Initiation: An Emerging ASX Listed Eagle Ford Operator

Transcription

1 Oil & Gas Exploration & Production: Exploration & Production Price: $0.49 (09/9/2014) Price Target: $0.65 OUTPERFORM (1) Christopher Walling Joseph McKay Key Data Symbol ASX: LNR AU 52-Week Range: $ Market Cap (MM): $368.6 Net Debt (MM): $102.3 Dil. Shares Out (MM): Enterprise Value (MM): $540.9 ROIC: ROE (LTM): Dividend: NA NA NA FY (Dec) 2014E 2015E EBITDAX Q1 $19.3A $26.3 Q2 $15.8A $28.9 Q3 $23.2 $31.7 Q4 $24.9 $34.5 Year $83.1 $121.3 EV/EBITDAX 6.5x 4.5x Discretionary Cash Flow per Share Q1 $0.0A $0.0 Q2 $0.0A $0.0 Q3 $0.0 $0.0 Q4 $0.0 $0.0 Year $0.1 $0.1 P/CF 6.1x 4.1x Earnings Per Share Q1 $0.01A $0.00 Q2 $0.00A $0.01 Q3 $0.00 $0.01 Q4 $0.00 $0.01 Year $0.02 $0.02 P/E 24.5x 24.5x Diluted EPS Initiating Coverage Initiation: An Emerging ASX Listed Eagle Ford Operator The Cowen Insight We are initiating with an Outperform rating and $0.65 price target. We think the continued ramp in production, additional acreage acquisitions, and derisking of its Eastern Eagle Ford area will support upside in shares. A Growing Eagle Ford Acreage Position The company now has 30,306 net acres in the Eagle Ford shale. It currently estimates 222 future drilling locations or 10.6 years of drilling at its current 21 wells/year drilling pace. We expect the company will continue to make small bolt-on acquisitions to expand its position with a target of 40-50K total net acres over the next months. Lonestar recently added over 7,000 net acres, mostly in the Eastern Eagle Ford area, for less than $3,000 per acre. Solid Production growth of 30-50% in 2015 The company is guiding to over 30% production growth in 2014 and 30-50% in Lonestar expects to exit the year with production of 6,500-7,000 Boepd, up significantly from second quarter average of 3,600 Boepd. LNR will drill 7-13 wells in 4Q14 alone. The company is guiding to 2014 EBITDA of $105 to $125 MM, and 40-60% growth in Sufficient liquidity to fund drilling program though 2015 A recent $220 MM 5 year note offering with a 8.75% coupon will fund its drilling program through 2015 and should lift any liquidity overhang on shares. The company plans to drill 21 wells this year with an estimated cost of $135 MM per year along with a similar program in Current liquidity is ~$108 MM, adjusting for its recent $13 MM acreage acquisition, and we model it outspending its cash flows by $32 MM in 2H14 and $45 MM in The company's $108.5 MM bank revolver is not currently being utilized, and should expand as it grows reserves. Delineation of southern Brazos county provides drilling catalyst LNR has 6,897 net acres in southern Brozos county prospective of the Eagle Ford Shale between 8,500-12,000 feet in depth. Only a few wells have been drilled by offset operators, but permit activity is accelerating. We think as LNR and other operators delineate the area and establish a type curve, there should be positive implications for our NAV. We currently model a development program but it is heavily risked. LNR plans to drill its first 2-4 wells in Other operators include Apache, Laredo, and Halcon. Valuation is Attractive We currently model a fully loaded NAV (including balance sheet items, future cash taxes and G&A) of $0.65/share. With over 50% upside to our risk NAV we initiate with an Outperform rating and $0.65 price target which approximates our NAV. We expect ASX listing and limited liquidity to provide overhang on shares, but recent OTCQX listing provides opportunity to increase its U.S. investor base. Please see addendum of this report for important disclosures.

