Torchlight Energy Resources Inc.

Torchlight Energy Resources Inc. (NASDAQ: TRCH) is an oil and gas company founded in 2007. It is engaged in the acquisition, exploration and development of oil and gas properties in the US.

Investment Rationale – Expensive at USD 9.19

• During Q1 FY2021, TRCH’s revenues declined YoY by ~97%.
• The Company has a loss-making operation and is reliant on external funding for its continuation of operations.
• On the profitability front, the net margin is in the negative zone and is lower than the industry median of 5.0%.
• On the liquidity front, the current ratio since FY2019 has been consistently lower than the industry median of 1.09x.
• On the leverage front, the debt/equity ratio since FY2019 has been consistently higher than the industry median of 0.80x.
• The stock is trading near its 52-week high price of USD 10.88. Hence, there is doubt about its upside potentials.
• On the technical front, the 14-day RSI at around 88.98 is in the overbought zone. Hence, there could be a downward movement in the stock price in the near term.

Key Risks

• Since the Company deals with an emerging business, there is a potential risk of business failure.
• The oil and gas industry is subject to many environmental regulations, which could increase the costs of TRCH.
• Sometimes, TRCH’s cash balances are more than amounts guaranteed by the Federal Deposit Insurance Corporation.

Recent News

Business Combination with Metamaterial Inc. On 21 June 2021, TRCH announced that there had been an extension to the closure date of business combination with Metamaterial Inc. to 30 June 2021. Also, the payment date for series A preferred stock dividend would be 25 June 2021. 

Special Dividend: On 14 June 2021, TRCH announced a Special Dividend of Series A Preferred Stock. It would be issued on a one-for-one basis to Common Stockholders on 24 June 2021. The special dividend would be issued in relation to the business combination transaction with Metamaterial Inc.

Financial Highlights (for three months ended 31 March 2021 (Q1 FY2021), as of 14 May 2021)

(Source: Company Website)

• Due to restricted operations caused by Covid-19, revenues in Q1 FY2021 were dramatically reduced to USD 2,471 from USD 84,620 in Q1 FY2020.
• However, driven by TRCH’s cost-cutting measures, the forgiveness of PPP loan and interest income, net loss in Q1 FY2021 declined by ~44.3% YoY.
• During the quarter, TRCH raised USD 25.9 million through equity offerings.
• Driven by the equity offering, TRCH’s cash position increased to USD 13.15 million in Q1 FY2021 from USD 0.13 million in Q1 FY2020.

One Year Share Price Chart

(Analysis done by Kalkine Group)

Conclusion

The Company did not provide detailed guidance for FY2021 due to uncertainty in its operations and prospects. It currently has loss-making operations and is dependent on external funding for running its operations. Currently, TRCH has interests in three oil and gas projects and two wells. It also plans to acquire Metamaterial Inc. However, there is a lack of visibility of the outcomes. Also, the stock is trading near its 52-week high, indicating overstretched valuation. The stock made a 52-week low and high of USD 0.21 and USD 10.88, respectively.

Considering the poorer profitability, liquidity and leverage position of the Company than the industry, lack of detailed guidance, the Company’s loss-making operations, and its reliance on external funding, we have given an “EXPENSIVE” recommendation on Torchlight Energy Resources Inc. at the current market price of USD 9.19 (as on 21 June 2021 at around 10.25 AM ET), while we look forward to reinvesting when there would be clarity regarding the further business prospects and combination development news.

*The reference data in this report has been partly sourced from REFINITIV.