Buckle up, backseat investors and climate fiends. An oil and gas company with a sketchy history has become the target of a short squeeze, led primarily by Reddit investors who have been driving hedge funds wild this year.
The latest focus of the Reddit-fuelled investment frenzy is a company called Torchlight Energy Resources, which currently operates oil drilling sites in West and Central Texas. Torchlight was hyped up on Reddit stock forums, including r/WallStreetBets, the infamous forum responsible for sending stocks in companies like GameStop and AMC to the moon, in recent weeks. Reddit-based Torchlight shareholders have even formed a separate subreddit, r/TRCH, which had more than 7,000 members on Tuesday morning. (“I’m here for the moon, brothers,” one post on the subreddit reads, with a screenshot of details on the user’s 5,000 shares in the company.)
Thanks to all this attention, the value of Torchlight’s stock has shot up as Redditors and others have seen the potential for a possible short squeeze. Bloomberg reported Tuesday that Torchlight is now the second-biggest gainer on the Nasdaq thus far this year; its stock jumped 74% on Monday, and was trading at more than $US10 ($13) a share on Monday (it’s back under $US10 ($13) as of Tuesday morning).
“There are a lot of companies in this shale sector,” said Clark Williams-Derry, an energy finance analyst at the Institute for Energy Economics and Financial Analysis. “A lot of big ones, a lot of little ones, everything from Exxon down to a tiny publicly traded but often sort of over-the-counter company. There has been a boom in shale, but shale has been one of the best places to lose your money over the past decade–it is a terrible investing sector.”
Williams-Derry pointed out that XOP, a popular oil and gas ETF — a common type of fund that bundles stocks that in this case is mostly shale gas companies — has plummeted in value since 2014, the height of the U.S. shale boom.
“Imagine if your investment advisor had told you at the beginning of 2014, ‘hey, I’ve got a great idea for you. Let me take your money, we’ll put half of it under your mattress, we’ll take the other half, and light it on fire,’” Williams-Derry said. “That strategy would have returned better than investing in shale. It’s been a great industry for not creating value but destroying value.”
Shale has rallied slightly over the past year, buoyed by a rise in oil prices overall and restraint in the industry on not spending so much on new exploration. But Torchlight’s incredible rise, Williams-Derry said, can’t be attributed to any big change in activity in the shale sector. “There’s been no change in the market fundamentals that would do that,” he said.
And even if shale is making a slight comeback, like a lot of the stocks Redditors have taken a shine to recently, Torchlight hasn’t exactly been making mountains of cash. In fact, the company is doing pretty badly. According to a federal filing from the company last month, Torchlight has lost $US114 ($146) million since its inception. And it expects even more losses coming down the road. That might be due in part to the fact that, as those filings show, it only sold $US2,471 ($3,169) of oil and gas in the first quarter of 2021. Your local Jiffy Lube almost certainly does more business in a week than Torchlight did in three months. But in part because of its meme stock status, Torchlight is now worth much more than your local oil change spot–its valuation now sits north of $US1 ($1) billion.
In December, Torchlight announced it would merge with a company called Metamaterial Inc., which produces, according to its website, products including “the world’s highest-performance Indium-free transparent metal-mesh” and is developing “a non-invasive glucose monitor that will help you take control of your life.” (Why they’re choosing to merge with a shale gas producer is unclear.) Torchlight said this week that the closing date for the merger was extended to June 30; it plans to pay out a special dividend to stockholders later this week, creating an extra incentive for those playing the stock market.
Despite bragging that it has a board with deep experience in the oil and gas industry, Torchlight actually has a pretty sketchy history. While normally companies need to go through rigorous vetting and public scrutiny with the SEC to go public, Torchlight appears to have pulled what’s known as a “reverse merger,” finding a publicly traded shell company to merge with to avoid the spotlight. In this case, it merged with a company that offered pole dancing classes (we’re not kidding) called Pole Perfect Studios, Inc. Bloomberg reported that the Texas Railroad Commission, which regulates drilling in the state, has actually listed Torchlight as inactive for more than four years, and hasn’t reported any production on three of its registered drilling permits.
In 2019, a firm that researches possible shorts for hedge funds wrote a report on the company, finding that Torchlight has only produced a little over 140,000 barrels of oil in its entire existence and sold only 22,887 barrels in the entirety of 2018. In comparison, Exxon produced 370,000 barrels of oil per day in Texas’ Permian basin in 2020, a decidedly terrible year for oil. Some of the Torchlight management’s oil and gas credentials, the report found, appear to have been fabricated.
“We believe [Torchlight] is a classic pump-and-dump run by a questionable management team in our opinion, with some of the leadership having previous run-ins with securities regulators,” the report states. “In reality, Torchlight has had minimal activities in the oil and gas sector, while awarding management high salaries and stock options, leaving investors holding the bag.”
Like many stocks that shoot to meme infamy, the Redditors hoping for a squeeze on Torchlight don’t seem to have an attachment to the actual company or the shale industry itself — this is purely a financial game for them. Sketchy shell companies, of course, can be found in all sorts of industries, and short squeezes can make any kinds of stock rise, not just oil and gas.
“It’s a little bit random, but it would not surprise me” if we see other shale companies become meme stocks, Williams-Derry said. “The world’s a weird place. There’s plenty of small, speculative players in the shale industry, including publicly traded players, that could be targeted for a short squeeze.”