2 At A Glance Our Investment Thesis Lonestar is a Eagle Ford Shale focused operator with a growing acreage position, oily production, and sufficient liquidity to fund its production growth over next few years. We think if the company can execute on its strategy and successfully delineate the Eagle Ford Shale in the deeper Brazos County area it will support shares. Our investment rating is Outperform with a $0.65 price target, which approximates our fully-loaded NAV (including balance sheet items, future cash taxes, and G&A). Base Case Assumptions NAV of $0.65/share at strip pricing including LT crude price of $90 and gas of $4.11 (with 1% y/y escalation) 53% upside to our NAV Price Performance $ Sep-14 Upside Scenario NAV of $1.09/share with a $10 crude price increase and $0.50 increase in natural gas 110% upside risk Company Description Forthcoming Catalysts Additional Acreage acquisitions Delineation of Eastern Eagle Ford Area Downside Scenario NAV of $0.50/share with a $10 crude price decrease and $0.50 decrease in natural gas 5% downside risk, Ltd. is an ASX listed energy company that engages in exploration and development of crude oil and natural gas in the United States. The company primarily operates in the Eagle Ford Shale in Texas. As of December 31, 2013 the company had proved reserves of approximately 18.2 million barrel of oil equivalent. Pro forma for the acquisitions announced in February 2014, year end proved reserves were 25.6 million barrel of oil equivalents, including 19.9 million barrels of oil, 2.3 million barrels of Natural Gas Liquids, and 20.6 billion cubic feet of natural gas. Its reserves are 36% developed. The company was formed though the merger of Ecofin Energy Resources Plc. (a UK holding company for, Inc.) and Amadeus Energy, Ltd, an ASX listed oil and gas producer on January 2nd, The company was renamed, Ltd, and its ticker was established as LNR. It is headquartered in Fort Worth, Texas. Source: Bloomberg Analyst Top Picks Ticker Price (09/9/2014) Price Target Rating Synergy Resources Corp SYRG $12.51 $17.00 Outperform Callon Petroleum Co CPE $9.21 $14.00 Outperform 2

3 Executive Summary We are initiating coverage of with an Outperform rating and $0.65 price target. The company is primarily focused on the Eagle Ford Shale in South Texas, which is mostly de-risked and offers attractive drilling returns given its leverage to oil. To date, the company has drilled 28 wells and accumulated 30,306 net acres in the play over the prior two years. The company utilized a merger with Australian listed Amadeus Energy to go public in January In order to attract a U.S. investor base, shares were listed on the OTCQX during 2014, which has provided more visibility and liquidity for shares. Despite its ASX listing and size, the company has a well-rounded and experienced management team that we think can successfully scale this company. We think LNR will likely add to its acreage position over the next two years, and continue to execute on its production growth profile. Second quarter production averaged 3.6 Mboepd but should exit the year at over 6.5 Mboepd. LNR also expects to grow production 30-50% in 2015 with capital spending of $135 MM. The company currently has 28 horizontal wells on production, with another 136 future engineered locations, and 86 potential additional locations, or ~10 years of inventory at its current pace. The company has 21 wells planned for 2014 and another 21 in It expects to spend about $135 MM per year, which is more than its current cash flow profile. We think its recent 8.75% note offering and untouched $109 MM revolver provide ample liquidity to fund $64 MM of outspending in 2014 and $35 MM in Trading at 6.2x 2015E EBITDA (adjusted for outspending), with top tier production growth, available liquidity, and likely accretive acreage acquisitions over the next two years, we are initiating with an Outperform rating. Catalysts Accretive acreage acquisitions Delineation of Eastern Eagle Ford Area Exploration drilling / JV in Bakken Extension Area Key Points Well-rounded Management team For a company of its size, Lonestar has a deep bench of talent, including both operational and capital markets experience. CEO Frank Bracken has over 27 years of experience in oil and gas finance, mostly with Jefferies, and also has some industry experience as the CFO of Gerrity Oil & Gas. His relationships should help provide access to capital markets to fund additional acreage acquisitions and drilling program. Chief Operating Officer Barry Schneider has over 28 years of industry experience; including positions at Denbury Resources (DNR) and Conoco-Phillips, and should be capable of executing and scaling up its drilling program going forward. Some of its other operations personnel have worked at successful US independent operators including Encore, Approach, Pioneer, Unit Corp, and KerrMcGee. 3

