Description

The notorious volatility of oil has kept some investors from `jumping into the energy market.

After the recent end of year oil decline,  many issues have been left behind in the past months’

crude advance. This action was most notable with the major oils rallying, leaving behind

smaller oil companies as  “red headed stepchildren”.

Before we jump into an individual stock selection, a brief overview of the world energy market

is in order. With Trump ending waivers, oil prices have firmed and the market has tightened  for now.

Venezuelan disruptions and with Saudi Arabia and Russia holding the line on supply and worldwide

 demand steady, the market appears in good shape. Saudi is the major swing producer and has

demonstrated a responsible and prudent approach. Thus, for the near term it is as calm 

as can be expected  from the oil pits.

A long time favorite of ours is Lonestar Resources-LONE- an independent  oil/gas company in the 

acquisition,  exploration and development  of oil, natural gas liquids and properties in the Eagle Ford

Shale of Texas with 57000 net acres showing  exemplary growth of a CAGR  of  27% proved reserve

growth. Lone also employs a very strong hedging program that locks in returns while it has moved the

 company to a solid 85% oil profile. Production has steadily increased from 10000 barrels-2018 (up 72%

VS 2017) with 2019 Guidance of 14000+ barrels with a target 17000-18300  boe/d in 2020.

A March 7 corporate presentation was quite informative.

Proven NAV /per share fully diluted less debt and adjusted working capital was $8.54 for 2018, up from

$7.42 in 2017 and $5.31 in 2016.  Similar numbers for proven & probable was $12.00, $10.13 and $8.50

respectively.

The corporate goal to drill 17-20 wells is expected to be fully funded from 2019  cash flow.

Our experience with the company is their estimates tend to be conservative in outlook and production.

Also company runs a good hedging operation locking in about 55% of production this year at about

$55 with 53% of 2020 oil volumes hedged at $5734 average price.  Additionally, the company related

on the conference call that they had a 13-14 year inventory at  a 20 wells a year drilling program all

funded from  operations.

Drilling costs are running at $20 a barrel and returns are expected to improve nicely as laterals are

anticipated to be 20%-25% longer  with little change in  costs.

The ultimate arbiter of shareholder value has been the underlying discounted cash flow of reserves

 and that is how assets are bought and sold, regardless of conditions in the public market.

Employing a flat price of $55 and $2.75 less debt and working capital adjustments, Lone has

 steadily grown  reserves. Since 2016, proved reserve values have grown by 30% to $8.54 a share while

 proved and probable values expanded by 21% to $12 a share.  Both values are well above the current  

 share price.

As part of the current 2019 program, they have already drilled and completed two new wells at Horned

Frog Northwest. These wells averaged 9,000 feet in length so they're 22% longer than the 2018 wells but

with identical well costs compared to the shorter laterals drilled in 2018 and with potential IRRs in

excess of 100% according to a third-party report.

One eye opening oil investment cited on the conference call, Marquee, which apparently turns out to

have been purchased for discounted  oil values- PDP- potentially returning the purchase price  in three

years. To be clear - It seems they had a three- year payback but even so  the property was fully intact

with no loss of value with an identical initial PDP value at  the completion of the period.

Lone anticipates maintenance cap- ex of $70 million which should offer a 30- plus years remaining

 economic life 

Insiders have been moderate buyers with no sales.

We just learned that Warren Buffet thru Berkshire Hathaway has committed $10 billion to Occidental

 Petroleum In its apparent bidding war with Chevron to purchase Anadarko Petroleum. This marks a rare

potential “seal of approval” in the  purchase of Permian oil assets by the Sage, who is known for his

 ability to buy undervalued assets.

Catalyst

Realization of prolific new discoveries and payback