Earthstone Energy, Inc.

However, we're focused on the future, and we believe there are numerous opportunities to continue driving significant value from our asset base. We're focused on optimizing the development of our high-quality asset base while managing costs and reducing absolute debt. Our confidence is high that over the next several quarters, we will be able to drive value through improving capital and operational efficiencies. As we have done with all of our acquisitions, we will focus on reducing costs on these recently acquired assets where we can, even with the inflationary pressures. With the Bighorn asset literally next door to our existing assets, we see some operating synergies with personnel and systems that will help us improve our operating procedures, reduce downtime on wells, and maximize margins. Our free cash flow is strong. The initial well results on our newly acquired Delaware Basin assets are meeting or exceeding expectations, and our expanded operations are going smooth. Looking forward, I feel that we're well positioned to execute on our operational plans and generate even more substantial free cash flow. The Bighorn assets are generating large amounts of free cash, particularly given these high commodity prices. In fact, during the interim period between the effective date of January 1st and closing on April 14th, the Bighorn assets generated such significant free cash flow that after preliminary purchase price adjustments, the consideration for the acquisition was reduced by about $145 million. We've been very pleased with our integration efforts so far. We believe that one of the most integral parts of integration is execution. We have Integrated the accounting, land, and financial reporting for the Chisholm acquisition in the Delaware Basin already, and we're well along the way of doing the same for Bighorn. Continuity and consistency are keys to operational efficiency. As Steve will discuss further, we've identified a couple of areas to potentially reduce drilling days on the Delaware Basin assets. We are making sure we have the right people in the field, and we've been pleased with the smooth transition because of the personnel that have joined us. We have also added to our office staff by hiring across all disciplines, including experienced technical staff from both of the companies we acquired assets, which will allow us to keep that operational continuity, and we've been able to attract talented employees from the industry. We are now approaching three months since closing on the Delaware Basin acquisition, and we're pleased to share with you some of our early successes. Steve will highlight some of the drilling side, but on the completion side, We completed our first pad in the Delaware Basin since closing in February and brought on the two-well menace pad targeting the third bone spring harky sand in April. These two wells, which are about 7,500 foot laterals located in Lee County, New Mexico, has shown strong early production results, averaging about 1,600 BOE per day per well with about 87% oil cut over the first 24 days of production. With the current strong commodity prices, we estimate that these wells will reach payout approximately four months from first production date. After bringing on the menace pad, we brought on a second two-well pad in Lee County, targeting the third bone spring, which are now flowing back. And while early, we're very pleased with the initial results, which further supports our view of the high-quality inventory we expected as we pursued this Delaware Basin acquisition. Our capital spending for the quarter was about 16% below the midpoint of our guidance, but we do expect to see significant impacts from inflation going forward, and we are maintaining our guidance for the full year between $410 and $440 million, and you'll hear more about that. Our near-term focus continues to be on integrating these new assets and executing on our drilling plans. As free cash flow is generated, our plan for the remainder of the year is to pay down debt But as you would expect, we'll remain open to potential acquisition opportunities that could provide us with additional scale and high-quality production and inventory while still giving us the ability to maintain the strength of our balance sheet. And finally, after we get a few quarters of operating the larger business behind us, we expect to be in a better position to consider shareholder returns in 2023. but we do not expect to initiate any plans in 2022. And with that, I'll turn it over to Steve.

