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Lonestar Resources Adds to Eagle Ford Portfolio in Q2

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   |    Tuesday,August 23,2016

Lonestar Resources U.S., Inc. reported its financial and operating results for the three months ended June 30, 2016.

Key Points:

• Lonestar added to its Eagle Ford Shale leasehold and reserves position by issuing 500,227 shares of its Class A common stock to Juneau Energy, LLC (98% owned by Leucadia National Corp.) in exchange for 2,567 gross / 1,284 net acres in Brazos County
• Lonestar will assume operatorship of this leasehold. In the month of July, these two wells produced 650 Boe/d gross / 254 Boe/d net. The acreage has the potential for 11 horizontal wells. Lonestar’s initial internal reserves estimates include Proved and Probable Reserves of 1.1 Million Barrels of Oil Equivalent.

Highlights:

• Lonestar Resources registered a 13% increase in net oil and gas production to 6,573 Boe/d in 2Q16, compared to 5,804 Boe/d in the second quarter of 2015. In the second quarter of 2016, 76% of the Company’s production was crude oil and NGL’s. The Company’s second quarter 2016 production results also represent a modest sequential increase over production results in the first quarter of 2016. However, crude oil production rose 17% sequentially as Lonestar’s 2016 completions have all been in the crude oil window.
• The Company continues to focus its technical and capital resources on the Eagle Ford Shale play of southTexas, where it generated a 17% increase in net oil and gas production in 2Q16 over 2Q15 results, to 5,991 BOE/D.
• Lonestar reported a net loss of $12.8 million for 2Q16 versus a net loss of $8.4 million in 2Q15. This loss in 2Q16 includes $13.2 million associated with a non-cash, mark-to-market revaluation of Lonestar’s crude oil hedge portfolio.
• Adjusted EBITDAX for the second quarter of 2016 was $16.0 million compared to $22.0 million for 2Q15, as a 13% increase in production volumes partially offset a 21% decrease in revenues due to a sharp decline in West Texas Intermediate oil prices and Henry Hub gas prices compared to 2Q15.
• Effective July 5^th, 2016, Lonestar successfully completed its efforts to re-domicile from the Australian Stock Exchange to the United States, listing on the NASDAQ Global Market under the ticker “LONE”.
• At June 30, 2016, $99.5 million was outstanding on the $120 million Senior Secured Credit Facility, leaving$20.5 million undrawn and available.
• As of August 18, 2016, the Company executed open-market purchases of its 8 ¾% Senior Unsecured Notes due April 15, 2019 totaling $48.4 million. These purchases were funded by the Company’s 12.0% Second Lien Notes. As of August 19, 2016, Lonestar has issued $25.0 million on its Second Lien Notes, and has $24.9 million remaining available for additional issuance. The net effect of these transactions is a$23.4 million reduction in total debt outstanding as of August 19, 2016, which the Company estimates would yield approximately $1.4 million of net interest expense savings on an annualized basis.

