Lonestar Resources, Ltd. - energyprospectus.com · 4/6/2016 · Lonestar’s proved reserves are...

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Lonestar Resources, Ltd.

April 6, 2016

Commentary by Dan Steffens Lonestar Resources, Ltd. (OTCQX: LNREF) is one of the companies in our Small-Cap Growth Portfolio. It is focused on developing its leasehold in the South Texas Eagle Ford Play. Fourth quarter production was 7,639 Boepd (52.5% crude oil), beating my forecast by over 500 Boepd. My forecast and valuation below assumes production will average 7,500 Boepd in 2016 and 9,000 Boepd in 2017. The company has not

provided production guidance as of the date of this report. The last report on the company that I received from Roth Capital (dated February 3, 2016) rated the stock a BUY with a price target of $7.00. During the last five years, Lonestar has steadily increased its production, proven reserves and low-risk drilling inventory. Their hedge position insures solid top line revenues through December 31, 2016.

Lonestar is trading for just over 1X cash flow per share Lonestar generated $3.85 operating cash flow per share in 2015 and should generate approximately $2.50 CFPS in 2016. They recently announced an upsizing and extension of their bank credit facility, which gives the company more than enough liquidity to fund continued growth. See Hedge Positions below. The only explanation that I can give for Lonestar’s low share price is that it does not trade on a major U.S. exchange. On December 16, 2015 the company announced a plan that should have the shares trading on the NASDAQ sometime in the 2nd quarter of 2016. I believe this move will draw a lot more attention to this rapidly growing small-cap E&P company. Well-funded small-caps with lots of running room have the potential for explosive share price appreciation when oil & gas prices rebound. I believe the up-listing of the shares to NASDAQ will draw Wall Street’s attention to this stock. Keep in mind that a lot of fund managers cannot buy stocks which are not listed on U.S. exchanges.

My Fair Value Estimate for LNREF is now $10.60/share Compares to First Call’s Price Target of $6.75

Disclosure: I do not have a position in LNREF and I do not intend on buying or selling it in the next 72 hours. I wrote this profile myself, and it expresses my own opinions. I am not receiving compensation for it from the company. I have no business relationship with any company whose stock is mentioned in this article.

Management Frank D. Bracken III, CEO, Director Barry D. Schneider, COO Tom H. Olle, SVP Operations Douglas W. Banister, CFO Jana Payne, VP, Geology

www.lonestarresources.com



April 6, 2016

Company Overview Lonestar Resources, Ltd. (ASX: LNR, OTCQX: LNREF) is focused on the acquisition, development and production of unconventional resources in the United States. While optimizing cash flows from its Conventional assets, Lonestar is focusing its attention and capital to continuing its growth strategy in the Eagle Ford Shale. Lonestar currently operates 100% of over 35,000 net acres in the Eagle Ford, and continues to expand its leasehold. Lonestar believes it is adequately capitalized to fund the development of its existing Eagle Ford Shale drilling inventory through internal means. Lonestar is also engaged in an early-stage project in the Bakken Petroleum System, where it has assembled a 52,559 acre leasehold (34,163 net acres) and tested light oil from the Bakken, Three Forks and Lower Lodgepole formations.



April 6, 2016

2015 Reserves On February 2016, Lonestar announced its proved reserves as of December 31, 2015 were 40.2 million barrels of oil equivalent (MMBOE), an increase of 30% over year-end 2014 proved reserves of 31.0 MMBOE. Lonestar’s proved reserves as of December 31, 2015 are comprised of 23.5 million barrels of crude oil and condensate, 7.2 million barrels of natural gas liquids, and 57.0 billion cubic feet of natural gas. By energy content, Lonestar’s proved reserves are weighted 76% to crude oil, condensate and natural gas liquids. At year-end 2015, 95% of Lonestar’s proved reserves were from the Eagle Ford Shale, while 5% were from its Conventional assets. In 2015, Lonestar increased its Eagle Ford Shale proved reserves by 38% to 38.0 MMBOE versus 2014 levels while lower oil and gas prices and production decreased proved reserves from its Conventional assets by 37% to 2.2 MMBOE versus year-end 2014 levels. Lonestar’s proved reserves at December 31, 2015 were reduced by 6.4 MMBOE as a function of lower prices. 2015 Highlights Include:

• Total reserve replacement was 394%. Capital spending of $94.2 million yielded an all-sources finding & development cost of $8.15 per BOE

• Excluding negative price-related revisions of 6.4 MMBOE, reserve replacement was 668% at an all-sources finding & development cost of $5.24 per BOE

• Eagle Ford Shale reserves increased to 38.0 MMBOE, an increase of 38% from 27.5 MMBOE at December 31, 2014

• Proved Developed Producing (PDP) reserves increased to 13.2 MMBOE, an increase of 8% from 12.2 MMBOE at December 31, 2014, comprised of a 15% increase in the Eagle Ford Shale, offset by a 19% decrease on its Conventional assets

• Lonestar operated 100% of its Eagle Ford Shale proved reserves with an average 87.1% working interest.

Frank D. Bracken, III, Lonestar’s Chief Executive Officer commented, “2015 saw unprecedented compression in oil and gas prices, making it an undeniably challenging year for the oil and gas industry, yet Lonestar’s focused approach in the Eagle Ford Shale allowed the Company to increase proved reserves by 30%. Notably, Lonestar increased Proved Developed Producing reserves in the Eagle Ford Shale by 15% and increased its Proved Undeveloped (PUD) reserves in the Eagle Ford Shale by 51%. These gains were achieved almost entirely on leasehold that Lonestar acquired via farm-ins and lease acquisitions, which were then followed up by successful drilling results which allowed for the booking of proved reserves in 2015. Notably, at December 31, 2015, Lonestar’s 62 Proved Undeveloped locations had an average perforated interval of 7,400 feet, with two-thirds of its PUD locations having planned perforated intervals of 8,000 feet or more, capable of generating attractive IRR’s at today’s NYMEX oil and gas futures strip.”



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Bracken further commented, “During 2015, Lonestar continued its strategy of using farm-ins, acreage trades and complimentary primary lease acquisitions to gain access to high quality Eagle Ford Shale leasehold which it proved up with the drillbit, allowing for significant reserve additions at Horned Frog and Burns Ranch, which are reflected in our proved reserve growth in 2015.” Bracken added, “Lonestar’s proved reserves are associated with 63.0 gross / 51.6 net producers and 62.0 gross / 55.3 net PUD locations on 17,482 net acres. Lonestar has an additional 140 drilling locations identified on an additional 18,010 net acres, 102 of which have been identified as probable and possible by our independent petroleum engineers. This leasehold and its associated drilling inventory represent significant potential sources of reserve growth for the foreseeable future for Lonestar, and are expected to complement Lonestar’s continuing efforts to grow reserves through farm-ins and focused lease acquisitions.”



April 6, 2016

2015 Fourth Quarter Update Highlights

• Lonestar Resources set a new production record, reporting a 31% increase in net oil and gas production to 7,639 BOEPD in 4Q15, vs. 5,816 BOEPD in 4Q14. Lonestar’s 4Q15 sales volumes also represented a 15% sequential increase over 3Q15 production levels. In the fourth quarter, 72% of the Company’s production was crude oil and NGL’s. Production was higher than the top end of its guidance thanks to excellent performance of its Horned Frog wells, and achieved despite deferring two well completions.

• The Company’s Eagle Ford Shale properties registered a 38% increase in net oil and gas production over 4Q14 results, to 7,039 BOEPD, and 18% growth sequentially.



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• EBITDAX was $19.4 million for 4Q15 vs. $27.3 million for 4Q14, as increased production volumes and incremental revenues from crude oil hedges helped offset a 42% decrease in West Texas Intermediate oil prices. EBITDAX dropped just 10% against 3Q15 results as production growth significantly offset a $4.25 per barrel drop inWTI1.

