Torch Energy Heading To Zero
Torch Energy Trust (OTCMKTS:TRRU) is a royalty trust whose only source of revenue is its net profits interest (NPI) in four fields in Alabama, Louisiana, and Texas. An NPI is a percentage of the profits (as opposed to revenues) derived from a specific oil field. The trust only does one thing -- collects its net profits interest from these fields, and distributes them to shareholders. Once the Trust no longer holds the NPI's, it has no soruce of revenue, and its worth comes down to the cash on its balance sheet less liabilities - book value. The trust currently trades at 15 cents a share, or a $1.29mm market cap. To put it mildly, this makes no sense. Briefly, in January 2008, by a 2/3's unitholder vote, the trust voted to terminate. This triggered a clause forcing the Trust to liquidate their NPI's (again their only revenue source), and distribute the proceeds from the sales. The Trust sold the fields in Alabama in December 2011 for $1mm, and sold the remaining fields in Louisiana and Texas in August 2013 for $3.2mm. In December 2013, the Trust distributed $3.258mm of these proceeds to unit holders, and after trust fees currently has $510,000 in cash, or 6 cents per share, and as noted because they sold their only revenue source, nothing more. The Trust might have even less than $510,000 if the costs associated with winding down the trust increase. Additionally, the Trustee has no outstanding litigation with any parties that could increase the value of the trust through settlements or legal victories. Either way, as the unitholders voted, the trust will terminate, and hit zero in the near future after it distributes the last of its cash. However, in the meantime it has a 60% downside to 6 cents a share where it should trade because that's all that's left.
Amazingly, the stock still has some liquidity. Average volume hits close to $10,000 per day, and Interactive Brokers has an inventory of shares to lend, so you can still get in on this trade.
Two possible catalysts that could move the stock lower come to mind, first the announcement of the final distribution at which point the Trust will announce it has no more money, and second the actual delisting of the shares. I spoke with the Trustee, and he believes that the Trust should wind down in the next 30-60 days, so stay tuned for more info.
Disclosure: I am short TRRU.
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