Torchlight Energy Resources: Special Dividend Likely To Be Of Limited Value

Summary

• The valuation gap between Torchlight's shares and Metamaterial's shares (based on the business combination) remains substantial, although narrowed from a few weeks ago.
• Torchlight's special dividend is likely to have limited value though.
• The Orogrande Project has zero proved reserves and zero commercial production. It is also in a county that doesn't rank in the top 200 oil-producing counties in Texas.
• Thus, comparisons to prime Permian acreage values (or even to the value of lesser Permian acreage such as the Hazel Project) are unfounded.
• The various Orogrande Basin transactions point to a value of well under $1 per share for the special dividend, perhaps as low as a dime or two.
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Torchlight Energy Resources (TRCH) is heading towards its merger with Metamaterial (MMATF). I've expressed my opinion about Torchlight's relatively high price compared to Metamaterial's given their relative stakes in the post-combination company. Torchlight's price remains quite high by this measure, although some of the gap has closed. Metamaterial's stock is up around 36% since that report, while Torchlight's stock is down around 38% over the same period.

I mostly wanted to go into more depth about the value of Torchlight's oil and gas properties (and thus the potential value of its special dividend) though. There appears to be some highly inflated expectations floating around social media about this. These calculations tend to mention the value of prime Permian Basin acreage when discussing Torchlight's Orogrande Basin acreage. However, that comparison shows a lack of understanding about oil and gas assets and is not that much more valid than using Manhattan land values to value a parcel in rural Nevada just because both areas are part of the United States.

Torchlight's Orogrande Project (Hudspeth County) acreage had no proved reserves at last report, and Hudspeth County had no reported production at last report either. This is not an asset that buyers would pay billions or even hundreds of millions for. The former operator of the Orogrande Project sold its 9.5% working interest in the assets for $2.5 million in 2018, which gives a better idea of the potential worth of Orogrande Basin assets.

Merger Calculations

Metamaterial may have approximately 122 million fully diluted shares now, while Torchlight may have around 153 million fully diluted shares. Based on the formula mentioned in Metamaterial's circular, Torchlight may issue approximately 403 million shares to exchange for Metamaterial's shares, which would imply around 3.3 Torchlight shares for each Metamaterial share. This is just a rough estimate based on the

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.