The oil business is similar to that of mining in that there are prospectors in oil just as there are in mining. In Midland, located in the Permian Basin in Texas, the go-to prospector is Richard Masterson who discovered the Wolfbone unconventional play in the Delaware Basin in West Texas extending into New Mexico.
It would be fair to suggest that Rich Masterson is a master of his trade and an expert in unconventional Permian Basin oil projects. Recently he discovered yet another giant oil district called the Orogrande Project now described as Wolfpenn.
While the price oil has crumpled under deflationary pressures and employment in the oil patch slashed, the price of land in the Permian Basin has held up. In deals done recently Diamondback Energy paid $23,845 per acre for 11,948 acres in the Midland Basin in May. In early July, LINN Energy sold 6,400 acres in the Wolfcamp district for $16,000 an acre. Wolfcamp is similar to Wolfbone and hopefully for the latest discovery in Orogrande. While energy prices were far higher last September, the price of almost $51,000 an acre paid by Encana Corporation for 140,000 net acres gives you an idea of the potential for these deals.
New districts get found now and again, that's not a big deal. Where the Orogrande Project becomes a big deal is that one company controls the entire 168,000 contiguous acres. That company that Rich Masterson located the giant field for is named Torchlight Energy (TRCH-OTCBB).
Torchlight did a deal on the 168,000 acres with the University of Texas. The deal requires a certain minimum amount of drilling to maintain the JV. Torchlight owns a 95% working interest that drops to 85.5% after initial costs payout takes place.
There have been wells drilled on the project so Rich Masterson and Torchlight have numbers to work from to compare with Wolfbone and Wolfcamp. In the Orogrande project the oil rich shales are shallower making drilling cheaper; about 6200 feet compared to 7800-9800 in Wolfcamp. The thickness of the pay structure is higher in Orogrande, 1300 feet of pay compared to 300-700 feet in Wolfcamp. The porosity is higher in Orogrande and total oil content up to 5 times higher than in Wolfcamp.
If we compare Wolfpenn/Orogrande to the other basins in the Permian structure, there is a potential of 4-6 million barrels per section. With a total land position of 168,000 acres, if 100,000 prove prospective, the project would yield 156 sections. Naturally if more acreage proves prospective, there would be more sections. A 624,000,000 barrel field would make Torchlight a big company.
Torchlight is looking for potential JV partners to provide the money for drilling. At present Torchlight is valued by the market only for their existing production. The market is giving little value for their potential. With such a large land position it would be impossible for a junior company to drill out the project. Torchlight will do some kind of JV including an option on more of the project for a certain minimum payment per acre.
Every bear market sets in place everything necessary for the next bull market. Oil is the lowest price in constant dollar terms in many years but we know we will need oil in the future. The leading oil companies will be looking to do deals with high potential and Orogrande certainly has potential.
In constant dollars, the CRB is the lowest it has been in 59 years. Those calling for deflation and even lower prices don't recognize that we have already had the deflation. Buying at historic lows always seems to work. With a $28 million market cap, Torchlight has a lot of potential for profit.
I am biased. I own Torchlight shares bought in the open market, I have participated in PPs at higher prices and Torchlight is an advertiser. Do your own due diligence.
Torchlight Energy Resources Inc
TRCH-NASDAQ $.98 (Aug 18, 2015)
29.9 million shares
Torchlight Energy website