Earnings Transcript for MMAT - Q3 Fiscal Year 2014

Executives: Derek Gradwell - SVP, Natural Resources, MZ Group, IR Tom Lapinski - CEO John A. Brda - President and Secretary Roger N. Wurtele - CFO

Analysts: Mike Breard - Hodges Capital Management Inc. Glenn Williams - National Securities Jim Collins - Portfolio Guru LLC Andrew Stuart - Hudspeth County Herald

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Torchlight Energy Third Quarter 2014 and Operational Update Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. [Operator Instructions]. This conference is being recorded today, Tuesday, November 25, 2014. I would now like to turn the conference over to Derek Gradwell from MZ Group. Please go ahead.

Derek Gradwell: Thank you, operator. Good morning everyone and thank you for joining us today for Torchlight Energy’s third quarter 2014 and operational update conference call. On the call today are the company’s CEO, Tom Lapinski; the company’s President, John Brda; and Roger Wurtele, the company’s Chief Financial Officer. Tom, John, and Roger will provide comments regarding recent developments in Torchlight’s exploration production as well as other corporate developments. After the prepared remarks they will be available to answer questions from investors. I’d like to remind our listeners that on this call prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties and that management may make additional statements in response to your questions. Therefore the company claims the protection from the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements related to the business of Torchlight Energy Resources Inc. and its subsidiaries can be identified by common used forward-looking terminology, and those statements involve unknown risks and uncertainties including all business-related risks that are more detailed in the company’s filings with the SEC. For those who are unable to listen to the entire call we will have an audio replay that will be available, and the call is being webcast so that you can log on via the Internet and access details were provided on the conference call announcement that was distributed last on November 19th. At this time I would like to turn the call over to Tom Lapinski, the Chief Executive Officer of the company and he will provide opening remarks. Tom, the floor is yours.

Tom Lapinski : Thank you, Derek and good morning to everyone. Over the course of the last three years one of our primary goals has been to position Torchlight to significant growth while properly managing our risk. To that end we currently have four core projects; the Marcelina Creek Field Development in Wilson County, Texas, the Ring Energy Joint Venture in Southwestern Kansas, the Hunton play in Central Oklahoma with Husky Ventures and the Orogrande Project in West Texas. The salient characteristic of these projects is the number of potential drilling locations they presently provide with predictability and ROIs which will benefit shareholders over the long-term. We are focused on low cost production which provides a meaningful safety buffer if oil prices go lower before recovering. Counting Marcelina Creek, the Hunton Play in Southwest Kansas we have over 500 locations that are primary producing formations. If we have success [ph] at Orogrande an additional 2,500 locations could become available for future development. So the future growth strategy of the company has been well orchestrated and mapped out and we are focused now on an orderly draw-out which will continue to increase our daily production. To that end during the last nine months we have grown our average daily production by nearly five-fold. At the end of 2013 we were at 88 barrels of oil equivalents per day as compared to 413 during September of this year. We also hit a major milestone in cost saving as our total lifting cost across all of our plays was lowered to about $19 per barrel of oil produced. The majority of our production increase comes from our Hunton partnership with Husky Ventures. We had at the end of the third quarter 28 producing wells and another ten either drilling or in some stage of completion across our 5 AMIs with Husky. We presently have four rigs running drilling approximately one well per month for each rig and we continue to add to our lease acreage each month, which adds new locations to be drilled in future. Torchlight Energy increased its ownership in Hunton Play with Husky Ventures acquiring an additional 25% in what we call the P4 AMI increasing the total acreage in this AMI that targets the Hunton by adding an additional 1,690 acres. The drilling program at Hunton continues to accelerate as the five-rig drilling program is set to resume in early 2015 which will also increase the number of wells being drilled on a monthly basis. The combination of a five-rig drilling program and ongoing leasing activity provides pronounced opportunity to deploy capital and grow our production portfolio. As at the end of the third quarter we now have 28,679 net undeveloped acreage in the Hunton Play with Husky. In Southwest Kansas our initial drilling program with Ring Energy where we are 50

