Shares of U.S. energy company Torchlight Energy Resources (TRCH) declined as much as 16% in early trading on Monday. While falling oil and natural gas prices didn't help the situation today, the news driving the drop was likely an update on the company's planned reverse merger with Metamaterial (MMAT.F).
In December, Torchlight, an exploration and production company, announced that it had entered into a fairly complex reverse-merger deal with Metamaterial, a Canadian specialty materials company. Effectively, Metamaterial will end up owning 75% of the combined company, with Torchlight shareholders owning the rest. Metamaterial management will run the company after the deal is complete, offering it a backdoor of sorts into a U.S. listing.
That said, there are a number of conditions on the deal, including Torchlight shareholders receiving preferred shares that will allow them to participate in the financial benefit from the planned sale of Torchlight's energy assets, which don't fit with Metamaterial's business plans. All in, there are a lot of moving parts here.
The original goal, announced during the conference call for the deal, was to close the transaction last month. That date has come and gone, with today's update pushing the closing out even further. According to the news release, as the companies work to get all of the necessary approvals and plans in place, the hope is that it will close in the second quarter.
Investors didn't seem to like this bit of information and sold the stock, perhaps reading the delay to mean that consummating this marriage has been more difficult than expected.
There's a number of different factors driving Torchlight Energy's stock right now. On the one hand, it's an oil and gas driller, so energy prices are important. That will remain true even after the merger, which involves disposing of those assets, given the preferred-share issue that is planned. Then there's the actual merger, which will effectively remake the company into something entirely new.
As it stands, Torchlight Energy is something of a special-situation play, and is likely only appropriate for more-aggressive investors willing to take a very active role in their portfolio.