Torchlight Energy Resources Inc. (NASDAQ:TRCH)
Operational Update Conference Call
July 17, 2014 11:00 AM ET
Derek Gradwell – MZ Group
Tom Lapinski – Chief Executive Officer
Willard McAndrew – Chief Operating Officer
John Brda – President and Secretary
Well, good day ladies and gentlemen and thank you for standing by. Welcome to the Torchlight Energy Operational Update Conference Call. During today’s presentation, all parties will be in a listen-only mode. Today’s conference is being recorded today, Thursday, July 17, 2014. I will now turn the conference over to Mr. Derek Gradwell, from MZ Group. Please go ahead Mr. Gradwell.
Thank you, operator. Good morning everyone and thank you for joining us today for Torchlight Energy’s operational update conference call. On the call today are the company’s CEO, Tom Lapinski; the company’s President, John Brda, Will McAndrew, the company’s Chief Operating Officer. Mr. Lapinski and Mr. McAndrew will provide comments regarding recent developments and accomplishments in the company’s operation along with commentary from John Brda, the company’s President.
I’d like to remind our listeners that on this call, prepared remarks may contain forward-looking statements which are subject to risks and uncertainties and that management may make additional statements in response. Therefore the company claims the protection from the Safe Harbor for forward-looking statements that’s contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements related to the business of Torchlight Energy Resources Inc. and its subsidiaries can be identified by common used forward-looking terminology and those statements involve unknown risks and uncertainties including all business-related risks that are more detailed in the company’s filings with the SEC. For those who are unable to listen to the entire call, we will have an audio replay that will be available and the call is also being webcast, so that you can login via the internet and access details were provided on the conference call announcement that was distributed yesterday.
At this time, I would like to turn the call over to Will McAndrew, Torchlight’s Chief Operating Officer, and he will provide opening remarks. Will, the floor is yours.
Thank you, Grad, and everyone for joining today’s call. We are extremely pleased to have this opportunity to speak with you about our operational progress. It’s been a very eventful six months for our company. We wanted to get an operational update up to the investors as quickly as possible.
However, we agreed to wait for our partner Ring Energy to announce results from our efforts in the Southwest Kansas first and that we would update and provide further detail on those results that we have today. Also I want to address production results for the second quarter and discuss our short-term goals as well as providing our expectations for the rest of the year.
It’s likely that we set our goals to double our daily production quarter-over-quarter leading to an exit rate of 2000 barrels of oil equivalents per day or BOE per day by the end of the year 2014. It is important for our shareholders to understand that these targets are predicated on the drilling and completion schedules that we put in place in 2013.
We exited 2013 at a 150 BOE per day. First quarter 2014 exit rate was 250 BOE per day getting our stated goal with planned drilling activity with Ring, Husky and our own operated Central Kansas projects, we felt comfortable saying the goal was to exit second quarter with 500 BOE per day.
Unfortunately, due to production delays on two productive wells that required additional time for infrastructure preparations which we will discuss later, we exited Q2 at a rate of 387 BOE per day and year-to-date just two weeks later, we are fortunately 460 BOE per day which is a four time increase from what we were producing at the beginning of this year.
What is important to note is that while we are a couple weeks late in reaching our goal, we are indeed reaching it and more importantly, this is merely an issue of completion schedules being moved out by a couple of weeks and the resulting production falling in Q3, early Q3 rather than late Q2. I would like to reiterate we remain on target for the third quarter exit of 1000 BOE per day and a year-end exit rate goal of 2000 BOE per day for 2014.
That being said, let me walk you through exactly how we plan to achieve these numbers and continued substantial growth beyond the years. First I’d like to talk about Southwest Kansas. The operating partner Ring Energy has done a great job as usual generating and more importantly overseeing this project. We are excited to be working with them and look forward a long and mutually profitable relationship.
We started this 10 well project with the understanding that we would drill, test, and evaluate these wells and then adjust the plan for future developments accordingly with what data was developed. Fully aware that 10 wells will not prove up 17,000 acres, we are looking for the signs that develop and provide a clear path on how to approach in the 10, 20 and dozens and dozens of more wells on the play.
I am happy to report that we are off to a very good start. We have drilled four wells to-date. The John’s number one well was recently completed and produced at an initial potential rate of 111 barrels of oil per day. As it’s typical with these wells in the play, it is settled into the 25 to 30 barrel per day range as expected.