4 Solid production growth of 30-50% in 2015E The company plans to drill 21 wells in 2014 with capital spending of $139 MM, which should grow production from 3.8 Mboepd in 1Q14 to 6.5 to 7.0 Mboepd at the end of the year. The company provided an initial 2015 CAPEX budget of $135 MM and production growth of 30-50%, which should grow EBITDA 40-60%. We estimate the company will likely accelerate the drilling program in 2016, which should support 20%+ growth. The company has identified 136 future drilling locations across its acreage, which includes 61 proved undeveloped locations. Recent acquisitions should add about 74 future locations, while the company estimates it has another 12 locations on more perspective acreage. At its current drilling speed of 21 wells per year, the company has between 6.5 (only engineered locations) and 10.6 years of future drilling. Sufficient liquidity to fund 2014 and 2015 drilling programs and additional acreage acquisitions During the second quarter, the company issued $220 MM of senior unsecured notes with a 8.75% coupon, which was upsized from $200 MM due to demand, a good sign in our opinion. The company ended 2Q14 with $216 MM of long term debt, $13.5 MM of cash and nothing outstanding on it $108.5 MM bank revolver. This gives the company sufficient liquidity for its drilling program through 2015, which we model the company outspending cash flows by $62 MM. The company recently acquired 5,200 net acres in Brazos County for $13 MM ($2,500 per acre) and we expect the company to continue to make these type of bolt on acquisitions. Delineation of Eastern Eagle Ford Region provides upside to our NAV The company has 12,307 gross (10,877 net) acres mostly in Brazos County, prospective of the Eagle Ford Shale. This is also the same area that Halcon Resources (HK) refers to as its El Halcon play. Lonestar has 3,839 gross (3,449 net) acres in what would be viewed as the fairway of the Eagle Ford formation, which ranges from depth of 6,500 to 8,500 feet. About 25 of the 136 future locations are associated with this area. The company also has 7,805 gross (6,897 net) acres in the deeper area of the play, including the 6,050 gross (5,855 net) recently acquired acres for ~$2,569 per acre. The Eagle Ford formation ranges from 8,500 to 12,000 feet in southern Brazos County. The company estimates about 61 potential locations on the acreage position. While the company has not drilled any wells in this area, Apache recently drilled a well with a vertical depth >10,000 feet that had an initial production rate of 1,455 Boepd. Laredo (LPI) and Anadarko (APC) are also drilling some exploration wells in the area. Lonestar plans to drill 2-4 wells >8,500 in 2015, to help de-risk the acreage. Bakken extension area provides exploration opportunity The company has ~50,000 net acres in Montana with 3-D seismic that is prospective for the Bakken along with other formations. While we do not expect Lonestar to spend much capital on exploration, it could find a partner willing to drill some exploration wells to earn an interest in the entire prospect. We currently model no value in our NAV, but a JV could be a positive catalyst for shares. 4

5 1/2/2013 2/2/2013 3/2/2013 4/2/2013 5/2/2013 6/2/2013 7/2/2013 8/2/2013 9/2/ /2/ /2/ /2/2013 1/2/2014 2/2/2014 3/2/2014 4/2/2014 5/2/2014 6/2/2014 7/2/2014 8/2/2014 9/2/2014 Cowen and Company Stock Performance LNR has traded between $0.16 and $0.64 over the prior 52-weeks, and is up 94% YTD versus the EPX Index up 5%. We believe the performance has largely been driven by additional acreage acquisitions, production growth, and the combination of its listing on the OTCQX. Figure 1 Shares are up 128% since Jan Source: Cowen and Company, Bloomberg Risks LNR AU Relative Performance Since 1/1/13 Commodity prices Changes in the commodity prices could impact its cash flows and limit the company s ability to fund its drilling program growth expectations. The company s oil volumes are ~80% hedged in 2014, ~78% in Limited U.S. Ownership - Geographic ownership is mostly concentrated in the UK with ~80%, while Australia accounts for ~10%. Ecofin Water & Power owns ~57% of shares outstanding, which is the original energy fund prior to the merger with Amadeus Energy. Balance Sheet The company currently has $215 MM of long term debt, or 2.9x TTM EBITDA. We model the company outspending its cash flows by $76 MM through year end 2015, although the company should have sufficient liquidity to fund the outspend. For the quarter ended June 31, LNR had $14 MM of cash and $109 MM available on its bank revolver. Company Overview, Ltd. is an independent oil and gas exploration and production company primarily focused on the Eagle Ford Shale in South Texas. The company also has a 50,000 (32,600 net) acre position prospective of the Bakken, Three Forks and Lower Lodgepole formations. It is headquartered in Fort Worth, Texas and is listed on both the Australian Securities Exchange (ASX) and the OTCQX under the symbol LNREF. 5

6 is the product of a January 2, 2013 merger between Ecofin Energy Resources Plc. (UK holding company for, Inc) and Amadeus Energy, Ltd., an ASX-listed oil and gas producer. The company was renamed Lonestar Resources, Ltd, and its ticker was changed to LNR. Reserves On December 31, 2013, LNR's total estimated net proved reserves were 25.6 million barrels of oil equivalent (MMBoe), of which 19.9 MMBbl were crude oil reserves, 2.3 MMBbl were natural gas liquids, and 20.6 billion cubic feet were natural gas reserves (78% Oil, 9% NGL, 13% Gas). Proved developed reserves accounted for 36% of total. The PV-10 value of its proved reserves totaled $566.4 MM. Included is 3.8 MMboe of conventional reserves which are 79% oil and had a PV-10 value of $73 MM at year end. Production Second quarter 2014 production averaged 3,600 Boepd, 74% crude oil. Despite a slight production decline during the quarter, the company is guiding to an exit rate of 6,500 to 7,000 Boepd in December as it ramps up activity. The company drilled 3 wells during the quarter, and had to shut in offset wells for completion activities which negatively impacted the quarter. The company expects to drill wells in 2H14, compared to only 8 in 1H14, with 7-13 in the fourth quarter alone. We are currently modeling 36% growth in 2014 and 45% in The company has two segments, Eagle Ford and conventional production. Eagle Ford accounted for 83% of second quarter 2014 production. Eagle Ford will continue to become a larger percentage of production as it ramps up. The company plans to drill total Eagle Ford wells in 2014 with a similar program in Financials The company currently has $215 MM of debt on its balance sheet, after issuing $220 MM senior notes with a 8.75% coupon during 2Q14. The proceeds were used to pay off its MM bank borrowing base and for general working capital purposes. LNR ended the quarter with $13.5 MM of cash. Net debt to EBITDA (TTM) is about 2.9x, which is slightly high but not concerning to us giving its production ramp. We model the ratio will decline to 2.4x by 4Q15. The senior notes were originally offered at $200 MM, although the increase due to demand is a positive endorsement by US investors regarding the company s ability to grow. We model 2014 discretionary cash flow of $60 MM, compared to CAPEX of $135MM. We estimate cash flows will grow to $90 MM in 2015 based on management s initial guidance of similar capital spending of $135 MM. We anticipate the company will continue to outspend over the next few years and thus additional asset sales and EBITDA growth will be needed to reduce leverage. We model the company outspending its cash flow by $76 MM though 2015 (2Q14:4Q15). However, given the EBITDA growth, we model its debt ratio declining to 2.4x by year end The company has about $123 MM of available liquidity, which we believe is sufficient to cover its cash flow outspend through 2015 of $76MM and its recent $13 MM acquisition. We expect the company will continue to focus on acreage acquisitions. 6