• Lonestar reported a net loss of $4.9 million for 4Q15 vs. a net Income of $25.4 million in 4Q14. This is before an expected impairment charge, which the Company expects to be included in its audited full-year results.

• At December 31, 2015, $87 million was outstanding on the facility on its $180 million Senior Secured facility, currently leaving $93 million undrawn and available.

• Lonestar is making progress towards its corporate objective of moving the Company’s domicile and public equity listing to the United States.

o On December 24, 2015 Lonestar submitted its Scheme of Arrangement with the Australian Securities & Investment Commission to commence a process intended to move Lonestar’s domicile to the United States.

o On December 31, 2015, Lonestar filed its Form 10 with the U.S. Securities & Exchange Commission with the intention of registering its equity securities in the U.S.

o Lastly, on January 8, 2016, Lonestar filed an application for listing on the NASDAQ: NMS and reserved the ticker “LONE” for trading in the United States, which when effective, will coincide with a delisting from the Australian Stock Exchange.

Financial Update Lonestar’s 31% increase in production and robust hedge book allowed the Company to register a modest 22% decrease in net oil and gas revenues in the fourth quarter of 2015, which totaled $27.7 million. On a wellhead basis, Lonestar’s net oil and gas revenues for 4Q15 decreased 41% to $18.3 million, versus $31.0 million a year ago. The precipitous decline in oil and gas prices was mitigated by Lonestar’s favorable crude oil hedge position, which added $9.4 million to revenues in the fourth quarter of 2015.

• Lonestar’s net wellhead oil and gas revenues from its Eagle Ford Shale assets fell 39% to $16.7 million for the fourth quarter of 2015 versus $27.6 million a year ago. 4Q15 revenues were bolstered by a 38% increase in production, which was offset by a 56% decrease in wellhead price realizations per BOE. Crude oil contributed 78% of revenues, while natural gas liquids contributed 9% of revenues and natural gas contributed 13% of revenues. Sequentially, Lonestar generated a modest 15% decrease in wellhead net oil and gas revenues over 3Q15 results, as BOE price realizations fell 28% and production increased by 18%.

• Lonestar’s net wellhead oil and gas revenues from its Conventional assets totaled $1.6 million during the fourth quarter of 2015, a 53% decrease over the fourth quarter of 2014. The decrease in revenue was driven by a 43% decrease in wellhead price realizations per BOE coupled with a 17% decrease in production. Crude oil contributed 79% of revenues while natural gas liquids contributed 1% of revenues and natural gas contributed 20% of revenues.



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Lonestar’s field operating expenses (lease operating expenses plus production taxes) for the fourth quarter of 2015 were $5.9 million, an increase of only 4% over 4Q14 field operating expenses of $5.7 million, despite a 31% increase in oil and gas production. Combined with increased volumes, the Company reduced total field operating expenses by 21% on a unit of production basis from 4Q14 to $8.45 per BOE. Lonestar’s 4Q15 results also represented a 3% sequential reduction in field operating expenses. Lease Operating Expense was $5.2 million for 4Q15, and increased 30% above 4Q14 levels on an absolute dollar basis, but remained flat on a BOE basis at $7.35 per BOE. Production taxes were $0.8 million for the fourth quarter of 2015, a 56% decrease over comparable levels in 2014, and a 67% decrease to $1.11 per BOE. Reduced production taxes were primarily due to realized reductions to Ad Valorem taxes versus estimates utilized for accrual purposes in previous quarters.

