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New Roth Capital Coverage: $1.75 Price Target

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COMPANY NOTE | EQUITY RESEARCH | June 18, 2018


Resources: Exploration & Production
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Torchlight Energy Resources, Inc. | TRCH - $1.36 - NASDAQ | Buy
Initiation of Coverage



12-Mo.Price Target $1.75

Cash (mil)
$1.2
Tot. Debt (mil)
$15.3




TRCH: Initiating Coverage with a Buy Rating

Torchlight is undertaking a rank exploration effort in the Orogrande Basin, in far west Texas. While this effort poses significant exploration risk, it also offers very significant upside potential. Recent results from science wells mitigate, in part, this exploration risk. We are initiating coverage of TRCH with a Buy rating and a $1.75 price target.


The Orogrande Basin is very lightly drilled with no significant oil and gas production. Torchlight has drilled two science wells and has drilled and is attempting to complete a third well as a producer. Final completion results of this third well should be released in the near term.

While the Orogrande Basin exploration effort carries significant exploration risk, the potential upside is, in our view, very substantial. Torchlight holds an approximate 68% interest in 133,000 contiguous acres of oil and gas leases. This is an acreage position comparable to many, much larger E&P companies.

Torchlight advises that all previous wells in the Orogrande Basin were vertical, conventional wells and Torchlight believes employing horizontal drilling and modern frack technology will yield significantly improved results. Also, none of the previous wells in this basin were drilled into the Pennsylvanian formation. Torchlight is targeting the Pennsylvanian formation, based on positive results from science wells drilled to date. Finally, Torchlight believes one of the key aspects of the potential of the Orogrande Basin is that the Orogrande Basin was formed during the same geologic time as the Delaware Basin and the Midland Basin. A comparison of geoscience metrics is contained herein.

Torchlight is also pursuing the development and potential divestiture of the Hazel Project in the Midland Basin, and the development of the Winkler Project in the Delaware Basin. At the Hazel Project, results from drilling activity have confirmed potential in the Lower Wolfcamp A and Upper Wolfcamp B as well as the Upper Wolfcamp A, the Dean formation and the Leonard formation. The acreage block is set up for 10,000 foot lateral wellbores. If divested, the proceeds would be used to further the effort in the Orogrande Basin.

The leadership team is, in our view, strongly aligned with shareholders with 27% of the common stock owned by directors and officers. Torchlight's Chairman of the Board of Directors is Mr. Gregory McCabe. Mr. McCabe's commitment to Torchlight is, in our opinion, impressive, with his current ownership, either individually or through his affiliates, equal to approximately 23% of the common stock of Torchlight.

Important Disclosures & Regulation AC Certification(s) are located on the last page of this report.


SUMMARY




VALUATION
Our valuation is based on a net asset value (NAV) analysis which produced $1.73 per share which we adjusted higher to our $1.75 per share price target.

Factors that may impede shares from reaching our price target include a significant decrease in oil and natural gas prices, difficulties encountered in the drilling and completion program, any changes enacted by federal, state or local governments that materially affect the profitability of oil and gas production and changes in the key management executives.


RISKS
Oil and natural gas prices: A significant decrease in oil and natural gas prices to levels below our current forecast would cause actual financial results to be lower than our forecasts for this company. Furthermore, a significant decrease in oil and gas prices could have a negative impact on investor sentiment and could be negative for the performance of U.S. exploration and production equities.

Operational risks: These include, but are not limited to, difficulties encountered in the drilling and completion program including dry holes, cost overruns, or timing problems and or shortages of oil and gas service equipment and supplies. Tax and regulatory changes: Any changes enacted by federal, state or local governments that materially affect the profitability of oil and gas production could negatively affect U.S. exploration and production equities, such as changes in royalty rates, government taxes on oil and natural gas production, environmental regulations and corporate income taxes.

Petroleum reserve risk: Estimates of economically recoverable oil and natural gas reserves and of future net revenues are based upon a number of variable factors and assumptions, all of which to some degree may vary considerably from actual results. Therefore, actual production, revenues, development and operating expenditures may not occur as estimated. The reserve data are estimates only, are subject to many uncertainties and are based on data gained from production histories and on assumptions as to geologic formations and other matters. Actual quantities of oil and natural gas may differ materially from the amounts estimated.

