)
April 2023 -   June 2023	OPIS	22,270,500	$	0.21

9

NOVO OIL & GAS HOLDINGS, LLC

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Derivative Gains and Losses - Cash receipts and payments reflect the gains or losses on derivative contracts which matured during the applicable period, calculated as the difference between the contract price and the market settlement price of matured contracts. The derivative contracts of the Company are settled based upon reported settlement prices on commodity exchanges. Because the Company does not apply hedge accounting treatment to its derivative contracts, the changes in fair value of these contracts are recognized in income as unrealized gains (losses) in the period of change.

The following table presents cash receipts and payments along with non-cash gains and losses of commodity derivative contracts (in thousands):

	Three Months Ended March 31,
	2023			2022
Cash received (paid) on derivatives	$	29,090		$	(11,008)
Unrealized gain (loss) on derivatives			2,844			(40,613)
Gain (loss) on derivatives, net	$	31,934		$	(51,621)

Financial Statement Presentation - All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the Condensed Consolidated balance sheets. Amounts related to contracts allowed to be netted upon payment subject to a master netting arrangement with the same counterparty are reported on a net basis in the Condensed Consolidated balance sheets. The table below presents a summary of these positions at March 31, 2023 (in thousands):

	March 31, 2023
	Gross Fair Value			Amounts Netted			Net Fair Value
Commodity derivative assets:
Commodity derivative asset, current	$	52,405		$	(16,248)		$	36,157
Commodity derivative asset, noncurrent			9,761			(6,169)			3,592
Total commodity derivative assets	$	62,166		$	(22,417)		$	39,749
Commodity derivative liabilities:
Commodity derivative liability, current	$	(16,248)		$	16,248		$		—
Commodity derivative liability, noncurrent			(9,561)			6,169			(3,392)
Total commodity derivative liabilities	$	(25,809)		$	22,417		$	(3,392)

10

NOVO OIL & GAS HOLDINGS, LLC

Notes to the Condensed Consolidated Financial Statements (Unaudited)

	December 31, 2022
	Gross Fair Value			Amounts Netted			Net Fair Value
Commodity derivative assets:
Commodity derivative asset, current	$	47,633		$	(9,941)		$	37,692
Commodity derivative asset, noncurrent			8,927			(6,453)			2,474
Total commodity derivative assets	$	56,560		$	(16,394)		$	40,166
Commodity derivative liabilities:
Commodity derivative liability, current	$	(15,004)		$	9,941		$	(5,063)
Commodity derivative liability, noncurrent			(11,358)			6,453			(4,905)
Total commodity derivative liabilities	$	(26,362)		$	16,394		$	(9,968)

Note 7 - Revolving Credit Facility

The Company has a senior secured revolving credit facility (“Revolving Credit Facility”) with a bank with a maximum commitment of $500.0 million. The Revolving Credit Facility has semi-annual borrowing base redeterminations on May 1 and November 1 each year. On March 28, 2023, the borrowing base of the Revolving Credit Facility was reaffirmed at $400.0 million. As of March 31, 2023 and December 31, 2022, the Company had $310.0 million and $250.0 million of outstanding borrowings under the Revolving Credit Facility, respectively. The Company has pledged substantially all of its oil and gas properties and other assets as collateral to secure amounts outstanding under the Revolving Credit Facility.

At March 31, 2023 and December 31, 2022, the interest rate on the Revolving Credit Facility was 8.3% and 6.9%, respectively. The Revolving Credit Facility contains representations, warranties, covenants, conditions, and defaults customary for transactions of this type, including but not limited to (i) limitations on liens and incurrence of debt covenants; (ii) limitations on the sale of property, mergers, consolidations, and other similar transactions covenants; (iii) limitations on investments, loans and advances covenants; and (iv) limitations on dividends, distributions, redemptions, and restricted payments covenants. The revolving credit facility also contains financial covenants requiring the Company to comply with a Condensed Consolidated leverage ratio, as of the last day of any fiscal quarter, to be greater than 3.25 to 1.0 and a Condensed Consolidated current ratio, as of the last day of any fiscal quarter, to not be less than 1.0 to 1.0. The Company was in compliance with terms and covenants of the Revolving Credit Facility as of March 31, 2023 and December 31, 2022.

11

NOVO OIL & GAS HOLDINGS, LLC

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Note 8 - Asset Retirement Obligations

The following table presents changes in asset retirement obligations (in thousands):

		March 31,
		2023			2022
Asset retirement obligations at beginning of year		$	2,706		$	1,035
	Accretion expense on discounted obligation			73			28
Asset retirement obligations at end of year		$	2,779		$	1,063

Given the unobservable nature of the inputs, the initial recognition of an asset retirement obligation is a non-recurring Level 3 fair value measurement.

