Lonestar Resources’ Deal Doubles Eagle Ford Leasehold

[Editor's note: this story was updated at 2:30 p.m. CT June 5.]

Lonestar Resources US Inc. (NASDAQ: LONE) said May 30 it agreed to acquire roughly 21,000 net Eagle Ford acres—more than doubling its leasehold in the South Texas shale play.

Fort Worth, Texas-based Lonestar entered definitive agreements with Sanchez Energy Corp. (NYSE: SN) and Battlecat Oil & Gas LLC to acquire properties in Karnes, Gonzales, DeWitt, Lavaca and Fayette counties, Texas, for about $116.6 million in cash and stock.

The assets include 115 gross (80.3) net producing wells with proved developed producing reserves of 6.3 million barrels of oil equivalent (boe). Lonestar will own an average 70% working interest in the producing wells, and operates 81 of them with a 93% working interest.

Average production from the assets is 2,052 boe/d. The acquisition will cost about $5,500 per acre, Baird Energy Research said.

Lonestar identified Sanchez Energy as one of the sellers in a June 2 filing with the Securities of Exchange Commission (SEC).

Sanchez agreed to sell its Marquis assets to Lonestar for $57 million, comprised of $50 million cash and 1.5 million shares of Lonestar stock, according to the SEC filings. In the Marquis area, Sanchez holds about 21,000 net acres, the majority of which are in Fayette and Lavaca counties, Texas, the company's website said.

The remaining assets in Dewitt, Gonzales and Karnes counties, Texas, were purchased from privately-held Battlecat Oil & Gas for about $60 million, comprised of $55 million cash and 1.2 million shares of Lonestar stock, the SEC filings said.

Lonestar plans to fund the purchase through an $80 million convertible preferred stock offering with Chambers Energy Capital and borrowings from its senior secured credit facility, according to the company release.

Upon closing, which is expected in late June, Lonestar’s net leasehold in the Eagle Ford will increase by 59% to 57,330 net acres from 36,069 net acres. The deal also vaults the company’s net drilling locations by 70%, to 263 from 155.

Despite more than doubling the company’s asset base on most metrics, Lonestar expects to add little to no overhead to integrate the assets, said CEO Frank D. Bracken III.

“We are acquiring high-quality Eagle Ford properties located in our core area that significantly increase the size and scale of our company,” Bracken said in a statement. “Importantly, we have arranged to finance the acquisitions in a way that significantly reduces our leverage, increases our liquidity and affords us the ability to drive up production and reserves for the benefit of our shareholders.”

Acquisition highlights:

• 30,219 gross (21,238 net) acres, of which 94% is HBP;
• Average 70% working interest;
• Proved reserves of 31.4 million boe as estimated by Lonestar as of year-end 2016;
  • About 25.4 million barrels (bbl) of crude oil, 3.1 million bbl of NGL and 17.5 billion cubic feet of natural gas; and
• Proved reserves have a PV-10 value of $260 million based on the NYMEX strip at year-end 2016.

Lonestar identified 85 gross (73 net) proved undeveloped drilling locations in the Lower Eagle Ford Shale, which the company internally estimates contain proved undeveloped reserves of 25.1 million boe. The company also identified an additional 34 gross (24 net) drilling locations in the Lower Eagle Ford Shale to which proved reserves have not been assigned.

Lonestar reaffirmed its 2017 drilling and completion spend of $62 million to $72 million. The company plans to fund its 2017 capex with cash flow and proceeds from the financing. Since August, the company has participated in a joint operating agreement with Lucas Energy Inc. (NYSE: LEI) to drill and complete wells.

In addition, Lonestar said the acquisitions provide the company with the ability to set an initial drilling plan for 2018 of 18 gross (16 net) wells with an estimated cost of $85 million to $95 million.

“We plan to increase our Eagle Ford Shale drilling rig activity from one rig to two rigs no later than January 1, 2018, which will allow us to scale our drilling program and obtain a dedicated frack spread, which we believe will afford us greater economies of scale, cost savings and better precision and timing of execution,” Bracken said.

In 2018, Lonestar said it expects the company's projected capex to be fully funded by internally generated cash flow based on current strip prices.

The total purchase price comprises $105 million in cash and 2.6 million Lonestar class A common shares.

In conjunction with the financing of the acquisition, Lonestar plans to retire the remaining $17 million of its second lien notes. On a pro forma basis, the company estimates its debt/EBITDAX ratio will be reduced to 3.2x from 3.9x for the three months ended March 31, Bracken said.

Lonestar’s senior secured credit facility with seven banks currently has a borrowing base of $112 million. The company said it received commitments from certain of its banks to amend the facility upon completion of the acquisitions, to among other things, to increase the borrowing base to $160 million.

At closing, Lonestar anticipates having about $105 million drawn on the facility.

Intrepid Partners and Johnson Rice & Co. LLC served as financial advisers for Lonestar and Latham & Watkins LLP was its legal adviser.

Emily Patsy can be reached epatsy@hartenergy.com.