ROTH CAPITAL John M. White
TRCH: Disputing White Diamond Research Report
On 4/29/2019, White Diamond Research published a report on TRCH, highlighting what are, in the opinion of White Diamond, negative aspects of TRCH’s business. In the report, White Diamond states it has a short position in the shares of TRCH. According to Eikon, the short interest in TRCH on 1/3/2019 was 1.6 million shares and on 4/18/2019 was 4.4 million shares, an increase of 175%.
White Diamond states it is short the shares of TRCH because White Diamond believes it is a classic pump-and-dump scheme run by a questionable management team. We infer “pump and dump" means 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.
After reading the White Diamond report, it was obvious to us that the White Diamond research team does not know the basics of the TRCH story. This is because White Diamond made no mention of the originators of the Orogrande Project, Gregory McCabe, Chairman of the Board and Rich Masterson, Consulting Geologist.
Concerning the “pump” portion of this accusation, we are not aware of any “false and misleading positive statements” by TRCH. The press releases and presentations by TRCH have contained the plans for and results of drilling, testing and geological and geophysical work performed on TRCH’s Orogrande Basin acreage. In our view, TRCH’s drilling and testing results have met or exceeded our expectations.
Concerning the “dump” portion of this accusation, we don’t see any evidence of this. Gregory McCabe, TRCH’s Chairman of the Board, is the largest shareholder, with 16.1 million shares representing 22.4% of the ownership of TRCH. TRCH advises us Mr. McCabe has not sold any of his TRCH common stock since acquiring his shares. In addition, Mr. McCabe has invested, according to TRCH, approximately $12 million in cash in the drilling, testing and geological and geophysical work performed on TRCH’s Orogrande Basin acreage. Mr. McCabe and his related oil and gas companies own a 25% interest in the Orogrande Project, separate and distinct from his ownership of TRCH common stock. John A. Brda, CEO, owns 2.3 million shares or 3.2% of the TRCH equity.
Important Disclosures & Regulation AC Certification(s) are located on page 7 to 8 of this report. Roth Capital Partners, LLC | 888 San Clemente Drive | Newport Beach CA 92660 | 949 720 5700 | Member FINRA/SIPC
Gregory McCabe is from Midland, Texas and is an experienced geologist who has over 32 years of oil and gas experience. Rich Masterson is a Consulting Geologist for TRCH. Mr. Masterson is very well known and enjoys an excellent reputation within the industry. Mr. McCabe and Mr. Masterson partnered to develop the Orogrande Project.
Since late 2014, our U.S. onshore E&P research has had a Permian Basin focus. In the course of our work, we have met and developed numerous relationships with public and private management teams, consultants and private equity professionals. Prior to initialing coverage of TRCH, we were well aware of the Orogrande Project and Messers. McCabe’s and Masterson’s efforts. Again, our channel checks indicate both enjoy an excellent reputation in the Permian Basin E&P industry.
The White Diamond report contained a summary with, among other items, the following points:
White Diamond: Torchlight Energy has an enterprise value of over $130M. The company's entire perceived value is based on possible oil in its Orogrande Project. Our response: This is, in our opinion, a true statement.
White Diamond: TRCH only paid $3.35M in cash and stock for 75% of the Orogrande in August 2014 when oil prices were much higher than today. Our response: This is true but we don’t understand what it means. TRCH’s Orogrande Project is a large spread of oil and gas leases in the Orogrande Basin. There is no meaningful oil and gas production in the entire Orogrande Basin and as such, 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
White Diamond: In April 2018, TRCH said it would sell its Hazel Project, but never did, and raised equity instead. Our response: White Diamond makes this bullet point sound like TRCH told investors one thing but did another. The facts are that TRCH announced its intention to sell its Hazel Project and in the press release explained the proceeds would be used to develop the Orogrande Project. The offering of common stock was announced on 4/18/2018, only ten days from the Hazel announcement.
In our view, it is common knowledge in the industry that executing divestitures of oil and gas properties typically take a minimum of 60 to 90 days. Additionally, it is common knowledge in the industry that the market for divestitures of small and mid-sized properties has been weak and apparently TRCH has not seen an acceptable offer. However, the Hazel Project is still being marketed for sale.
In the press release on the stock offering, TRCH stated a portion of the proceeds would be used to meet its drilling obligations at its Hazel Project and the remainder would be deployed to develop the Orogrande Project. If TRCH did not meet its drilling obligations some of its Hazel leases would have expired. TRCH chose to meet its drilling obligations to keep the acreage block intact. TRCH has advised us the Hazel wells have been drilled.
White Diamond: In April 2019, TRCH said it will sell its Orogrande Project, but we don’t believe that will ever happen. Our response: Again, TRCH’s decision to market its Orogrande Project was just made this month. This marketing effort is, in our view, going to take a considerable amount of time, likely several months. White Diamond offers no analysis supporting its opinion that the sale will not occur.
In fact, during early 2019, a number of the major oil companies have been signaling in public appearances their intention to increase their exposure to U.S. onshore assets, in particular, West Texas. Recently, CVX (CVX-NC) announced an agreement to acquire Anadarko Petroleum (APC-NC), valued at $33 billion at the time of the announcement. This offer has been countered by Occidental Petroleum (OXY-NC) with a $38 billion offer. One of APC’s primary assets is its Permian Basin holdings in West Texas.
Regarding Mr. Brda’s involvement in certain legal proceedings, Mr. Brda advised us this action was vacated due to lack of proper notice.
Our 1Q 2019 estimates for EPS/CFPS/EBITDA of $(0.02)/$(0.01)/$0.3 million are essentially unchanged from our previous $(0.07)/$(0.01)/$0.4 million.
Page 2 of 8