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Joe Giamichael's Top Two Oil & Gas Fixer-Uppers

Source: Tom Armistead of The Energy Report  (5/29/14)

Joe Giamichael likes a project. The founder of Umbrella Research & Advisory finds underperforming junior explorers and producers with fundamentals that spell success, and he works with them to achieve their potential. In this interview with The Energy Report, Giamichael describes the strategies that have allowed these companies to thrive, and why the good times are just beginning for shareholders.

The Energy Report: Your research is focused on small, domestic companies with core strengths that are starved of growth capital. What does this focus do for your portfolio's value?

Joe Giamichael: It means that a lot of our target companies are projects. They're fixer-uppers. Our goal is to find assets and management teams that we like and help to get them on the right path. So there's typically a bit of a lag at the beginning as the ship is being righted. The junior exploration and production (E&P) space is littered with broken companies, where they have some of the pieces of the equation, such as good management, good assets and access to capital, but they've failed in one of those three endeavors. Typically, if we find a nice asset that we like, we can work with the management team to help find the best way for them to develop it.

TER: You initiated coverage of Torchlight Energy Resources Inc. (TRCH:NASDAQ), expecting it to evolve significantly. Has it fulfilled your expectations?

JG: It has, and I think that we're still in the early innings with it. Torchlight is a pretty exciting company that we've been working with for nearly two years. I think it has made huge strides over that time. Given the aggressive drilling program that it has in front of it right now, I think the good times have only just begun for shareholders. We'll see pretty significant volume growth this year.

Torchlight value growth
Source: Umbrella Research & Advisory

TER: Where does the company go from here?

JG: In 2014, you could see almost a tenfold growth in barrels per day. It has a capex program of 90 additional wells. It has all-star partners in both Kansas and Oklahoma. I think it is punching well above its weight in regard to its partners. Its portion of those 90-gross wells should take it north of 2,000 barrels a day (2 Mbbl/d) production as an exit rate for this year.

TER: Is it doing its own geological research? How is it finding the productive properties?

"In 2014, you could see almost a tenfold growth in barrels per day from Torchlight Resources Inc."

JG: The chairman of the company actually was the former head of midcontinent E&P for Amoco Corp. He has gone into areas that he has known and developed to source Torchlight's core projects. The company looked for players with good engineering and drilling capabilities and a history of success in those specific regions. As an example, in Kansas, it is partnered with Ring Energy Inc. (REI:NYSE), and Ring's management team has had two previous successful public exits, the most recent being Arena Resources Inc., which it sold to SandRidge Energy Inc. (SD:NYSE) for $1.7 billion ($1.7B). Ring's team has a tremendous track record for drilling and producing these less sexy but very economic infill wells, and does so pretty rapidly. So Torchlight has a pretty good pilot program, and we expect the company could knock out as many as 20 or 30 wells this year, in which Torchlight is a 50/50 partner.

In Oklahoma, Torchlight has partnered with a group called Husky Ventures Inc., which has built a very big Hunton presence. Chuck Long, who runs Husky, has done an amazing job of unlocking the code there. The results seem to be improving well by well. Its last handful of wells has paid out in a matter of months despite pretty massive frack jobs.

TER: Looking back to the beginning, what prompted your expectation that Torchlight would evolve?

JG: Torchlight had some core acreage in Texas, where it was developing the Austin Chalk and Buda zones in the Eagle Ford area. Basically, this was going to be its first foray into bringing enough production on-line to make it economically viable as a public company. But this acreage was small—just a start. So what we saw was a few obligation wells and the ability to add to its acreage in order to reach maybe 300–400 barrels per day (300–400 bbl/d). From there, Torchlight would have the core cash flow to build a bigger and better company. What we liked was management's approach to really leveraging their relationships and getting involved in some pretty attractive projects. So it wasn't necessarily what it had in hand, but where we thought it was going.

Since we got involved, Torchlight's ability to access growth capital allowed it both to bring its legacy assets in Texas on-line and to make investments in other programs. The company used its friends-and-family network to get started. Then, through a structured offering, Torchlight was able to raise about $12 million ($12M) with retail. That's really what's gotten them going. Management has made a lot of very good choices in terms of allocating that capital.

TER: Is the growth of the company going to change the way it operates?