• Lonestar’s field operating expenses from its Eagle Ford Shale assets totaled $5.0 million during the fourth

quarter of 2015, a 10% increase over the fourth quarter of 2014. However, on a unit of production basis, field operating expenses decreased 20% to $7.65 per BOE, year-over-year. Direct lease operating expenses totaled $4.3 million in 4Q15, or $6.68 per BOE, a modest increase of 3% on a per unit basis. Production taxes were $0.6 million, or $0.96 per BOE, compared to $1.5 million, or $3.12 per BOE in the year-ago quarter. More importantly, Lonestar was successful in sequentially decreasing Eagle Ford Shale lease operating expenses by 6% on a per-BOE unit basis. Reduced production taxes were primarily due to realized reductions to Ad Valorem taxes versus estimates utilized for accrual purposes in previous quarters.

• Lonestar’s field operating expenses from its Conventional assets totaled $1.0 million during the fourth quarter of 2015, a 21% decrease versus the fourth quarter of 2014. On a unit of production basis, field operating expenses decreased 4% to $17.90 per BOE. In total, LOE was $0.8 million, or $15.13 per BOE, compared to $0.9 million, or $13.90 per BOE in 4Q14. Sequential, Lonestar was able to achieve reductions in LOE on an absolute-dollar basis by 2%. Production taxes were $0.2 million, or $2.77 per BOE, compared to $0.3 million, or $4.72 per BOE in the quarter a year ago.

Operations Update

• Lonestar set another production record in the fourth quarter of 2015, registering sequential production growth of 15% over 3Q15 levels. The Company’s net production for the fourth quarter of 2015 also represented a 31% increase over 4Q14 levels, rising to 7,639 BOEPD. Lonestar’s Eagle Ford Shale drilling program continues to be the driver for the Company’s record-setting production. Fourth quarter 2015 volumes were comprised of 4,011 barrels of oil per day, 1,472 barrels of NGL’s per day, and 12,937Mcf of natural gas per day. The Company’s 4Q15 results capped off an impressive year- as full-year 2015 production averaged 6,407 BOEPD, an increase of 43% over 2014 results.

• During the fourth quarter of 2015, Lonestar achieved considerable improvement in its lease operating expenses. Total Company lease operating expenses were $7.35 per BOE on unit of production basis, a reduction of 6% sequentially from third quarter 2015 results and a reduction of 22% from the second quarter of 2015, when LOE per BOE averaged $9.43 per BOE. In a commodity price environment where margins are paramount, Lonestar is achieving unit-cost reductions through a combination of increased sales volumes, industry-wide reductions in energy service costs, and a focused internal effort to optimize the Company’s



April 6, 2016

chemicals program. Lonestar believes that continued cost reduction efforts should further reduce LOE per BOE in the first quarter of 2016.

• Crude oil hedging continues to be an important element of Lonestar’s strategy, providing visibility to cash flow streams and associated liquidity in the current crude oil price environment. Currently, the Company has West Texas Intermediate (WTI) swaps covering 2,276 barrels of oil per day for calendar 2016 at an average strike price of $77.15 per barrel. For 2017, The Company has three-way collars covering 1,000 bopd, which provide an effective floor of $55.25 per barrel with WTI prices between $40.00 per barrel and $60.00 per barrel but also gives upside to $80.25 per barrel. At December 31, 2015, the mark-to-market value of Lonestar’s hedge portfolio was $32.6 million, and at January 31, 2016, the mark-to-market value of the portfolio is estimated at $32.8 million.



April 6, 2016

Operations Eagle Ford Shale Trend – Western Region Asherton – In central Dimmit County, no new wells were completed during the quarter. However, production rates from the 4 producing wells continued to outperform the third-party engineering projections. The Asherton leasehold is Held by Production, and Lonestar does not plan drilling activity here in 2016. Beall Ranch – In Dimmit County, Lonestar continues to benefit from refined geo-steering targets and engineered completions. Through 196 days of production, Lonestar’s #26H-#28H have cumulatively produced an average per well of 44,810 barrels of oil from an average 2,990-foot perforated intervals, or 14,003 bbls per 1,000 feet. These



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results are 42% better than the directly offsetting #32H-#34H wells, which were treated with a similar amount of proppant. Building on this success, Lonestar began drilling the Beall Ranch #20H-22H wells during the fourth quarter of 2015. As of this report, Lonestar has drilled and cased the Beall Ranch #22H & #21H. The #22H was drilled to a total depth of 13,450 feet in 11 days while the #21H was drilled to a total depth of 14,600 feet in 10 days. The #20H is currently being drilled with a projected total depth of 15,900 feet. Lonestar has a 97.7% working interest in these wells which will have an average perforated interval of 6,150 feet and an average AFE of $4.4 million.

