Lonestar Resources Update - April 25

[dan_s]

Comments below are from John White at Roth Capital on 4-25-2019:

Our valuation is based on a net asset value (NAV) analysis which produced $10.97 per share which we adjusted higher to $11.00, which is our target price.

LONE: Strong Production Growth in 2H 2019: Positive

We expect strong production growth in 2H 2019, with 3Q 2019 sequential growth of 24% followed by sequential production growth of 6% in 4Q 2019. Full year 2019 production growth is slated for an impressive 24%. LONE continues to employ longer laterals, with an average of 7,700 feet in Karnes County, 12,000 feet at Horned Frog and 9,000 feet to 12,000 feet at Cyclone/Hawkeye.

Our 1Q 2019 production estimate of 11,236 BOE per day is lower than our 13,291 BOE per day estimate as contained in our 2/10/2019 note. This downward adjustment is in line with LONE guidance for production in 1Q 2019 in the range of 11,200 BOE per day to 12,000 BOE per day. As previously announced, LONE suspended drilling operations as commodity prices fell in 4Q 2018 and opportunistically re-negotiated contracts for drilling and completion operations.

Our Q1 estimates move slightly lower from EPS/CFPS/EBITDA $(0.07)/$0.99/$33.6 million to $(0.16)/$0.71/$26.7 million, due to the lower production guide.

Our 2018 quarterly EPS does not sum to the full year 2018 EPS due to the accounting treatment of EPS as related to LONE’s Class A Participating Preferred Stock.

To better reflect the current commodity price environment, we have increased our 2019 WTI crude oil price estimates as follows: 2Q 2019: from $50.00/bbl to $64.00/bbl, 3Q 2019: from $52.00/bbl to $62.00/bbl, 4Q 2019: from $55.00/ bbl to $64.00/bbl. Our 2020 and thereafter WTI crude oil price projection moves from $55.00/bbl to $60.00/bbl. Our near term Henry Hub natural gas price forecast moves lower while our intermediate and longer term estimates are relatively unchanged, as follows: 2Q 2019: from $2.70/MMBtu to $2.50/ MMBtu, 3Q 2019: from $2.75/MMBtu to $2.60/MMBtu, 4Q 2019: from $2.75/ MMBtu to $2.80/MMBtu. Our 2020 and thereafter Henry Hub price projection is unchanged at $2.70/MMBtu. We have updated our 1Q 2019 estimates using actual 1Q 2019 oil and gas prices.
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Keep in mind that Lonestar sells all of their oil under a marketing agreement tied to the LLS index, so they are getting over $5/bbl premium to WTI on their crude oil. - Dan

[ChuckGeb]

As I understand it LONE has a significant portion of its oil hedged at prices less than current WTI for 2019. Thus they should be largely receiving their hedge price plus the premium of lls over wti. On the other hand they will be paying royalty and severance on the full lls price received for their oil. Is this thinking correct?

[dan_s]

Yes, royalties and production taxes are paid on what the oil actually sells for. All companies sell their production into the market or under marketing contracts regardless of their hedges. Hedges are "paper" transactions that are settled with the counter-parties each month.

[dave_n]

They just did a shelf registration to issue $300m more stock.

https://www.sec.gov/Archives/edgar/data ... 552ds4.htm

That's not good news.

[ChuckGeb]

I don’t think this is all bad. Frank indicated in his EPG presentation that there were a number of potential private equity rollups on the horizonand based on that this should be expected. I believe Frank and his board is savvy enough to do only deals that will be accretive to the current shareholders. Frank has certainly established his credibility with me and although the small cap e & p sector seems to be shunned by WS I believe that LONE is truly out to create value for its shareholders in a tough market. If he can delever the company in a relative sense in this manner it appears to be a prudent move.

[dan_s]

I do think Frank has been working on a significant acquisition. He has also been trying to sell some non-core assets to shore up the balance sheet. I don't mind an equity raise if the money is used to add production and proven reserves. Better equity than debt at this point. Plus, Lonestar only has 25 million shares outstanding.

I've never understood why equity raises are always considered "bad". It depends on what the money is used for. Remember, Lonestar is an "Aggressive Growth" company that increased production by 72.4% year-over-year in 2018. Lonestar already has a clear path to 20,000 Boepd of production by year-end 2020.

[ChuckGeb]

25 million to 100 million shares with shelf offering at today’s price. Better hope the target is a whopper!

[dan_s]

I think it could be a "Whooper".