Energy Prospectus

Lonestar's Chief Executive Officer, Frank D. Bracken, III, commented, "While our first quarter 2019 results represented significant improvement over the year prior, it represented a temporary pause in what the market has come to expect in terms of our ongoing financial growth and maturation. In fact, very little of our planned completion activity contributed to our first quarter results. Just 3 of our planned 20 completions for the year added to first quarter production, and those completions represented just 11% of the total perforated interval we plan to bring onstream over the course of 2019. The quarter was also impacted by an unprecedented number of frac hits from offset wells. I am pleased to report that Lonestar's wells not only weathered those hits but now have been restored to full rate. In the second quarter, completion activity has accelerated significantly, with 6.0 gross / 5.2 net wells commencing flowback in May. These wells represent total perforated interval of 47,600 feet, or 27% of our anticipated total for 2019. Current net production is a record 14,000 BOE/d, and accordingly, we expect the second quarter to reflect significant sequential growth in production and Adjusted EBITDAX, which will accelerate in the third quarter, when we expect to set an all-time record for both."

Read full Press Release: https://finance.yahoo.com/news/lonestar ... 00834.html

I have updated my forecast/valuation model for Lonestar and posted it to the EPG website. The line to focus on is "Cash Flow per share" (highlighted in yellow) near the bottom of the spreadsheet. Also, note that my forecast is based on 2019 production coming in near the bottom of the company's production guidance. Lonestar is completing wells in bunches, so production growth will be choppy, but should accelerate this summer. MY VALUATION REMAINS WHAT WAS IN THE APRIL 30TH NEWSLETTER.

CONFERENCE CALL DETAILS

Lonestar will host a live conference call on Monday, May 13, 2019 at 9:00 AM CDT to discuss the first quarter 2019 results and operational highlights.

To access the conference call, participants should dial:

USA: 1-800-925-4693
International: +1-303-223-0113
A playback of the conference call will be available on the Investor Relations section of Company's website beginning approximately May 14, 2019.

Lonestar issued production guidance of 12,400 to 12,800 BOE/d for the second quarter of 2019, a 12% increase over 2Q18 results at the midpoint. The primary sources for production growth in the second quarter will be 2.0 net wells at Horned Frog NW, which will contribute volumes for essentially the whole quarter, and 3.2 net wells in Karnes County, which are expected to contribute volumes for roughly half of the second quarter.

Production guidance for the full year 2019 is 13,700 to 14,700 Boepd

Lonestar issued Adjusted EBITDAX guidance of $30 to $32 million for the second quarter of 2019, a 15% sequential increase over 1Q19 results. During the quarter, the Company anticipates oil realizations of +$2.10/bbl to WTI and lease operating expenses of $6.00/BOE. < 100% of Lonestar's oil is sold under a marketing contract at LLS prices, ~$5/bbl premium to WTI.

If you attended our March 20 luncheon in Houston that was hosted by Lonestar, you may recall that Frank was very high on the Sooner Prospect leasehold.

"At the end of the first quarter, the Company commenced drilling 3 gross / 3.0 net wells at its Sooner property, the Buchhorn #4H, Buchhorn #5H and Buchhorn #6H. These wells, our first at Sooner, have planned total measured depths of approximately 20,300 feet and expected perforated intervals of 6,000 feet. Lonestar expects to commence flowback operations on these wells in August 2019. Lonestar has a 100% WI / 78% NRI in these wells."

These three wells should give 2H 2019 production a big boost.

Lonestar (LONE) has officially hit, imo, irrational levels at At $2.55. LONE is trading at under 1.0x Q1A annualized cash flow per share. Using EPG's numbers for 2019E, trading at 0.72x cash flow/share.

LONE did announce modestly disappointing Q1 results as it suffered from an unusual number of unannounced third party frack hits in the quarter. Extremely unlikely this will reoccur. Beyond the frack hits, the first quarter was expected to be the lowest for the year with increasing production and cash flow for each quarter.

Insiders have been buying, CEO Frank Bracken bought 10k at $4.40, then bought progressively more down to $2.72 last week. One Director and one office bought small as well. If LONE continues to languish I think you will see more buying.

Over the last two weeks I have been updating all of the Small-Cap Growth Portfolio companies' forecast/valuation models and the profiles. I can tell you that Lonestar is not the only one that is trading at an "irrational" share price.

Size does matter in this business and Lonestar is one of the smaller companies in the portfolio with current production of ~14,000 Boepd (up from 11,372 Boepd in Q1). With smaller companies the timing of individual well completions can and does cause big swings in production from quarter to quarter. Lonestar is completing a lot of high-rate horizontal wells in Q2 and Q3 that should result in very impressive production growth over the rest of 2019.

If oil prices stay exactly were they are today through June 30th, Lonestar will report a big increase in Reported Net Income because of a big positive mark-to-market increase in the valuation of their hedges. Go take a look at the forecast/valuation model for Lonestar and you will see that they reported 4Q EPS of $3.05; not bad for a stock trading today at $2.66!

My point is that "Reported Net Income or Net Loss" is meaningless for upstream companies with a high percentage of their production hedged, but it can and does influence investors that are ignorant of how GAAP accounting rules distort earnings for upstream oil & gas companies. ALWAYS FOCUS ON CASH FLOW FROM OPERATIONS.

With ~85% of their 2019 oil production hedged, Lonestar has $200 million of revenue locked in for this year. That should generate approximately $85 million in cash flow from operations and cover all of their D&C capex this year.

As I posted earlier: Keep an eye on their Sooner well results. Frank is extremely high on the potential of that prospect area.