Burns Ranch Area – In northern La Salle County, Lonestar successfully executed a primary term lease on an additional 440 gross/220 net acres on the Burns Ranch. Since its initial entry into the area as part of its acquisition of properties from Clayton Williams Energy, Inc., Lonestar has increased its leasehold position in the Greater Burns Ranch Area from 1,280 gross / 800 net acres in January, 2013 to its current position of 3,857 gross / 3,125 net acres at December 31, 2015. Importantly, this acreage is configured in a manner that allows Lonestar to drill 8,000-foot laterals, which it believes are necessary to achieve attractive internal rates of return in the current price environment. Lonestar is pleased with the results of its initial 8,000’ laterals it drilled on the Burns Ranch in 2015, and has



April 6, 2016

permitted 3 additional wells on this property in 2016. Horned Frog – In La Salle County, Lonestar drilled and completed the Horned Frog A #1H & B #1H with an average perforated interval of 8,233 feet. After registering impressive Max-30 day production rates of 1,438 BOEPD and 1,315 BOEPD, respectively, the Horned Frog A#1H and B#1H continue to perform well. The Horned Frog A#1H has produced a total of 142,896 BOE in its first 4 months of production and the Horned Frog B#1H has produced a total of 134,307 BOE in the same period. To date, these wells rank as the top two performers among 107 offset wells. Further, these wells have outperformed the 107 well average by 85% on a per-foot basis. In the fourth quarter of 2015, Lonestar drilled and completed the Horned Frog D#1H & E #1H to an average total measured depth of 18,300 feet. The Horned Frog D #1H tested 369 bopd and 4,447 Mcfgpd, or 1,395 BOEPD on a processed three-stream basis on a 21/64” choke and averaged 1,242 BOEPD over its Max-30. The Horned Frog E #1H, which had a perforated interval of 5,553 feet, tested 344 bopd and 3,815 Mcfgpd, or 1,218 BOEPD on a processed three-stream basis on a 20/64” choke, and averaged 1,050 BOEPD. The D and E wells produced a higher percentage of oil when compared to the A and B wells, and may ultimately yield better returns. Lonestar utilized the IOG Capital Joint Venture. Accordingly, Lonestar is paying 10% of the well costs and will have an initial 15.0% working interest in these wells. Upon achievement of a specified IRR, Lonestar’s working interest would increase to 57.5%. Eagle Ford Shale Trend – Central Region Pirate Area – In southwest Wilson County, Lonestar has drilled the Pirate #M1H and Pirate #N1H wells and cased them to an average measured depth of approximately 16,100 feet. Lonestar has a 100% working interest and an average 76.4% net revenue interest in these two wells. These wells are being held in inventory awaiting fracture stimulation. Lonestar will continue to weigh allocating capital to completion of these wells versus other projects in the Company which compete for capital. Southern Gonzales County – In Gonzales County, Lonestar’s Harvey Johnson #1H-#6H continue to perform well, with production from the six wells averaging 1,582 gross / 593 net BOEPD in the fourth quarter of 2015. Lonestar’s success at Harvey Johnson in accessing Eagle Ford Shale acreage which has been Held By Production by Austin Chalk wells has prompted additional efforts to expand the Company’s drilling inventory. In the current oil price environment, Austin Chalk wells are increasingly uneconomic and incapable of holding Eagle Ford Shale rights, and Lonestar is seeking to take advantage of this trend by accessing additional acreage either via farm-in or low-cost lease acquisition. To date, Lonestar has leased a total of 1,130 net acres which will accommodate 10 gross laterals with average lateral lengths of 7,200 feet and has top-leased an additional 1,726 net acres associated with marginally economic Austin Chalk units. If executed, Lonestar’s total leasehold of 2,856 net acres would accommodate a total of 31 gross laterals with an average lateral length of 7,000 feet. Lonestar estimates that remaining potential leasehold expenditures are less than $1.9 million.



