by Sonya Colberg
Hang onto your G-string. Torchlight Energy Resources Inc (NASDAQ:TRCH), formerly a pole dancing studio, appears positioned to shimmy down to reality.
The oil and gas company danced onto the public stage as Pole Perfect Studios, a business built around “a fireman’s pole often found in gentleman’s clubs” ala the one-time fitness fad reminiscent of strip clubs. Pole’s founders invested less than a penny per share to start the biz and raised a few thousand dollars in 2008 by selling shares for 7 cents apiece.
But Pole teetered. So in 2010, the pole dancing company pulled off its fake eyelashes, changed its name and ticker symbol, and emerged as an oil and gas company.
Now operating out of a small office leased from a Plano, Texas travel agency, Torchlight today lists five projects in Texas, Oklahoma and Kansas. Much like its predecessor, Torchlight exists as a largely unproductive, money-chewing entity that hands investors a minus 360 percent return on equity.
In fact, financial despair has forced Torchlight into an extremely liberal interpretation of its oil reserves.
Torchlight was unavailable for comment by deadline, but investors may find other viewpoints here. Meanwhile, here are the top six reasons TheStreetSweeper would never own this stock.
1.*Outlandish Oil Reserve Estimates
Torchlight’s estimates of the value of its oil reserves – oil still in the ground – are out of touch with reality.
Why? The company bases estimates on $91.48 oil prices! That’s right.
Oil prices are running about $44 per barrel. Analysts recently told The Wall Street Journal that they predict crude will remain below $60 through 2016.
Torchlight insults investors by trumping up its estimated future revenue from reserves – about $23 million – based on outdated, unlikely-to-be-seen-again-for-many-years oil prices.
Furthermore, investors may think that Torchlight has a good shot at getting that oil out of the ground when they read about its “proved undeveloped,” or “proved developed” reserves. But the outcome is extremely iffy, as described below in “Depressing Torchlight Properties.”
Note the warnings contained in a letter sent to Torchlight by consultants hired to estimate the potential:
“Future net revenue presented in this report … should not be construed as being the fair market value of the properties.”
In other words, the study is essentially hype. Nobody really knows how much oil is underground, whether oil will be struck or whether any given well will actually be economically productive. In fact, just in Kansas this year, 226 of 602 wells drilled have been dry holes.
2.*Stock Offering Ahead: Running Out Of Cash, Insufficient Assets, Going Concern Issues
The chart below hints at the depth of Torchlight’s financial difficulties.
As shown by the red column below, with the exception of the working capital, the already-terrible finances became far, far worse this year. Note that in just the last quarter, Torchlight lost ~$31 million – that is more than the total future oil reserve value hinging on long-ago oil prices. And cash trickled down to ~$212,000.
(Sources: Company SEC filings here, here)
That’s not all. Torchlight has existed on a mountain of loans and stock offerings. Its accumulated losses doubled in six months and now total $64.7 million.
The warnings are growing more ominous:
“We expect to continue to have cash flow provided by financing activities as we seek new rounds of financing and continue to develop our oil and gas investments.
“Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the next twelve months and as such we will require additional debt or equity financing…
“Despite our efforts, we can provide no assurance that we will be able to obtain the financing required to meet our stated objectives or even to continue as a going concern.”
Indeed, Torchlight raised $9.8 million in June by selling investors convertible preferred shares. It just filed this report showing board approval for converting preferred shares and warrants held by one such investor, Sawtooth Properties, to pay off Torchlight’s loan due Sept. 30, 2015. When Sawtooth converts its ~ 600,000 shares plus 150,000 warrants, it will dilute current stockholders’ shares.
Here’s the interpretation of Torchlight’s financial warning, recent capital raise and financial chart:
Torchlight will once again try to add debt or sell stock – an action posing to dilute stock currently held by shareholders.
But its track record may prevent such efforts, raising doubt about Torchlight’s continued existence.
A stock offering may be the only hope of keeping Torchlight’s lights on awhile longer.
3.*Excessive Executive Pay; Resignations; Struggling Former Companies
Torchlight is tottering near the brink of destruction, while executives and directors rack up ~$1 million in total compensation.
