## Item 1. Business 

## Overview 

## PART I 

Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with our consolidated subsidiaries, the “Company,” “our,” “we,” “us,” or similar terms), is a growth-oriented independent oil and gas company engaged in the acquisition and development of oil and gas reserves through activities that include the acquisition, drilling and development of undeveloped leases, asset and corporate acquisitions and mergers. Our operations are all in the upstream segment of the oil and natural gas industry and all our properties are onshore in the United States. At present, our assets are located in the Midland Basin of west Texas and the Eagle Ford Trend of south Texas. 

Our primary focus is concentrated in the Midland Basin of west Texas, a high oil and liquids rich resource basin which provides us with multiple horizontal targets with proven production results, long-lived reserves and historically high drilling success rates. Utilizing one rig for the entirety of 2019 and two rigs for portions of the second and third quarters, we successfully drilled 17 gross / 12.7 net operated wells in the Midland Basin in 2019. Additionally, we spud and drilled vertical sections of eight gross / 7.5 net operated wells late in 2019. We completed and brought online 17 gross / 12.6 net operated wells and had 3.4 net non-operated wells brought online in the Midland Basin in 2019. Additionally, in late December, the operator of a 15-well non-operated project completed approximately five gross / one net well, which had previously been anticipated to occur in early 2020. Completions on this 15 gross / 3.1 net well project are continuing and all 15 wells are anticipated to be brought online during the first quarter of 2020. 

With 445 potential gross horizontal drilling locations in the Midland Basin, we are focused on developmental drilling and completion operations in the area. During 2019, we began increasing the spacing between our wells in order to reduce well to well interference which in turn increases capital efficiency and productivity. In certain areas, our acreage may support different spacing designs and we will drill accordingly in seeking to maximize economics and recovery. We continue to pursue acreage trades or bolt-on acreage acquisitions in the Midland Basin with the intent of increasing our operated acreage and drilling inventory, drilling and completing longer laterals and realizing greater operating efficiencies. 

We have approximately 29,100 net acres in the core of the Midland Basin that are highly contiguous on a project by project basis which allow us to drill multi-well pads. Of this acreage, 79% is operated and 21% is non-operated. We hold an approximate 94% working interest in our operated acreage and an approximate 40% working interest in our non-operated acreage. Our operated acreage in the Midland Basin is primarily located in Reagan, Upton and Midland counties. Our non-operated acreage in the Midland Basin is located primarily in Howard, Glasscock, Martin, Midland and Reagan counties. In total, we have an interest in 212 gross producing wells in the Midland Basin. We have approximately 14,500 net leasehold acres in the Eagle Ford Trend, which primarily consists of approximately 14,100 operated net leasehold acres in the crude oil window in Fayette, Gonzales and Karnes counties, with working interests ranging from approximately 12% to 67%. We have an interest in 116 gross operated producing wells and six gross non-operated producing wells in the Eagle Ford Trend. 

At December 31, 2019, our estimated proved oil and natural gas reserves were approximately 94,336 MBOE based on the reserve report prepared by Cawley, Gillespie & Associates, Inc. (“CG&A”), our independent petroleum engineers. Based on this report, at December 31, 2019, our proved reserve quantities were approximately 56% oil, 19% natural gas, 25% NGLs with 33% of those reserves classified as proved developed. The calculated percentages include proved developed non-producing reserves. Of these interests, approximately 51,426 MBOE are attributable to noncontrolling interests. See Note 9. Noncontrolling Interest  in the Notes to Consolidated Financial Statements. 

## Our Business Strategy 

Our current business strategy is to focus on the economic development of our existing acreage, increase our acreage and horizontal well locations in the Midland Basin and increase stockholder value through the following: 

• developing our acreage and profitably growing our production while seeking to achieve Free Cash Flow (defined in “Non-GAAP Measures” below); 

• operating our properties efficiently and continuing to improve our operating margins; 

• deploying capital efficiently by drilling multi-well pads, reducing drilling times and increasing completions per day; 

• operating our assets in a safe and environmentally sensitive manner; 

• continuing to hedge commodity prices as opportunities arise; 