7 Figure 2 Cash Flow Compared to Capital Spending (in $MM) $160 $140 $120 $100 $80 $60 $40 $20 $- Source: Cowen and Company, Company Reports Valuation Analysis CAPEX Discretionary Cash Flows E 2015E Our valuation methodology includes two approaches: a relative approach and an intrinsic value approach. Our sum-of-the-parts NAV analysis represents our intrinsic value approach, and our market multiples analysis represents our relative value approach. Our NAV analysis values a company s proved developed and proved undeveloped reserves separately and sums them together with selected balance sheet items to calculate 1P NAV / share. Our NAV analysis assumes a price deck of the current NYMEX strip. By approximating the development profile of a company s proved reserves, we are able to remove the reserve auditor s price assumption and, instead, use the current strip prices. To arrive at total current NAV, we build up an asset-byasset development (drilling and production) profile and sum the present values. In the asset development profile, we estimate specific production curves, differentials, operating expenses, and development costs. To prevent double counting, we remove the value associated with the proved undeveloped reserves. Our estimate of potential reserves represents the value a company should realize by developing its unproven assets according to our estimate of a company s development timeline for each asset. We risk each asset on three levels according to the riskiness of the play, acreage position, and well success rate. Other key assumptions that affect our NAV analysis include: well costs, operating costs, well inventory, development and infrastructure costs, the initial production rate, decline curves, and ultimate recovery. We calculate a sum-of-the-parts NAV of $0.64/share at the current NYMEX strip (Figure 3). The proved reserves (including long-term debt, estimated future cash taxes, and general and administrative expenses) are approximately 52% of our valuation, while un-booked potential accounts for 48%. 7

8 Figure 3 Commodity Price Deck Source: Cowen and Company, Bloomberg Figure 4 - NAV Summary Gas ($/MMBtu) Oil ($/Bbl) 1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY 2011-A $4.10 $4.32 $4.20 $3.55 $ A $94.10 $ $89.78 $93.87 $ A $2.73 $2.21 $2.81 $3.40 $ A $ $93.45 $92.15 $88.15 $ A $3.48 $4.01 $3.58 $3.86 $ A $95.33 $94.14 $ $97.26 $ E $4.93 $4.58 $4.05 $4.06 $ E $98.68 $ $ $92.82 $ E $4.18 $3.86 $3.91 $4.04 $ E $92.29 $91.97 $91.58 $91.14 $ E $4.18 $3.95 $4.00 $4.13 $ E $89.50 $89.79 $89.37 $89.22 $89.47 B eyo nd $4.22 $3.99 $4.04 $4.17 $4.11 Be yond $90.39 $90.68 $90.27 $90.11 $90.36 Source: Cowen and Company 8

