In a tight oil market where the WTI price recently dipped
below $30 a barrel again on the NYMEX, ranging down to around $26 a barrel in
January (making it about half as expensive as milk on the Chicago futures
market), only the best of the best can survive and thrive. Investors looking
for E&P companies to add to their portfolios will want to focus on players
that have a good mix of low lifting (production) costs, a solid footprint in
established domestic plays with low jurisdictional risk and a balance sheet
that is relatively clear of debt overhang.
One such company is Plano, Texas-based Torchlight Energy
Resources (NASDAQ: TRCH), which, in this regard, made huge strides last year,
achieving a total elimination of senior debt, divestment of non-core assets,
and a successful reduction of overall lifting costs to under $15 a barrel. At
the same time, the company has honed its primary focus and has set its sights
on the potential billion-barrel Orogrande Basin discovery (http://dtn.fm/0w5Tt)
(WolfPenn) in West Texas, where it owns a 47.5 percent working interest on
168,000 acres alongside Founders Oil and Gas, LLC. Torchlight drilled the Rich
A-11 well (6,091 feet) on the Orogrande Project in March last year and
subsequently executed a $50 million JV farm-out agreement with Midland,
Texas-based Founders Oil and Gas, who initiated frac work on the well in
November (http://dtn.fm/Fq4JD).
Torchlight’s five-year Orogrande lease (which offers
exceptional five-year renewal terms) covers the majority of the Orogrande
Basin, and the approximately 1,400 feet of pay being targeted here (at a highly
economical depth of 4,000 to 6,100 feet) was originated by famed Permian Basin
geologist Rich Masterson. Masterson, a recipient of the 2014 Hearst Energy
Award for Technology, is the guy who originated the famous Wolfbone play in the
Delaware Basin using a combination of old school mud log perusal, sample
analysis, and pure experience-based instinct. The Wolfcamp and Bone Spring
shales, readily characterized by high oil content and liquids-rich natural gas,
are a key feature of the multi-horizon Delaware Basin, which is the foundation
for horizontal development in the Greater Permian. The Orogrande formed at the
same time as the Delaware and Midland basins, and the company expects a nice
80/20 mix of oil and high BTU gas from the analogous siltstone present at
Orogrande.
The core siltstone target is a 700-foot interval of
clean/contiguous pay that will be digested in two sections, with the lower
section receiving the initial effort’s attention, and being used to establish
production potential, as well as behavioral characteristics. A full suite of
logs on the Rich A-11 were analyzed by Haliburton (NYSE: HAL) and found to be
very promising, with superb shows in a variety of formations and good overall
permeability. Moreover, while around 100 units of background gas were
anticipated during drilling, Torchlight encountered as much as ten times that
amount and core results showed good pay in the analyzed zones, with over 2,000
pounds of virgin pressure. There is a lot to be excited about here for
Torchlight and its investors, as the estimated ultimate recovery (EUR)
potential based on analogous Midland Basin EURs is in the neighborhood of four
to six million barrels per section, with as many as eighteen horizontals per
section.
Now, Torchlight isn’t just a one-trick pony, mind you. The
company has an impressive (yet streamlined) portfolio of operated and
non-operated positions under its belt, including the Marcelina Creek Project in
South Texas, with its prime access to the Austin Chalk, Buda, and Eagle Ford
formations. Marcelina is surrounded on all four sides by leading Eagle Ford
producers; there are as many as seven horizontal drilling locations for all of
the pay zones on the lease, and the lease actually offsets an excellent Buda
field drilled by none other than Exxon (NYSE: XOM). The company has three
producing wells with a combined BOPD of around 60 bbls already – 100 percent of
CAPEX is paid by two of the company’s non-op industry partners, and Torchlight
is preparing to drill a second Austin Chalk well sometime here in Q1.
On February 1, Torchlight announced a successful re-entry to
one of its over 20 drilling locations on the Marcelina Project’s lease, where
the company owns 75 percent WI on a 1,080-acre block, as well as a 50 percent
WI on a smaller 280 acre block. The company’s Johnson #4 was drilled out
laterally into the Austin Chalk about 2,500 feet and has subsequently shown
increasing fluid and gas entry (http://dtn.fm/9M6xB), with 540 bbls over three
eight-hour days, and liquids-rich gas up to 80 percent oil cut. With the shut
in tubing holding steady around 470 PSI and good swab results thus far,
Torchlight is quite excited about forthcoming initial production figures from
this recompleted well that was previously running only 10 BOPD. Investors
should keep an ear to the ground in coming weeks for an update from the company
on the Johnson #4 and take note of how Torchlight has unlocked serious
potential here at Marcelina from what was a marginally producing well – a feat
which indicates similar potential across the company’s promising asset base and
also reinforces the validity of its exploitation thesis that is being applied
selectively thereto.
Torchlight also has a JV with Ring Energy (NYSE MKT: REI) to
do E&P in the massive Hugoton Field area of Kansas, where the company is
matching Ring Energy’s lease cost by drilling wells, and stands to end up
owning a 50 percent interest across the entire 17,000-plus acre block. With
numerous shallow pay zones around 5,200 feet, ranging from the Chase Formation
through to Mississippian Age carbonates, cheap vertical well completion totals
of around $550,000, and anticipated initial production levels in the
neighborhood of 100 to 300 BOPD – Torchlight has every reason to be eager about
seeing new well starts here in Q2 targeting the Morrow Formation.
In addition, Torchlight has some choice assets at the
Cimarron Project outside Oklahoma City in the Edmonds Field that it is
currently selling, and has already announced the first of six intended sales.
This first sale, to Husky Ventures, will reportedly bring in over $1.4 million
net from a $4.6 million price tag, and has already produced a partial cash
closing for the company.
These are exciting times for this lean and mean E&P
junior, which is focused squarely on profitable domestic drilling, as well as
working interest programs with a near-term payback window.
For more information, visit http://www.torchlightenergy.com/
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MissionIR is committed to connecting the investment community with companies that have great potential and a strong dedication to building shareholder value. We know our reputation is based on the integrity of our clients and go to great lengths to ensure the companies represented adhere to sound business practices.
Sign up for “The Mission Report” at www.MissionIR.com
Please see disclaimer on the MissionIR website http://www.missionir.com/disclaimer.html
