Shares of oil and gas producer
Torchlight Energy Resources
TRCH
rallied more than 200% over the past month to close the last trading session at $7.00. The stock hit its all-time high of $10.88 on Jun 21. Scarcely justified by underlying fundamentals, the staggering rally of 900% year to date has primarily been driven by the social media-driven ‘meme’ craze. Essentially, rising oil prices and the company’s ability to capitalize on it made the social media forums target the stock despite its fundamental weakness. As a matter of fact, Torchlight is being discussed by Redditors as a short squeeze candidate, and it is currently one of the top 10 most-discussed stocks on Twitter.
Cashing in on the retail trading frenzy, the Plane, TX-based company has announced plans to sell an upsized share offering of $250 million, taking a cue from fellow meme names like
AMC Entertainment
AMC
,
Transocean
RIG
and
Express Inc.
EXPR
.
In addition to the enthusiasm of retail traders, Torchlight’s year-to-date performance has been driven by an improving outlook for the
Oil/Energy
sector. The rally in crude prices to a multi-year high of more than $70 a barrel on the back of calibrated OPEC+ supply cuts and an upbeat demand forecast has lifted the upstream space and contributed to Torchlight’s rally.
However, despite the support from soaring oil prices, short-sellers have increased their bets on Torchlight (nearly 13% of float has been sold short) given its weak financials. A potential short squeeze is perhaps another reason for the stock being targeted by subreddit WallStreetBets.
The stock’s incredible run has rewarded early investors handsomely, but it remains to be seen if there is any further upside left in the stock. To that end, there are a few factors to consider:
Firstly, Torchlight is undergoing a complex merger deal that will see the fourth-biggest gainer on the Nasdaq this year abandon its energy operations. In December, the company entered into an agreement to combine with Canada-based Metamaterial Inc. – a developer of advanced materials. Should the transaction go through, Torchlight will merge its business with that of Metamaterial and even change its name. The final entity will trade on Nasdaq, with Torchlight shareholders holding a 25% stake. Recently, Torchlight declared a special dividend of preferred shares associated with this pact that will be payable just before the closing. The company’s shares have more than doubled since the announcement. Investors should note that the merger agreement has been plagued with delays, with the latest one deferring the closure from Jun 24 to Jun 30.
Further, Torchlight, which says its primary focus is on oil and gas projects in West Texas’ Permian Basin, saw its sales plunge more than 97% in the first quarter. The company is yet to turn profitable and raised ‘substantial doubt’ about its ability to remain a going concern in the latest quarterly securities filing, as its accumulated losses of around $114 million is only expected to increase. Moreover, Torchlight has very little production to substantiate its efforts.
In light of the weak fundamentals, the company’s excessive valuation looks unjustified. Torchlight is currently trading at 466.37 times its sales versus the industry average of 2.27X. Moreover, its P/B of 18.39X compares to the industry average of 2.12X.
To conclude, it’s quite unpredictable as to how this saga will play out. While a sudden rally in Torchlight stock may generate eye-popping returns for retail investors overnight, it may also quickly catch traders offside and lead to massive losses, given the extreme volatility associated with it.
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