9 Figure 5 NAV Sensitivity to change in Commodity Prices LNR NAV Sensitivity Gas Prices ($/Mcf) $0.64 $3.00 $4.00 $5.00 $6.00 $7.00 NYMEX $80.00 $0.35 $0.37 $0.39 $0.42 $0.44 $0.37 Oil Prices $90.00 $0.60 $0.62 $0.65 $0.67 $0.69 $0.62 ($/Bbl) $ $0.85 $0.88 $0.90 $0.92 $0.95 $0.88 $ $1.11 $1.13 $1.16 $1.18 $1.20 $1.13 $ $1.36 $1.39 $1.41 $1.43 $1.46 $1.39 NYMEX $0.61 $0.64 $0.66 $0.68 $0.71 $0.64 Source: Cowen and Company Oil and Gas Assets Western Eagle Ford (14% of 2Q14 production) The company has a total of 10,320 gross (8,108 net) acres in Dimmit and La Salle counties, including the 1,035 net acres it recently acquired for ~$3,043 per acre. Second quarter production averaged 2,301 boepd (67% oil, 14% NGL, 19% gas). LNR drilled 5 wells in 1H14 and expects to drill another 3-6 in 2H14, all in the fourth quarter. Figure 6 Acreage Position - (recent acquisition in light blue) Source: Cowen and Company, Company Presentations Central Eagle Ford (29% of 2Q14 production) The company has a total of 11,587 gross (11,320 net) acres mostly in Wilson County, including its recent acquisition of 336 net acres for ~$5,400 per acre. Second quarter production averaged 497 boepd, which is 100% oil. Lonestar drilled 3 wells in 1H14, and expects to drill another 3-5 in 2H14. The company plans to drill 2 wells during 3Q14. 9

10 Figure 7 Acreage Map (recent acquisition in light blue) Source: Cowen and Company, Company Presentation Eastern Eagle Ford Shale (6% of 2Q14 production) The company has 12,307 gross (10,877 net) acres in the Eastern Eagle Ford extension area, also known as the El Halcon play, in Brazos County. About 5,022 net acres are in the more delineated fairway of the play, which includes over 10 active drilling rigs in Brazos County (7 APA, 1 APC, 1 HK, 3 others). There are also another 5 active rigs in Burleson County (APA, LPI, CRK, 2 others). The recent 5,855 net acre acquisition is in the deeper section of the play, and more of a step out from the core fairway. While other operators are also testing deeper areas, early results have been positive. The company s recent acreage acquisition was in the deep part of the play between 11,000 and 12,000 feet. APA reported a completion this year with a total vertical depth over 11,000 feet that had an IP rate over 1,000 boepd. Laredo Petroleum and Anadarko are also drilling some wells in the deeper section of the play. Second quarter production averaged 209 boepd (87% oil, 6% NGL, 7% gas). The company did not drill any wells during 1H14, although expects to drill two during 3Q14 and 3-4 during 4Q14 for a total of 5-6 wells. First production was 1Q14. Recent $15 MM acquisition (6,050 gross / 5,855 net) acres averaged $2,569 per acres. 10

11 Figure 8 - Acreage Map - (recent acquisition in light blue) Source: Cowen and Company, Company Presentation Figure 9 Newly acquired acreage in deeper part of basin Source: Cowen and Company, Company Presentation 11

12 Conventional (17% of 2Q14 Production) Through its merger, the company acquired 3.8 MMboe of proved reserves, at year end Second quarter production averaged 605 boepd, 75% liquids. The company is currently spending less than $2 MM of capital annually on these properties. The company recently sold its non-operated Raccoon Bend asset for $3.2 MM. We expect the company to continue to trim around the edges to fund its Eagle Ford program. Bakken-Three Forks Trend In March, the company acquired 105 square miles of 3-D seismic data covering the Poplar West project area. Lonestar (65% WI) and its partners are currently interpreting the data and mapping conventional and unconventional prospects. The company expects this process to be completed at the end of August and will then bring in a farm-in partner. The company has a position of about 50,000 gross (32,600 net) acres in Roosevelt County, to the north of Brockon-Froid fault. We attribute no value in our NAV for this early exploration play. Management Frank D. Bracken III, CEO. Mr. Bracken s career has mostly been focused on Energy Investment Banking at Jefferies & Company and Sunrise Securities. He was previously CFO of DJ Basin focused Gerrity Oil & Gas Corp, an NYSE-listed exploration & production company. Barry D. Schneider, COO. Mr Schneider joined the company in May 2014, from Denbury Resources where he was Vice President-Northern Region. He had worked for Denbury for about 15 years, and before that was employed by Wiser Oil and Conoco- Philips. 12