Operational

• Lonestar reported a 13% increase in total company production in the second quarter of 2016 and a 17% increase in its Eagle Ford Shale production. Second quarter 2016 volumes of 6,573 Boe/d were comprised of 3,979 barrels of oil per day, 1,039 barrels of NGL’s per day, and 9,332 Mcf of natural gas per day. The Company produced 6,564 Boe/d through the first six months of 2016, an increase of 16% over the comparable period in 2015. The Company’s production rates rose modestly sequentially, as new Eagle Ford Shale wells were placed onstream at a slower rate than in past quarters. During the second quarter of 2016, Lonestar placed 2 new Eagle Ford Shale wells onstream during May, 2016. Lonestar holds a 42% working interest and a 33% net revenue interest in these wells, meaning that Lonestar added 2.0 gross / 0.8 net wells in the second quarter of 2016, as compared to 3.0 gross / 2.9 net wells in the first quarter of 2016 and 4.0 gross / 2.3 net wells in the fourth quarter of 2015. However, crude oil production rose 17% sequentially from 3,414 Bo/d for the three months ended March 31, 2016 as Lonestar’s 2016 completions have all been in the crude oil window.
• Lonestar’s lease operating expenses for the second quarter of 2016 were $4.4 million, representing a 4% decrease over 2Q15 lease operating expenses of $4.6 million. Notably, lease operating expenses on a dollar basis were reduced in spite of a 13% increase in production volumes. The factors combined yield an 15% reduction in total field operating expenses on a unit of production basis from 2Q15’s levels of $8.68per BOE to $7.35 per BOE in the current quarter.
• Crude oil hedging continues to be an important element of Lonestar’s strategy. We believe crude oil hedging provides increased visibility to cash flow streams and associated liquidity in the current crude oil price environment, as well as augmenting the Company’s borrowing base. For 2016, the Company has West Texas Intermediate (“WTI”) swaps covering 2,692 barrels of oil per day for July 2016 throughDecember 2016 at an average strike price of $69.57 per barrel. As previously announced, the Company has three-way collars covering 1,000 bop/d for calendar 2017, which provide an effective floor of $55.25per barrel with WTI prices between $40.00 per barrel and $60.00 per barrel but also gives upside to $80.25per barrel. During the second quarter of 2016, the Company added 500 barrels of oil per day of NYMEX crude oil swaps for January 2017 through December 2017 at a volume weighted average strike price of$50.87 per barrel. In total for 2017 the Company has 1,500 barrels of oil per day hedged at an average strike price of $53.79 per barrel. At June 30, 2016, the mark-to-market value of Lonestar’s hedge portfolio was $12.7 million.
• Lonestar added to its Eagle Ford Shale leasehold and reserves position by issuing 500,227 shares of its Class A common stock to Juneau Energy, LLC (98% owned by Leucadia National Corp.) in exchange for 2,567 gross / 1,284 net acres in Brazos County, which includes the purchase of a 50.0% Working Interest/ 39% Net Revenue Interest in two wells which hold all of the acreage by production. Lonestar will assume operatorship of this leasehold. In the month of July, these two wells produced 650 Boe/d gross / 254 Boe/d net. The acreage has the potential for 11 horizontal wells. Lonestar’s initial internal reserves estimates include Proved and Probable Reserves of 1.1 Million Barrels of Oil Equivalent.

Eagle Ford Shale Trend - Western Region

• Asherton – In central Dimmit County, no new wells were completed during the three months ended June 30, 2016. Production rates from the four producing wells continued to outperform the third-party engineering projections. The Asherton leasehold is held by production, and Lonestar does not plan drilling activity here in 2016.
• Beall Ranch – In Dimmit County, Lonestar drilled and completed the Beall Ranch #20H – #22H with an average perforated interval of 6,075 feet in in the first quarter of 2016. The three new wells were fracture stimulated with an average proppant concentration of 1,520 pounds per foot, and commenced flowback in late first quarter of 2016. These were the first three wells completed in partnership with Schlumberger as part of the companies’ Geo-Engineered Completion Alliance (“GECA”). While still preliminary, the production results during the first 150 days onstream are encouraging, as the cumulative production is 14% higher than that of the #26H – #28H wells, drilled 12 months prior, when compared on a barrel-per-lateral-foot basis for the same period of time. The #26H-#28H wells utilized certain elements of the GECA, which Lonestar believes were significant contributors to the 43% outperformance as compared to the offsets, the #32H-#34H, which were completed in July, 2015. In total, through two iterations of technology improvements, Lonestar has achieved a 63% improvement in cumulative oil production per lateral foot. Lonestar is encouraged by the results of the GECA to date, and will seek to apply them across its portfolio.
• Burns Ranch Area – Burns Ranch production was curtailed during the first quarter of 2016 by a severe fire at Southcross Energy, L.P.’s Lancaster gas processing plant, which rendered all of the Company’s natural gas and natural gas liquids unsaleable in the months of February and March 2016. The same issue partially affected April 2016, which reduced sales by approximately 26 Boe/d in the three months endedJune 30, 2016. The Lancaster plant resumed normal operations mid-April 2016 and Burns Ranch sales volumes have recovered. Drilling activity at Burns Ranch has been delayed by protracted negotiations related to a lease swap on certain of Lonestar’s leasehold on the property. In August 2016, Lonestar executed a lease swap agreement with another operator and consolidated Lonestar’s leasehold position so that we can now drill at our own discretion. Within the leasehold associated with this trade prior to this lease swap, Lonestar had 19 gross/15.1 net laterals booked totaling 152,000 lateral feet. Following the lease swap, Lonestar has 18 gross/16.1 net laterals totaling 151,000 lateral feet. Lonestar commenced drilling operations on the Burns Ranch Eagleford B Unit #8H, #9H and #10H wells with a planned average lateral length of 9,000 feet. Lonestar anticipates that completion of these three wells will increase the leasehold that is held by production at Burns Ranch from 2,712 net acres to 3,328 net acres, which equates to 86% of our total net leasehold at Burns Ranch.
• Horned Frog – In southern La Salle County, no new wells were completed during the three months endedJune 30, 2016. Lonestar does not plan drilling activity on the Horned Frog property in 2016, having held on the leasehold by production with our drilling activity during 2015.