Lowly paid directors get a whopping $100,000 apiece in cash and/or stock … just to attend some meetings (OK, we’ll admit Torchlight provides them with many sleepless nights, too. But still.).
That’s right: $300,000 total shelled out to its three independent directors, Jerry D. Barney, Edward J. Devereaux and Eunis L. Shockey (Mr. Shockey loaned Torchlight $500,000, which Torchlight defaulted on and had to pay up by issuing him more shares).
Meanwhile, CEO Thomas Lapinski resigned (another major red flag) last December, followed by resignations in April of director Wayne Turner and Mr. Lapinski, as director, both “for personal reasons.” The chief executive departure handed the reins to the president ($300,000 compensation), chief operations officer ($300,000 compensation) and chief financial officer ($180,000 compensation), as shown below:
(Source: Company Securities and Exchange Commission filings)
According to SEC filings here, COO Willard McAndrew and CFO Roger Wurtele, held executive positions with Energy & Engine Technology from 2001 through May 2006. That company filed for bankruptcy protection in December 2006.
Both officers also served as executives with Xtreme Oil & Gas until September 2013.
The chart below shows where the Xtreme stock last traded – 31 cents per share:
Xtreme Oil & Gas emerged from a 2006 shell company, did a reverse stock split and defaulted on payments of a $2.3 million convertible note from June 2012 to September 2013 – yes about the time the current Torchlight officers fled Xtreme.Indeed, the company had just ~$12,000 cash and no revenue by the time Mr. McAndrew and Mr. Wurtele left.
As of June 30, 2015, Massive Interactive, formerly Xtreme, noted a “substantial doubt” that it will continue as a going concern and only ~$292,000 in cash – a few dollars more the cash Torchlight now reports.
If Xtreme management seemed ineffective, investors can only hope the gentlemen will avoid such mistakes as they guide Torchlight.
4.*Depressing Torchlight Properties
Torchlight finds itself holding a pile of disappointing properties. And not only because of depressed oil prices. With one exception, the properties, shown here, are unproductive or challenged:
- Coulter: Torchlight holds 34 percent working interest, 25.5 percent net revenue interest agreement for a $696,948 investment thus far. This consists of one currently non-commercial well on 940 acres in Texas.
- Marcelina: Three wells drilled in Central Texas with a partner, producing 80 total barrels per day. A fourth well is expected to be drilled in 2015.
- Smokey Hills: A $1.6 million property acquisition in Kansas and Oklahoma, including a salt water disposal well. Torchlight owned part of a well drilled in the 1960s, which was drilled laterally and fracked before Torchlight’s acquisition. The “results were disappointing.” This property recently sold for $65,000, a jaw-dropping loss.
- Ring Energy: Torchlight has spent $5.3 million thus far on a 50-50 joint venture targeting 10 wells in Kansas. Of seven wells drilled, only three are producing. Additional drilling was suspended until seismic data (shouldn’t this have been done originally?) can gauge prospects of more wells. Torchlight believes the project is “still considered to be in the testing phase.”
- Hunton: Three wells in central Oklahoma, with Torchlight retaining only 1 percent and .25 of 1 percent working interests.
- Lenhart: A Hunton well left damaged and unproductive. Torchlight gets left holding the bag in a $600,000 settlement.
5.*Insignificant Institutional Ownership, Analyst Interest
Meanwhile, analysts and institutions are largely avoiding Torchlight stock. Just one analyst covers Torchlight and institutional ownership is an exceptionally low percentage. Here’s a graphic portrayal of institutional ownership and the decreased positions in Torchlight:
6.* Key Statistics Point To Overvaluation
The chart below highlights some key ratios that further reveal Torchlight’s extreme overvaluation.
(Source: Yahoo Finance)
All in all, investors need to plug and abandon Torchlight shares before the company throws another dime down a well, issues another round of dilutive stock or returns to pole dancing.
As the aforementioned material and stock chart below suggest, a generous valuation would be about 50 cents per share.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in TRCH and stand to profit on any future declines in the stock price.