13 LoneStar Resources Income Statement* 1Q14A 2Q14A 3Q14E 4Q14E 2014E 2015E REVENUES Production Gas Production (Mmcfpd) Oil Production (BOPD) NGL Production (BCPD) Price Natural Gas ($/Mcf) Crude Oil ($/Bbl) NGL ($/Bbl) Revenues Natural Gas ($MM) Crude Oil ($MM) NGL ($MM) Hedging Value ($MM) (1.1) (1.9) (2.9) 0.0 Total Revenues $25.7 $24.7 $31.5 $34.6 $116.5 $169.4 OPERATING EXPENSES Lease Operating Expense Severance Tax Exploration Expense Depreciation, Depletion & Amortization Selling, General, & Administrative Other Operating Expenses Total Operating Expenses OPERATING INCOME OTHER INCOME Equity in Earnings of unconsolidated affiliates Other Income (Expense) Net (0.4) (0.9) (1.3) 0.0 Non-Operating Income Interest Income Interest Expense (1.6) (7.3) (7.5) (7.5) (23.9) (30.9) Total Other Income (Expense) (2.0) (7.8) (7.5) (7.5) (24.8) (30.9) NON-RECURRING ITEMS Gains on the Sale of Assets Provision for Property Impairments SFAS 133 (2.2) (6.1) (8.3) 0.0 Other Non Recurring Items (0.4) (0.6) (1.1) 0.0 Total Non-Recurring Items (2.6) (6.8) (9.4) 0.0 INCOME BEFORE TAXES AND MINORITY INTEREST 6.6 (7.5) Income Tax 1.6 (0.5) Effective Tax Rate 24% 7% 35% 35% 52% 35% Minority Interest NET INCOME - REPORTED $5.0 ($7.0) $2.9 $2.8 $3.7 $17.4 NET INCOME - RECURRING $7.1 ($0.7) $2.9 $2.8 $12.0 $17.4 Earnings per common share - Basic $0.01 -$0.01 $0.00 $0.00 $0.00 $0.02 Earnings per common share - Diluted $0.01 -$0.01 $0.00 $0.00 $0.00 $0.02 Diluted EPS from continuous operations $0.01 $0.00 $0.00 $0.00 $0.02 $0.02 Weighted Average Shares Outstanding - Basic Weighted Average Shares Outstanding - Diluted EBITDAX $19.3 $15.8 $23.2 $24.9 $83.1 $121.3 Unit Cash Operating Margin ($/Mcfe) $9.30 $8.47 $10.08 $9.34 $9.33 $9.33 Source: Company Reports, Cowen and Company Estimates *$ million, except where noted 13

14 LoneStar Resources Condensed Cash Flow Statement* 1Q14A 2Q14A 3Q14E 4Q14E 2014E 2015E CASH FLOW FROM OPERATIONS Net Income (recurring) $7.1 ($0.7) $2.9 $2.8 $12.0 $17.4 Depreciation, Depletion & Amortization Deferred Taxes and Retirement Obligations 2.2 (1.0) Exploration Other Operating Discretionary Cash Flow Changes in Working Capital 0.3 (3.9) (3.7) 0.0 Net Cash Provided by Operating Activity $17.9 $5.4 $15.7 $17.3 $56.3 $90.4 CASH FLOWS FROM INVESTING Capital Expenditures (30.9) (32.3) (32.3) (32.3) (127.8) (135.0) Other Investing (68.9) 10.1 (13.0) 0.0 (71.8) 0.0 Net Cash Provided by Investing Activities ($99.8) ($22.2) ($45.3) ($32.3) ($199.6) ($135.0) CASH FLOWS FROM FINANCING Change in Debt Change in Preferred Stock Shares Issued / Paid Dividends Paid Other Uses of Cash Net Cash Used by Financing Activities $81.0 $24.5 $20.0 $12.0 $137.5 $45.0 Net increase (decrease) in cash Cash, beginning of period $6.7 $5.8 $13.5 $3.9 $6.7 $0.9 ENDING CASH $5.8 $13.5 $3.9 $0.9 $0.9 $1.4 DISCRETIONARY OPERATING CASH FLOW $17.6 $9.3 $15.7 $17.3 $60.0 $90.4 FREE CASH FLOW ($13.0) ($26.9) ($16.6) ($15.0) ($71.5) ($44.6) DISCRETIONARY CASH FLOW PER SHARE ($/Sh) $0.02 $0.01 $0.02 $0.02 $0.08 $0.12 FREE CASH FLOW PER SHARE ($/share) -$0.02 -$0.04 -$0.02 -$0.02 -$0.10 -$0.06 DIVIDENDS ($/share) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Balance Sheet* 1Q14A 2Q14A 3Q14E 4Q14E 2014E 2015E ASSETS Cash & Cash Equivalents $5.8 $13.5 $3.9 $0.9 $0.9 $1.4 Short Term Investments Accounts Receivable Inventories Other Current Assets Total Current Assets $18.6 $32.7 $23.1 $20.1 $20.1 $20.5 Property, Plant & Equipment Goodwill Other Assets TOTAL ASSETS $410.2 $447.2 $471.6 $487.9 $487.9 $559.6 LIABILITIES Total Current Liabilities $26.1 $42.3 $42.3 $42.3 $42.3 $42.3 Long-Term Debt Deferred Taxes and Retirement Obligations Other Non-Current Liabilities TOTAL LIABILITIES $235.3 $278.4 $299.9 $313.4 $313.4 $367.8 SHAREHOLDERS' EQUITY TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES $410.2 $447.2 $471.6 $487.9 $487.9 $559.6 Source: Company Reports, Cowen and Company Estimates *$ million, except where noted

