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/
