We’ve read this playbook before.
Reddit gets a hold of a stock with low float and high short interest…
…cue the music.
Their most recent play – Torchlight Energy (TRCH).
Not only did shares surge, but search volume in our TrackstarIQ data did as well.
For a company with hardly any revenues, you’ve got to wonder…
Is this a real investment opportunity?
When we dug into the details, things looked pretty bad.
Who is Torchlight Energy?
Torchlight Energy is what is known as an exploration and production company. They find oil reserves and then drill for oil.
Stocks in this sector live and die by the price of oil.
What’s painful about this company is that they still exist.
No joke, they’ve sold less than $200,000 in the nine months ending September 2019.
The only good thing you can say is they got rid of a heavy amount of debt.
But, here’s the real problem.
Torchlight Energy’s value comes entirely from its assets.
Their production is close to jack squat.
Recently, Torchlight announced a merger with Metamaterial, giving 1 share of Metamaterial for 3.6 Torchlight shares.
Metamaterials, which makes advanced materials, will own 75% of the combined company with Torchlight owning 25%.
Why do this?
So Metamaterial could get a U.S. listing.
And get this, following the merger, Torchlight plans to exit the exploration and production business altogether.
Yes, the company’s been in talks with several buyers to essentially dump its assets.
Those proceeds funded a recent special dividend to shareholders.
So, is the company totally changing?
The Torchlight Energy of today will be completely changed within a few years.
Valuing the company means figuring out what the assets will sell for as well as the potential for the Metamaterial.
Better E&P companies
Look, if you want to get into the E&P space, this certainly isn’t the way.
Storied brands like ConocoPhillips (COP), Marathon Oil (MRO), and the like will do just fine.
And if you don’t want to get too far into the details, the SPDR Oil & Gas E&P ETF XOP is a great way to play the sector.
One of the best in the sector is Cabot Oil & Gas (COG).
While the company carries a serious amount of debt, they maintained positive earnings every year for the last decade except 2015-2016.
The current price-to-earnings ratio of 22.5x isn’t too expensive, but the forward valuation of 10.2x looks rather tasty.
Our hot take
Investing in the oil and gas exploration sector comes down to your outlook on the industry.
If you think oil prices stay here or head higher, this sector is a great place to invest.
Looking at the XOP ETF as a proxy, we can see the companies are still valued well below 2018-2019.
So don’t assume just because we’re near recent highs the run is finished.
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