Lonestar Resources: Continues To Teeter On The Edge Of Bankruptcy

Summary

• Lonestar has extended its forbearance agreements to September 11.
• The challenge appears to be that the company's credit facility needs to be paid down considerably, requiring an influx of new money.
• A viable restructuring plan may require its credit facility debt to be reduced to around $150-175 million, compared to credit facility debt of $285 million in July.
• The company's shares are of minimal value, while unsecured bondholders may need to put in a substantial amount of new money or risk credit facility lenders ending up being in control.
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Lonestar Resources (LONE) continues to teeter on the edge of bankruptcy after receiving another forbearance extension. This forbearance extension lasts until September 11.

Although the forbearance extension pushes off a bankruptcy filing a bit further, I do not believe that Lonestar's situation has improved at all. Rather, I believe that the forbearance extension reflects that the company may be having trouble coming up with an acceptable restructuring plan that includes enough new money to pay down its credit facility substantially.

Forbearance Extension

Lonestar failed to make its $14.1 million interest payment on its unsecured notes on July 1. It then entered into a forbearance agreement with its credit facility lenders on July 2 (due to the missed payment being an event of default), and then entered into a forbearance agreement with the unsecured noteholders on July 31 once the 30-day grace period ended.

The credit facility forbearance agreement was originally until July 31, then was extended to August 21 and now September 11. The unsecured notes forbearance agreement was originally until August 21 and then was extended to September 11.

The challenge here appears to be that Lonestar's credit facility lenders want the company's credit facility debt reduced significantly. Its borrowing base was reduced to $225 million versus $285 million in credit facility borrowings (as of early July), resulting in a substantial borrowing base deficiency. If Lonestar restructures, it will probably need to reduce its credit facility borrowings further below $225 million to have a viable plan to exit restructuring.

Lonestar is likely trying to secure funding (such as via a rights offering involving unsecured noteholders) to pay its credit facility debt down further. Failure to secure that funding will likely leave the company in the hands of the credit facility lenders.

Notes On Valuation

If Lonestar's underlying value was

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.