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Fresh-Start Accounting

12 Months Ended

Dec. 31, 2020

Emergence from Voluntary Reorganization under Chapter 11

As noted above, on the Petition Date, Lonestar Resources US Inc. and 21 of its directly and indirectly owned subsidiaries filed Bankruptcy Petitions for relief under Chapter 11. In addition, on the Petition Date, the Debtors filed their Joint Prepackaged Plan of Reorganization with the Bankruptcy Court (the “Plan”). On November 12, 2020, the Bankruptcy Court entered its confirmation order (the “Confirmation Order”) approving and confirming the Plan. On November 30, 2020, (the “Effective Date”) the Plan became effective and was implemented in accordance with its terms.

Plan of Reorganization

On the Effective Date, the Company consummated the following reorganization transactions in accordance with the Plan:

•Adopted an amended and restated its certificate of incorporation and bylaws, which reserved for issuance 90,000,000 shares of common stock, par value $0.001 per share, (the “New Common Stock”) and 10,000,000 shares of preferred stock, par value $0.001 per share;

•Cancelled all outstanding common and preferred shares of the Predecessor and the Predecessor's equity compensation plan and related unvested shares.

•Provided for the following settlement of claims and interests in the Predecessor as follows:

◦Holders of claims on the Predecessor Senior Secured Credit Facility (the "Prepetition RBL Claims") received distributions of:

▪Cash in the amount of all accrued and unpaid interest;

▪A first-out senior secured revolving credit facility with total aggregate commitments of $225 million;

▪A second-out senior secured term loan credit facility in an amount equal to $60 million;

▪555,555 Tranche 1 warrants and 555,555 Tranche 2 warrants, reflecting up to a 10% ownership stake in the Successor company's equity interests;

•Holders of the 11.25% Senior Notes due 2023 (the "Prepetition Notes Claims") received distributions of a pro rata share of 96% of 10,000,149 shares of New Common Stock issued on the Effective Date, subject to dilution by a to-be-adopted management incentive plan (the "MIP") and the new warrants);

•Holders of Predecessor preferred equity interests received distributions of a pro rata share of 3% of the New Common Stock in the Successor company (subject to dilution by the MIP and the new warrants);

•Holders of Predecessor Class A common stock received distributions of a pro rata share of 1% of the New Common Stock in the Successor company (subject to dilution by the MIP and new warrants); and

•General unsecured creditors were paid in full in cash.

•Incurred “success fees” of $4.7 million; and

•Reserved approximately $6.8 million to pay professional fees associated with the Chapter 11 Proceedings that were yet to be approved by the Bankruptcy Court.

Reorganization Items, Net

Any expenses, gains and losses that are realized or incurred as of or subsequent to the Petition Date and as a direct result of the bankruptcy proceedings and adjustments to reflect the carrying value of certain liabilities subject to compromise at their estimated allowed claim amounts, as such adjustments were determined, are recorded under “Reorganization Items, Net” on our Consolidated Statements of Operations for the Predecessor and consist of the following:


	Predecessor
In Thousands	Period from September 30, 2020 through November 30, 2020
Unamortized discounts and debt issuance costs	$	(3,243)
Professional fees and other	(11,847)
Fresh start valuation adjustments	(93,282)
Gain on settlement of liabilities subject to compromise	181,843
Total reorganization items, net	$	73,471

Liabilities Subject to Compromise

Liabilities and obligations whose treatment and satisfaction were dependent on the outcome of the Chapter 11 Proceedings and have been segregated and classified as liabilities subject to compromise on the Predecessor’s consolidated balance sheets at the amounts that were allowed, or that the Company estimated would be allowed, as claims in the Chapter 11 Proceedings. See Note 3. Fresh Start Accounting for further information on the composition of liabilities subject to compromise and satisfaction pursuant to the Plan.

