Lonestar

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ChuckGeb
Posts: 945
Joined: Thu Nov 21, 2013 2:46 pm

Lonestar

Post by ChuckGeb »

LONE issued a press release today to indicate good production results at its Horned Frog NW with 30 day rates on the two wells completed and announced during Q1 earnings release. Good 24 hrIP rates were announced on two additional wells that had previously been indicated as Q3 completions. No mention of the 4 Battle Cat wells that were slated for completion in Q2. We’ll hope Frank was just trying to get some good news out and the BC wells are good as well.
dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Re: Lonestar

Post by dan_s »

FORT WORTH, Texas, June 24, 2019 /PRNewswire/ -- Lonestar Resources US Inc. (NASDAQ: LONE) (together with its subsidiaries, "Lonestar", "we", "our" or the "Company") announced additional well results in its Horned Frog area located in La Salle County, Texas.

Lonestar previously announced initial test results for its Horned Frog #4H and #5H wells which were placed onstream in April 2019. In Lonestar's first quarter report, we disclosed that the #4H well tested at initial rates of 1,489 BOE/d while the #5H well tested at initial rates of 1,475 BOE/d. These new wells have since cleaned up after flowback and registered the following maximum rates over a 30-day period ("Max-30" rates):

> Horned Frog NW #4H - With a 9,771' perforated interval, the #4H well produced a Max-30 rate of 764 Bbls/d of oil, 335 Bbls/d of NGL's & 1,962 Mcf/d of natural gas, or 1,426 BOE/d on a three-stream basis. Lonestar owns a 100% working interest in the well.
> Horned Frog NW #5H - With a 9,645' perforated interval, the #5H well produced a Max-30 rate of 770 Bbls/d of oil, 360 Bbls/d of NGL's & 2,108 Mcf/d of natural gas, or 1,481 BOE/d on a three-stream basis. Lonestar owns a 100% working interest in the well.

Notably, our new 2019 wells have recorded 3-Stream Max-30 rates that are 3% higher on a per-foot basis than our Horned Frog #2H and #3H wells, which were placed onstream in 2018. Moreover, our 2019 wells have produced more oil and NGL's per foot than our 2018 completions, which are immediate offsets.

Lonestar also announced initial test results for its Horned Frog F #A1H and F #B1H today. Their average test rates of approximately 2,500 BOE/d are records for the Company and highly encouraging in many respects:

> Horned Frog F #A1H - was drilled to a total depth of 22,534 feet and completed in a 12,461' interval over 42 stages at a proppant concentration of 2,312 pounds per foot. The F #A1H recorded a test rate of 555 Bbls/d of oil, 654 Bbls/day of NGL's & 7,066 Mcf/d of natural gas, or 2,387 BOE/d on a three-stream basis. Lonestar owns a 100% working interest in the well.
> Horned Frog F #B1H - was drilled to a total depth of 22,391 feet and completed in a 12,170' interval over 41 stages at a proppant concentration of 2,338 pounds per foot. The F #B1H recorded a test rate of 629 Bbls/d oil, 706 Bbls/d of NGL's & 7,629 Mcf/d of natural gas, or 2,607 BOE/d on a three-stream basis. Lonestar owns a 100% working interest in the well.

Notably, our new 2019 Horned Frog wells have recorded oil production rates that are 26% higher on a per-foot basis than the two wells we brought onstream in 2018, the Horned Frog #G1H and #H1H. Additionally, the test rates on our 2019 wells have exceeded the outstanding production-per-foot results generated by our 2018 completions by 7%, logging rates of 203 Boe/d per 1,000 ft. Lastly, our new wells were not booked as Proved reserves in our reserve report for the year ended December 31, 2018.

