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With the execution of a letter of intent between the company and the chairman of its board, Torchlight Energy will essentially double its working interest in the Hazel Project in the Midland Basin, says Dallas Salazar of ATLAS Consulting, calling the deal one of the single most accretive energy complex transactions dating back to the beginning of the current commodity pricing crisis.

Torchlight Energy's Hazel Prospect

Torchlight Energy Resources Inc. (TRCH) has announced that it has entered into a Letter of Intent (LOI; a document outlining substantially what is expected to be an immediate-term agreement) to essentially double its ownership (i.e., working interest) in its Midland Basin Wolfcamp assets, also known as the Hazel Project.

Given that the LOI would bring Torchlight Energy's working interest to ~74% across 12,000 gross acres, if ultimately consummated, this would result in the exploration and production company (E&P) owning a pro forma 8,800 net acres the play. This transaction, if ultimately consummated (and considering the structuring of the transaction), would definitively be one of the single most accretive energy complex transactions dating back to the beginning of the current commodity pricing crisis.

In October 2016, owners of Torchlight Energy's "Series C Preferred" shares elected to convert into working interest in the newly acquired Hazel Project development play, thus removing them from the capital structure at the E&P and reducing Torchlight Energy's ownership to ~33.33% working interest. If consummated—and it should be noted that the transaction counter parties engaged are intimately vested in Torchlight Energy's ultimate success—Torchlight Energy would obtain an additional 40.66% working interest from an entity owned and controlled by its chairman of the board of directors, Mr. Greg McCabe. This, in consummation, would increase the E&P's total ownership to ~74% across 12,000 acres.

In the transaction—which is subject to approval by Torchlight Energy's board of directors, as well as a fairness letter (which will be provided to Torchlight Energy by a third party)—Torchlight would pay Mr. McCabe 3,301,379 shares of TRCH common stock. It should be noted that Mr. McCabe, in addition to the being chairman of the board, is currently the single largest shareholder of Torchlight Energy common stock. Additionally, it should be noted that Mr. McCabe has been repeatedly vocal about his long-term ownership intentions.

Concurrent with the equity issuance, Mr. McCabe would cancel or cause to be cancelled 3,301,379 outstanding warrants; thus producing a non-dilutive event for Torchlight. This protection from dilution adds infinitely to the accretive value of the transaction, and ranks it at or near the top of such transactions (again, dating back to the beginning of the current commodity crisis). In addition, the transaction structuring will equate to a purchase price equivalent of ~$663 per acre, using TRCH equity pricing as of the day of the transaction announcement. Torchlight would be responsible for related costs and expenses at closing. Since 2013, acreage prices in the Eastern Midland Basin have averaged, adjusted for production, ~$12,000 an acre.

Put simply, Torchlight Energy should be able to essentially double its ownership (working interest) in its Midland Basin Wolfcamp assets by way of a transaction that sees its largest shareholder and chairman shuffle physical assets from his external portfolio for no compensation other than illiquid financial assets (i.e., TRCH equity issuance). Mr. McCabe, who is quite clearly already intimately vested in the E&P, in a highly visible, easy-to-understand way, has shown a willingness to increase exposure in Torchlight Energy, even given the immaturity of the E&P and the commodity pricing environment.

Further, Mr. McCabe sacrifices all-important liquidity, for all intents and purposes, in that acreage (i.e., physical assets) in the energy complex has shown to be much, much more liquid than TRCH common equity dating back the last several years. Put another way, Mr. McCabe's substantial Torchlight Energy exposure, for better or worse, are his to warehouse for the time being, with the most recent transaction an indication of confidence in that warehoused exposure.

While the overwhelming majority of Torchlight Energy's well-advertised investment thesis rests with the success or failure of its Orogrande Project efforts—an exploratory drilling program Torchlight Energy is deploying across its 168,000 largely contiguous acres in the Wildcat play—it's clear that a newly optimized board of directors (Mr. McCabe included) has intentions of establishing a baseline enterprise value by way of developing noncore assets.

ATLAS Consulting, an Austin-based energy complex consulting firm, recently completed internal analysis of Torchlight Energy's Hazel Project assets, assigning a value greater than the current market capitalization of the E&P (using comparable transaction analysis and using comparable value assignment analysis for publicly traded peers). With additional working interest being acquired [without requiring dilution], this analysis would obviously need to be positively revised.

ATLAS also recently provided independent, third-party analysis of Torchlight Energy's Orogrande Project University Founders B-19 #1 Well scientific data, which was confirmed by the late October 2016 announcement of the indication of hydrocarbons at the well. The addition of any speculative value in which the investment community chooses to assign to the development of the Orogrande play simply adds to the deep value inherent in Torchlight Energy at this point. ATLAS has been vocal in its consistent reiteration that Torchlight Energy could yield 10X-20X upside from spot pricing (as of the close of 11/11/2016).

Despite historic macro hurdles, Torchlight Energy continues to execute from an operational standpoint, and continues to unlock value for early-stage investors. Run resembling a private E&P and/or a joint venture between sophisticated investors, Torchlight Energy has, time and time again, answered the call of critics questioning if an exploratory E&P can be taken to scale at all, but especially given the macro hurdles. Again, Torchlight Energy continues to show consistent operational progress, growing its deep value all while improving its top-end monetization potential.