Lonestar Resources Ltd.’s Eagle Ford drilling campaign has an extra $100 million to maneuver with after agreeing to a joint development agreement (JDA) with Dallas’ IOG Capital LP.
IOG has committed up to $100 million in off-the-balance sheet financing to Lonestar. The Fort Worth, Texas, company will be able to drill while hunting down more acquisitions—and without taking a major hit to its balance sheet, the company said.
The midpoint of the company’s 2015 drilling budget is about $79 million.
Lonestar said the JDA will only help fund and develop additional farm-in opportunities such as Horned Frog, a 3,614-acre leasehold recently acquired in La Salle County, Texas.
“Lonestar does not expect a reduction in its current net drilling activity,” said Andrew Smith, analyst, Global Hunter Securities in a report, “Alchemy in the Eagle Ford.”
“Lonestar continues to see increasing opportunities in the Eagle Ford Shale to execute additional farm-ins, which increase its acreage position without requiring large up-front acreage capex or stretching the balance sheet,” Smith said. The company is rated a Speculative Buy.
In April, Lonestar acquired 4,047 net mineral acres and added 32 gross (20 net) horizontal drilling locations in La Salle. At the close of 2014, the company held interests in 143 engineered locations in the play.
Frank D. Bracken III, Lonestar's CEO and managing director, said IOG wants to pursue more opportunities in the current market.
The JDA will give Lonestar the flexibility to “spread its drilling capital over a larger number of wells, which should have positive benefits in terms of scale” and up the number and size of acquisitions it can execute.
Lonestar will primarily seek farm-in opportunities that don’t materially inflate its capital budget, Bracken said. The company is currently focused on the oil window of the Eagle Ford, where it operates 100% of its 34,360 net acres.
"Farm-ins have been a principal source of leasehold and reserve growth for Lonestar in 2015, and we see that trend continuing," he said.
The JDA provides Lonestar capex incrementally and is engineered as non-recourse capital for Lonestar. Such an agreement typically limits the capital provider from pursuing anything other than collateral if the agreement is breached.
IOG will contribute up to 90% of the initial capital for wells drilled in the JDA. Lonestar can back into as much as 90% of working interest by reaching certain return thresholds.
Eagle Ford Survivor
Lonestar, which is listed on the Australian stock exchange as LNR, has quietly withstood lower commodity prices because of its hedging.
In the second quarter of 2015, Lonestar’s EBITDAX rose 32% to $22.1 million compared to $16.7 million during the same period in 2014.
Oil hedges offset a 45% decrease in its average wellhead price.
Global Hunter’s EBITDAX estimates for the company are largely unchanged at $87 million for 2015 and $82 million in 2016.
For the balance of 2015, the company is hedged for 2,593 barrels of oil per day (bbl/d) at $82.58/bbl WTI. In 2016, its hedges cover 2,276 bbl/d at $77.15/bbl WTI.
The company’s production mix is 72% oil, 17% gas and 11% NGL.
So far in the third quarter of 2015, Lonestar has completed three short laterals at Beall Ranch in Dimmit County, Texas, where it has a 97.7% working interest. The wells are currently in flowback.
The company also concluded the drilling and completion of two 8,000-foot laterals as part of its Horned Frog farm‐in. The wells are set to be fracked in August and begin production in September.
In the fourth quarter, Lonestar plans to drill two 7,500 foot laterals in Wilson County, Texas, and two 8,000 foot laterals in Brazos County, Texas.
For the year, the company plans to drill and complete about 14 net wells.
Lonestar is also engaged in an early‐stage project in the Bakken Petroleum System, where it has assembled a 52,559 gross (34,163 net) acre leasehold and tested light oil from the Bakken, Three Forks and Lower Lodgepole formations.
The company also said July 28 it has closed a $500 million senior secured credit facility, which replaces its previous $400 million facility. The new facility was arranged by Citibank NA and has an expanded borrowing base of $180 million. Pro forma liquidity as of June 30 was $108 million, including $4 million of cash.