Lonestar Resources (LONE) Update - Oct 12

[dan_s]

Reuters: 6 Wall Street Analysts' reports are included in the consensus (First Call estimates and target price). The average consensus recommendation is 2.00 ("BUY"). The six reports have valuations for LONE of $11 to $17, with the most recent report being the highest (from Sun Trust Robinson).

Here are First Call's forecasts for Lonestar's Cash Flow from Operations per share ("CFPS"):
2017A = $1.45 CFPS
1H 2018A = $0.98 CFPS
Q3 2018E = $0.95
Q3 2018E = $1.10
2019E = $5.09 < Based on First Call's EPS forecast of $0.67

My valuation of LONE is $20.00/share, less than 4X First Call's CFPS forecast for 2019, which BTW is based on oil prices of less than WTI of $65/bbl.

Lonestar has ~63% of their 2019 oil hedged at WTI $51.21/bbl, however they are selling all of their oil into the LLS market at a premium to WTI. They get to keep the premium on 100% of their oil sales.

[zdrk10]

Dan, It appears LONE has no gas or NGL's hedged and production mix is now stated at 19% gas, 23% NGL's and 58% oil. That gives 58% oil and 42% Gas/ngl mix. Should this surge in NatGas prices help LONE a good bit?

[dan_s]

Yes, higher gas prices will give LONE a nice boost.

Higher commodity prices helps all of the upstream companies, even those with a lot of production hedged. Why? Because it makes their proven reserves more valuable.

When you cut through all the crap, an upstream company's value is really its proven reserves base (P1) + probable (P2) + possible (P3) - debt. When I was at Hess, our initial valuation of a target company was 65% of P1 and 25% to 40% of P2 less debt. We never valued P3, but often it ended up being the most valuable. For example, in Hess' acquisition of Transco offshore the P3 ended up paying off the entire acquisition price ("Baldpate").

One thing to remember about shale companies is that P2 is now much closer to P1 value than it used to be since the shale plays are now defined more accurately.

[dan_s]

BTW you can download the Lonestar forecast model to Excel and put the higher gas price in the assumptions at the bottom and the spreadsheet will automatically update.