I would like to remind our listeners that these wells cost approximately $650,000 to drill and complete. Therefore this well should achieve another one of the company’s models objectives b y paying out in less than one year, not accounting for the tax benefit associated with the oil and gas industry.
Based on the results here, decided that we would drill an offset well called the John’s number two. During the analysis of the structure prior to completion, we found the formation on the number two well to be what is called down dip to the number one well.
What this means is that, we could effectively drain the same reserves from the first well alone and as a prudent operator, we agreed with Ring not to spend the additional $450,000 to complete and equip this well. But instead, keep the funds that have been allocated for the completion and make it available for use on additional efforts in the play. Our next well the First Trust is case and we are currently evaluating whether to make it a gas producing well or a future salt water disposal well.
Would it make better sense at that time to make a decision in the future. Once we drill the next wells we will finalize a joint decision to produce gas or reduce our direct disposal cost with the rest of the producing wells. One of our fourth well, the – was drilled in multiple oil-bearing intervals that looks highly prospective for production.
But we encountered something remarkable from an exploratory standpoint which is a zone called the moral channel. As this word channel implies it is basically a formation created by an ancient underground river. These types of discoveries are rare and maybe prolific if fully realized.
The zone we uncovered shows 22 feet of pay in the zone with high porosity levels ranging from 21% to 25%. We filed the drilling by perforating and fracking into the channel zone with very, very positive results. As the well commenced production is tested at over 75 barrels in the first twelve hour period, and it’s currently producing 10 to 15 barrels of oil per day.
We expect that there exists some blockage at the perforations and are currently planning procedures that will clean up the well bore and stimulate production. This type of procedure is very commonly employed at the completion or following a usual test of a new well.
I would like to refer back to my comments regarding the remaining completion funds from the John’s number two well and what we plan to undertake. A joint decision was made with Ring Energy to run a 12 mile 3D seismic shoot over a block of our existing acreage.
Our expectation is that this imagery data will define not only where the model channel exists over our acreage, but also will greatly improve future success rates and all with the formations we grow with the (Inaudible). We are convinced that these wells have great potential in daily production and most importantly cumulative reserves.
It is typical that a model well might easily equal three to four of the vertical tide Mississippi wells that we and others are drilling in the area. For more information, on the impact of a moral channel formation and find, I’d like to turn it over to Tom Lapinski our CEO. Tom, would you take it from here?
Well, thank you very much. Will you are right on when it comes to the moral channel or any other channel systems with that matter, such as the oil creek in Oklahoma or the pilot channels in Montana. The last thing you should do is try to exploit them using the drill bit as your finding tool.
Channel systems are normally narrow and they tend to meander, meaning you simply cannot offset a discovery in four directions and expect production from all of those additional locations. Discovery is fortunate.
We recognize the chance of finding a channel when we first review some regional to these seismic lines that were shot by Texaco in 1980 and 1981. Texaco shot a series of long regional lines, all of them in an east west direction. The lines were placed several miles apart.
So when we did identified what appears to be a seismic response to the channel, we could not predict what was happening between the lines. The 3D seismic survey we will be acquiring with Ring next month should be effective in tracing the path of the channel. We should also point out that these channels can be very lucrative.
Just we are aware is the moral that has produced 6 million barrels of oil from 20 wells. The field is in the beginning stages of a water flood program that will increase its ultimate recoverable production. Ultimate reserves for channel wells as Will had mentioned can be three to four times greater than the Mississippian and initial rates are two to three times greater.
I would like to point out however, that we will be very deliberate in how we develop a field like this once identified and lets also keep in mind that we penetrate this moral interval in all our wells as is above our primary target which remains the Mississippian, Will, I’ll let me turn the call back over to you here.
Thanks, Tom. We originally plan to have five wells under production by the end of last quarter and we are delayed in getting these wells online sooner due to rig availability, issues partially due to waiting for the right crew and the right rig to drill these wells. This timing issue as well as production (inaudible) well certainly has been a contributing factor to where our production profile stands today.
We should be underway on the next six wells later this month or in early August based on rig availability. Our goal to drill an additional 15 to 20 wells with Ring Energy on this project in 2014.
Next I’d like to address the current operation as well as other operating partner Husky Ventures. Since Torchlight started with Husky in April 2013, we now have ownership in 21 producing wells. We have eight wells that are in various stages of completion, an additional four wells currently being drilled and 77 wells on the drilling schedule through August 2015.