Lonestar's Chief Executive Officer, Frank D. Bracken, III, commented, "Our four new 2019 Horned Frog wells have been outstanding performers thus far, and continue a streak of highly productive Eagle Ford Shale wells in our 2019 capital program, which is currently generating a new production record for the Company each month. Our 2019 program is expected to generate outstanding returns for our shareholders and yield significant increases in production and EBITDAX while establishing cash flow self-sufficiency."
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Lonestar reported $3.05 Earning Per Share (EPS) in the 4th quarter of 2018 and a loss of $2.45 per share in Q1 2019. The reason for the big swings in reported earning are simply the HUGE mark-to-market adjustments on the company's hedges. Q2 2019 will include a BIG mark-to-market gain on their hedges that could push reported EPS over $1.00 for Q2.
To hit the low end of Lonestar's 2019 production guidance (13,700 BOE per day), the company's exit rate needs to be over 17,000 Boepd. < This compares to actual production of 11,372 Boepd in Q1 2019. Obviously, the company's two new Horned Frog wells will give 2H 2019 production a nice boost. They will also cause a big increase the company's proven reserve base.
Operating Cash Flow per share and production growth are the key stats for LONE.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Lonestar

Post by dan_s »

Six analysts' reports are included in First Call's price target for LONE. Their valuations range from $6.00 to $13.00 per share and all six of them rate it a BUY.

The Eagle Ford small-caps don't get much LOVE these days. That is counter-intuitive because Eagle Ford oil is selling at a nice premium to Permian oil because there are no pipeline takeaway capacity issues. Eagle Ford oil sells at about a $2/bbl discount to Brent (which closed at $64.86/bbl today). IMO the only negative that is holding down LONE is the fact that it is outspending cash flow from operations. < Not by a wide margin, but the Wall Street Gang is really negative on any small-cap growth companies that are outspending cash flow.

My updated forecast/valuation model for LONE will soon be posted to the EPG website.
Dan Steffens
Energy Prospectus Group
ChuckGeb
Posts: 945
Joined: Thu Nov 21, 2013 2:46 pm

Re: Lonestar

Post by ChuckGeb »

Does anybody know the market’s investment thesis on LONE that causes it to trade at $2.50 per share, be virtually unaffected by positive oil market news despite reaching company record highs in production?

Does not make sense at all.
cmm3rd
Posts: 420
Joined: Tue Jan 08, 2013 4:44 pm

Re: Lonestar

Post by cmm3rd »

Dan,

Thanks for posting your updated forecast. A few questions.

You are forecasting 2019 CFPS of $3.36 "net of pfd stock dividends." I assume that means "after" payment of pfd stock dividends, so that after all pfd stock dvds are paid, they should report $3.36 of CFPS for 2019. Correct?

You also forecast 2019 CF of $83.1 million, again, net of preferred stock dividends. You also say their 2019 D&C budget is $82-$90 million. Is "D&C budget" the same as "capex," or are there differences? What about maintenance capex?

So, does this mean that at 2019 YE, if they spend $90 million on D&C, they would still not be "living within cash flow," assuming your forecast is realized?

As importantly, with your forecast of 2020 cash flow of $94.39 million in mind, what capex (or "D&C budget") would be necessary to sustain that level of cash flow (or to generate similar or improved cash flow in 2021)?

I'm trying to get a handle on when LONE will reach, and be able to sustain, that level of financial performance and discipline that the market seems to demand from any upstream E&P these days, "living within cash flow."

Also, how does the company progress if all they do is break even with cash flow and capex (i.e., make no profit, not pay down debt). I would guess the theory is that they would somehow (how, with rapid decline rates?) be able to produce more product at lower capex, thus have free cash flow for a long enough time to actually be profitable, maybe pay debt or somehow get rid of the preferred? Inotherwords, what is the long term strategy to make the company successful?

Finally, you use a "fair value price" metric of 5x CFPS to reach a fair value of $17.00, noting others' lower valuations of $11 and $6. Using what process do you choose 5x CFPS as your multiple? Why not 3x, or 1x, bearing in mind right now the market is assigning a valuation of about 0.75x 2019e CFPS?

