The Energy Report - Tue, Sep 5, 2017

Hurricane Harvey Creates Buying Opportunity in E&P Company

John White, an analyst with ROTH Capital Partners, explained why the market's reaction to Hurricane Harvey's impact on this energy company creates a favorable time to buy its stock.


In an Aug. 29 research report, John White reported that "the market punished Lonestar Resources Ltd. (LONE:NASDAQ), taking the stock down 7.1%" due to Hurricane Harvey's inclement weather negatively affecting the company's operations.

Those effects included Lonestar's "crude oil purchasers and terminal operators advising of suspended operations on Aug. 24, 2017, which receive LONE's crude oil via truck" and "shutdowns of refineries in the Gulf Coast region," White detailed.

Lonestar also experienced "reduced natural gas sales at its Horned Frog property due to an outage at its amine plant, shut-in of certain wells in Gonzales County due to lack of crude oil trucking availability and certain shut-ins of wells at the Marquis property due to power outages," outlined White.

The ROTH report indicated Lonestar expected the outages to be "short term" and "we concur with this assessment," wrote White. Supporting that opinion, he noted, "LONE advises trucking operations and oil sales have resumed as of today [Aug. 28] in Dimmit and LaSalle counties. LONE further advises the bulk of its operated production is not affected and continues to produce."

More generally, due to Harvey, "news of shutdowns in the Eagle Ford began being released last week by the larger operators in the play," White said.

ROTH, however, believes the market's response vis-à-vis Lonestar's stock to be "an overly harsh reaction to what appear to be short-term production disruptions" and, further, White explained, because the company "recently closed its previously announced acquisition of Eagle Ford shale assets which LONE estimates, on a pro forma basis, increases its Proven reserves by 70%."

Another reason the stock price drop was "particularly harsh" is because projections for Lonestar's Q4/17 production indicate "growth looks strong," described White, "with our Q4/17 production estimate of 9,342 barrels of oil equivalent per day (boe/day) up approximately 66% compared to the actual Q2/17 figure of 5,635 boe/day." Additionally, "the consensus estimate of 8,827 boe/day represents an increase of 57% compared to the actual Q2/17 production level."

ROTH Capital currently has a rating of Buy and a 12-month target price of $9 per share on Lonestar. Its stock is trading at around $2.88 per share.

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