15 Valuation Methodology And Risks Valuation Methodology Exploration & Production: Our valuation methodology includes two approaches: a relative value approach and an intrinsic value approach. Our sum-of-the-parts NAV analysis represents our intrinsic value approach and our market multiples analysis represents our relative value approach. Our NAV analysis values a company s proved reserves and unproved reserves separately and sums them together with selected balance sheet items to calculate sum-of-the-parts NAV / share. Our NAV analysis assumes a price deck of the current NYMEX strip. By approximating the development profile of a company s proved reserves, we are able to remove the S.E.C. price assumption and instead use the current strip prices. We also estimate company specific differentials, operating expenses, and development costs for unproved reserves. Our estimate of potential reserves represents the value a company should realize by developing its unproven assets according to our estimate of a company s development timeline for each asset. We risk each asset on three levels according to the riskiness of the play, acreage position and well success rate. Other key assumptions that affect our NAV analysis include: well costs, operating costs, well spacing, development and infrastructure costs, initial production rate, decline curves, and ultimate recovery. We favor EV/EBITDA and P/CF as the most relevant metrics for our relative value methodology as these metrics more closely reflect cash flows, which are less volatile in the face of varying tax rates and large unrealized hedging gains and losses. Growth companies generally have higher multiples. We compare growth based on our estimate of debt adjusted production growth because this metric allows us to compare production growth for companies with different capital spending and capital funding needs. Investment Risks Exploration & Production: The oil and gas exploration and production industry is one of the most volatile and unpredictable industries in the economy. The industry s key investment risk is its exposure to oil and gas prices, whose price and volatility are affected by expectations of the strength of the global economy and world s demand for energy. While crude oil is a global market, the natural gas market in North America is more regional in nature and is thus more exposed to market fundamentals in the United States, Canada and Mexico. The E&P industry has recently undergone a technological shift as unconventional drilling has become more prevalent. Since unconventional drilling and fracturing are recent developments, uncertainty concerning the regulation of these practices presents an investment risk. Increasing regulation of offshore drilling activities also presents an investment risks in the wake of the BP Macondo disaster. In Canada the E&P industry is seasonal due to the spring break-up, which is when the ground frost melts and local authorities restrict heavy equipment on the roads and highways. The duration of spring break-up is weather dependant and it annually varies in duration. The length of spring break-up directly impacts an operator s ability to grow production. Risks To The Price Target 15

16 We rate Outperform because of its above average production growth, production mix is 74% oil which supports cash margins, solid management team, and upside to NAV from delineation of Eastern Eagle Ford Area acreage. We also expect the company to continue to make bolt-on acquisitions at accretive prices. Risked to our price target include (1) decline in commodity prices and its cash flows (2) lower than expected production growth, and (3) access to services. 16