Thanks, Robert. Good morning, everyone. We continue to operate two drilling rigs in the Midland Basin and two drilling rigs in the Northern Delaware Basin. Our first quarter average daily production was just over 35,500 VOE per day, which is up 17% from the fourth quarter of 2021. We have seen strong initial production results from the first two wells completed and brought online in the Delaware Basin since closing the Chisholm acquisition in February. We are optimistic that we will be able to improve capital efficiency on the Delaware Basin assets over time. As Robert mentioned, we have identified an area or two on the drilling side related to pre-setting surface casing that we are working to incorporate that will allow us to reduce days drilling in many circumstances. We also recently completed six wells in Upton County on our Bitterdom pad that have an average lateral length of 7,600 feet and were drilled and completed for a cost of approximately $800 a foot. While these wells are still cleaning up, early results are in line with our type curve, with initial average daily production per well of 900 BOE per day, approximately 88% oil. Let me provide an update on the operational integration of the assets acquired this year. With respect to the Delaware Basin Assets, which closed in February, operation of the new assets is running smoothly. This is in part due to bringing on bringing on field personnel that were previously operating the assets, and for the most part, executing their existing plans. As Robert mentioned, we also hired additional technical staff that are focused on production, completions, and drilling engineering, geology, and land, exclusively for the Delaware Basin asset. Despite having only closed on the Bighorn assets about three weeks ago, I can say that things are going as expected, and we do not foresee any material changes to the integration of the operation of these assets as we have retained a large majority of the field staff that have been operating these assets. Combining this with Earthstone's approach to operating nearby assets, we expect to be able to implement some improvements over time to maximize production and minimize costs. With an active drilling and completion program in both areas, we find ourselves shedding wells in and working over wells before and after fracs in areas with existing production. Although this frac prep work increases production downtime and work-over expense, it is accounted for in our guidance. With respect to the Bighorn assets, we see some additional work-over opportunities, which should enable us to reduce long-term operating expense, potentially reduce production downtime, and increase production. This activity is under review with economics and operating efficiency driving these decisions. Our capital program calls for a continuation of our full-rig program. with two rigs operating in the Midland Basin and two in the Delaware Basin. Currently, we have the Midland Basin rigs in Reagan County and Erie County, while the two Delaware Basin rigs are in Lee County and Eddy County. We are completing wells in Reagan and Erie County as well. As you can see by the first quarter capital expenditures being below guidance, the inflation pressure was not that impactful in the first quarter. However, we fully expect that over the course of the year, service costs will continue to rise. We have locked in casing deliveries for the next couple of quarters, and sand is also committed throughout the year for our two areas with a fixed price contract on the midland volume. Recapping costs, we completed a 10,000 foot lateral pad in December at $680 a foot. And as Robert pointed out, we just completed a 7,600 foot lateral pad at $800 per foot. Although hard to normalize due to the lateral length differences, you can see that the shorter laterals are less efficient and we're beginning to see the influences of cost pressures. We are focused on efficiencies in order to drive down days on location for both drilling and completion activities. Now with a much larger production base, we expect to obtain some cost savings on lease operating expenses as well. Having a much larger operation will allow for greater purchasing power on everything from vehicles to chemicals and compression. With that, I'll turn it over to Mark.

Thank you, Steve, and good morning, everyone. As usual, I'm going to take this time to provide some additional details on some meaningful metrics and several key highlights. As you know, you can find a detailed breakdown of our results in our earnings release and in our 10-Q. I would also say that you can find additional information on our recent debt and equity financings in our April 14th press release. Well, we've had a lot going on since the beginning of the year related to our balance sheet, so I'll start with an update as of quarter end, and then I'll give you a more current update as well. As of March 31st, 2022, we had a borrowing base on our revolving credit facility of $825 million. With borrowings of $624 million at quarter end, we had approximately 201 million undrawn capacity on our revolver. In April, we completed a $550 million notes offering and a 280 million dollar pipe offering, and we used these proceeds in part to close on the Bighorn acquisition in mid-April, and also to pay the $70 million of deferred cash consideration from the Chisholm acquisition, which closed earlier in the year. Also in conjunction with the closing of Bighorn in mid-April, the bar based on our credit facility was increased from the $825 million level at quarter end to $1.325 billion in conjunction with the closing of Bighorn. And we elected to reduce the commitments on the revolver from the $825 million at quarter end down to $800 million. So beginning with our quarter end debt and cash balance, but adjusting for all this activity in April, here's what it would have looked like on that basis. We would have had total outstanding debt of approximately $1.013 billion, which would have been comprised of $550 million of senior unsecured notes and $463 million of debt outstanding under our credit facility, leaving $337 million of undrawn availability on the $800 million of total commitments on the credit facility. Given all the recent activity, I think it's also important to break down our outstanding share count. As you'll see in our 10Q, we had approximately 113.4 million total common shares outstanding as of April 28th, which