EARTHSTONE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Imbalances
The Company recognizes revenue for all oil, natural gas and natural gas liquid sold to purchasers regardless of whether the sales are proportionate to the
Companys ownership interest in the property. Production imbalances are recognized as a liability to the extent an imbalance on a specific property exceeds the Companys share of remaining proved oil, natural gas liquid and natural gas
reserves. The Company is also subject to natural gas pipeline imbalances, which are recorded as accounts receivable or payable at values consistent with contractual arrangements with the owner of the pipeline. The Company had no imbalances as of
December 31, 2022 or 2021.
Contract Balances
Under the Companys product sales contracts, the Company invoices customers once performance obligations have been satisfied, at which point payment is
unconditional. Accordingly, the Companys product sales contracts do not give rise to contract assets or liabilities under ASC 606.
Transaction
Price Allocated to Remaining Performance Obligations
Substantially all of the Companys product sales are short-term in nature, with a contract
term of one year or less. For these contracts, the Company has utilized the practical expedient in ASC 606 which exempts the Company from the requirements to disclose the transaction price allocated to remaining performance obligations if the
performance obligation is part of a contract that has an original expected duration of one year or less.
For the Companys product sales that have a
contract term greater than one year, the Company has utilized the practical expedient in ASC 606 which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration
is allocated entirely to a wholly unsatisfied performance obligation. Under these contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the
transaction price allocated to remaining performance obligations is not required.
Prior-Period Performance Obligations
The Company records revenue in the month that product is delivered to the purchaser. Settlement statements for certain natural gas and natural gas liquids
sales, however, may not be received for 30 to 90 days after the date the product is delivered, and as a result the Company is required to estimate the amount of product delivered to the purchaser and the price that will be received for the sale of
the product. In these situations, the Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. Any identified differences between the
Companys revenue estimates and actual revenue received have historically been insignificant. For the years ended December 31, 2022 and 2021, revenue recognized in the reporting period related to performance obligations satisfied in prior
reporting periods was not material.
Concentration of Credit Risk
Credit risk represents the actual or perceived financial loss that the Company would record if its purchasers, operators, or counterparties failed to perform
pursuant to contractual terms.
The purchasers of the Companys oil, natural gas, and natural gas liquids production consist primarily of independent
marketers, major oil and natural gas companies and natural gas pipeline companies. Historically, the Company has not experienced any significant losses from uncollectible accounts. In the year ended December 31, 2022, three purchasers accounted
for 21%, 20% and 14%, respectively, of the Companys oil, natural gas, and natural gas liquids revenues. In the year ended December 31, 2021, two purchasers accounted for 34% and 13%, respectively, of the Companys oil, natural
gas, and natural gas liquids revenues. In the year ended December 31, 2020, three purchasers accounted for 32%, 15% and 12%, respectively, of the Companys oil, natural gas, and natural gas liquids revenues. No other purchaser accounted
for 10% or more of the Companys oil, natural gas, and natural gas liquids revenues during the years ended December 31, 2022, 2021 or 2020. Additionally, at December 31, 2022, four purchasers accounted for 21%, 19% , 18% and 14%,
respectively, of the Companys oil, natural gas and natural gas liquids receivables. At December 31, 2021, three purchasers accounted for 26%, 21% and 12%, respectively, of the Companys oil, natural gas, and natural gas liquids
receivables. No other purchaser accounted for 10% or more of the Companys oil, natural gas, and natural gas liquids receivables at December 31, 2022 and 2021.
The Company holds working interests in oil and natural gas properties for which a third-party serves as operator. The operator sells the oil, natural gas, and
natural gas liquids to the purchaser, collects the cash, and distributes the cash to the Company. In the year ended December 31, 2022, one operator distributed 8% of the Companys oil, natural gas and natural gas liquids revenues. In the
year ended December 31, 2021 one operator distributed 13% of the Companys oil, natural gas and natural gas liquids revenues. In the year ended December 31, 2020, one operator distributed 15% of the Companys oil, natural gas and
natural gas liquids revenues.
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