Roger N. Wurtele: Thanks, Tom. We posted solid financial results for the three months ended September 30, 2014. Revenues for the third quarter were approximately $2 million compared to $1.5 million in the third quarter of 2013, representing a growth of 330%. This is reflected by the ramp up in production from our core assets, principally from the Oklahoma relationship as Tom has just described. Our third quarter’s additional investment in oil and gas properties totaled $5.6 million of which $4 million was deployed in Oklahoma and $1.6 million in Southwest Kansas. Total investment in properties at September 30 was $36.2 million. Capital was sourced through equity offerings which closed in the third quarter. They netted $3.4 million to the company. An additional $4.5 million was received from proceeds from the issuance of subordinated convertible notes. Looking at our capital obligations over the next 12 months we will need to acquire new capital through additional debt or equity financing in order to continue to expand our operations. Results of operations reported for the third quarter 2014 are a net book loss of $2.8 million of which $2.2 million was driven by non-cash expenses. Adjusted EBITDA, that is after taking into account non-cash expenses for the third quarter was a positive $309,000. Cash used in operations was $700,000 for the third quarter. Now I will hand it over to John Brda, who will provide you with the summary and further detail.

John A. Brda: Thanks, Roger. Currently our growth plans for the remainder of 2014 and 2015 are all coming through the drillbit. We have no plans to acquire other producing companies or properties. However we will consider to expand or keep expanding with our current partners on a case by case basis. Our CapEx over the next 15 months including 2015 will remain around $35 million. The majority of this CapEx will be utilized in our Hunton Play in Central Oklahoma. Even at today’s oil prices we will continue to expand in the Hunton as our LOEs in the play have been better than expected at around $15 per barrel. As a company we have reduced our LOE project-wide and company-wide to approximately $19 per barrel of oil produced. This is really significant and it speaks to our ability to make money in a low price oil environment. We plan on further development on our Ring project once the 3D seismic is assessed and we will perform a couple of reentries in the South Texas. Most importantly we'll begin drilling on our new project at Orogrande in the first quarter of 2015. As Roger mentioned above we'll be sourcing capital for these project via debt, equity cash flow, farm-out, sale of non-core assets or a combination of any of above in order to continue to meet our obligations. In addition, we will be high-grading projects and looking to divest of certain projects that are no longer core to our business strategy. We are expecting to exit 2014 having spent approximately $28 million in CapEx for the year, including our drilling scheduled wells for this year remaining for the fourth quarter. We have discussed openly throughout the year the number of wells we expect to have involvement and although it’s an evolving process for the year we are currently on pace looking to exit the year at approximately 45 wells, which is a significant number compared to many of our peers and compared to where we were this time last year. Any fluctuations will be strictly due to rig availability at this point. Locations and other services are not a problem. As most of you know we have been working through an incredibly arduous process of securing debt financing to move the company forward. Certainly this process has taken significantly longer than anticipated due to the environment we are in and as we talk today that's still ongoing. We feel that this process will come to an end at any moment and we will be able to announce that as soon as we can. And believe me we are all anxious -- more anxious than any of you on the phone today. Although the stock has traded down this last quarter due to oil price decline, a short attack [ph] and the apparent need of finance we are still making money on a daily basis and producing oil on a daily basis and we're not going anywhere. Being a non-operating partner we have the ability to pick and choose if need be which wells we need to drill and which ones we don't. There will be mistakes and we like the province [ph] we are in, I just wanted to let everyone know we have the flexibility to ride out any storm if need be. We ended the third quarter with a run rate of approximately 413 barrels of oil per day net to Torchlight’s working interest and we will revise the year end guidance when we announce the closing of the financing. Lastly more than a few shareholders have asked us what is going on with our investigation to the short attack by an anonymous letter writer. I can assure you we have not let up on our investigation and we feel like we are getting close to finding that who that person is. Once we do we will turn that information over to the proper authorities and also pursue legal recourse on our own through a libel suit. Operator that concludes our comments for today. We can open up for questions when you ready?

Operator: Certainly. [Operator Instructions]. Our first question comes from the line of Mike Breard with Hodges Capital. Please proceed with your question.

Mike Breard : Yes, on your financing are you negotiating with the same individual and group and just trying to dot the I’s and cross the T’s and satisfy the law here?

Tom Lapinski: Well I will tell you this that we have -- love to talk about more like this, more about this particular financing. We have identified a lead in the transaction and we have identified the partners to go along with that transaction. And I’d love to be able to tell you exactly where we're at on it, Mike. I know everybody wants to know. All I can say is we're getting close and we're going to announce something as soon as we can.

Mike Breard : Okay. But it’s…

Tom Lapinski: Nothing has changed from the partner standpoint or anything of that nature or who the lenders are.

Mike Breard : Okay, there is no big differences, you’re just trying to analyze the document.

Tom Lapinski: That is correct.

Mike Breard : Okay thank you.

Operator: Thank you. And our next question comes from the line of Glenn Williams with National Securities. Please proceed with your question.