The partnership with Husky is proving not only be very successful experience for Torchlight, but also provides us with a clear plan of site for our developments schedules and the capital needs looking forward for more than a year from now. And the positive results and track record of successful wells is mounting for Torchlight.
Husky has drilled 56 wells in a row clearly defining why we have chosen them as a partner. We are now in six different areas of mutual interest AMIs or leases if you will with Husky. Having been invited and you have to be invited into all of the current projects that Husky is working on today.
In one particular year mile with Husky, we have drilled two for two successful wells. One of the wells was flowing out of so hard, while we were drilling and trying to complete it that we were almost unable to set tight and seaming in the well bearing our casing procedures. But the indication is one of a tremendous productive well.
On the second well, we encountered over 200 feet of oil-bearing sands and additionally we identified 19 feet of the oil creek channel. Similar to the moral, the oil creek is another highly prospective channel and should prove very productive. We own 30% of these two wells and over the AMI as a whole as these two wells will be producing high quality BTU gas, they will require a pipeline to move it to market.
Although a delay in production as a result of such a need, once these two wells online, we should not only achieve the daily production goals mentioned in the second quarter, but we will be well on our way to meeting our third quarter numbers. Final bids are doing this week and we will pick an operator or contractor will be made for the construction of a five mile pipeline.
This is going to be a ten inch line capable of transporting over 15 million cubic feet of gas in daily capacity, enough for the first two wells and many, many more wells. On an another new AMI we have drilled, completed and begun producing a well that is doing 3 million cubic feet of gas per day on a 33/64 inch choke, that’s just a little bit bigger than a half-an inch choke and 400 barrels of oil.
We own 10% in this well, which should really move the needle for the company. The second well, a direct offset to the first one has been drilled and tested with the frac being designed as we speak and should be in production in this quarter. We own 5% of that well.
Several wells at Husky has drilled recently have paid out and 100 days or less. The last well called the Kodiak being the best well to-date that should covered its cost in 45 days. That amounts to producing over 50,000 barrels of oil and additional gas. Now let me comment on our first operative project. It is called the Smokey Hills project. It’s also in Kansas.
It is an 18,000 acre play with over 800 closely situated, historically successful wells that have produced over 23 million barrels of oil. It is similar to our nature, to our project with Ring Energy where we will drill ten wells, test and evaluate. These wells are shallow, straight, vertically drilled to 3400 feet with no big fracs, they are cost-effective to drill and complete, only about $450,000 and quick to produce results and revenue once drilled and completed successfully.
Currently, we have drilled the first two wells and are almost finished with the third well; we have reached the total depth and are logging that third well today. We have set casing in the first two wells, and we are completing the first well this week and the second well next week.
We identified over 39 feet of productive pay zone in the wells with an average ferocity of 16%. During the completion on the first well, the Evans well in the project, we achieved results, have initially produced over 300 foot oil column from the well. Swapping procedures will continue until the well is cleaned up and put into daily production.
These initial results are very, very encouraging and we look forward to providing official production numbers once we have them. We expect these wells to really impact our third quarter production numbers as we own approximately 70% working interest in this project.
Our plan here is drill about 10 to 15 wells this year. We have a very active aggressive leasing program in this AMI and we are the tip of the sphere on this project. We feel we have been aggressively meeting our goals and we will continue to do so. If you look at the primary zone of interest in each of our projects and we were to drill 90 to 100 wells per year, our inventory would equate to 10-year drilling inventory in the coming days.
This is not counting any of the uphold potential that we have on our wells or any new projects where our existing partners may invite us into. We are very excited, we are in a very excited period of growth of the Torchlight and are committed to translating that value to our shareholders. Now back to Tom to discuss our legacy assets down in South Texas, Marcelina Creek.
Thanks, again, Will. Our three Marcelina Creek wells are producing at rates that vary from about 60 barrels to 100 barrels of oil per day net to our working interest. That range is somewhat lower than normal due to some mechanical problems that we have had here over the last month looking down whole pump problems and (inaudible).
We are presently producing from the Austin Chalk formation as well as the Buda. Our current plans for Marcelina Creek are to drill another lateral well by the end of the third quarter this year into the Austin Chalk. Our number one Johnson which is also a Chalk well came in at about 492 barrels of oil per day two years ago and continues to produce between 65 and 70 barrels of oil each day.