Note 9 - Fair Value Measurement

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, revenue payable, advances from joint interest partners, and accrued liabilities included in the accompanying Condensed Consolidated balance sheets approximated fair value at March 31, 2023 and December 31, 2022.

Note 10 - Members’ Equity

The Company has three authorized classes of membership interests consisting of Class A units, Class B units, and Class C units. These membership interests are differentiated by ownership, voting rights, capital contribution requirements, and payout treatment. For the three months ended March 31, 2023 and 2022, the Company made distributions of $110.0 million and $25.5 million, respectively.

As of March 31, 2023 and December 31, 2022, 4,170,175 Class A units, 80,000 Class B units, and 100,000 Class C units were authorized. At March 31, 2023 and December 31, 2022, the Company had issued 3,092,175 Class A units, 63,106 Class B units, and 100,000 Class C units.

Subsequent to March 31, 2023, the Company made distributions to Class A and B Members for a total of $110.0 million. These subsequent distributions were in excess of their aggregate capital contributions plus a return on those capital contributions as defined in the Limited Liability Company Agreement. As defined in the Limited Liability Agreement, these subsequent distributions triggered distribution rights to Class C Members.

Note 11 - Commitments and Contingencies

Due to the nature of the oil and natural gas business, the Company is exposed to possible environmental risks. The Company has implemented various policies and procedures to avoid environmental contamination and risks from environmental contamination. The Company has not historically experienced any significant environmental liabilities and is not aware of any potential material environmental issues or claims that existed at March 31, 2023 and December 31, 2022.

12

NOVO OIL & GAS HOLDINGS, LLC

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Note 12 - Leases

Operating lease costs and short-term lease costs are included in “general and administrative expense” in the accompanying Condensed Consolidated statements of operations and included in the following components (in thousands):

	For the Three Months Ended March 31,
	2023		2022
Operating lease cost	$	65	$	62
Short-term lease costs	$	1,426	$	442
Lease costs capitalized in proved oil and gas properties	$	3,829	$	1,872

Note 13 - Supplemental Disclosures to Condensed Consolidated Financial Statements

Accrued Liabilities - Accrued liabilities consisted of the following at the dates indicated (in thousands):

	March 31, 2023			December 31, 2022
Accrued production taxes	$	5,891		$	4,939
Accrued interest			1,287			678
Accrued compensation costs			—			342
Accrued liabilities	$	7,178		$	5,959

Supplemental Cash Flow Information -The following table provides certain supplemental cash flow information for the periods indicated (in thousands):

		March 31,
		2023		2022
Supplemental Disclosure of Non-Cash Information:
	Change in accounts payable related to    oil and gas properties	$	34,426	$	(24,134)

Note 14 - Subsequent Events

In preparing the accompanying Condensed Consolidated Financial Statements, management has evaluated all subsequent events and transactions for potential recognition or disclosure through June 23, 2023, the date the Condensed Consolidated Financial Statements of the Company was available for issuance and concluded there were no material subsequent events other than discussed below.

Subsequent to March 31, 2023, the Company borrowed $40.0 million on its Revolving Credit Facility and as previously discussed in Note 1, signed a definitive agreement with Earthstone to sell substantially all of its oil and gas assets.

13

EX-99.4

Exhibit 99.4

June 14, 2023

Geoff Vernon     

Vice President of Reservoir Engineering and A&D

Earthstone Energy, Inc.

1400 Woodloch Forest Dr., Suite 300

The Woodlands, Texas 77380

Re:     Evaluation Summary – NYMEX Strip Price Case

         Novo Oil and Gas Holdings, LLC Interests

         Proved Plus Probable and Possible Reserves

        Certain Properties in New Mexico and Texas

As of May 1, 2023                                                     

Dear Mr. Vernon:

    As you have requested, this report was completed on June 14, 2023 for the purpose of submitting our estimates of proved plus probable and possible reserves and forecasts of economics attributable to the interests of Novo Oil and Gas Holdings, LLC (“Novo”) interests, which Earthstone Energy Holdings, LLC (“Earthstone”) intends to acquire with an effective date May 1, 2023. This report represents only those interests to be acquired directly by Earthstone or approximately 66.7% of Novo’s total proved plus probable and possible reserves, which are made up of oil and gas properties in Culberson and Ector Counties, Texas and Eddy County, New Mexico. This report utilized a NYMEX strip price deck quoted on May 24, 2023. The results of this evaluation are presented in a composite summary by reserve category below:

				Proved
			Proved	Developed	Proved
			Developed	Non-	Developed	Proved	Total	Probable	Possible
			Producing	Producing	Shut-In	Undeveloped	Proved	Undeveloped	Undeveloped
Net Reserves
	Oil	- Mbbl	13,513.0	4,911.5	0.0	15,345.8	33,770.3	2,572.7	20,015.4
	Gas	- MMcf	132,708.2	49,655.6	0.0	68,745.9	251,109.6	9,235.2	247,384.5
	NGL	- Mbbl	18,526.8	6,551.4	0.0	10,402.3	35,480.5	1,389.2	31,633.0
Net Revenue
	Oil	- M$	891,325.1	328,080.7	0.0	974,472.7	2,193,878.5	158,628.5	1,230,037.9
	Gas	- M$	403,446.3	155,958.4	0.0	225,549.6	784,954.2	30,578.0	819,726.7
	NGL	- M$	358,191.5	126,374.6	0.0	194,007.1	678,573.2	25,500.0	579,339.0
Severance Taxes		- M$	112,242.2	35,745.9	0.0	102,890.1	250,878.3	15,777.6	146,439.9
Ad Valorem Taxes		- M$	3,788.4	2,457.2	0.0	516.5	6,762.0	97.5	12,644.0
Operating Expenses		- M$	553,289.9	186,989.7	44.6	397,354.5	1,137,678.7	53,914.5	922,639.9
Abandonment Costs		- M$	6,939.9	1,581.7	342.4	5,400.8	14,264.8	733.8	8,860.7
Future Development Costs		- M$	0.0	43,361.2	0.0	393,659.9	437,021.1	59,615.4	732,775.6
Net Oper. Income (BFIT)		- M$	976,702.2	340,278.1	-387.1	494,207.6	1,810,801.3	84,567.5	805,743.2
	Discounted @ 10%	- M$	671,053.6	241,258.3	-384.2	260,155.6	1,172,082.9	36,304.1	262,929.9

Novo Oil and Gas Holdings, LLC Interests

June 14, 2023

Page 2

Future net revenue is prior to deducting state production taxes and ad valorem taxes. Future net cash flow is after deducting these taxes, future capital (development) costs and operating expenses, but before consideration of federal income taxes. The future net cash flow has been discounted at an annual rate of ten percent to determine its “present worth”. The present worth is shown to indicate the effect of time on the value of money and should not be construed as being the fair market value of the reserves.

    The oil reserves, which include oil and condensate volumes, and natural gas liquid (NGL) volumes are expressed in barrels (42 U.S. gallons). Gas volumes are expressed in thousands of standard cubic feet (Mcf) at contract temperature and pressure base.

Hydrocarbon Pricing

    As requested, oil and gas prices were adjusted to the following May 24, 2023 NYMEX strip prices:

WTI Cushing    Henry Hub

            Oil Price    Gas Price

Year$/BBL$/MMBTU

        2023    73.23    2.732

        2024    69.93    3.548

        2025    66.63    4.082

        2026    64.04    4.088

    2027    61.83     4.068

        2028    60.97     4.068

         Thereafter    Flat    Flat

        Cap    60.97    4.068

Oil prices were held constant beginning January 1, 2028 at $60.97 per BBL, and beginning January 1, 2027, gas prices were held constant at $4.068 per MMBTU. NGL prices were applied at 30.0% of WTI Cushing oil prices as provided. Adjustments to oil and gas prices were made based upon data provided by Earthstone and include local basis differential, treating cost, transportation charges and/or crude quality and gravity corrections.

Future Development Costs, Expenses and Taxes

    Capital expenditures (Future Development Costs), lease operating expenses and ad valorem tax values were forecast as provided by Earthstone. As you explained, the capital costs were based on the most current estimates, lease operating expenses were based on the analysis of historical actual expenses, operating overhead is included for non-operated properties and no credit or deduction is made for producing overhead paid to the company by other owners of the operated properties. Lease operating expenses are based on operator and wellbore orientation and are applied on a well-by-well or unit-by-unit basis. Capital costs and lease operating expenses were held constant.

    Severance and ad valorem tax rates were applied at effective rates based on historic data as provided by Earthstone on a well-by-well basis.    

Reserve Estimation Methods

Reserves for proved developed producing wells were estimated using production performance methods for the vast majority of properties. Certain new producing properties with very little production history were forecast using a combination of production performance and analogy to similar production, both of which are considered to provide a relatively high degree of accuracy.

    Non-producing, both developed and undeveloped, reserve estimates were forecast using either volumetric or analogy methods, or a combination of both. These methods provide a relatively high degree of accuracy for predicting non-producing reserves. The assumptions, data, methods and procedures used herein are appropriate for the purpose served by this report.

