- An SA article on June 8 paints a very negative thesis on Torchlight Energy, but in my opinion the information is mostly irrelevant to Torchlight's prospects.
- Comparing a producing, U.S. company to an entire class of fraudulent Chinese RTOs is baseless, making me question the thesis.
- Pointing to accumulated losses and going concern language as highly significant for a start-up company is misleading as most start-ups have these characteristics initially.
- Torchlight has multiple analysts and industry partners that support it.
On June 8th, an article with an aggressive and alarmist title came out stating Torchlight Energy (NASDAQ:TRCH) stock, "May Go to $0." I have to admit that I was worried at first. Perhaps a well researched article by an experienced financial analyst had found some tremendous holes in the story? However, after reading the summary, I realized I had little to worry about.
Sometimes when one tries to refute a negative article, one might try to impinge upon the credibility of the author of the piece. I won't even go there.
The only good news is that new and existing investors now have a buying opportunity. I will touch upon several issues I have with the aggressive, highly negative article.
Problems With the Short Thesis as Articulated
Ok, I said it in the heading above -- short thesis. I have no problem with a short thesis if it's factual, and filled with well reasoned and highly relevant information. Unfortunately, I found many irrelevant or insignificant points put forth as being highly significant in the author's argument that the stock could go to zero (bankruptcy). Please consider the following:
Guilt By Association
Guilt by association is the oldest trick in the short seller's book. The author uses this trick with reckless abandon. Tying in Chinese RTO stocks with Torchlight is a stretch to say the least. This comparison is ruthless, the author shows a horrendous stock chart of a Chinese RTO victim not once, but twice. And here's the insidious twist, nowhere in the article is it stated or implied that Torchlight itself is a fraud. This is even worse than guilt by association as there's no true association to begin with.
Going Concern Language
Hundreds if not thousands of viable growth companies, early-stage companies and start-ups have, "going concern" warnings as routine parts of their risk disclosures. Obviously, if losses at Torchlight were to continue indefinitely and the company was unable to raise additional capital-- then the company could be forced into bankruptcy. However, going concern language for emerging companies is far different from a mature business that runs into trouble and then receives the going concern language.
By the author's reasoning, every company that is not yet generating earnings, no matter how promising the company is, could be facing bankruptcy. Technically, that's correct. Yet it's a meaningless and potentially misleading statement to say that Torchlight's going concern warning is indicative of an imminent Chapter 11 filing.
I found a post in the comment section of this short article especially interesting as I share this point of view,
"As a former CPA, going concern opinions are reduced to going concern footnotes as a companies operations improve and then no going concern discussion. In reviewing the last K-1, that is what I read into the reduced disclosure. It is not uncommon to include this wording until operations are profitable."
Abnormally High Valuation??
The author opens with the assertion that the company could be filing for bankruptcy, then follows that argument with a segment on valuation? That makes little sense, obviously the author thinks the stock is overvalued, yet this assertion is listed as another reason to sell the stock.
Interestingly, the author leaves wide open the real possibility that the stock valuation could actually end the year trading on the cheap side. According to an interview of Torchlight's COO last month, the company could exit 2014 at 2,000 bpd net to the company. Instead of trading at $400,000 per daily flowing barrel, (the author incorrectly stated a figure of $500,000 per flowing barrel), Torchlight could end the year trading just $50,000 per flowing barrel.
Anonymous Author Vs. Named Analysts....
Select analyst comments on Torchlight this year:
The Energy Report, Interview with Michael Breard (3/11/14) "Torchlight Energy Resources Inc. is a small company with a property in the Eagle Ford that provides cash flow. It plans to sell that asset, if it can get a high enough price, because it is going more into the Hunton play in Central Oklahoma with a private operator, Husky Ventures Inc. Husky has drilled 35-40 wells in the Hunton after spending a lot of money on technical work to find the right spots to drill and has been very successful. Torchlight has four areas of mutual interest with Husky. Torchlight has two other properties in Kansas, where it can drill low-cost, low-risk oil wells. Torchlight is currently drilling in one Kansas play with Ring Energy Inc.
TheStreet.com, Jim Collins, (5/21/14)- In the past week, I've had the opportunity to attend Gastar Exploration's (GST) analyst day in New York and listen to two Torchlight Energy presentations. The key takeaway is that Oklahoma is more than OK. The two companies share interests in wells drilled by private operator Husky Ventures in Kingfisher and Canadian counties, and the early results have been quite strong.
What we are finding out is that the acreage that was hidden under the corporate girth of Chesapeake is actually both really productive and really oily. That is a potent combination, and as I have been saying, the way to invest in a hot play is through smaller, more nimble operators. The results show up in significant production revenue and earnings growth, whereas it is difficult for the big boys to move the needle....
What About Torchlight's Partners?
Unsurprisingly, the author of yesterday's article failed to mention that Torchlight Energy is in partnership with some successful companies who presumably did due diligence on Torchlight. Companies like Husky Ventures and Ring Energy (REI). Anyone interested in further information on Torchlight Energy should review the company's June corporate presentation.
When I read an article with a highly negative spin on a stock, I typically hold it to a higher burden of proof. When an author compares a producing E&P growth company in the U.S. with an entire class of fraudulent Chinese stocks, it forces me to seriously doubt everything the author says.
The, "weight" of this stock, down 26% on June 8th alone, makes me, "vote" that the stock is a buy at these oversold levels. Always remember what the author credited Warren Buffet as saying, "in the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company."
The fact that it was Benjamin Graham who said that, not Warren Buffet, is probably not of much concern to the author. I believe that yesterday's article provides investors with an opportunity to buy Torchlight at oversold levels.