TORC Oil Gas: A New Light Oil Junior Emerges

Goodbye Vero Energy, Hello TORC Oil & Gas (TOG-TSX).

TORC (which I believe stands for Tight Oil Resource Corp.) just announced it is combining with Vero Energy VRO.TO 2.51 [0.00]. TORC was a private company with 60 net sections of Cardium and 150 net sections prospective for Alberta Bakken oil. Pro-forma, TORC will become a Cardium focused junior light oil producer with more than 90 net sections of land.

Vero is a shadow of its former self. The company sold about 7,300 boed (86% natural gas) of production in the Deep Basin back in January of 2012. ??It rebooted as a junior oil producer focused on its 60 net sections of Cardium.

The transaction metrics imply an $80,000/boe for Production which is a fair price for 2,200 boepd with only 65% oil and liquids. But I still feel the pain for those who bought in a little over a year earlier when the stock was above $5.

The following statement by VRO’s CEO is supposed to make you feel better:

‘The combined entity represents an exciting opportunity for Vero shareholders.’

The last time I read the word exciting in a sale process, I remember some shareholder shafting was involved. This automatically tells you you’re supposed to be part of the other team, that’s where the good deal is being done!

The new TORC would provide a solid production base from the Cardium and a significant exploration platform with more than 350 net sections of emerging resource play exposure.

The Cardium formation is a known low risk development play ‘ boring, we know what it’s all about.

On the other hand, the emerging oil play at Monarch in Southern Alberta is intriguing. The company claims 80% success on 10 net wells drilled so far. Three of them are on production but there are no figures provided. This is a good management team, is their success similar to what DeeThree is having? If yes, the upside could be huge thanks to more than 150 net sections of land.

Speaking of management, they have built and sold companies more than once, 3 times to be exact. They’re an experienced bunch led by Brett Herman and they own 20% of the new TORC. Nothing beats having skin in the game when it comes to motivation and results.

torc track record

shiny track record rinse and repeat!

VRO didn’t trade at a premium but since the new TORC team will be fully in command, it looks like things will be different.

The market seems to agree based on the $/boed metric of the new company:

Basic O/S: 194 million

Exit Production: 3,900 boe/d (75% oil & NGL)

Debt: 0

Cash: $40 million

Assuming the whole 3,900 barrels of production are light oil and a $2.60 share price based on the financing price, the company is trading at $119,000/boed. That’s rich; in fact it’s higher than Pinecrest Energy for one.

A 25% increase in average annual production to 4,900 boed in 2013 still leaves the company expensive relative to its peers. The market truly believes this team can repeat past successes, you can see it through the valuation.

Finally, we all know where this is going; the new TORC is simply part of the rinse/repeat process in value creation. Grow production quickly and sell out to a major for a premium. The Alberta Bakken prospect deserves a closer look, time to get Mr. Herman on the phone.

What do you think of TORC?