Concentration and Control Risk: Mr. Gregory McCabe holds the position of Chairman of the Board of Directors and beneficially owns, either individually or through his affiliates, approximately 23% of the common stock of Torchlight. Mr. McCabe has also loaned Torchlight $3.25 million in connection with an oil and gas property acquisition. As a result, Mr. McCabe has significant influence in matters voted on by the shareholders and the board of directors, including the election of the board members, and in all other facets of the business, including business strategy and daily operations.

Going Concern Comment from Auditor: The letter from Torchlight’s public accounting firm, which addresses the audit of the 12/31/2017 financial statements, states that “the accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern." As discussed in Note 2 to the consolidated financial statements, the company has incurred recurring losses from its operations and has a net capital deficiency which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. Source: Torchlight SEC filings


COMPANY DESCRIPTION
Torchlight Energy Resources, Inc. is an exploration and production company, engaged in the acquisition, exploration, and development of oil and natural gas properties in the U.S. Torchlight operates through Torchlight and four other wholly owned subsidiaries, Torchlight Energy Operating, LLC, Hudspeth Oil Corporation, Torchlight Hazel LLC, and Warwink Properties LLC.

Torchlight principal interests are in three oil and gas projects. Torchlight’s is primarily pursuing the development of its large acreage position in the Orogrande Basin, the development and potential divestiture of the Hazel Project in the Midland Basin, and the development of the Winkler Project in the Delaware Basin.


Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Disclosures:

Within the last twelve months, ROTH has received compensation for investment banking services from Torchlight Energy Resources, Inc., Earthstone Energy, Inc., Halcón Resources Corporation and Ring Energy, Inc..

ROTH makes a market in shares of Torchlight Energy Resources, Inc., Callon Petroleum Company, Earthstone Energy, Inc., Diamondback Energy, Inc., Halcón Resources Corporation, Ring Energy, Inc. and RSP Permian, Inc. and as such, buys and sells from customers on a principal basis.

A Research Analyst and/or a member of the Analyst's household own(s) debt or equity securities of Torchlight Energy Resources, Inc. stock.

Shares of Torchlight Energy Resources, Inc. may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities.

Within the last twelve months, ROTH has managed or co-managed a public offering for Torchlight Energy Resources, Inc., Earthstone Energy, Inc., Halcón Resources Corporation and Ring Energy, Inc..











Each box on the Rating and Price Target History chart above represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first note written during the past three years. Distribution Ratings/IB Services shows the number of companies in each rating category from which Roth or an affiliate received compensation for investment banking services in the past 12 month.

Distribution of IB Services Firmwide

IB Serv./Past 12 Mos.
as of 06/17/18
Rating
Count
Percent
Count
Percent
Buy [B]
254
70.56
135
53.15
Neutral [N]
51
14.17
23
45.10
Sell [S]
8
2.22
4
50.00
Under Review [UR]
46
12.78
24
52.17

Our rating system attempts to incorporate industry, company and/or overall market risk and volatility. Consequently, at any given point in time, our investment rating on a stock and its implied price movement may not correspond to the stated 12-month price target.

Ratings System Definitions - ROTH employs a rating system based on the following:
Buy: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return of at least 10% over the next 12 months.
Neutral: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return between negative 10% and 10% over the next 12 months.
Sell: A rating, which at the time it is instituted and or reiterated, that indicates an expectation that the price will depreciate by more than 10% over the next 12 months.
Under Review [UR]: A rating, which at the time it is instituted and or reiterated, indicates the temporary removal of the prior rating, price target and estimates for the security. Prior rating, price target and estimates should no longer be relied upon for UR-rated securities.
Not Covered [NC]: ROTH does not publish research or have an opinion about this security.
ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months. The material, information and facts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used as a complete analysis of the company, industry or security discussed in the report. Additional information is available upon request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report are subject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a high degree of risk and may not be suitable for all investors. No part of this report may be reproduced in any form without the express written permission of ROTH. Copyright 2018. Member: FINRA/SIPC.




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