Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

The accompanying unaudited condensed consolidated financial statements of Lonestar Resources US Inc., and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These financial statements and the notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 filed on March 13, 2019 (the “Form 10-K”). Unless indicated otherwise or the context requires, the terms “we,” “our,” “us,” “Company” or “Lonestar,” refer to Lonestar Resources US Inc. and its subsidiaries.

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the year. In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of our consolidated financial position as of September 30, 2019 and our consolidated results of operations for the three and nine months ended September 30, 2019 and 2018.

Net Income (Loss) per Common Share

The two-class method is utilized to compute earnings per common share as our Class A Participating Preferred Stock (the "Preferred Stock") is considered a participating security. Under the two-class method, losses are allocated only to those securities that have a contractual obligation to share in the losses of the Company. The Preferred Stock is not obligated to absorb Company losses and accordingly is not allocated losses. Net income attributable to common stockholders is allocated between common stock and participating securities based on the weighted average number of common shares and participating securities outstanding for the period.

Basic earnings per share is computed by dividing the allocated net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Diluted earnings per share is computed similarly except that the denominator is increased to include dilutive potential common shares. Potential common shares consist of warrants, equity compensation awards and Preferred Stock. In certain circumstances adjustment to the numerator is also required for changes in income or loss resulting from the potential common shares. Basic weighted average common shares exclude shares of non-vested restricted stock. As these restricted shares vest, they will be included in the shares outstanding used to calculate basic earnings per share.

Recent Accounting Pronouncements

Leases. In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases ("ASU 2016-02"). The standard requires lessees to recognize a right of use asset ("ROU asset") and lease liability on the balance sheet for the rights and obligations created by leases. ASU 2016-02 also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"), which provides for an alternative transition method by allowing entities to initially apply the new leases standard at the adoption date, January 1, 2019, and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Comparative periods presented in the financial statements continue to be in accordance with ASC Topic 840, Leases.

In the normal course of business, the Company enters into lease agreements to support its exploration and development operations and lease assets, such as drilling rigs, field services, well equipment, office space and other assets. The Company adopted the new standard on the effective date of January 1, 2019, using a modified retrospective approach as permitted under ASU 2018-11.

The new standard provides a number of optional practical expedients in transition. The Company:

• elected the package of 'practical expedients', which permits the Company not to reassess, under the new standard, its prior conclusions about lease identification, lease classification and initial direct costs;

• elected the practical expedient pertaining to land easements and plan to account for existing land easements under the Company's current accounting policy;

• elected the short-term lease recognition exemption for all leases that qualify and, as such, no ROU asset or lease liability has been recorded on the balance sheet and no transition adjustment has been required for short-term leases; and

• elected the practical expedient to not separate lease and non-lease components for all of the Company's leases.

The Company did not elect the hindsight practical expedient in determining the lease term and assessing impairment of ROU assets when transitioning to ASU 2016-02.

Upon adoption, the Company recognized additional operating lease liabilities of approximately $0.3 million with corresponding ROU assets. See Note 4. Leases for more information.

Fair Value Measurements

Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. ASC 820 prioritizes the inputs used in measuring fair value into the following fair value hierarchy:


•	Level 1 – Quoted prices for identical assets or liabilities in active markets.


•	Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs derived principally from or corroborated by observable market data by correlation or other means.


•	Level 3 – Unobservable inputs for the asset or liability. The fair value input hierarchy level to which an asset or liability measurement falls in its entirety is determined based on the lowest level input that is significant to the measurement in its entirety.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, for each fair value hierarchy level:



	Fair Value Measurements Using
In thousands	Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total
September 30, 2019
Assets
Commodity derivatives	$	—		$	25,655		$	—		$	25,655
Liabilities:
Commodity derivatives	—			(3,275		)	—			(3,275		)
Warrant	—			—			(461		)	(461		)
Stock-based compensation	(1,287		)	—			(579		)	(1,866		)
Total	$	(1,287	)	$	22,380		$	(1,040	)	$	20,053

December 31, 2018
Assets:
Commodity derivatives	$	—		$	23,143		$	—		$	23,143
Liabilities:
Commodity derivatives	—			(451		)	—			(451		)
Warrant	—			—			(1,055		)	(1,055		)
Stock-based compensation	(1,267		)	—			(636		)	(1,903		)
Total	$	(1,267	)	$	22,692		$	(1,691	)	$	19,734

Commodity Derivatives

The Company's commodity derivatives represent non-exchange-traded oil and natural gas fixed-price swaps that are based on NYMEX pricing and fixed-price basis swaps that are based on regional pricing other than NYMEX (e.g., Louisiana Light Sweet). The asset and liability measurements for the Company's commodity derivative contracts represent Level 2 inputs in the hierarchy, as they are valued based on observable inputs other than quoted prices.

Warrants

The fair value of the Company's warrants is based on Black-Scholes valuations. In addition to the Company's observable stock price, other significant inputs are considered unobservable, and the Company has designated these estimates as Level 3.

Stock-Based Compensation

The Company's stock-based compensation includes the liability associated with restricted stock units ("RSUs") and stock appreciation rights ("SARs") dependent on the fair value of Lonestar's publicly-traded common stock. The fair value of RSUs is measured based on measurable prices on a major exchange; the significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs. The Black-Scholes model used to determine the fair value of the SARs uses inputs, in addition to the Company's observable stock price, that are considered unobservable; to this end the Company has designated these estimates as Level 3. See Note 10. Stock-Based Compensation, below for more information.

Level 3 Gains and Losses

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the nine months ended September 30, 2019:



In thousands	Warrant			Stock-Based Compensation			Total
Balance as of December 31, 2018	$	(1,055	)	$	(636	)	$	(1,691	)
Unrealized gains	594			57			651
Balance as of September 30, 2019	$	(461	)	$	(579	)	$	(1,040	)

Assets and liabilities measured at fair value on a nonrecurring basis

Non-recurring fair value measurements include certain non-financial assets and liabilities as may be acquired in a business combination and thereby measured at fair value; impaired oil and natural gas property assessments; warrants issued in debt or equity offerings and the initial recognition of asset retirement obligations for which fair value is used. These estimates are derived from historical costs as well as management’s expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, the Company has designated these estimates as Level 3.

Other fair value measurements

The book values of cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to the short-term nature of these instruments. The carrying value of the Credit Facility (as defined in Note 8. below) approximates fair value since it is subject to a short-term floating interest rate that approximates the rate available to the Company. The fair value of the 11.25% Senior Notes (as defined in Note 8. below) was approximately $214.8 million as of September 30, 2019 and are considered a Level 3 liability, as they are based on market transactions that occur infrequently as well as internally generated inputs.