Why Lonestar Is Soaring 100%

stacks of oil barrels (WLL)

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stacks of oil barrels (WLL)

Lonestar Resources (NASDAQ:LONE) is an unlikely winner on Friday. Days after filing for Chapter 11 bankruptcy, LONE stock is up more than 100% in intraday trading. What is driving this move?

stacks of oil barrels (WLL)

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stacks of oil barrels (WLL)

Texas-based Lonestar perhaps unsurprisingly deals with oil and gas. Its more than 50,000 net acres primarily are in the Eagle Ford Shale region of the state. However, it is that very identity that has made 2020 so rough. Since the start of the novel coronavirus pandemic, oil and gas companies have struggled. Demand is down along with manufacturing activity and the economy, and oil prices have struggled. Making matters worse was a price war between Saudi Arabia and Russia that flooded the market with cheap crude.

On the back of all that, Lonestar filed for bankruptcy at the end of September.


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So, let me go back to the first question. Why exactly is LONE stock soaring almost 100% today?

On Thursday, the company announced that it had received approval from Judge David Jones to access its cash collateral. This cash collateral — which a company needs approval to access during bankruptcy proceedings — will be used to maintain daily operations. According to at least one report, Lonestar owes $500 million to its creditors. While it goes through the restructuring process and formalizes a plan to pay off its debts, it can now access its cash, cash equivalents and other assets to maintain operations.

Without this cash, mostly coming from domestic bank accounts, its future would be much more uncertain. Lonestar now has a favorable court ruling on its side and some money to get through the near term. It is clear that LONE stock is rallying as investors bet on its strong future.

Why LONE Stock Is Surging Today

Although this news is a victory for Lonestar, abundant risks remain. Equity shareholders could get completely wiped out, and it is not uncommon for stocks trading in bankruptcy to be delisted.

However, the excitement in LONE stock today is likely a result of the bigger picture. This has been a miserable year for oil and gas companies, and perhaps investors just want to celebrate a small success. After watching more than a handful of firms enter bankruptcy, there is a sense of hope that Lonestar will emerge a stronger name. It can take time to restructure and figure out what it needs to do to thrive. In the meantime, Lonestar has the cash it needs.

Be careful here. Just this morning we are seeing oil prices plummet even more on news President Donald Trump and First Lady Melania Trump tested positive for the coronavirus. The road ahead is far from smooth.

On the date of publication, Sarah Smith did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Sarah Smith is a Web Content Producer for InvestorPlace.com. 

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