Eagle Ford - Central Region

• Southern Gonzales County – Encouraged by the results of the initial six wells on our Harvey Johnsonlease in southern Gonzales County, Lonestar leased a total of 1,450 gross / 1,450 net acres in our Cyclone project area through June 30, 2016, just west of Harvey Johnson. Lonestar drilled and completed the Cyclone #9H and #10H wells on this leasehold, and placed these two wells onstream on May 12, 2016. After drilling a pilot hole and running logs to gather information on rock properties and petro-physics , Lonestar drilled and completed the Cyclone #9H & #10H with an average perforated interval of 6,685 feet. Lonestar holds a 42% WI / 33% NRI in these wells. The two new wells were fracture stimulated with an average proppant concentration of 1,518 pounds per foot. The Cyclone #9H tested 543 Bopd and 239 Mcfg/d, or 598 Boe/d on a processed three-stream basis on an 18/64″ choke and registered a 30-day production rate of 486 Boe/d. The Cyclone #10H tested 576 Bopd and 239 Mcfg/d, or 631 Boe/d on a processed three-stream basis on an 18/64″ choke and registered a 30-day production rate of 521 Boe/d. Originally estimated to cost an average of $5.2 million, these wells have been drilled and completed at an average cost of $4.7 million. Based on the results of its initial wells on the Cyclone project, Lonestar has executed agreements to lease an additional 1,456 gross / 1,322 net acres that directly offset the Cyclone #9H and #10H wells. These additions increase Lonestar’s total leasehold in its Cyclone project to 2,906 gross / 2,656 net acres as of August 15^th, 2016, which is expected to accommodate 29 additional laterals with an average lateral length exceeding 7,000 feet.

Eagle Ford - Eastern Region

• Brazos & Robertson Counties – In central Brazos County, Lonestar has permitted two 8,000-foot laterals with the Texas Railroad Commission and on March 8^th, 2016 Lonestar was granted operations permits with the City of College Station. The Company is encouraged by the results of offset drilling by a leading operator, who recently announced 30-day production rates on four wells immediately offsetting Lonestar’s leasehold, which have ranged from 1,587 to 1,973 BOE per day. Lonestar currently plans to drill these wells in the fourth quarter of 2016.

Corporate

On July 5, 2016, Lonestar achieved a significant milestone in the Company’s history when its Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission, and its shares of Class A common stock commenced trading on the NASDAQ Global Market under the symbol, “LONE”.  On July 7^th, 2016, the ordinary shares of the Company’s predecessor were delisted from the Australian Stock Exchange as a further step to move the domicile of the parent company from Australia to the United States as a Delaware corporation.

Financial Transactions

• On August 2, 2016, Lonestar entered into an agreement with subsidiaries of Leucadia National Corporation, which allows for the issuance of up to $49.9 million of Second Lien Notes, which are secured by second-priority liens on substantially all of the Company’s assets, pursuant to an intercreditor agreement with the lenders in the Company’s Senior Secured Revolving Credit Facility. As of August 18^th, 2016, Lonestar had issued $25.0 million of Second Lien Notes, leaving $24.9 million available for additional issuances.
• As of August 18^th, 2016, in a series of open-market transactions, Lonestar had purchased $48.4 million of its 8 ¾% Senior Unsecured Notes due April 15, 2019, leaving $171.6 million of these Notes outstanding. The net effect of these transactions has been to reduce Lonestar’s long-term debt from $319.5 million to $294.7 million, as if these transactions had occurred at June 30, 2016.