LONESTAR RESOURCES ON TRACK TO GENERATE FREE CASH FLOW IN SECOND HALF OF 2019
Company: Lonestar Resources (Lone)
Headquarters: Fort Worth, Texas
Project: Eagle Ford Shale
CEO: Frank Bracken
Education: Bachelor of Art, Yale University
In current role: 7 ½ years
Focused on the Eagle Ford Shale in south Texas, independent oil and natural gas company Lonestar Resources (Lonestar) has spent the last seven years strategically carving out a niche for itself. “We’ve assembled 57,000 net acres, up from 1,000 just 7 years ago, in the crude oil window of our play,” explains CEO Frank Bracken. “We have unfettered access to pipelines that get us to refineries and export markets. We’ve been moving a lot of our oil overseas for a number of years now, which results in superior pricing.”
Lonestar has significantly grown its reserves since going public in 2013. The company’s technical approach, which uses proprietary targeting and drilling techniques to drill some of the longest laterals in North America, is expected to yield 25 per cent compounded growth for 2019/2020. “This will lead to terrific earnings and cashflow for Lonestar. Already, we’ve grown our crude reserves at a compounded annual growth rate of 52 per cent at a cost of US$7.53, which we are sell for about US$65 by contrast.”
Furthermore, as the competition in the Eagle Ford Shale thinned out in recent years, Lonestar has identified a unique opportunity. “We used to have eight or nine competitors, now there are only two. The industry is underfunded. The equity markets are difficult to raise money in right now and we’re in an environment where most of our competitor’s attention is elsewhere. That’s been a huge advantage to us.” Lonestar intends to continue its focus on the Eagle Ford Shale in 2019 and 2020 as this is where the company’s 2018 capital programs resulted in significant success with internal rate of returns for these capital projects of between 55 per cent and 70 per cent.
Eagle Ford Shale is situated in the perfect location due to its proximity to refineries and export markets. “We get premium prices to West Texas Intermediate. We get the best prices in North America. We have spare capacity in all our pipelines. The business of having your product delivered to the buyer at a great price is an easy box to check with us.” In addition to targeting quality assets and growing reserves, Lonestar has experienced success in growing production. In 2018, the company reported production of 11,155 barrels of oil equivalent (boe)/day, up 72 per cent from 2017 production. Lonestar anticipates the growth momentum to continue, reporting production guidance between 13,700 and 14,700 boe/day for 2019.
Still, despite its many successes, Lonestar’s stock is undervalued. “Energy as a percentage of the S&P has fallen from over 12 per cent to 6 per cent. There’s an overall lack of interest in the oil and gas sector right now and the smaller companies, like ours, are hard hit when those circumstances arise. It’s happened seven times in my 30 years of being in the business.” Now that the business is running well, Bracken says the attention is focused on telling Lonestar’s story to investors.
Bracken believes now is the time for investors looking for a great opportunity, to buy in. “Our stock is trading at half of its proved net asset value. I think you’re betting on a company with a cheap valuation that’s a maverick in a way. We are real contrarians. We are growing and focusing our technical efforts in an area that a lot of companies are abandoning, and we are doing so in a time when Lonestar’s capital program is expected to be completely covered by free cash flow by 2020. Not all companies our size can do this, so it is quite remarkable.”
Asked to summarize the top three reasons why now is the time to purchase Lonestar stocks, Bracken says:
- Lonestar is the technical leader in the Eagle Ford Shale south Texas with few direct competitors. The company has grown its reserves by 52 per cent compound annual growth rate since it went public.
- Our technical approach to the business has allowed Lonestar to grow production by 72 per cent in 2018 with 27 per cent production growth forecasted for 2019/2020.
- Lonestar aims to transition to a self-funding capital program over the next two years, with free cash flow expected in the second half of 2019.