Torchlight Energy Resources Inc. (TRCH:NASDAQ), a dynamic junior oil and gas explorer, recently confirmed a major discovery. That came in the form of measured substantial Initial Potential (IP) oil and gas production from its Orogrande Basin Project.
To be sure, it's a very big deal. Despite that there remains, for now, a sizeable short market position that's likely weighing down shares.
Yet hot on the heels of this exciting discovery comes still more exciting news that could dramatically change the narrative.
It's a development that might well push this oversized short position to reverse and dash for cover.
And that could mean explosive upside price action in the stock in the very near term.
Here's what you need to know…
Torchlight is Rapidly De-Risking
Torchlight debt holders of $6 million in principal and $1.5 million in accrued interest have elected to convert into Working Interest in the Orogrande, per their right of conversion when the transaction was consummated.
This is significant, and a testament to their conviction of the deep inherent value in Orogrande. That's because the transaction instantly eliminates that debt from Torchlight's books, while reducing the company's working interest in the Orogrande project to 66.5.
What's more, just two weeks ago, TRCH announced a noteworthy extension to a portion of its debt maturity. $4 million of the company's outstanding debt of $12 million saw its maturity extended by a full year, from April 10, 2020, to April 10, 2021.
In response to this constructive development Torchlight's CEO, John Brda said, "This is a very positive step for the company and a vote of confidence from the noteholder. We continue to work with our creditors and other capital sources to continue shoring up our balance sheet and remain current on our debt obligations."
But the latest news that $7.5 million has been converted into an Orogrande Working Interest packs the biggest punch.
It means those debt holders, seasoned and respected oil and gas investors, have just given a massive thumbs up to the project.
Dramatic Value Still Available…For Now
Just last week, Torchlight announced it had measured substantial Initial Potential (IP) oil and gas hydrocarbon recoveries from the recently drilled and completed Cactus A35 #1H well.
To date, Torchlight's peak 24-hour production rates are 15 barrels of oil per day (BOPD) and 110 thousand cubic feet per day, which together equal 33 barrels of oil equivalent per day (BOEPD). Equating this to a 10,000-foot lateral, the Cactus well can be extrapolated to make 1,500 BOPD and 11 million cubic feet per day potentially, or combined 3,300 BOEPD.
This type of well production has the potential to be significantly better than most Midland Basin wells from a moderate depth of only 5,700 feet.
All of this provides great reasons for debt holders to convert to a Working Interest in the Orogrande.
That prompted Torchlight CEO John Brda to comment, "The conversion terms placed a value of approximately $1,100 an acre on the 134,000-acre play. This conversion value was set prior to any drilling, science gathered, or hydrocarbon discovery from our recent work in the project. It is fair to assume the value of the acreage, in their opinion, is more than $1100 otherwise they would not have converted. We continue to make progress cleaning up the balance sheet as well as progress in the field."
These major improvements in TRCH's debt profile go a long way to shoring up the company's financial health.
It's just this type of "vote of confidence" that should help lead to a big reduction in the outsized short position as those shorts scramble to cover.
The positive confluence of all these factors, in turn, is likely to lead to much more upside in Torchlight's share price.
And the ongoing "de-risking" of Torchlight Energy should handsomely reward early investors.
Peter Krauth is a former portfolio adviser and a 20-year veteran of the resource market, with special expertise in energy, metals and mining stocks. He has been editor of a widely circulated resource newsletter, and contributed numerous articles to Kitco.com, BNN Bloomberg and the Financial Post. Krauth holds a Master of Business Administration from McGill University and is headquartered in resource-rich Canada.
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Disclosure:
1) Peter Krauth: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: Torchlight Energy. My company has a financial relationship with the following companies mentioned in this article: None. I determined which companies would be included in this article based on my research and understanding of the sector.
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