Does anyone else use anything close to a 5x CFPS multiple for companies similarly situated? If not, why do you?

What (e.g., LONE's becoming FCF positive for a few quarters, and how would such likely occur) would need to occur for the market to change its valuation and adopt your 5x CFPS multiple, and how likely and when do you foresee such events occurring?

Thanks.
ChuckGeb
Posts: 945
Joined: Thu Nov 21, 2013 2:46 pm

Re: Lonestar

Post by ChuckGeb »

LONE’s 1st quarter slides says their capital budget for 2019 is $107-130 million for 17-20 wells. Where does the lower amount come from? Was there a recent revision?
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Lonestar

Post by dan_s »

1. Operating cash flow on row 48 is net of preferred stock dividends on row 41. Net Income on row 43 is also net of pfd stock dividends.

2. "D & C Budget" is just drilling and completion costs. Lonestar's full capital expenditure budget is now $107 to $130 million including acquisitions and some production facilities. The wide range is because they plan to complete 17 to 20 gross (15.6 to 18.6) horizontal wells this year. For an upstream company, most of their "maintenance capex" is included in LOE (expensed currently).

3. In 1H 2019 Lonestar is outspending cash flow from operation (recent asset sale does fill some of the gap). Frank does expect all 2H 2019 and 2020 capex to be covered by cash flow from operations. Note that as of 3-31-2019 Lonestar had $3.7 million in cash and $81 million in liquidity under their credit facility.

4. For 2020, put your cursor over the cell where I show $94,392,000 of cash flow from operations (row 48, column S). At the top of the spreadsheet you will see the formula on how I calculate it. Note that I have a $28 million cushion in the formula. The production volumes and commodity prices used to calculate revenues, net income and operating cash flow are at the bottom of column S.

5. As noted above, Frank thinks Lonestar will be operating within cash flow from operations in a few months. Keep in mind that Lonestar does sell all of their oil at LLS pricing, so the oil price used in the 2020 forecast does look conservative today. As a general rule, LLS oil sells for about a $2/bbl discount to Brent.

I use a multiple of operating cash flow to value a company that is similar to what we used at Hess. I don't know how each Wall Street Analyst values a company; there is a BIG variance between the valuations sent to Reuters. In my opinion, an upstream company with a decent balance sheet and lots of high quality undeveloped leasehold should never trade below the NAV of its P1 reserves which at 12-31-2018 was $8.54/share (see slide 6 of Lonestar's June presentation, which you can find on their website.) BTW Lonestar has 83 PUD drilling locations TODAY that are probably worth more than the company's current market-cap. The PUD locations in Karnes County may be worth $2 million each.

As of last Friday's close, the Sweet 16 was trading at approximately 3.6 X operating cash flow per share (range of 1.12 to 6.73). A group of that quality should be trading for AT LEAST 6X CFPS.

Why does LONE trade at less than 1X operating cash flow per share?
> This market is EXTREMELY NEGATIVE on upstream companies in general and you can double the negativity for small-caps.
> Investors are negative on the Eagle Ford for some reason. Investors love the "Stacked Pay" concept of the Permian Basin and the Eagle Ford does not have as much Tier One leasehold. That said, Lonestar's horizontal wells are outstanding.
> Wall Street seems to be ignoring growth of proven reserves. If a company is funding 25% to 30% production growth and proven reserve annual growth of more than 50% that should be worth a lot. At any point in time, an upstream company is worth NAV + the value of it undeveloped leasehold. In the Stifel report I mentioned earlier today, they call it "4P NAV".
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PS: I got a note from John White at Roth Capital this morning (June 27). He has not updated his forecast/valuation for LONE since they announced the new well results. In John's report dated 4/25/2019 his price target was $11.00/share. John is now updating a lot of his models (I got two new ones this morning). When he updates LONE, I will share it here.
Dan Steffens
Energy Prospectus Group
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