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Eagle Ford Shale Trend – Eastern Region Brazos and Robertson Counties – In Central Brazos County, Lonestar has permitted two 8,000-foot laterals with the Texas Railroad Commission and is currently finalizing its operations permits with the City of College Station. Lonestar anticipates approval of these permits within the next 30 days. The Company is encouraged by the results of offset drilling by a leading operator, who recently announced impressive 30-day production rates on four wells immediately offsetting Lonestar’s leasehold, which have ranged from 1,587 to 1,973 BOE per day. Recent Activity Joint Development Agreement On July 28, 2015, Lonestar announced the closing of a $100 million Joint Development Agreement with IOG Capital, L.P. The Agreement provides incremental non-recourse capital for Lonestar to drill wells in its focus area of the Eagle Ford Shale play.



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Lonestar’s agreement with IOG Capital makes available a maximum of $100 million in funds to be used in drilling incremental Eagle Ford Shale wells. The Joint Development Agreement, which calls for IOG to participate as a non-operated working interest owner, states that the funds can be deployed towards the drilling and completion of Eagle Ford Shale wells which meet the collective return criteria of Lonestar and IOG. The JDA calls for IOG to contribute up to 90% of the initial capital for wells drilled in the program, with Lonestar contributing the remainder of well costs. After IOG achieves a specified return, Lonestar’s working interest would increase to 90%.

“Our deal with IOG Capital is tailor-made for Lonestar’s strategy in the current market. It makes sense to pursue additional growth opportunities in the current market, but do so in a manner that is consistent with Lonestar’s philosophy of maintaining balance sheet flexibility. First and foremost, this Agreement will allow Lonestar to more aggressively pursue additional farm-in opportunities without materially augmenting our capital budget. Farm-ins have been a principal source of leasehold and reserve growth for Lonestar in 2015, and we see that trend continuing… The Joint Development Agreement will also allow Lonestar to spread its drilling capital over a larger number of wells, which should have positive benefits in terms of scale, as well as enlarge the number and size of acquisitions the Company can prosecute, which makes sense for a company our size.” – Frank D. Bracken, III, Managing Director and Chief Executive Officer

Senior Secured Credit Facility On July 28, 2015, Lonestar announced the closing of a new $500 million Senior Secured Credit Facility, which replaces its previous $400 million facility. Lonestar’s new facility was arranged by Citibank, N.A., and importantly, features an expanded borrowing base of $180 million, an increase of $30 million from the $150 million borrowing base under its previous facility. There are several additional upgraded features related to the new facility which include:

• Improved Liquidity- At June 30, 2015, Lonestar had $76 million drawn on its facility, yielding $74 million of liquidity. Pro forma its new facility, liquidity is $104 million, an improvement of 41 percent.

• Reduction in Interest Rate Grid- Under its new facility, the spread over LIBOR interest rates is 25 basis points better than under its previous facility. At current levels, Lonestar’s interest rate has been reduced from 2.73% to 2.48%.

• Extension in Maturity Date – Lonestar’s new credit facility matures on October 16, 2018, representing a 7 month extension versus its prior facility.

• Expanded Bank Group- ABN Amro, Texas Capital Bank and Bank of Texas each expanded their commitments under the new facility. Additionally, Lonestar added considerable firepower to the long-term capacity of the facility by adding three new banks: Comerica, BBVA Compass, and Barclays.