17 Addendum Stocks Mentioned In Important Disclosures Ticker CPE LNR AU SYRG Analyst Certification Important Disclosures Company Name Callon Petroleum Co Synergy Resources Corp Cowen and Company, LLC and or its affiliates make a market in the stock of, Callon Petroleum Co and Synergy Resources Corp securities. Cowen and Company, LLC acts as OTCQX Principal American Liaison for and receives compensation for acting in such capacity. has been client(s) of Cowen and Company, LLC in the past 12 months. Cowen and Company, LLC and/or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next 3 months from. is or was in the past 12 months a client of Cowen and Company, LLC; during the past 12 months, Cowen and Company, LLC provided IB services. Cowen and Company, LLC and/or its affiliates received in the past 12 months compensation for investment banking services from. Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firm's investor clients. Individual compensation determinations for research analysts, including the author(s) of this report, are based on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources, including revenues from investment banking. Cowen and Company, LLC does not compensate research analysts based on specific investment banking transactions. Disclaimer This research is for our clients only. Our research is disseminated primarily electronically and, in some cases, in printed form. Research distributed electronically is available simultaneously to all Cowen and Company, LLC clients. All published research can be obtained on the Firm's client website, Further information on any of the above securities may be obtained from our offices. This report is published solely for information purposes, and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state where such an offer or solicitation would be illegal. Other than disclosures relating to Cowen and Company, LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the available data. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. For important disclosures regarding the companies that are the subject of this research report, please contact Compliance Department, Cowen and Company, LLC, 599 Lexington Avenue, 20th Floor, New York, NY In addition, the same important disclosures, with the exception of the valuation methods and risks, are available on the Firm's disclosure website at Price Targets: Cowen and Company, LLC assigns price targets on all covered companies unless noted otherwise. The price target for an issuer's stock represents the value that the analyst reasonably expects the stock to reach over a performance period of twelve months. The price targets in this report should be considered in the context of all prior published Cowen and Company, LLC research reports (including the disclosures in any such report or on the Firm's disclosure website), which may or may not include price targets, as well as developments relating to the issuer, its industry and the financial markets. For price target valuation methodology and risks associated with the achievement of any given price target, please see the analyst's research report publishing such targets. Notice to UK Investors: This publication is produced by Cowen and Company, LLC which is regulated in the United States by FINRA. It is to be communicated only to persons of a kind described in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order It must not be further transmitted to any other person without our consent. Copyright, User Agreement and other general information related to this report 2014 Cowen and Company, LLC. Member NYSE, FINRA and SIPC. All rights reserved. This research report is prepared for the exclusive use of Cowen clients and may not be reproduced, displayed, modified, distributed, transmitted or disclosed, in whole or in part, or in any form or manner, to others outside your organization without the express prior written consent of Cowen. Cowen research reports are distributed simultaneously to all clients eligible to receive such research reports. Any unauthorized use or disclosure is prohibited. Receipt and/or review of this research constitutes your agreement not to reproduce, display, modify, distribute, transmit, or disclose to others outside your organization the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets). All Cowen trademarks displayed in this report are owned by Cowen and may not be used without its prior written consent. Cowen and Company, LLC. New York (646) Boston (617) San Francisco (415) Chicago (312) Cleveland (440) Atlanta (866) London (affiliate) COWEN AND COMPANY RATING DEFINITIONS Cowen and Company Rating System effective May 25, 2013 Outperform (1): The stock is expected to achieve a total positive return of at least 15% over the next 12 months Market Perform (2): The stock is expected to have a total return that falls between the parameters of an Outperform and Underperform over the next 12 months Underperform (3): Stock is expected to achieve a total negative return of at least 10% over the next 12 months Assumption: The expected total return calculation includes anticipated dividend yield Cowen and Company Rating System until May 25, 2013 Outperform (1): Stock expected to outperform the S&P 500 Neutral (2): Stock expected to perform in line with the S&P 500 Underperform (3): Stock expected to underperform the S&P 500 Assumptions: Time horizon is 12 months; S&P 500 is flat over forecast period Cowen Securities, formerly known as Dahlman Rose & Company, Rating System until May 25,

18 Buy The fundamentals/valuations of the subject company are improving and the investment return is expected to be 5 to 15 percentage points higher than the general market return Sell The fundamentals/valuations of the subject company are deteriorating and the investment return is expected to be 5 to 15 percentage points lower than the general market return Hold The fundamentals/valuations of the subject company are neither improving nor deteriorating and the investment return is expected to be in line with the general market return Cowen And Company Rating Definitions Distribution of Ratings/Investment Banking Services (IB) as of 06/30/14 Rating Count Ratings Distribution Count IB Services/Past 12 Months Buy (a) % % Hold (b) % % Sell (c) % % (a) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLC's rating definitions. (b) Corresponds to "Market Perform" as defined in Cowen and Company, LLC's ratings definitions. (c) Corresponds to "Underperform" as defined in Cowen and Company, LLC's ratings definitions. Note: "Buy", "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in its ratings system and should not be construed as investment options. Rather, these ratings terms are used illustratively to comply with FINRA and NYSE regulations Callon Petroleum Co Rating History as of 09/09/2014 powered by: BlueMatrix 2 Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Closing Price Target Price Rating History as of 09/09/2014 powered by: BlueMatrix Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Closing Price Target Price 18

19 Synergy Resources Corp Rating History as of 09/09/2014 powered by: BlueMatrix 2 Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Legend for Price Chart: Closing Price Target Price I = Initiation 1 = Outperform 2 = Market Perform 3 = Underperform UR = Price Target Under Review T = Terminated Coverage $xx = Price Target NA = Not Available S=Suspended 19

20 Points Of Contact Analyst Profiles Christopher Walling New York Chris Walling is a vice president on the oil and gas exploration & production team. He previously worked at Dahlman Rose, Sidoti and KPMG. Reaching Cowen Main U.S. Locations New York 599 Lexington Avenue New York, NY Atlanta 3399 Peachtree Road NE Suite 417 Atlanta, GA International Locations Cowen International Limited Boston Two International Place Boston, MA Chicago Joseph McKay New York joseph.mckay@cowen.com Joseph McKay is an associate covering the Oil & Gas Exploration and Production sector. He joined Cowen in October 2013 from Grant Thornton. 181 West Madison Street Suite 1925 Chicago, IL Cowen and Company (Asia) Limited Cleveland Detroit Road Suite 100 Rocky River, OH San Francisco 555 California Street, 5th Floor San Francisco, CA London 1 Snowden Street - 11th Floor London EC2A 2DQ United Kingdom Hong Kong Suite 1401 Henley Building No. 5 Queens Road Central Central, Hong Kong Cowen and Company 20