Oil and natural gas company Torchlight Energy Resources, Inc. (TRCH) explores for, acquires and develops oil and natural gas properties in the United States. The company holds interest in the Orogrande project in New Mexico and the Hazel project in Sterling, Tex. TRCH’s stock has rallied 1,317.1% year-to-date and 188.9% over the past month on the meme stock frenzy.

In December, the company agreed to a business combination with Metamaterial Inc. Under the agreement, TRCH’s shareholders will retain only a 25% equity interest in the combined business. Meanwhile, its staggering losses and weak cash balance continue to be a concern for investors. 

Although the U.S. energy industry has been gaining momentum on soaring oil prices and favorable government policies, TRCH has not been able to capitalize on the tailwinds and is currently generating a loss. 

Here is what we think could influence TRCH’s performance in the near term:

Meme Stock Rally Can be Short-lived

TRCH’s stock skyrocketed with retail traders taking interest in the stock. It is one of the latest additions to the meme club following in the footsteps of other names, including GameStop Corporation (GME) and AMC Entertainment Holdings (AMC). While the frenzy looks tempting, playing the short squeeze is certainly not a surefire path to long-term gains. Meme stocks are very volatile given that they are touted on social media platforms without necessarily  possessing solid underlying fundamentals. So, TRCH’s massive rally should be  expected to be short-lived.

Acquisition Deal

In December 2020, TRCH inked a merger agreement with Canada-based Metamaterial Inc., the completion of which will deliver to shareholders of Metamaterial holding an approximate 75% equity interest in the combined company. TRCH’s shareholders are expected to retain an approximate 25% equity interest in the combined company. The acquisition could fundamentally change TRCH because  it plans to sell off its oil and gas assets.

Unimpressive Financial Performance

TRCH’s oil and gas sales were $2,471 for the first quarter, ended March 31, 2021, representing a 97.1% year-over-year decline. The company’s gross loss came in at $12,021, compared to a $16,762 gross profit in the first quarter of 2020. Also, TRCH reported a $2.06 million net loss for this quarter, while its loss per share was  $0.02. Furthermore, its general and administrative expense increased by 64.4% year-over-year to $1.72 million over this period.

The company’s trailing-12-month gross profit margin stands at negative 21.5%. Its ROE, ROA and ROTC are negative 32%, 19.9% and 6.7%, respectively. And TRCH’s cash from operations is negative $4.56 million. Its 4,052.7% CAPEX/Sales ratio is significantly higher than the 9% industry average.

Stretched Valuation

In terms of trailing-12-month EV/Sales, TRCH is currently trading at 8,087.14x, significantly higher than the 3.19x industry average. Moreover, its 5,821.73 trailing-12-month Price/Sales multiple is significantly higher than the 1.70 industry average. In terms of trailing-12-month Price/Book, TRCH’s 16.47x is 943.9% higher than the 1.58x industry average.

Consensus Price Target Indicates Potential Downside

Currently trading at $9.92, analysts expect the stock to hit $2.7 in the near term, indicating a 72.8% potential decline.

POWR Ratings Reflect Bleak Prospects

TRCH has an overall F rating, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. TRCH has an F grade for Stability. This reflects that the stock is more prone to volatility versus  its peers.

The company has a Value grade of F, reflective of its stretched valuation. Also, it has an F grade for Quality, which is in sync with its lower-than-industry asset turnover ratio.

In addition to the grades we’ve highlighted, one can check out additional TRCH ratings for Sentiment, Growth, and Momentum here. TRCH is ranked #94 of 95 stocks in the C-rated Energy – Oil & Gas industry.

Click here to view the top-rated stocks in the Energy – Oil & Gas industry.

Bottom Line

TRCH’s steep rise in stock price has been driven primarily by the meme craze. However, the company’s weak fundamentals do not justify its stock’s  massive gains. Furthermore, uncertainty surrounding TRCH’s recent business combination with Metamaterial could be a cause of concern  for investors. Given these factors, we think the stock could retreat from its record levels and, hence, it is best avoided now.

TRCH shares fell $9.92 (-100.00%) in premarket trading Tuesday. Year-to-date, TRCH has gained 1,317.14%, versus a 12.93% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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