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Analyst Disputes Negative Report on Texas-Based Oil & Gas Firm

Streetwise Reports
0 Comments|May 3, 2019

The article's general and specific claims were presented and discussed in a ROTH Capital Partners report.

Torchlight Drill Pad
 

In an April 30 research note, ROTH Capital Partners analyst John White refuted the points made about Torchlight Energy Resources Inc. (TRCH:NASDAQ) in an opinion piece by White Diamond Research that outlined the alleged "negative aspects" of the energy company's business.

White first addressed White Diamond's general claims. The research firm asserted that Torchlight is "a classic pump-and-dump, run by a questionable management team." ROTH interpreted "pump-and-dump" to mean "a form of securities fraud that involves artificially inflating the price of a stock through false and misleading positive statements in order to sell the stock at a higher price," White explained.

Regarding the pump accusation, White noted that it simply is not the case. ROTH is "unaware of any false and misleading statements" by Torchlight. Instead, all of the reported drill and test results the company has released "met or exceeded our expectations," he added.

As for the dump claim, White stated there is no evidence of Torchlight doing this either. Chairman of the Board Gregory McCabe, the largest shareholder, owning 22.4% of Torchlight (16.1 million shares), has not sold any of them since he bought them, according to Torchlight. In fact, he invested $12 million in cash in the Orogrande project for exploration work. CEO John Brda owns 3.2% of Torchlight (2.3 million shares).

In response to the research firm's questionable management comment, White wrote, "it was obvious to us that the White Diamond Research team does not know the basics of the Torchlight story." Specifically, there was no mention made of the two men behind Torchlight's Orogrande project, McCabe, a Texas geologist with more than 32 years' experience in the oil and gas industry, and consulting geologist Rich Masterson, a well-known and well-respected industry expert. "Our channel checks indicate both enjoy an excellent reputation in the Permian Basin exploration and production industry," added White.

ROTH's White next responded to each of White Diamond Research's specific points about Torchlight.

1. All of the perceived value of Torchlight, with an enterprise value of more than $130 million, is based on "possible oil" at its Orogrande project, White Diamond wrote.

White agreed.

2. Torchlight paid $3.35 million in cash and stock for 75% of the Orogrande in August 2014 when oil prices were much higher than they are now.

That is true, but the implication of the comment is not clear, White noted. "The acreage traded for a nominal value, reflecting, in our view, the lack of production on the leases, the lack of production from any nearby leases and the exploration risk of the leases," he added.

3. Torchlight indicated, in April 2018, it intended to sell its Hazel project, but rather than do that, it raised equity.

This statement erroneously makes it sound like Torchlight management said it would do A but instead did B, White noted. He agreed that, yes, Torchlight announced its plan to sell Hazel and use the proceeds to develop Orogrande then 10 days later announced the common stock offering.

However, regarding Hazel, White indicated, it is common knowledge that divesting of oil and gas assets typically takes 60–90 days and that the appetite for small and mid-sized projects like Hazel has been minimal. Further, Torchlight continues to market Hazel as being for sale.

Torchlight's intent with the common stock offering was to use a portion of the proceeds to fulfill drilling requirements at Hazel, which it had to do or face expiration of some of its leases, and which it did, explained White. The company said it would apply the remainder of the equity raise funds to Orogrande.

4. Torchlight, in April 2019, announced it intends to sell Orogrande, "but we don't believe that will ever happen."

The research company presented "no analysis supporting its opinion that the sale will not occur," White pointed out. However, similar to the Hazel sale situation, he wrote, Torchlight only recently made the Orogrande announcement, and it will take at least several months to effect a transaction.

ROTH maintained its estimates on Torchlight, along with its Buy rating and $2.70 per share target price. The energy company is trading today at around $1.26 per share.


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