Torchlight Illuminates a New Texas Oil Basin

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Source: Bob Moriarty for Streetwise Reports   07/31/2018

Bob Moriarty of 321 Energy takes a look at what positive drill results in the Orogrande Basin in West Texas mean for the company.

Long patient shareholders of Torchlight Energy Resources Inc. (TRCH:NASDAQ) must have felt like it was a combination of Christmas and their birthday last week when the company finally announced positive drill results from a new and untested oil basin in far West Texas. In baseball terms the announcement would be called a home run out of the park with the bases loaded.

The Orogrande Basin project has been a work in progress since August of 2015. Back then the price of oil was collapsing to an eventual low of $26 a barrel in February of 2016. But the best deals are found at the bottom when even angels fear to tread and don't even think about investing. Torchlight Energy signed a deal with the University of Texas on the 172,000-acre Orogrande Basin in September of 2014.

The Orogrande Basin is the baby of oil expert Richard Masterson, discoverer on the Wolfbone shale play in the Delaware Basin in West Texas. After last week's results, he has a new trophy to plant on his mantelpiece with confirmation of the potential of the Orogrande Basin located in far West Texas.

It's been common knowledge for many years that the district has petroleum potential and a number of vertical wells have been drilled for test purposes. It took the brilliance of Rich Masterson and the good business sense of Torchlight to bring the potential of the field into the practical as experience grew in development of unconventional oil fields and the use of fracking in horizontal laterals.

Giant resource projects cause big problems because they eat money. It's not enough to have what might be as little as an interesting theory; you also have to have the money to develop it. Torchlight entered into an agreement with Founders Oil and Gas three years ago where Founders would invest up to $50 million into development of the basin. That agreement didn't work out the way the partners wanted so in November of last year, Torchlight announced reworking the deal.

It took financing and some time to get the project back on track and in January of 2018 Torchlight drilled the Founders A25 well in the Orogrande to a vertical total depth of 5,500 feet. At that point all Torchlight had accomplished was to drill a vertical well identical in nature to the half dozen or so test wells drilled over the years.

The real issue was going to be actual oil and gas production from a horizontal lateral and fracking. Torchlight isn't interested in production wells right now until they put together enough data about costs and flow to understand the nature of the beast they are riding. So the plan was to put in a short 1,000-foot horizontal lateral instead of the 10,000 to 20,000 foot laterals in major development wells. That leg was completed in February.

In the resource business, no news is almost always bad news. Companies announce exciting results coming "SOON" and when the actual results don't meet the company expectations they most often sit on the news in the futile hope that investors forget what has been promised. And I know from my emails that investors began to feel that waiting for an announcement of the results of the lateral leg were about as exciting as watching paint dry as time went by with no follow-up on results.

In defense of Torchlight, they probably had a pretty good idea of the results back in May. There was however the sticky situation of coming to a final agreement to the divorce between Torchlight and Founders. An agreement was made and last week the brilliant results were announced to the world and the long patient shareholders.

Initial production from the University Founders A25 #1 well produced a 1.8 MMCFPD flow based on hourly gas measurements. That would translate to about a 300 BOE when the well completes the liquid removal from the lower four stages which show significant oil potential. Currently the well is shut in pending delivery and installation of special gas lifting equipment that is expected to unload the wellbore and increase oil production recovery.

That rate of flow suggests that with a more normal 10,000-foot lateral in the same Pennsylvania formation will flow at a 3,000 BOEPD rate. A similar well with a 5,500 vertical and 10,000 foot horizontal will cost in the range of $8-$10 million. Using a metric of $40,000 per flowing BOEPD, a 3,000 BOEPD well would be worth $120 million in net present value. For certain that is a home run out of the park. If multiple wells are done at the same time the cost of drilling and completion will come down.

Considering only the Pennsylvania formation using 10,000-foot horizontal laterals Torchlight has 1,150 potential drill locations. But when you have one large zone, the odds favor more similar in nature zones that have the potential for hundreds to thousands of more drill locations.

Torchlight has rights to 72.5% of the field and the drill locations. In the Permian basin similar undeveloped unconventional drill locations are valued at between $1 and $2 million apiece. The Orogrande Basin compares favorably to the Permian Basin located 200 miles to the east with better than average permeability and porosity and higher reservoir pressure gradient. All of which is very good.

Rich Masterson deserves all the credit in the world for his discovery of a new exciting petroleum basin in West Texas. Torchlight is perfectly positioned to reap the rewards from a commanding land position in this new field discovery. I would be very surprised if Torchlight didn't enter into a joint venture with a much larger partner with deep pockets to monetize the field.

Torchlight is an advertiser. I have owned shares for over three years. Naturally I am biased. Do your own due diligence.

Torchlight Energy Resources
TRCH-NASDAQ $1.28 (Jul 30, 2018)
69.5 million shares
Torchlight Energy website.

Bob and Barb Moriarty brought 321gold.com to the Internet almost 16 years ago. They later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on current events affecting both sectors. Previously, Moriarty was a Marine F-4B and O-1 pilot with more than 832 missions in Vietnam. He holds 14 international aviation records.

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Disclosure:
1) Bob Moriarty: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Torchlight Energy Resources. Torchlight Energy Resources is an advertiser on 321 Gold. I determined which companies would be included in this article based on my research and understanding of the sector.
2) The following companies mentioned are billboard sponsors of Streetwise Reports: Torchlight Energy Resources. Click here for important disclosures about sponsor fees. As of the date of this article, an affiliate of Streetwise Reports has a consulting relationship with Torchlight Energy. Please click here for more information.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
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5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article, until one week after the publication of the interview or article. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Torchlight Energy, a company mentioned in this article.

( Companies Mentioned: TRCH:NASDAQ, )

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