Fresh-Start Accounting

All conditions required for the adoption of fresh-start accounting were met when the Plan became effective, November 30, 2020. The implementation of the Plan and the application of fresh-start accounting materially changed the carrying amounts and classifications reported in the Company’s consolidated financial statements and resulted in the Company becoming a new entity for financial reporting purposes. As a result of the application of fresh-start accounting and the effects of the implementation of the Plan, the financial statements on or prior to the Effective Date are not comparable with the financial statements after the Effective Date.

Upon the application of fresh-start accounting, the Company allocated the reorganization value to its individual assets and liabilities in conformity with ASC 805, Business Combinations (“ASC 805”). The amount of deferred income taxes recorded was determined in accordance with ASC 74 Income Taxes. Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities.

Reorganization Value

Under ASC 852, the Successor Company must determine an enterprise value to be assigned to the debt and equity of the emerging company as of the date of adoption of fresh-start accounting. In the disclosure statement associated with the Plan, which was confirmed by the Bankruptcy Court, the Company estimated a range of enterprise values to be approximately $290 million to $415 million, with a midpoint of $353 million. The Company deemed it appropriate to use the midpoint between the low end and high end of the range to determine the final enterprise value of $353 million.

The enterprise value was derived using an asset-based valuation methodology of estimated proved reserves, undeveloped acreage, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh-start reporting date of November 30, 2020.

The Company’s principal assets are its oil and natural gas properties. For purposes of estimating the fair value of the Company’s proved, probable, and possible reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company’s reserves, including future operating and development costs. Within the income approach, the reserve categories were risked and discounted using a weighted average cost of capital rate of 10.5%. The proved reserve locations were limited to wells expected to be drilled, at that time, in the Company’s 5-year development plan while the probable and possible reserves included wells that are expected to be drilled in year 2025 and beyond. Commodity prices utilized in the determination of the fair value of oil and natural gas properties were based on the New York Mercantile Exchange (“NYMEX”) strip as of the Effective Date for years 2020 through 2022 and then escalated at an inflation rate of 2% through the end of the life of the reserves. In estimating the fair value of the Company’s undeveloped acreage, a market approach was used in which a review of recent transactions was considered. See further discussion below in the Fresh-start accounting adjustments for the specific assumptions used in the valuation of the Company’s various other assets.

The fair value of the Successor’s exit financing (revolving credit facility and term loan facility) was estimated based on the Discounted Cash Flow (“DCF”) approach, taking into consideration credit quality of the Company and the yield of the instruments. The Company concluded that the terns of the exit financing are at fair value.

The fair value of the Successor warrants was estimated by applying a Monte Carlo simulation model (“MCSM”) to incorporate the Minimum Equity Value hurdle of $100 million for the Warrants.

The MCSM approach was employed to simulate future equity value in a risk-neutral framework. For each simulation path, the equity value for Lonestar was simulated from the Valuation Date to the Expiration Date to see if the simulated equity value met the Minimum Equity Value Threshold during the 3-year measurement period for each tranche of the Warrants. The volatility input used in the simulation was based on a set of guideline public companies (“GPC”). Specifically, the GPC’s equity volatilities were calculated as the average of the 3-year historical volatility and implied volatility, which was then adjusted for leverage. The risk-free interest rate was based on the yields on U.S. Treasury Strips with a remaining term of 3.0-year, which is commensurate with the remaining contractual term of the Warrants as sourced from Capital IQ.

Although the Company believes the assumptions and estimates used to develop enterprise value and reorganization value are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating these values are inherently uncertain and require judgment. The following table reconciles the Company’s Enterprise value to the estimated fair value of the Successor’s common stock as of November 30, 2020:


In thousands	As of November 30, 2020
Enterprise value	$	353,000
Plus: Cash and cash equivalents and restricted cash (excluding funds held in the professional fee escrow of $6.8 million)	11,970
Less: Fair value of debt	(272,007)
Fair Value of Successor equity	$	92,963

The following table reconciles the enterprise value to its reorganization value of Successor’s assets to be allocated to the Company’s individual assets as of the Effective Date:


In thousands	As of November 30, 2020
Enterprise value	$	353,000
Plus: Cash and cash equivalents and restricted cash (excluding funds held in the professional fee escrow of $6.8 million)	11,970
Current liabilities (excluding current portion of long-term debt)	41,459
Non-current liabilities excluding long-term debt	4,846
Mortgage obligations related to Boland Building LLC	8,328
Reorganization value of Successor's assets to be allocated	$	419,603

Balance Sheet

The adjustments included in the following fresh start consolidated balance sheet reflect the effects of the transactions contemplated by the Plan and executed by the Company on the Effective Date (reflected in the column “Reorganization Adjustments”) as well as fair value and other required accounting adjustments resulting from the implementation of fresh start accounting (reflected in the column “Fresh Start Adjustments”). The explanatory notes provide additional information with regard to the adjustments recorded, the methods used to determine the estimated fair values and significant assumptions.


	As of November 30, 2020
In thousands	Predecessor		Reorganization Adjustments		(1)	Fresh Start Adjustments			Successor
Current assets
Cash and cash equivalents	$	40,565	$	(30,752)	(2)	$	—		$	9,813
Restricted Cash	2,157		6,815		(3)	—			8,972
Accounts receivable
Oil, natural gas liquid and natural gas sales	10,354		—			—			10,354
Joint interest owners and other, net	1,458		—			—			1,458
Derivative financial instruments	916		—			—			916
Prepaid expenses and other	8,403		100		(4)	—			8,503
Total current assets	63,853		(23,837)			—			40,016
Property and equipment
Oil and gas properties, using the successful efforts method of accounting
Proved properties	1,100,211		—			(786,239)		(16)	313,972
Unproved properties	77,382		—			(42,457)		(16)	34,925
Other property and equipment	21,862		—			(2,188)		(16)	19,674
Less accumulated depreciation, depletion, amortization and impairment	(734,231)		—			734,231		(16)	—
Property and equipment, net	465,224		—			(96,653)			368,571
Accounts receivable	6,053		—			—			6,053
Derivative financial instruments	216		—			—			216
Other non-current assets	209		4,538		(5)	—			4,747
Total assets	$	535,555	$	(19,299)		$	(96,653)		$	419,603


	As of November 30, 2020
In thousands	Predecessor		Reorganization Adjustments		(1)	Fresh Start Adjustments			Successor
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	8,606	$	(1,898)	(6)	$	—		$	6,708
Oil, natural gas liquid and natural gas sales payable	17,507		—			—			17,507
Accrued liabilities	8,972		3,951		(7)	—			12,923
Derivative financial instruments	4,321		—			—			4,321
Current maturities of long-term debt	286,759		(264,602)		(8)	—			22,157
Total current liabilities	326,165		(262,549)			—			63,616
Long-term liabilities
Long-term debt	8,991		249,602		(9)	(402)		(17)	258,191
Asset retirement obligations	7,327		—			(2,969)		(18)	4,358
Deferred tax liability, net	—		—			—			—
Equity warrant liability	—		—			—			—
Derivative financial instruments	485		—			—			485
Other non-current liabilities	(10)		—			—			(10)
Total long-term liabilities	16,793		249,602			(3,371)			263,024
Liabilities subject to compromise	271,110		(271,110)		(10)	—			—
Total liabilities	614,068		(284,057)			(3,371)			326,640
Stockholders’ equity
Predecessor common stock	142,655		(142,655)		(11)	—			—
Predecessor preferred stock	—		—		(11)	—			—
Predecessor additional paid-in capital	176,012		138,980		(12)	(314,992)		(19)	—
Successor common stock	—		10		(13)	—			10
Successor additional paid-in capital	—		92,953		(14)	—			92,953
Accumulated deficit	(397,180)		175,470		(15)	221,710		(19)	—
Total stockholders’ equity	(78,513)		264,758			(93,282)			92,963
Total liabilities and stockholders’ equity	$	535,555	$	(19,299)		$	(96,653)		$	419,603