Pretty much all the oil and oil service stocks have been falling for about a month, along with crude oil prices, so might we find some gems out there?
I don’t know, but that was my thinking when I clicked on the ad for Keith Kohl’s Pure Energy Trader ($1,499/yr… 30-day refund policy) — I started seeing these ads last week, and it’s all about some “hidden” oil that no one knew about, just next door to the ballyhooed Permian Basin in West Texas.
This is the headline that got my attention:
“Tiny Texas Driller Announces New $185 Billion Oil Discovery in the “Secret Permian”
“Their $2 stock could be worth $2,500 per share (and no, that’s not a typo)”
Well, that’s surely balderdash — $2 to $2,500 isn’t “we found hidden value,” it’s more like “we’re trying to make you dream of lottery tickets.”
But still, we’re curious.
Here are some more of the clues…
“Pay close attention because this little-known $2 oil stock will be one for the ages.
“The company is developing a major play on the edge of Texas’s Permian Oil Basin.
“I’ve been tracking them for a couple of years. I told my subscribers to get in recently. And in just a couple months’ run, their shares have already delivered more than 200% gains…”
(that bit comes with one of those exciting stock charts — this time showing a stock that went up from about 70 cents in December to $1.75 in February)
And apparently Keith Kohl has been researching them for a bit…
“I just sat in on a conference call with senior management.
“What this company’s geologist revealed on the call — and independent oil industry analysts confirmed — was breathtaking.
“You see there have long been rumors that this company’s 100,000 acres of land could hold one billion barrels of oil….
“The billion-barrel rumor massively understated how much oil is there for the taking….
“Our company’s 100,000 acres are indeed full of the same kind of shale rock formations as you find in the main Permian Basin.
“And like the Permian, there’s a ton of oil there.
“Then came the punchline of the call — and it was no joke…
“On the back of all this proof, they revealed there’s actually 3.7 billion barrels of recoverable oil.
“Nearly four times as much oil as they’d predicted…
“And that’s assuming a conservative 11% recovery rate, using modern drilling and extraction technology.”
So that’s the big-picture claim here — that a company has been exploring an area with shale oil potential immediately outside the “official” Permian area, and had been building expectations that they could find a billion barrels, but are now claiming 3.7 billion barrels.
Which, we will stipulate, is a heckuva lot of oil.
What other clues do we get? There’s quite a bit about the key “oil guy” in the company…
“You see this company’s geologist — a partner in the company — is no stranger to the Permian.
“In fact, he has a 30-year history in the area, with a pile of successes under his belt developing oil and gas plays, discovering some of the Permian’s biggest deposits, and selling deals to some of the biggest, most cash-rich players in the Texas oil industry.
“He worked with Clayton Williams Energy. They went on a 10-month, 15-times run right before Noble Energy bought them for $3.2 billion. That’s right — 15 times your money in under a year.
“He worked with Rosetta Resources, which Noble also snagged in 2015 for $2.1 billion.
“This same geologist worked on projects with Energen Corporation, which Diamondback bought out last year for $9.2 billion.
“He worked with Cimarex Energy, a company whose shares went up by 864%…
“And he worked with Occidental, who delivered 2,198% gains to shareholders…
“In fact, he was one of the key geologists to identify and then prove the potential of the Wolfbone shale in the bigger Delaware Basin.”
And some hints about the actual stock price…
“… you can still scoop up shares for less than $2, and the company’s market cap is less than $150 million….
“I’ve just doubled down on my recommendation for this stock and told my readers to make sure they grab any more shares they want to buy — fast…”
And this geologist decided to turn his expertise into making some money, apparently — Kohl says that he formed his exploration company and secured drilling rights to that large area, then started drilling last year.
And he says that the findings have also been backed up by an outside expert…
“… our geologist and his team were so confident in their findings that they invited on a third-party expert to analyze all this data.
“This was an industry insider with 42 years of experience, including 25 years with Halliburton.
