FOR GRANULARITY ON THIS DATA OR FOR EXPLANATION OF HOW THIS DATA SHOULD FACTOR INTO AN INVESTMENT THESIS PLEASE SCHEDULE A 1:1 CONSULTATION
Torchlight Energy announced today that it has repurposed its Rich A-11 Well (aka “the Rich Well”) and that it is moving on with development of its next three Wells. With the Rich Well being substantially a “learning” Well – one that has helped validate early data gathered from the new resource play being derisked and developed (the Orogrande play) – this makes sense, is not a concern, and in fact was predictable. Put another way, the movement from the Rich Well to the newly announced “University Founders Well” is good news and nothing but; this development moves Torchlight forward and into further proving out its thesis.
Those owning Torchlight should be prepared for a multi-year hold if looking to hold to full maturation. However, it should be noted that valuation increases and/or a monetization event (READ: a buyout by those which are naturally acquisitive) could take place very early on in the development roadmap. Torchlight is developing a new resource play that could lead to quick and marked enterprise value creation if early data is proven out. As Torchlight continues to do just that investors will be asked to remain patient.
With the understanding that Torchlight will trade highly inefficiently, more so than any of our other recommendations, following and understanding the fundamental narrative becomes even more paramount to knowing when to hold position, when to add to position, and when to abandon position. So far, we very much like the fundamental progress being made at Torchlight.
That said, the following is my reaction to the Torchlight announced news:
“Torchlight Energy Resources, Inc. (NASDAQ: TRCH) (“Torchlight” or the “Company”), today announced that the Orogrande Development Committee, consisting of members of the project operator, Torchlight Energy and consulting geologist Rich Masterson have elected to move forward on planning the next phase of drilling in the Orogrande Project. The project operator plans to permit three new wells starting with the University Founders B-19 #1 well. The new wells would be drilled vertically for test purposes and would have sufficient casing size to support lateral entry into any pay zone(s) encountered once the well is tested vertically. Torchlight and the project operator would then run a battery of tests on each well to gain information for future development of the field. Testing should confirm the pay zones seen in the Rich A-11 and five wells drilled in the field by Texaco and others…Field operations would begin within 90 days and in line with the development agreement. Upon commencing new drilling operations, Torchlight would receive $500,000, which is the next installment per the original $50 million Farm In Agreement with the project operator.”
As alluded to above, the Rich Well and the following University Founders Well are “learning” Wells – Wells used to help prove out data and to prove out further drilling activity zones. The University Founders Well will take learnings from the Rich Well, look to reiterate data, and look to improve on learnings and standard operating procedures derived from the Rich Well. These are all fairly easy and fairly straight forward concepts of scientific method.
Of note regarding Torchlight financials is that all-in Torchlight should take in ~$1.5 million in milestone installments from Founders Oil & Gas (aka D.R. Horton). By our estimates this will be more than enough to cover 100% of Torchlight overhead over the next 12 months. Reiterating that Torchlight is NOT a “financial” story just yet, per se, but one of fundamental development this is still meaningful. I believe this milestone-overhead “breakeven” makes Torchlight even more defensive a name to own into such a dangerous and volatile commodity pricing environment.
“The Rich A-11 well has been evaluated and numerous scientific tests were performed which provide key data for the field development thesis. During the testing process a poor cement bond was identified preventing a cost effective production test for the primary pay zones. Repair to the well bore necessary for a subsequent frac procedure was determined to be economically unfeasible. With the Rich A-11 designed as a test well rather than commercial target, a decision to begin plans for drilling the next well(s) with larger casing that utilized for future commercial production was made.”
Essentially, in learning sometimes mistakes happen. This was one of those scenarios but even in this we’re using the word “mistake” quite loosely. Torchlight is literally “drilling blind” in not knowing what exactly it is drilling into and in not having an established standard operating procedure. As Torchlight maximizes its “learning per dollar per Well” mistakes and inefficiencies should be fewer and fewer. This is a metric by which we’ll continue to evaluate Torchlight’s fundamental development and a measure by which we’ll look to hold management accountable.
We fully expect Torchlight’s next cohort of Wells to yield substantially more data/prove out and to run much smoother than the Rich Well testing. Still, we’re quite happy with the Rich Well “proceeds”. With the cost to fix the Rich Well (to proceed with testing) being too great when factoring into a “cost/benefit” analysis the decision was made to simply repurpose the Rich Well and to begin with the drilling of cohort #2; this is a decision we are fully supportive of.
“We are pleased that the project operator is underway on next steps in evaluating our Orogrande Project,” stated Will McAndrew III, COO of Torchlight. “Drilling additional test wells is the appropriate next action, providing data necessary for validation of the play and the development plan for the entire 168,000 acres. Our principal strategy is to create control data by strategically placing wells across the acreage and thus creating a development thesis for the entire basin. The capital and expertise being provided by our operating partner has set the stage for continued value creation for Torchlight and our shareholders.”
Again, Torchlight is a longer term position that has an investment thesis built entirely on the development and prove-out of the value of the Orogrande. We’re confident in this and thus we remain vocal fans of the company, management, and the equity. We continue to own Torchlight Energy.
Good luck everybody.
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