Lonestar Resources

A drilling rig working at one of Lonestar's 20 proved locations in Beall Ranch, Texas.

OIL & GAS FINANCIAL JOURNAL: Lonestar was formed in June 2010. You joined the company as CEO in January 2012. How was the company able to grow the asset base to include more than 23,000 net acres in the heart of the Eagle Ford?

Frank Bracken: Lonestar was undoubtedly more modestly capitalized than many of our peers until now, but virtually 100% of our focus as a team has been on the crude oil window the Eagle Ford. I think we've been extremely resourceful when it comes to assembling this position. We've purchased working interests in individual leases and wells, we've acquired properties out of bankruptcy, we've taken primary term leases and we've engaged in farm-ins. And as we grew our position, our borrowing base, and our profitability, we were able to finally compete in the larger scale acquisition market. To date, that growth has culminated by the consummation of the Clayton Williams acquisition of March of 2014.

OGFJ: The Eagle Ford has been on the radar of many companies in recent years. What makes the play continuously compelling?

Bracken: We're a returns-driven company and we believe the IRRs and the crude oil and condensate windows in the Eagle Ford are among the highest in the world. In simple terms, from our perspective, in 2013 our EBITDA margins at the property level in the Eagle ford were over $66 of BOE, which equated to roughly 85% of our gross revenues. When we can bring reserves on-stream at capital costs of $15 to $25 of BOE, drilling new wells in the Eagle Ford makes our shareholders a lot of money. That's a recipe for success. It was the economics of this play over others that was important to our focus here, particularly if we could control costs. Equally important for us was our belief that the leasehold environment within the Eagle Ford—and more specifically the crude oil window—was conducive to acquiring additional properties. It's one thing to be able to drill a well and make excellent returns, but you've also got to be able to aggregate a position of consequence and our view was that both of those conditions were in place when we started to focus on the play in earnest.

OGFJ: Do you feel like Eagle Ford land grab is over? Are there still opportunities?

Bracken: There are absolutely opportunities. We've been actively taking new leases and making bite-sized acquisitions to bolster some of the positions that we acquired from Clayton Williams—both in La Salle and Brazos counties. They aren't high dollar target in terms of capital outlay but we're definitely taking on more acreage in and around positions that we already have and improving the scale and the economics of our existing leasehold. That was part of the attraction to the Clayton Williams package. We felt there was some low hanging fruit in that regard. That type of organic growth has always been a part of our strategy, but also there are some smaller players that either don't have enough capital to prosecute everything they've got to drill, or they're flippers. There are companies who will drill five to 10 wells and then seek to monetize. What's good about our company today is that with an undrawn line of credit we're in a position to attempt to consolidate some of those smaller players.

OGFJ: You've been active in the acquisition stage. When do you enter the drill and develop stage – or are you there ?

Bracken: In our minds, we're always at the drill and development stage because time is the enemy of IRR. We're not in the business of becoming a land bank. Each time we bring a property into ownership we need to quickly convert it to cash flow with the drill bit. I think the longest we've waited to get a drill bit in the ground and start harvesting that is six Julys. Most recently, with respect to some properties that we've pulled down from Clayton Williams, we acquired leases that were set to expire within 60 days of closing. We had pads built, permits filed, and wells staked before we closed and we're happy to report that we were able to drill and complete two wells there to hold upwards of about 1,400 acres in the area. We have a different mentality. We'll continue to acquire new leasehold and new packages, but we're always in a development mode. From a capital standpoint, our intentions are that with our current asset base, that our capital program for 2015 and beyond would be 100% funded out of cash flow. We don't need external capital to prosecute development of our existing base, and frankly, we don't even have to spend a multiple of our cash flow which, I think, puts us ahead of the game in terms of our peers. Our capital ware withal beyond our cash flow is really reserved for additional opportunities in the Eagle Ford.

Lonestar will operate 2 rigs in the oil window of the Eagle Ford for the remainder of 2014.

OGFJ: How much of the budget will be allocated to the Eagle Ford in 2014?

Bracken: In 2014 upwards of 95% of our $130 million budget is focused on the Eagle Ford.

OGFJ: Can you provide a few details on well results?

Bracken: We've got 10 wells that are in various stages. Sixty days from now we'll have all kinds of things to talk about. Right now I don't have anything that I can disclose that wouldn't be news to the market. However, I can say that on the whole we've seen relatively consistent results across all our positions.

OGFJ: In addition to the Eagle Ford, Lonestar has 50,000 acres in Roosevelt County, Montana prospective for the Bakken and Three Forks as well as production from conventional oil reservoirs in Texas. What role do these assets play?

Bracken: Our intent really is to have a portfolio of assets that spans the maturity spectrum. Our conventional assets are very late in life assets with shallow declines. They throw off a lot of free cash without requiring much in the way of reinvestment. They've been the ATM for us in terms of funding some of our Eagle Ford development. There's not a lot of capital investment we can make there to alter the ultimate productivity that will come off those assets.