Novo Oil and Gas Holdings, LLC Interests

June 14, 2023

Page 3

    This evaluation includes 21 developed non-producing wells (drilled but uncompleted) anticipated to begin production in 2023 and 2024 and 72 proved undeveloped locations, all of which are commercial using strip pricing presented herein. Also included are six (6) shut-in wells which have no reserves associated with them, only anticipated plugging and abandoning expenses, and are included herein for inventory and accounting purposes only.

    Each of these commercial drilling locations proposed as part of Earthstone’s development plans conforms to the proved undeveloped standards as set forth by the Petroleum Resources Management System. In our opinion, Earthstone has indicated it has every intent to complete this development plan as scheduled.  Furthermore, Earthstone has demonstrated that it has adequate company staffing, financial backing and prior development success to ensure this development plan will be fully executed.

Miscellaneous

    An on-site field inspection of the properties has not been performed nor has the mechanical operation or condition of the wells and their related facilities been examined, nor have the wells been tested by Cawley, Gillespie & Associates, Inc. Possible environmental liability related to the properties has not been investigated nor considered. Further, the costs of plugging and abandonment wells have been included herein as provided.

The reserve classifications and the economic considerations applied herein conform to the criteria set forth in the June 2018 Petroleum Resources Management System (PRMS) approved by the Society of Petroleum Engineers (SPE). The reserves and economics are predicated on regulatory agency classifications, rules, policies, laws, taxes and royalties in effect on the effective date, except as noted herein. The possible effects of changes in legislation or other Federal or State restrictive actions have not been considered. All reserve estimates represent our best judgment based on data available at the time of preparation, and assumptions as to future economic and regulatory conditions. It should be realized that the reserves actually recovered, the revenue derived therefrom and the actual cost incurred could be more or less than the estimated amounts.

    The reserve estimates and forecasts were based upon interpretations of data furnished by Earthstone and available from our files. Ownership information and economic factors such as liquid and gas prices, price differentials and expenses were furnished by Earthstone. To some extent, information from public records was used to check and/or supplement these data. The basic engineering and geological data were utilized subject to third party reservations and qualifications. Nothing has come to our attention, however, that would cause us to believe that we are not justified in relying on such data. All estimates represent our best judgment based on the data available at the time of preparation. Due to inherent uncertainties in future production rates, commodity prices and geologic conditions, it should be realized that the reserve estimates, the reserves actually recovered, the revenue derived therefrom and the actual cost incurred could be more or less than the estimated amounts.

Closing

    Cawley, Gillespie & Associates, Inc. is a Texas Registered Engineering Firm (F-693), made up of independent registered professional engineers and geologists that have provided petroleum consulting services to the oil and gas industry for over 60 years. This evaluation was supervised by W. Todd Brooker, President at Cawley, Gillespie & Associates, Inc. and a State of Texas Licensed Professional Engineer (License #83462). We do not own an interest in the properties, Earthstone Energy, Inc., Earthstone Energy Holdings, LLCor Novo Oil and Gas Holdings, LLC and are not employed on a contingent basis. We have used all methods and procedures that we consider necessary under the circumstances to prepare this report. Our work-papers and related data utilized in the preparation of these estimates are available in our office.

Novo Oil and Gas Holdings, LLC Interests

June 14, 2023

Page 4

Yours very truly,

CAWLEY, GILLESPIE & ASSOCIATES, INC.

Texas Registered Engineering Firm F-693

/s/ W. Todd Brooker
W. Todd Brooker, P.E. President

/s/ Robert P. Bergeron, Jr., P.E.
Robert P. Bergeron, Jr., P.E. Reservior Engineer

XML

Cover	Jun. 27, 2023
Cover [Abstract]
Document Type	8-K
Document Period End Date	Jun. 27, 2023
Entity Registrant Name	EARTHSTONE ENERGY, INC.
Entity Incorporation, State or Country Code	DE
Entity File Number	001-35049
Entity Tax Identification Number	84-0592823
Entity Address, Address Line One	1400 Woodloch Forest Drive
Entity Address, Address Line Two	Suite 300
Entity Address, City or Town	The Woodlands
Entity Address, State or Province	TX
Entity Address, Postal Zip Code	77380
City Area Code	281
Local Phone Number	298-4246
Written Communications	false
Soliciting Material	false
Pre-commencement Tender Offer	false
Pre-commencement Issuer Tender Offer	false
Title of 12(b) Security	Class A Common Stock, $0.001 par value per share
Trading Symbol	ESTE
Security Exchange Name	NYSE
Entity Emerging Growth Company	false
Entity Central Index Key	0000010254
Amendment Flag	false