Lonestar Resources (LONE) Update for Q3 - Nov 11

[dan_s]

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

Lonestar is an "Aggressive Growth" pure play on the Eagle Ford shale play in South Texas.

Highlights:
> The company is on-track for 36% year-over-year production growth in 2019. After 72.4% production growth in 2018.
> The company's year-end 3rd party reserve report is likely to show a net asset value PV10 of over $10/share just for their proved reserves (P1).
> You should be able to add another $5/share for all of the company's low-risk high-yield development drilling locations. Over 300 HZ locations.
> Lonestar sells all of their oil at close to LLS prices; a $3 to $5 premium to WTI
> This company has a habit of under-promising and then over-delivering on production guidance, so my guess is that they top Q4 guidance by ~500 Boepd.
> Only Q3 negatives are crappy NGL prices and production was a bit "gassier" than my forecast. Natural gas and NGL prices are improving in Texas as winter heating season has started early this year.

LONE is on-track to $3.25 operating cash flow per share in 2019. IMO this stock deserves at least 4X CFPS as a target price.

[mkarpoff]

Wow. Lone was up .40 in pre-mkt after reporting, now down. Amazing.

[ChuckGeb]

Great results. Market likely reacting to forecasted drop in production in Q4 while getting significantly gassier in Q4. Market rarely acts positive to any positive quarterly earnings. If they can get to FCF in Q4 which appears doable with so little capital spending it will be a big plus.

[dan_s]

Lonestar's cash flow from operations should be $90 to $110 million in 2020; enough to fund a D&C program similar to the one this year.

Keep in mind that Lonestar sells all of its oil into the LLS market at a nice premium to WTI. Their hedges are "paper transactions" that settle based on WTI during each month. This means that they get to keep the LLS premium on 100% of their oil.

I was on the Lonestar conference call and I have made a few changes to my forecast/valuation model that increase my valuation. I have re-posted my model to the EPG website.

Capex will be way down in Q4 as they drill one new well and complete three new wells. They should be FCF positive going forward.

Frank always "under-promises and over-delivers" on production guidance.

You can listen to a replay of the CC this afternoon. Make sure you follow along on the slides.
Lonestar has over 200 low-risk development drilling locations in proven areas.

[cmm3rd]

Just read the cc transcript and agree -- very upbeat.

Their 2023 notes are priced at .70 on the dollar, implying an annual yield to maturity of about 25%.

Frank readily acknowledged that their debt is constraining growth, and he obviously feels that there are many opportunities for them (one of which he alluded to could happen soon, but in exchange for equity - hmmm).

Would they use proceeds from sale of east Texas assets, if that happens, to buyback some of those 2023 notes?

[dan_s]

I don't think that Lonestar should sell the East Texas package into this depressed market. Frank should be able to fund 100% of the 2020 D&C program with cash flow from operations.

[cmm3rd]

I am asking a different question, not whether they should (or will) sell their east Texas assets, but rather, if they do (as they seem to be attempting), would they use the proceeds to buy back some of their debt, currently trading at .70 on the dollar (with Frank expressly acknowledging that their weak balance sheet is constraining what he can do).

From the cc transcript:

Jeff Grampp

Okay, great. Thank you. And for my follow-up, I was curious if you can kind of give us any kind of update on the potential asset sale of your East Texas assets.

Frank D. Bracken

Yes. So, we completed our Brazos well. The logs were better than the Wildcat well. the wells stimulated better than the Wildcat well, I would tell you. And we’re able to generate really good early rates. We’ve got a mechanical obstruction that we’re waiting on lower pressures to deal with. I would tell you, I think we’re not – we’re producing out of a fraction of the total lateral length right now. We’re going to let those pressures come down, go remediate that well. And then I think at that point in time, would be the appropriate time to launch a formal process. I will tell you that we’ve not been able to stave off all of the – all the inbound inquiry and we have people working in advance with our data on the asset. So, hopefully, it’s just a deferral of that sale and nothing else.

[dan_s]

How would I know what Frank will do with proceeds from an asset sale?

If buying back debt at a nice discount is the best use of funds then I'm sure he will consider it.
If oil prices move higher in 2020, then maybe accelerating development drilling on one of more oily areas would be the best use of funds.

Frank has a good BOD. It will be their decision.

[dave_n]

Lonestar hit a 52 week low today. Anybody aware of what might be driving this after such a strong quarter? Especially on a day where oil is trending up?

[dan_s]

We will publish an updated profile on Lonestar by the end of November.