The three existing wells have produced in excess of 22,000 barrels of oil for the year so far and they contribute about a $125,000 of revenue per month net to Torchlight. Although at present, we don’t have any plans to drill an Eagleford well this year, we continue to see Eagleford developments in our immediate area. Hunt Oil continues to be active and Lonestar Resources is completing its fourth Eagleford well on a lease just to our west across the San Antonio River.
Our preliminary look at the 2015 well budget for Marcelina Creek does include at least one Eagleford well. This is in addition to our planned horizontal Austin Chalk well this year and then there remains four to six locations to be drilled in each of the three formations.
Now I’ll turn the call over to John Brda for a final commentary, to provide clarity in answers to some recently raised questions. John, the floor is yours.
Great, thank you, Tom. Let me take a few moments to address to (inaudible) my comments. I know that one of the elephant in the room is in regard to the financing that we have publicly discussed. We are financing to fund CapEx over the balance of this year. We have been less descriptive than we would prefer to be at this time in the progress regarding the question for now, but I would do my best to address this given the limitation and disclosure rules. I can tell you that we proceed multiple term sheets, turn down the wrong ones and we are in late round discussions with several lenders and we hope to have something close in the immediate future.
I know many people are disappointed that we have not yet close to this and if that is left to open for certain individuals to make serious allegations regarding our ability to source capital. I would remind investors that this financing will be considerably larger than any of our previous raises or currently the aggregate of our previous raises.
We would like to be in a position to fully fund our large developments programs and have capital available because of the potential to move some very exciting strategic discussions along with our existing partners. We will need to make sure that we have all the basic coverage and I am confident we will accomplish that.
Also, while everything is still on top of this, I want to point out that while the company is growing our top with capital that has consistently been reduced and it’s something we remain very conscious about. Frankly, it is why we have not announced the closing any sooner than we have today. We are all shareholders and we are all focused on equity value creation and limiting dilution.
Well, therefore it is considerate effort to achieve the best terms available in order to continue the growth of our company. I would also like to address the top that is on most of our minds at the moment. Personally, and as a company we have been under constant forage in the various articles from an individual author and short – I know the companies are not advised to directly address these types of things, I will not go through and review the allegations I point – basis as they are mostly faults.
Our goal is to see our shareholders and trust that their investment is rewarded. When they feel there is an inaccurate when there is inaccurate, incomplete or misleading information in the public domain. We feel obligated to address it directly.
So as we perpetrate these campaigns at one motivation and ask to make money by driving the stock price down. They had typically never one of this or contributed to our economy as entrepreneurs. They hide behind an alias or not even disclose their names. I will say that the truth has been twisted and stretched in a way that the shareholders of our company are taking action now and had filed complaints with the appropriate regulatory bodies, specifically, the SEC.
It is our belief that this individual has purposefully misrepresented information in an effort to create panic reactions from our shareholders. This can only been looked at in one way in our opinion that it equates to market mutilation for personal benefit. We will fully comply with the SEC in any matters pertaining to these effects and any investigation into the trading or misrepresentation.
We expect that this individual is listening to this call and preparing of a start all of that being put to the side in an effort to create panic and again propagate the short position. Of course that’s purely speculation on our part. Aside from that, our perspective is that the only way to resolve this situation is through fundamental execution of our business plan and the transparent and consistent communications.
We are confident that over the balance of this year our efforts will dispel the opposing pieces and makes light of the false doesn’t written in a definitive indirect manner. From a fundamental standpoint an important first step is achieved by our growth in production volume, the company is now operational cash flow positive and given our current run rate we will continue to be so.
Additionally, we are in the process of updating our reserve reports from this year so that we can display our assets value has grown and have the capital that we have invested in our projects has been rated in multiples to what has been put to work. We are working with our reserve engineers and we hope to have a new report out by the time we report our second quarter numbers.
Exponential growth in our reserve base, drilling daily production and growing positive task force see climbs over the balance of this year. Our business has never been stronger than it is today, nor has our prospects than better.
We are sourcing growth capital, but many of our operations are self-funding with cash flow centered with the existing production. I am confident that our efforts over the next few months will continue to prove this out and look forward to continuing to update investors as these milestones are achieved.
On behalf of Torchlight management and myself, this concludes our prepared remarks and we want to thank you all for participating and your interest in this call. If you have any further information needed, please visit our website at www.torchlightenergy.com. Thank you.
And again ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.
[No Q&A Session for this event]
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