JG: I think the growth is definitely going to change it. As this company evolves, its cost of capital should come down pretty drastically, and its access to capital should improve. If you look at its earlier financings, that's about as expensive as capital is going to get.

TER: You said that you expected "uninspiring" results for 2013 for Stratex Oil & Gas Holdings Inc. (STTYX:OTCQB), and with accumulated net losses of $5.2M, it looks like it has fulfilled that expectation. Why did you initiate coverage?

JG: In 2013, Stratex didn't really have anything, to be perfectly honest. It had some non-op interests, and it was producing 30–40 bbl/d, hardly enough to justify being a public company. What got us involved was the fact that Alan Gaines joined its advisory board and, as of May 8, became chairman. He brought with him an asset package in Texas' Zavala County, about 3,000 acres and a pretty meaningful associated reserve base. That gave Stratex a very nice core asset to develop.

Stratex value growth
Source: Umbrella Research & Advisory

TER: Is the market overlooking value in this company now?

JG: Stratex has actually been very successful in raising capital to develop its Zavala County asset. The company recently announced that will acquire Richfield Oil & Gas Co. (ROIL:OTCQX). What Richfield offers is a presence in Kansas similar to Stratex's strategic development in Texas, where it's just traditional, unsexy but very economic infill drilling. Acquiring Richfield also gives Stratex a wild card with the Utah acreage, which is a bit more exploration-oriented. It's a large position in the central Utah overthrust. That has been an exciting venue for geologists but a frustrating area for drillers, as few have been able to unlock the code.

TER: Stratex has shifted from not operating to being an operator. How will this shift improve its results?

JG: Stratex will own the assets and control the development process. Being an operator allows Stratex to more efficiently allocate capital and to internally have more control over the direction and growth of the company. It's important for the company to be able to control its own destiny.

TER: Will this improvement be quantifiable in terms of barrels per day?

JG: Yes, absolutely. There are several wells coming on-line over the coming weeks. They are a result of the initial investments the company has made in Texas, as well its reworks in Kansas. The op model versus non-op is always going to have better margins. I think you'll see more volume growth in the very near future.

TER: Are there any other companies you're excited about?

JG: Because of the nature of how much work goes into getting these juniors on the right paths and making sure that they're funded and operating, we just don't have that much breadth, unfortunately. So we have to stay focused on the few companies that we have in hand. There are a few private entities that we're looking at and would like to work on further. I believe there are some decent growth opportunities that will bring these private companies into the public sphere, but for right now, we're staying focused on Stratex and Torchlight, probably for the next six months.

TER: Do you have other ideas on how companies can access capital?

JG: The one thing I will say is, having spent most of our careers in the small-cap space, we at Umbrella Research & Advisory view intelligent capital formation as paramount. As a result, we overuse a few aphorisms. One that our management teams get tired of hearing us say is that you can always drill a dry hole—that's the nature of the industry, and you have to be prepared for that—but you can't do a bad deal. You can survive a few dry holes, but you'll drown under a single bad deal. There are plenty of people who will offer you capital. You just have to be very cognizant of the hooks that are associated with it, and what those obligations will do to you in the long term, whether you're successful or not.

TER: That sounds like good advice for any energy investor. Joe, thanks very much for your time.

JG: Absolutely, thank you for having me.

Joe Giamichael is the founder of Umbrella Research & Advisory. He has over a decade of research experience concentrating on small-cap companies. He previously worked as a managing director and a senior research analyst at Global Hunter Securities, covering international and industrial companies. Prior to that, Giamichael was a director of research and senior research analyst at Rodman & Renshaw. His 13 years in financial services include his time with CJS Securities as a senior analyst and managing director, and at Knight Capital, where he was a vice president involved with special situation trading. Giamichael holds a Bachelor of Science degree from Skidmore College.

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DISCLOSURE:
1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services toStreetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Torchlight Energy Resources. Streetwise Reports does not accept stock in exchange for its services.
3) Joe Giamichael: I own, or my family owns, shares of the following companies mentioned in this interview: Stratex Oil & Gas Holdings Inc. and Torchlight Energy Resources Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: Stratex Oil & Gas Holdings Inc. and Torchlight Energy Resources Inc. My company has a financial relationship with the following companies mentioned in this interview: Stratex Oil & Gas Holdings Inc. and Torchlight Energy Resources Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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