Dear Fellow Shareholders:

Welcome to Earthstone Energy, Inc.! We are excited about our new name and very pleased with our new logo. We hope you are too.  In coming weeks, we will be revamping our website to reflect these changes and encourage you to revisit the site as this transformation unfolds. This year we are moving our annual meeting from December to late September; a more traditional time frame that we expect to be more convenient and provide more enjoyable weather. We encourage all of our shareholders who can attend to experience Denver and the mountains during this special time of year. Finally, we are extremely pleased to submit this report to you on our financial results for fiscal year 2010. 

Appreciation. I wish to thank all of our shareholders who supported the Board’s recommendation pertaining to last year’s Proxy proposals. During the time spent garnering support for these crucial amendments, I spoke with a number of you by phone and spent many an evening listening to your concerns as well as your praise. I especially appreciate those of you who candidly voiced your fears and shared your misunderstandings. I’d like to take this opportunity to apologize for the many misgivings these changes created. While I believe our new Articles of Incorporation give our Board a stronger position in potential acquisition or merger negotiations, I regret that these proposals played into the hands of those who would find fault with any proposed course of action and allowed them to distort our intentions and promote confusion and mistrust among so many of our shareholders. Our intention remains unchanged; to further the interests of all our shareholders. I am confident our actions now and in the future, will demonstrate this statement to be true. It has been an honor to be a part of this company’s management. I, along with the entire Board of Directors, wish to thank the shareholders for the opportunity to serve the company for the past year.

Results.  What a difference a year makes! To be sure, our outlook now is considerably brighter than it was at the end of our last fiscal year. We ended last year having just announced the termination of a hostile takeover attempt and with oil prices just starting to rebound off a five year low; a low that created an “all-in,” expense of approximately $3.2 million to our “bottom line.” With oil prices recovering to the mid-70’s this year, reserves, production and income are up; as is our share price.  We posted solid gains in BOE production and reserves; up 12% and 22%, respectively. While EBITDA did decline, our cash was up by 25%. Net income was up so much our earnings per share nearly doubled.  We had a great year!  Certainly, in no small part, these successes are due to our sixteen well “down-spacing” drilling effort on our Antenna Federal property in Weld County, Colorado. The impact of this drilling effort to both our oil and gas production has been substantial.  Our gas production alone has increased by 30% since last year and 110% since fiscal 2008.

Status Of Our Industry.  It would be difficult to discuss the oil and gas industry without mentioning the Macondo blow-out in the Gulf of Mexico. Not surprisingly, the concerns, fears and anger of the general public are now focused on our entire industry. It is obvious this event will have serious industry-wide repercussions far beyond the Gulf of Mexico.  Unfortunately, these fears will be used as a political excuse to increase already burdensome regulations and hamper efforts to develop our nation’s energy resources. We expect this expansion of federal jurisdiction and restrictions to include onshore regions as well, especially on federal lands. Sadly, if increased regulations and restrictions come to pass, they will drive the price of oil and gas higher and unnecessarily raise the cost of energy for all of us.

We would like our shareholders to know that we have no offshore operations and we have very few operations on federal onshore lands. In fact, our strategy over the past decade has been to avoid federal lands where possible. We believe this strategy has served us well in the past.  Given the new hurdles we now anticipate on federal lands, the rewards of this strategy are more evident than ever. We would like to assure our shareholders that we consider ourselves to be conscientious stewards of the land and strive to thoughtfully consider our risks. We strive to maintain our facilities in compliance with industry standards, especially state and federal regulations. Our corporate culture is to “do the right thing.”

Looking Forward. This year is shaping up to be an exciting and busy year. First, we are commencing three new wells on the flanks of our Antenna property in Weld County, Colorado. In addition, we are deepening ten of our new Codell wells on this property down to the J-Sand formation. These new wells should mitigate the normal, but steep, initial decline that all of our previously drilled Codell wells are now experiencing. In the Williston Basin, advances in hydraulic stimulation are being applied to our recently drilled Pederson #10-3H where operations are progressing with encouraging results. This and other successes around the Banks field, where we have leasehold interest in 13,000 gross acres, are arousing attention. The two predominate companies in this field, Panther Energy Company, LLC. and Zenergy, Inc., are battling for operations. As a result, we expect things to heat up. We would not be surprised to see another operator move into the area or buy out one of these two companies. Our hope is that one, or both, of these companies, or their successor, will stand-up rigs this fall.  As we have in the past, we intend to participate in new wells proposed by other companies that pool or space our leasehold rights within spacing units they operate. If both companies commence drilling, we could potentially see cash commitments approaching $500,000 every 30 days.

In an effort to balance this drill bit activity, the Company is intensifying its acquisition efforts. With a number of efforts both underway or in the planning stage, we are very excited about the opportunities we see and how close we are to success.  We have seen more good opportunities in the last four months than we saw all last year.  We have submitted four offers so far this year. On one property, we were the high bidder with a $7 million dollar offer, but backed away from closing due to unacceptable terms. Two other offers are on hold, while the seller vacillates on whether or not to sell. The fourth offer was rejected, but the seller is taking the property to auction where we will have a second chance to acquire the prospect. We are currently pursuing one other project where we are in the initial stages of evaluation. We believe success on any one or all of these projects will make a positive impact to the Company’s growth and profitability. 

In Summary.  Our ultimate goal is to create value for our shareholders. We intend to do this by economically growing our production and our reserves. The Board of Directors and I are implementing a growth strategy which we believe will capitalize on the opportunities we see and will see in the future. We intend to put an emphasis on acquisitions, even though the drill bit has been dominant in our strategy and success in adding reserves. We believe the opportunities we see at this point are substantial.

Once again, thank you for the opportunity to lead this company. As a shareholder, I, like you, am deeply committed to the success of this enterprise. 

Sincerely,
Ray Singleton,
President