“He did an independent analysis and had the opportunity to confirm or deny their findings. And he confirmed this incredible discovery.
“On the call, he confirmed…
“They’re seeing multiple “pay zones” — the same “layer cake” phenomenon common throughout the Permian…
“The pay zones are showing thousands of feet of thickness of oil-soaked shale rock, matching the geology of some of the other high-producing Permian deposits…
“New data is suggesting some of the areas are what oil experts call ‘over-pressurized,’ making the oil even easier to pull out of the ground.”
And, most curiously to me, we’re also told that this company is also effectively trying to monetize their discovery immediately… not to build a company, but to sell to someone who will do the hard work.
“Insiders hold 27% of the shares of this company. They’ve got skin in the game….
“They want to look at rocks, decide which have oil, prove their hypothesis, and cash out.
“And so they’ve put their 100,000-acre, $185 billion oil play on the market. And if they announce they have a buyer, the share price will soar.”
So… hoodat? Thinkolator sez this is: Torchlight Energy (TRCH)
Torchlight is the baby of Richard Masterson, who is indeed credited with discovering the Wolfbone shale, and he put together the deal to buy control of the Orogrande Basin Prospect from the University of Texas — the original deal was timed about as poorly as you could imagine, the initial deal was made near the peak of the oil market in the summer of 2014, but they also paid part of the cost in stock (which has also fallen since 2014), and they have also amended and extended it since and done quite a bit of exploratory drilling.
That “third party expert” was Mike Mullen at Stimulation Petrophysics Consulting, in case you’re curious.
This is purely an asset value and “takeover” play at this point, their two other projects (Hazel and Winkler) are also on the block, as is noted in the March Investor Presentation, mostly because they want to focus all their energy on Orogrande. And asset/takeover stocks are easy to either overthink or overhype. We don’t know what it’s worth, but there’s always the suspicion in your mind that as the company has given presentations to more than a half dozen investment consortia and private equity firms and other possible buyers, if the value was a lot higher than it’s trading at we would presumably have seen that information start to “leak out” from the folks who have seen the data and met with the team in the form of buying pressure on the stock. And it hasn’t, the stock has trended down pretty steadily since the mid-April release of that updated “recovery potential” estimate.
It’s interesting that all of the insiders are holding onto their shares — they seem focused on getting to their “cash out” point with some kind of deal to sell their Permian assets, but it’s not as interesting as it would be if those insiders had kept buying shares (they’re just exercising their options and holding their stock awards, not buying more with their own money). Can’t blame them, I suppose, they already own about a third of the company. And it’s also possible that they can’t buy or sell right now, since there’s presumably a lot of non-public information floating around the company.
So… are we better judges than a bunch of energy investors? Is Keith Kohl? Do we know more than they do what a field of potentially 3.7 billion barrels of oil is worth? It’s probably not the cheapest oil to extract, I haven’t seen any commentary about the economics of the area, but apparently it’s there and they’ve had an outside geologist back them up to help satisfy their potential investors.
But on the other hand, we’re not really looking at trying to evaluate production costs and figure out what their cash flow and their depletion rate will be — this is just a bet, a bet that this particular stock will rise because someone will want to buy and develop their unconventional oil field near the Permian… or, as Torchlight would call it, their extension of the Permian.
I wouldn’t try to talk you out of making that bet, but just be aware that you are gambling — and if you’re gambling, and you’re not certain that you’re better informed than the person on the other side of the table who’s selling you those shares, then you’re taking a substantial risk. Doesn’t mean it can’t pay out, but the performance of the stock is telling you either that the smart folks haven’t noticed this opportunity… or that they’ve already discounted it as too risky or uninteresting, which means that your probability of success might be lower than Keith Kohl would like you to believe.
There was an interesting article in Bloomberg that might provide some perspective… the headline? “Big Oil’s Message to Permian Strugglers: We Won’t Bail You Out.” That doesn’t mean there won’t be bidders for this relatively small early-stage project, but it does provide some perspective on the deal-making environment in that part of the world… and the possibility that big oil might be trying to show a bit of price discipline in the wake of the bidding war for Anadarko.