includes both our Class A common and Class B common shares. This does not include the impact of the expected conversion of the $280 million of convertible preferred equity that was issued in the pipe in April. Upon the expected conversion of these shares into Class A common stock, our total common share count will increase by 25.2 million shares bringing our total outstanding common share count to $138.6 million. Now going back to the results for the quarter. Our first quarter EBITDAX of $123 million was a 44% increase quarter per quarter, which was largely attributable to the incremental production from about half a quarter of the Delaware Basin assets and also from higher commodity prices. We also generated $36 million of free cash flow in the first quarter, which marks our eighth consecutive quarter of positive free cash flow. With the first quarter only including Delaware Basin assets for about half the quarter and not including the Bighorn assets at all, we're excited about realizing much higher production and cash flow in the second quarter than what we saw in the first quarter, which will include the Delaware Basin assets for the full quarter and the Bighorn assets for about 83% of the quarter. We expect to have very significant amounts of free cash flow for the balance of 2022, which is earmarked for repayment of debt under our credit facility. From a leverage standpoint, we're really in a better position today than where we expected to be in early January when we announced the Bighorn acquisition. The combination of a significantly larger downward adjustment in the purchase price of the Bighorn acquisition, as Robert mentioned, and then just generally higher EBITX levels in the first quarter and expected going forward really have improved our position and outlook. As you might recall, we originally were targeting getting down to 1.0 times debt to EBITX by the end of the year on an annualized fourth quarter basis. And if you look at what we did in the first quarter, and of course this is before Bitcoin closed and has the result of Chisholm in it, we were actually right around 1.0 times debt to EBITX in the first quarter. When you take our quarter in balances on the debt side, plus Earthstone's EBITX for the quarter and adjust to add the Chisholm EBITX from the period for the first part of the quarter before we own the assets. So that really puts us in a much better position than we anticipated. And from this 1.0 times leverage that we are at on the first quarter adjusted on that basis, we expect to continue to tick down lower throughout the year and finish the year well below the 1.0 times debt to EBITDAX on a fourth quarter annualized basis. Looking at the first quarter relative to our guidance, we were largely around the middle of our guidance for all guided metrics except for CAPEX. which, as already mentioned, was about 16 percent below the midpoint of our guidance. From a production standpoint, we produced an average of 35,500 BOE per day in the first quarter, and that was comprised of 44 percent oil, 29 percent natural gas, and 26 percent natural gas liquids. To reiterate what we mentioned last quarter, we expect to produce approximately 70,000 to 74,000 BOE per day, with about a 41 percent oil component in the second quarter, which again factors in a full quarter of the Delaware Basin assets we acquired in February and about 75 days of the Bighorn assets, which we acquired in mid-April. Further, for the second half of the year, we expect production to be somewhere between 76,000 and 80,000 BOE per day, with the oil component, again, being about 41%. And this, of course, includes the full contribution from both the Delaware Basin assets and from the Bighorn assets. So, on a full-year basis, no changes to our guidance on production, but the buildup results in production somewhere between 64,250 and 67,750 BOE per day, and it's comprised of about 41% oil, 33% natural gas, and 26% natural gas liquids. Total cash G&A for the first quarter came in right about where we expected and was at $6.5 million compared to $6.3 million in the fourth quarter. Of course, we added more volumes in the first quarter compared to the fourth quarter of last year. So on a per BOE basis, our cash G&A went down by about $0.22 per BOE quarter over quarter from $2.25 in the fourth quarter to $2.03 in the first quarter. And we still expect full year 2022 cash G&A to be between the $31 million and $34 million range we put out earlier this year. And that would be about $1.35 cents per BOE based on the midpoints of both our production and G&A guidance. Moving over to LOE, in the first quarter we recorded LOE per BOE of $6.77. As we got it last quarter, we expect LOE per BOE to be elevated compared to the original LOE per BOE prior to closing on these two acquisitions. And we're maintaining our full year guidance for LOE of $7.25 to $7.75. We are monitoring both inflationary pressures and potential need for some higher workover activity on the recently acquired assets. But at the same time, we're hopeful that some of the operational synergies we think we can achieve will offset that a bit. And we're excited about that as we've now just gotten our hands on both sets of assets here in the past 30 to 90 days, respectively. Turning over to the capital expenditure side, we did spend $82 million in the first quarter, which was about 16% below the midpoint of our guidance of $95 million to $100 million. And this was largely driven by the impact of the timing of inflation. And really what happened is there was less realized inflation in the first quarter than what we expect to see going forward. And I would say in hindsight, we probably baked in too much inflationary cushion in the first quarter. At the same time, we do absolutely expect to see more significant impacts from the second quarter going forward. On that basis, we're maintaining our guidance of $410 to $400 million for the full year, and I would say that we'd probably lean towards the high end of that. Obviously, none of us can perfectly predict how inflation plays out for the end of the year, but we're certainly expecting more pressure throughout the year. On the hedging front, we're not really all that different from where we were when we reported our 2021 results in March, which is right about 55% to 60% hedge for the remainder of the year with a mix of swaps and callers. With that, I will turn it back over to Robert for closing comments.