In the past week, I've had the opportunity to attend Gastar Exploration's (GST) analyst day in New York and listen to two Torchlight Energy (TRCH) presentations. The key takeaway is that Oklahoma is more than OK. The two companies share interests in wells drilled by private operator Husky Ventures in Kingfisher and Canadian counties, and the early results have been quite strong.
What we are finding out is that the acreage that was hidden under the corporate girth of Chesapeake is actually both really productive and really oily. That is a potent combination, and as I have been saying, the way to invest in a hot play is through smaller, more nimble operators. The results show up in significant production revenue and earnings growth, whereas it is difficult for the big boys to move the needle.
The Holy Grail in such exploitations is the stacked play. This is when different geographic formations are found to be hydrocarbon-rich and can be attacked from the same acreage and, at times, from the same drilling pad. Gastar and Torchlight have been attacking only the Hunton formation through their association with Husky, but both managements have noted the possibility of a stacked play in that acreage.
In the spirit of research, I looked at the most recent presentation from Newfield Exploration (NFX), which has a major position adjoining the Husky/Gastar/Torchlight area of mutual interest. Newfield is exploiting the Woodford and Meramec shales, which lie on top of the Hunton, geologically speaking.
My initial reaction on reading the NFX presentation was astonishment. Newfield is absolutely killing it in Kingfisher County in their wells, which primarily attack the Upper Meramec formation. Newfield's success from the Meramec proves the concept of the stacked play exists in North Central Oklahoma. Newfield has also had success drilling the Woodford shale, which lies between the Meramec and Hunton formations.
So, there is a stacked play there, and the economics are attractive. Gastar figures a 67% IRR from its Lower Hunton wells. While the figures in Gastar's presentation assume a lower IRR (30%) from a typical Meramec well, the oil cut is much higher (77%) and my sense is that Newfield is executing at lower well costs than Gastar is assuming.
So, Oklahoma's OK, and the question is how to play it. Gastar's shares jumped after the analyst day last week and are still trading well below Gastar CEO Russ Porter's self-calculated net-asset-value estimate of $24 per share. There might be a little Texas hyperbole in that number (Gastar is headquartered in Houston) but I would not bet against Porter. In fact, I am very much betting on him, as Gastar's two preferred series (8.625% Series A and 10.75% Series B) feature prominently in every portfolio I manage using my classic income-based strategy.
But my stock-picking "Mad Money" strategy requires pure upside, and that's where Torchlight is included. I believe TRCH has more current upside than Gastar, as it is a "younger" story and TRCH shares have not joined in Gastar's recent rally.
To produce more share price appreciation Gastar management has to execute much more efficiently on its own Hunton wells (the ones Gastar is operating, not Husky), which have not been generating attractive returns thus far. Also, Gastar needs to prove that it can successfully exploit the Utica from its existing Marcellus pads in West Virginia.
I believe Torchlight only has to do two things to "juice" its share price. First, finalize a capital raise, which I believe will be in the range of $20 million to $25 million. Second, announce successful results from the first five wells of TRCH's southwest Kansas joint venture with Ring Energy (REI), which is a great complement to TRCH's Oklahoma assets.
I believe both events will occur in the next few weeks; thus, now is the perfect time to initiate a position in Torchlight Energy. I published a price target for TRCH of $8.25 in March and I still believe that figure applies.
