![]() ![]() Once the deal closes, the positions will offset, leaving the cash spread available to cover the value of the oil and gas distribution (which those short Torchlight will also be short). Therefore, I have bought Metamaterial shares and shorted out the equivalent amount of Torchlight shares to capture the spread. The value of the ongoing business with Metamaterial will be valued at the $0.74 implied by the Metamaterial shares, as investors can switch their exposure to Metamaterial at any time.Īs you can see, even if we assume the Orogrande is worth the full amount implied by the distressed debt transaction, Torchlight shares are trading with a significant spread to their estimate post deal value. To take that into account, I'm going to look at the merger from the perspective of a Torchlight holder. In both cases before considering the value of the Torchlight oil and gas assets. With Metamaterial at $2.74 USD and Torchlight at $2.15 USD that implies a Metamaterial share will be worth $8.06, or equivalently, that a Torchlight share will be worth $0.74. I'm going to assume the ratio ends up at 3.75 Torchlight for every Metamaterial share, which I think is probably conservative. I think the ratio may end up being slightly less than that, as Torchlight gets credit for shares sold to raise cash above a minimum. Given Metamaterial shareholders are to own 75% of the combined firm, that would imply a ratio of 3.96 Torchlight for every Metamaterial share. Based on a recent press release, I estimate Metamaterial will have approximately 109 MM shares outstanding. I estimate approximately 144 MM Torchlight shares will be outstanding at the close of the transaction. Starting from Torchlight's most recent quarterly report, I went through and added up the number of shares outstanding, plus new issuances for cash, debt conversion, and the assumption that in-the-money warrants and options will exercise. Given Metamaterial shareholders will only be getting a stake in the combined business and no other consideration, I'm not going to value their business separately, as I don't think that's especially relevant for the trade I'm making here. I think that is a very best case scenario for Torchlight shareholders, and I'll present cases showing a sensitivity to this factor. The combination of those three sums comes to $93.7 MM. However, to give Torchlight the benefit of the doubt I'll assume the full $80.9 MM. Given the area around Orogrande isn't a prolific part of Texas (with minimal drilling in the area) I think it's also possible that Orogrande could be worth $0. Nevertheless, even if we assume it was and take full value that would imply a value of $80.9 MM for the entire stake. The probability of them being able to repay that debt wasn't overwhelmingly high, so I doubt it was worth its face value. Orogrande has a couple of recent transactions surrounding it, and the highest priced was the conversion of $7.3 MM of debt into a 6% working interest. That burdens the economics of any development and makes the land less valuable than it otherwise would be. That means he will receive 4.5% of all revenues while not contributing toward any capital or operating costs. One factor reducing the value is that, according to the most recent 10-Q, the chairman of Torchlight holds a 4.5% royalty interest in a private company. ![]() The company has a 66.5% interest in the Orogrande project which they have been trying to market for some time. That leaves only their Orogrande project. They also sold their Winkler project for proceeds of $350,000. I'm going to assume this option gets exercised, as oil prices are up substantially since it was granted. They've granted an option to a buyer on their Hazel asset already for $12.4 MM, and I think it's most of the value. Prior to the deal announcement TRCH shares traded around $0.30 per share, and I think that's a reasonable guess at the value of the special dividend on TRCH shares. The deal seems largely designed to tap into current market enthusiasm for green energy assets. Torchlight holders will also get a distribution that will allow them to receive the proceeds from the sale of the oil and gas assets (or the rights to a spin-off of those assets). The arrangement specifies that Metamaterial holders will get 75% of the new shares, while TRCH holders will get 25%. The transaction is essentially a reverse merger, with Metamaterial getting a NASDAQ listing for their firm, which is a clean energy business, while Torchlight (a subscale oil and gas company) gets paid for their shell. Metamaterial ( OTCPK:MMATF) is merging with Torchlight Energy Resources ( TRCH).
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