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“We are extremely pleased with our expanded facility. It provides immediate benefits of increased capital availability at a lower interest cost. The facility also affords Lonestar an enhanced ability to hedge while leaving that decision completely at the discretion of the Company. Longer term, the facility’s maturity is extended by 20% and the increased number of large lenders in our group gives Lonestar the capability to substantially expand borrowing base among current lenders, which should streamline future expansions in the credit facility.” – Frank D. Bracken, III, Managing Director and Chief Executive Officer

Re-Domiciliation of Company On March 10, 2016, Lonestar held a shareholders meeting in Australia to vote on the Company’s Schemes of Arrangement, the process in Australia required by law to effect transaction which results in the movement in domicile to the United States. Lonestar is pleased to announce that all resolutions put to security holders at the Scheme Meetings held on 10 March 2016, were passed with the required majority. In fact, 99.52% of the votes cast by Lonestar common shareholders voted ‘For’ the resolutions which the Company requires to execute its plan move its domicile and share listing to the United States.

“I am pleased that Security Holders have resoundingly endorsed the plan to re-domicile the Company to the United States and list on NASDAQ. This is a logical progression for Lonestar, given that 100% of its assets and operational management are located in the U.S. Re-domiciling in the US and listing on NASDAQ better aligns Lonestar’s corporate structure with its assets and management and over the medium-term it should reduce the group’s cost of capital” – Frank D. Bracken, III, Managing Director and Chief Executive Officer

The Company will now proceed to implement the Schemes, which remain subject to final Australian Court approval and based on Court schedules, it is anticipated that the second Court hearing will be held on or about 31 March 2016. The Company will advise the definitive revised date for the second Court hearing once it has been set down by the Court. Assuming a second court hearing date of 31 March, and that the Court grants orders approving the Schemes, it is anticipated that trading in Lonestar shares on the ASX will cease at the close of business on about 31 March 2016, and that the scheme implementation date will be on or about 7 April, 2016. An updated timetable will be provided to Security Holders on the ASX platform, once the dates become definitive. 2016 Spending In the current commodity price environment, Lonestar has adopted a highly flexible capital spending plan for 2016 with a principal focus on maintaining current debt levels and maximizing liquidity while continuing to avail the Company to new leasehold opportunities. Lonestar currently plans to drill and complete a total of 6 to 7 net wells (9 to 10 gross wells) at today’s NYMEX strip prices, with a focus on Dimmit, LaSalle and Gonzales Counties. This budget should result in no change in the Company’s net debt position over the course of 2016 and yield production which Lonestar estimates would range from flat to an increase of up to 10% over 2015 results. Importantly, Lonestar



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has no commitment wells in 2016, and may utilize funds from its $100 million JDA with IOG Capital to gain access to new farm-in opportunities while maintaining its capital budget. As market conditions change, Lonestar remains flexible in its ability to modify its spending in alignment that is in the best interests of its shareholders. Hedge Position Lonestar uses the commodity derivatives market as a tool to manage commodity price risk, create higher certainty of returns on capital expenditures, and maximize its borrowings available under its Credit Facilities. As the Company places new wells into production, it has historically entered into additional derivatives transactions to further insulate the Company from the risks associated with the oil and gas business, and to lock in attractive returns, a policy that Lonestar expects to continue. As has been its practice since inception, crude oil hedging has been a key element to providing visibility to its cash flow streams and associated liquidity in the current crude oil price environment. In an effort to provide additional long�term visibility to its cash flow streams in the current crude oil price environment, Lonestar has recently increased its crude oil hedge position. Giving effect for these new hedges, the Company has increased its positions, and currently stand at:

• 2016 – Lonestar has West Texas Intermediate swaps that total to 2,276 barrels of oil per day for 2016 at an average strike price of $77.15 per barrel.

• • 2017 – Lonestar’s 2017 oil hedge position consists of a 3�Way West Texas Intermediate Collar covering 1,000 barrels per day for calendar 2017, comprising of a $60.00/$40.00 put spread against an $85.00 call.



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