Lonestar Resources - Updated Forecast on August 6

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dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Lonestar Resources - Updated Forecast on August 6

Post by dan_s »

I have updated my forecast/valuation model for Lonestar and posted it to the EPG website.

Notes:
> Like all upstream companies with lots of their production hedged, Net Income is a misleading number. FOCUS ON CASH FLOW FROM OPERATIONS.
> My Cash Flow From Operations actuals and forecasts are net of preferred stock dividends THAT LONESTAR HAS BEEN PAYING "IN KIND".
> In order for Lonestar to hit their fresh production guidance, the company is on-track to have an exit rate this year that is higher than the top end of their 2020 production forecast. IMO Frank is definitely "under-promising so he can over-deliver" on production. This is why my 2020 forecast is based on production of 19,000 Boepd rather than the high end of the company's guidance.
> My 2020 forecast assumes all preferred stock, warrants, stock appreciation rights and restricted stock units (shown on page 6 of the 10Q) will be converted to common stock in 2020. The odds of them all being converted are zero, but now my valuation is based on a "super conservative" share count.
> You can all expect to see a very encouraging operations update on the new Sooner prospect HZ wells in September. Extended reach horizontal wells in that area should have VERY HIGH IP-30 rates. See slide 10 of the CC slides posted to the Lonestar website today.

Small-caps with this kind of production growth, 72.4% in 2018 and ~35% in 2019 and running room (at least 200 high quality HZ drilling locations), should be trading for AT LEAST 6X operating cash flow per share.

You should all listen to a replay of the conference call and follow along on the slides.

PS: I wish none of their oil was hedged, but their hedging program does significantly reduce the commodity price risk. The actual commodity prices shown at the bottom of my forecast/valuation model includes the cash settlements on their hedges that were paid during each quarter.
Dan Steffens
Energy Prospectus Group
cmm3rd
Posts: 420
Joined: Tue Jan 08, 2013 4:44 pm

Re: Lonestar Resources - Updated Forecast on August 6

Post by cmm3rd »

Dan,

LONE's LT debt as of 6/30 is $459.5 mm (with total LT liabilities of $472.2 mm). What metric do analysts use to measure how levered this type of company is, i.e., debt:???? (what LONE calls adjusted ebitdax, which was $33.5 mm in Q2, 2019 est. = $135-140 mm?), and in LONE's case, if not ebitdax, what is it? I note also they "target" 2020 ebitdax at $165-185 mm. How would one describe that level of leverage (low, moderate, high)?

Is the degree of leverage a primary factor the market generally considers when determining valuation? E.g., would highly levered companies get a lower pps/CFPS ratio (e.g., 1x instead of 6x) because of the increased risk associated with higher leverage? I'm trying to understand what level of valuation the market could realistically give LONE (now under <1x CFPS) vs. when you say it deserves "AT LEAST 6x" CFPS, or, on your spreadsheet, 4.2 (avg CFPS 2018-2020). Is leverage an important variable for the market?

Re the Brazos County assets that Frank hopes to sell, what would be a ballpark value of same, and should we expect that he would use the proceeds to pay down the 11.25% notes? Again, I am trying to estimate how much debt might be reduced, should he sell those assets and use proceeds to reduce debt, in order to estimate how much the market might adjust valuation as a result.

At page 31 of the 10Q, it says they expect to spend $130 mm of operational capex in 2019. Your updated forecast says $107-130 mm. Why do you think they might spend less in 2019 than what the 10Q says? Also, their cc slide #12 says they are targeting 2020 ebitdax at $165-185 mm by drilling 15-16 wells that they say can be achieved using $115-$120 mm of D&C capital (which would be a bit less than $130 mm they say will be used in 2019). Is Drilling and Completions capital precisely the same as capex?

Finally, the 10Q makes clear they are still paying Series A-1 Preferred dividends in kind, increasing the preferred count, at what eventually could become fairly onerous rates (up to 20% per year), and which is continuing to dilute common shareholders each quarter. What is the current FMV of these Series A-1 shares, and shouldn't their value be added to debt level (since they are functioning as debt) in order to arrive at a true picture of leverage?

One comment. The capital structure of this company seems complicated, such that one needs to have expertise in O&G accounting to figure it out with accuracy. Not all investors have such expertise. Makes getting comfortable with valuation and predicting market treatment much more difficult, at least for me.

Thanks!
dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Re: Lonestar Resources - Updated Forecast on August 6

Post by dan_s »

Compare Lonestar's debt to the PV10 of their proved reserves. See box at bottom of the forecast model. Lonestar's debt level is not excessive for a company with PV10 over a $Billion. Keep in mind that this year's well should add a lot more P1 reserves.

I have no idea what the Brazos County assets will sell for. Result of the new well may determine the price.

Note that in the 2020 forecast I am subtracting the preferred stock dividend from cash flow and including the dilution in the share count.

D&C is most of capex but not all of it. Other capex is leasehold, gathering and processing facilities, F&F, cars & trucks, etc.
Dan Steffens
Energy Prospectus Group
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