Glenn Williams : Hi. Good morning everyone. Just had one quick question, I was wondering if you could speak, I guess briefly to the economics of the wells, primarily within Hunton play in Central Oklahoma area specifically as it relates to what's being going on with oil prices in general and how that could potentially impact the drilling program moving into I guess ‘15.

Tom Lapinski: No problem. Actually we were just up with Husky Ventures having the same discussion and it was a quite detailed discussion, talking about where oil prices need to be and at what point do we actually scale back on our operations up there and really reduce our CapEx and talk about reducing rigs and what have you. And the answer to that question is probably if we get to a below $70 environment, approaching the $65 environment we will probably scale back rig activity to only drill the acreage that we need to drill in order to hold acreage. One of the things I touched on earlier in the call is that we really have a low operating environment up there. We're spending above $5.2 million to drill a well. So our lease operating cost along with our finding costs are less than $40 a barrel out there and if you figure SG&A is and what have you, I think $65 starts to be at a point where we start to reduce our CapEx out there and only drill to hold acreage. Anything over and above that is still profitable for us and we will continue to drill that acreage and the game plan that Husky has set up.

Glenn Williams : Okay. Thank you. That's all I actually had.

Tom Lapinski: Okay.

Operator: Thank you. [Operator Instructions]. And our next question comes from the line of Jeff Collins with Portfolio Guru. Please proceed with your question.

Jim Collins: Good morning. It's Jim Collins, You've mentioned in -- a.k.a. Jim, yes. You mentioned in your earnings release 34 wells and 413 barrels of oil equivalent per day net production to you. That was as of September 30th. Can you give us those numbers for today or as recently as you have them?

Tom Lapinski: The answer to that question is I'll be able to talk more about the production once we announce the financing. I am not in a position to do that until we announce the financing and once we do that we'll be able to speak to what our current production is as of today. Those 34 wells obviously are company-wide, 28 of those being in the Hunton. We have brought on several wells since September 30 in the Hunton Play so we're prepared to talk about that but we can't talk about it until we announce like I said.

Jim Collins : Okay, and just on the -- it looks like you're listing Smokey Hills as non-core now. Can you just talk about where you are in the AMD process and what happened there that it didn't meet your expectations?

Tom Lapinski: Well certainly, over the summer and you saw this in the CapEx we spent in the third quarter, we drilled about five wells out there and our expectations were that we'll be seeing in a Maquoketa [ph] Dolomite, we did see in the Maquoketa [ph] Dolomite but the production levels from those areas were just not sufficient enough for us to continue that program. So we're going to be looking to sell the well bores that we're in out there as well as sell the remaining acres that we have, and David Arndt who is our Operations Manager has taken strides in that process already. So we have not officially hired a company to market it. I don't think the size and scale of the project warrants that but we have had discussions with local operators about taking over those well bores and the leases.

Jim Collins : Okay, and my last question is on the opportunities you see [ph] with project Ring in terms of 3D seismic. You've spoken about that before. Can you just update us on how that shoot is going and what…

Tom Lapinski: The shoot has not been started. In fact we are -- at this point we are still interviewing possible vendors for the shoot and I think within the next 45 to 60 days process will get started and I assume that that would be finished up by end of first quarter of 2015.

Jim Collins: Okay. Thanks for the timeframe there and thanks for answering my questions.

Tom Lapinski: All right. Thanks Jeff.

Operator: Thank you. And it seems that we have no further questions at this time. I'd like to turn the floor back to management for additional or closing remarks.

Derek Gradwell: Actually we just have one more question that popped in, Hudspeth County Herald.

Operator: Here we go, I guess Andrew Stuart, please proceed with your question.

Andrew Stuart: Thank you I was just wondering if you could say a little bit about, I guess what the timeline is for the Orogrande project or how you view that progressing in the coming months or…?

Tom Lapinski: Absolutely, we are actually doing all the background work right now, working with University lands to determine the locations we want to start with out there, talking to vendors about their roads and locations that are going to be necessary, speaking with people all about what kind of services they are going be needed. We did have an obligation to start drilling out there in the first quarter of 2015 and we are on target to do so. So our plans are to get all of our homework done here over the next 30-45 days and look to turn to the right as I just say some time in the first quarter of 2015.

Andrew Stuart: Thank you.

Tom Lapinski: Thank you.

Operator: Okay, it seems there are no further questions at this time.

Tom Lapinski: Thank you all for joining us today.

Operator: Okay, thank you ladies and gentlemen. This concludes today’s teleconference. You may now disconnect your lines at this time. And thank you for your participation.