Lonestar Resources (LONE)

[dan_s]

I have updated my forecast model for LONE using what IMO are conservative estimates of production. I am also assuming that they sell the full allotment of shares (13.8 million) in their current offering. The stock sale should bring in approximately $72 million, net of all fees. The cleaned up balance sheet should justify a higher multiple of cash flow per share than I am using for my valuation.

I am lowering my valuation by $7.70/share to $13.80. This compares to First Call's price target of $13.50, which has not been changed since they announced the stock offering.

The lower valuation is caused by dilution of more shares (going from 8,022,000 to 21,822,000 shares) offset by lower interest expense.

On 11/14/2016 John White over at Roth Capital sent out a detailed report on Lonestar. His price target was $15.00 at the time. His production target was 8,200 Boepd by 12-31-2017; a significant increase from 5,920 Boepd in Q3, 2016. My forecast/valuation assumes production averages 7,200 Boepd in 2017. Back-end loading of production should raise the realized oil price above what I am using in my forecast.

What we need to know:
> How much stock they sell.
> Net proceeds of the stock sale
> 2017 drilling program, which should be fully funded by cash flow from operations + cash from the stock offering.
> How stock offering impacts the bank credit facility. This should be quite positive.
> 2017 production guidance

[bellwj]

It will be interesting to see if 'the fix was in' in the recent HUGE share offering of LONE. Having been trading in the $8-9 range, with outside fair value estimates well in excess of that (Dan, your estimate had been over $20?), one wonders why management settled on a price of $5.75.
They certainly did a number on most of the existing shareholders. However, Leucadia National, the largest institutional shareholder, who had reported owning 500,000 shares as of Sept. 29, bought 3,478,261 shares of the $5.75 offering and have been handsomely rewarded as the stock price has rebounded to the mid-$7 range. It makes you wonder.

[cviller]

Don't forget the underwriter's overallotment option, equal to 15% of the shares raised at $5.75. Both Leucadia and the underwriters are up 33% in a week. Be interesting to see if these bankers are still on the team for any subsequent offering.

[dan_s]

My updated forecast model assumes that the full allotment of shares (13.8 million) will be sold.

My valuation of LONE goes down (obviously) because of the big increase in the outstanding share count. I am still using a rather low multiple of operating cash flow per share to value LONE. I may be justified in raising the valuation if we get clear guidance for 2017. A two rig program could grow the company's production much faster than what my forecast model assumes.

In my opinion, LONE's relationship with SLB has significant potential. If you are not aware of it, read the 10Q. In a nut shell, SLB engineers have come up with a more aggressive completion design that is already showing impressive results. It does cost more, but SLB believes it could increase recoverable oil & gas per well by 50%.

Roth Capital issued a report on LONE in mid-November. Send me an e-mail if you'd like to see it. dmsteffens@comcast.net

Remember: SMALL-CAPS HAVE MORE RISK THAN THE LARGE-CAPS IN OUR SWEET-16.