And no, of course it’s not going to get a takeover offer that makes the stock soar from $2 to $2,500. Nor is it at all likely to go to $100, or even $25. They have reported the improving details of their potential oil resource, and plenty of people who are far more expert in oilfield evaluation than I have looked at their info… If it were true that a rational assessment could lead you to a dramatically higher valuation immediately, people would be buying it hand over fist. And they aren’t. It’s not even at $2 anymore, though it did have a lively start to the year — it got down to near 50 cents at the low in December, then surged up through $1.80 or so as enthusiasm built about the improved “potential barrels” report and people were initially excited about the reports that they were shopping themselves around, and now we’re back to about $1.10.
The company itself, in their investor presentation, trots out a couple estimates for the value of the Orogrande Basin — they say that the company’s current market cap of $82 million, even ignoring any value from Hazel and Winkler, means you’re effectively buying Orogrande at $820 per acre (back in March it was a market cap of $108 million, so $1,080 per acre, and they said that was “unheard of in the Permian Basin”)… and they imply that a range of reasonable valuation might be from $2,500 an acre ($240 million market cap) to $7,500 an acre ($720 million market cap). There are 72 million shares outstanding, so that would be a range of $3-10 per share. I have no idea whether that’s reasonable, or if major oil companies will want to pay that much (or more, investors cross their fingers) for this project, but that seems a more rational “dreaming” range.
Here’s what they reported on May 21:
“Torchlight Energy Resources, Inc. (NASDAQ: TRCH) (“Torchlight” or the “Company”), today provided an update regarding the Company’s process addressing acquisition interest from industry majors in its Orogrande Basin Project. Since commencing discussions in April, Torchlight has made seven individual presentations to publicly traded industry majors and private equity backed firms. These Companies remain unnamed due to confidentiality agreements and range in size from an enterprise value of $400M to over $100B. These discussions have focused on Torchlight’s scientific data gathered covering the Orogrande Basin including the report, prepared by Stimulation Petrophysics Consulting, which outlines the potential recoverable reserve estimate from the unconventional zones on Torchlight’s 134,000 acres in the Orogrande using standardized recovery factors and described in Potential Barrels with a Mean Case of 3.7 Billion Barrels BOE at a Recovery Factor of 11%.”
And they concluded their update with…
“We believe that next round discussions will help identify the best partners for a transaction, accelerate the process and move us to another round of final geoscientific review and capital discussion.”
Investing is almost always a game of probabilities — there are few things that are 100% bad or 100% good, and luck and circumstances come into play quite often. My impression is that if other investors aren’t excited enough to bid this up, then they might know something I’m missing… particularly because this is an area where I don’t have any technical expertise, and I know a lot of the folks who are buying and selling these shares do have that expertise and an intimate knowledge of the Texas oil business.
But you never know, maybe this little guy is sitting under the radar because of all the big-picture news in the world today, and maybe they’ll get a nice buyout offer that sends the stock soaring in the next few months. That’s certainly possible, I just don’t know if it’s more or less probable than calling a coin flip.
This is still pretty new — the conference call and announcement of that expanded oil potential in the Orogrande came on March 22 and the third party reserve estimate came on April 11 (revised on April 15), and the stock was jumpy for a little while after that but the lack of a visible bidding war seemed to cool investors’ ardor. The oil world is a chummy one, so maybe there are rumors floating around Midland and Houston, but I haven’t heard them… if you’ve been following the story and have any thoughts on Torchlight, by all means, share away with a comment below.
For me, I can see that there’s some potential in the combination of a possibly attractive exploration story and a management team that wants to sell, but I’m not crazy about being the least informed person in the bidding war and it’s hard to believe that any excitement about this one outside of the Torchlight C-suite wouldn’t have been reflected in the share price over the past six weeks… so I’ll sit on the sidelines.