Lonestar Resources (LONE) is very well hedged on its oil production, so the crash in benchmark oil prices is unlikely to have any effect on its financials in 2020 or 2021. Lonestar is affected by the associated impact on NGLs though, as well as the negative trend in Eagle Ford oil differentials.
Although Lonestar’s financial results over the next two years will probably have minimal differences at $30 WTI oil compared to $60 WTI oil, weak oil prices will make it even more difficult to refinance its January 2023 unsecured notes and may cause its borrowing base to be reduced.
2020 Outlook
Lonestar was evaluating its 2020 capital plans in early March after Saudi Arabia had initiated a price war and had anticipated releasing Q4 2019 earnings (and an update on its capital plans) on March 30. The subsequent Coronavirus induced oil price crash has delayed its earnings release and capital plan update. Lonestar had previously indicated it was aiming for 17,500 BOEPD production in 2020, but given the current environment, I am estimating that it now averages 15,500 BOEPD with a $40 million capex budget.
This would result in Lonestar being hedged on approximately 105% of its projected 2020 oil production. I have also estimated that Lonestar’s oil differential ends up at negative $3 during 2020 due to Eagle Ford oil differentials widening. LLS was previously trading at around a $3 premium to WTI, but LLS basis futures are now averaging a $2 discount to WTI over the remainder of 2020.
At $35 WTI oil, Lonestar is now projected to end up with $194 million in revenues after hedges.
| Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million | |
| Oil | 2,602,450 | $32.00 | $94 |
| NGLs | 1,357,800 | $8.00 | $12 |
| Natural Gas | 10,183,500 | $2.05 | $24 |
| Hedge Value | $64 | ||
| Total Revenue | $194 |
With a $40 million capital expenditure budget, Lonestar would then end up with a projected $135 million in cash expenditures. This would result in $59 million in positive cash flow during 2020. Lonestar also benefits a bit from lower interest rates with its credit facility, with it locking in LIBOR swaps at 0.68% on $190 million of its credit facility borrowings for the next few years.
| $ Million | |
| Lease Operating Expense | $35 |
| Production and Ad Valorem Taxes | $8 |
| Cash G&A | $15 |
| Cash Interest | $37 |
| Capital Expenditures | $40 |
| Total Expenses | $135 |
Debt Situation
With that positive cash flow, Lonestar may be able to reduce its credit facility debt to $186 million by the end of 2020. Lonestar’s borrowing base is currently $290 million, but is likely to be reduced due to the significant decrease in oil strip prices. This should be partially mitigated by Lonestar’s strong hedge position (including 7,000 barrels of 2021 WTI oil swaps at $50.40) which may cover 100+% of its projected oil production in both 2020 and 2021.
Lonestar’s credit facility currently matures in November 2023, but will spring forward to July 2022 if its January 2023 unsecured bonds are not dealt with before then.
Lonestar’s ability to refinance its January 2023 unsecured bonds appears quite questionable. Lonestar may be able to pay down its credit facility further in 2021 with a below maintenance capex budget. However, this would leave it in a position of needing around $70 WTI oil and a realized price of $25 per barrel for its NGLs in order to get its total debt to EBITDAX down to around 2.5x for 2022, which is a scenario where it could probably refinance its 2023 notes at a high interest rate again.
The low likelihood of this scenario is reflected in the price of Lonestar’s unsecured bonds, which are only trading at 20 cents on the dollar currently.
Conclusion
Lonestar is very well hedged on oil for the next couple years, so whether oil is at $30 or $60 makes little difference to it in terms of cash burn for now. It seems likely to go with a limited capex budget and work on paying down its credit facility debt though, since drilling at current oil prices doesn’t make much sense. As well, Lonestar’s credit facility lenders will be adjusting its borrowing base to manage their risk for when Lonestar’s hedges run out.
Lonestar’s 2023 unsecured note maturity looks very difficult to deal with, and it may need $70 WTI oil by mid-2022 in order to be able to refinance that note. Thus restructuring by the July 2022 springing maturity date of its credit facility looks pretty likely.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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