At the other end of the spectrum is the Bakken/Three Forks acreage. We call this area our Stone Turtle project. That's the name of the exploratory unit we're seeking to form with the Bureau of Land Management. It's a 50,000 acre contiguous block what sits on the western flank of the Poplar Dome which is one of the biggest structures in the Williston Basin. This is very early stages. We've shot a 3D seismic survey over the block and we're encouraged by both the large number of conventional targets and the presence of a high degree of fracturing in area. You're going to need that incremental permeability to get through fractures. That's why we set ourselves up on the flank of the stone. Our own internal view of the prospectivity of this block has been enhanced based on the 3D data and we're developing our plan to go forward right now.

We don't want to break our focus on the Eagle Ford, however, the asset in Montana has a lot of prospectivity and it's definitely something that we want to see examined and exploited. I think the likelihood is that we'll conduct a process in the fall whereby we seek a farm-in partner to operate the project, begin to tackle some of the technical issues, and develop a practice by which we can exploit the Bakken and the Three Forks horizontally…at very limited cost to Lonestar.

OGFJ: What about your drilling and completion recipe? What seems to be working in terms of vertical depth, lateral length and completion designs?

Bracken: I think an essential part of our success is the high degree of technical flexibility that our team has displayed. Our presence across the play, from Dimmit all the way to Brazos County, heightens our appreciation for the fact that there's been an enormous amount of variability in all the factors that determine economic recovery in the Eagle Ford. We, by design, have aggregated our leasehold in three areas of concentration so that when we make an improvement in an area we have enough acreage on which to apply those improvements that it has material benefit.

We're huge believers that regardless of where you are, you‘ve got to get well spacing correct early to maximize resource recovery and arrange for an orderly development. If you're infilling post production, we think that's a recipe for trouble. We don't think you're going to get good frack efficacy and we think it's going to be highly disruptive to your existing producers. In the western region in La Salle counties, we're believers that 500 foot spacing is optimal and that high proppant concentrations are most effective. We're typically pumping 1,500 pounds of proppant per perforated foot in the western Eagle Ford and have been doing that for three years now.

In the central area encompassing Wilson and Gonzales counties, geosteering laterals to the most frackable part of the Eagle Ford and devising methods to deal with lost circulation have been very important. Just recently we drilled two 7,400 foot laterals in southwest Wilson counties with brine-based mud system—almost unheard of in the Eagle Ford—and these two wells were highly cost effective. The real results will be borne out after we frack those wells, flow them back and get some sense of their productivity, but from a technical perspective and from a cost perspective we feel like we've cleared a major milestone in the central Eagle Ford.

In the eastern Eagle Ford where Halcon and Apache are extremely active, most of what we've learned in the western portion of the play can be applied. We have met with some of the leading operators in Brazos County and have gone to school on some of the nuances of this area before we put the bit in the ground. We believe that we've gotten up the curve without the onus of having spent a lot of capital in what is a very new area in the history of the play. The plan is to have one or more of those operators as partners in wells that we'll operate. They'll then have a vested interest in transmitting their learning curve to us. We're hopeful that we'll get out of the chute in Brazos County with a high degree of knowledge about what it takes to make best wells there.

"In our minds, we're always at the drill and development stage because time is the enemy of IRR. We're not in the business of becoming a land bank. Each time we bring a property into ownership we need to quickly convert it to cash flow with the drill bit." — Frank Bracken III

OGFJ: An exciting aspect about the Eagle Ford remains in the unknown – lots of stacked pay, downspacing, long laterals, comingling, etc. Are these all opportunities Lonestar is pursuing?

Bracken: We've been nicking around the Chalk, but we really are focused on the lower Eagle Ford. First and foremost for us, we're really trying to drill longer laterals. I think a much greater percentage of our wells are going to be 7,000 to 9,000 feet wherever the lease geometry holds. There's just so much incremental return in drilling those longer laterals and we, as a team, along with our service providers, are becoming increasingly comfortable drilling those longer laterals. That's our next chapter.

OGFJ: Talk to us about your recent listing and any related plans for a capital raise.

Bracken: On June 2, our OTCQX listing became effective. For us, it's really straightforward: our fiduciary duty to our equity holder is to create the broadest possible market for our shares. It just made sense to us that we linked our share price to the US market because that's where the bulk of our peer companies trade. As of this interview, we're only in day six of trading, but the results have been humbling. I think our stock is up 50% since the listing took hold. With the listing there's now the potential to raise money in both the US and Australia. Right now we just completed a $220 million senior unsecured note deal with Jefferies and Wells Fargo in the states. That transaction has given us an undrawn line of credit that totals $109 million. We feel like we've got all the capital we need right now.

OGFJ: Finally, what might Lonestar look like in 5 years?

Bracken: Our primary mission is to build an asset of consequence in the Eagle Ford. In my view, optimally, there would be a 40,000-50,000 acre position. We think the well results and the M&A activity that has been perpetually reemphasized through improvements in well quality and the constant purchase by non-Eagle Ford operators of Eagle Ford assets or Eagle Ford companies is a validator to our philosophy. I think our goal is to build an asset of consequence so that at some point in time, someone who has a different sense of value comes along and takes the company out. We're in this to make money for our shareholders; I'm not out to build the next Exxon. We'll prosecute the strategy as long as it's accretive to our equity holders. If somebody comes along that decides we're worth more to them than we are to the stock market, then we'll sell, but I see our development cycle taking 3 to 4 years before the company would ultimately be monetized.

OGFJ: Thank you very much for your time.