Umbrella Research Torchlight Energy Resources

(OTCBB: TRCH)
______________________________________________________
Torchlight Energy Resources – Big Opportunities for
Little Players in US E&P
______________________________________________________
Summary

We are initiating coverage of TRCH with a Buy rating and a near

term price target of $5, based solely on the earning potential of the
existing projects. Torchlight Energy Resources represents a small-
cap means to play the multi-decade, Shale Revolution that is rapidly
Torchlight Energy Resources changing the face of the domestic E&P sector. While small cap E&P
has proven to be a highly volatile space, we view TRCH as a low-
Rating Buy risk/high-reward opportunity, where the company offers investors
Price Target $5.00 downside protection from current prices, based on the value of its
Valuation Methodology: NPV of Existing asset portfolio with the potential upside for exponential returns,
assuming the company is successful in further developing its
Assets
existing properties. The company is structured as a vehicle which
Current Price: $2.55
acquires interests in low-risk producing assets that can provide
Diluted Shares Outstanding: 17.2mm immediate cash flow with short payback periods. The operating
Float: 6mm model is highly scalable and volume growth can be very accretive to
Short Interest: -- earnings; as production volumes increase, the company is able to
Average Daily Volume (3 months): 11,960k access additional non-dilutive funding, predicated on the incremental
Market Cap: $34.6mm volumes, which is then redeployed into additional producing assets.
Cash and Equivalents: $0mm We have chosen what we believe to be a conservative stance in
Total Debt: $0.9mm regard to valuation based on the current outlook; as the production
Enterprise Value: $35.5mm programs move forward, we would expect to increase earnings
Working Capital: $-1.6mm estimates and price targets accordingly. In this model success
begets success and incremental volumes can generate exponential
Tangible Book Value: $2.5mm
investor returns.
Net Cash/Share: $0
Tangible Book Value/Share: $0.2
Investment Thesis
ESTIMATES $ (mm except multiples & EPS)
2011 2012 2013 The domestic US E&P industry is in the midst of a multi-decade
Revenue secular boom as a result of technological advancements in seismic
Q1 $ - $ 0.0 $ 1.2 imaging, horizontal drilling and hydraulic fracture techniques; which
Q2 $ 0.0 $ 0.3 $ 1.5 have allowed significant production increases from domestic
Q3 $ - $ 0.3 $ 1.5 unconventional oil plays. Over the past five years the contribution
Q4 $ - $ 0.8 $ 1.5 from these tight oil reserves have added nearly 1.8mm barrels per
FY $ 0.0 $ 1.3 $ 5.7 day (bopd) of crude oil production and that rate was recently
projected, by Blackrock, to increase to 3.5mm by 2020, which would
bring US production to 11.6mm bopd, second only to Saudi Arabia.
The previous decade has seen the formation of a number of
companies created to focus on exploiting those largely North
American natural resources. While many of these companies began
as small caps, intelligent capital allocation and resulting cash flows
have allowed many to grow into large cap companies, generating
returns in excess of several-fold for investors, during the same
period of time that the markets have only retraced previous levels.
Investors in companies like EOG, APA, COG, KOG, DVN have
benefitted both from significant equity appreciation, yield gains and
M&A activity. More recently, the entry of the Super Majors (XOM,
CVX, COP, BP, RDS, TOT) has led to consolidation among the
larger domestic producers and a focus on building scale. The
emphasis on scale and reserve life has led to a selloff of smaller
assets, determined to be non-core to larger entities.
These assets do not fit the requirements for a large E&P player either because they are small scale producers or reserve
lives are deemed too limited to tie up capital and management resources. This has resulted in the displacement,
shuttering or underdevelopment of what could be highly profitable assets within a smaller portfolio.

We feel that there remains a tremendous, niche oriented, market opportunity for a more nimble E&P entity, with access to
capital, to build a highly profitable portfolio of low-risk producing assets with highly visible cash flows. It is our opinion that
Torchlight Energy represents that opportunity; the company was created in June of 2010 with the intention of it being a
vehicle to acquire interests in oil and gas properties. Management has focused its resources on the acquisition and further
development of producing oil and gas properties (with an emphasis on oil); where investment targets present low risk, as
a result of proven reserves, and strong rates of return and short payback periods.

The ability to identify and execute strategic acquisitions will be key to the growth and success of Torchlight. These efforts
will be spearheaded by an experienced and competent management team led by Chairman and CEO Tom Lapinski, who
has over 44 years of experience within the oil and gas industry, 30+ of which were spent with Amoco, from which he later
retired and subsequently joined the Stephens Group to assist in the expansion of their oil and gas investment portfolio.

The company has two current projects, the Marcelina Creek Field Development and the Coulter Field, in which there are
currently two operational wells and a drilling program that should bring one more on in Q1 2013 without significant
incremental expenses. Based on total expected reserves of 9.33mm barrels of oil in the Marcelina Creek Field alone
(5.25mm of which would go to Torchlight as per the working interest agreements), we believe that this represents in
excess of $440mm of potential revenue and $100mm+ of potential net income. This base asset valuation offers the
downside protection to investors while the execution of near term drill programs transform this from an asset story to a
growth and earnings story, meaning that valuation will likely shift from a discount to the value of the asset on hand to a
multiple of the cash flows being generated from that asset. Assuming the Johnson#1 well is indicative of the remaining
opportunities we would expect the company to generate over $5mm in revenues over the next 12 months without
incurring any meaningful incremental expenses on drilling additional wells or entering into any new agreements. Given
this run-rate the company will have access to numerous forms of non-dilutive growth financing with which it can initiate the
next series of asset purchases.

Company Description

Torchlight Energy Resources Inc. (OTCBB: TRCH) is an energy exploration and production company headquartered in
Houston, Texas, focusing on oil related assets. The company is structured as a vehicle which acquires interests in low-
risk, producing assets that can provide immediate cash flow with short payback periods.

Torchlight currently has interests in two oil and gas projects, the Marcelina Creek Field Development and the Coulter
Field. Management expects to be involved in numerous other oil and gas projects in the future, once the company obtains
adequate funding. These projects may be available from wide range of sources, including small operators in financial
distress, larger companies that need to share costs and large producers who are consolidating their activities in other
areas. The strategy is to acquire exploration and development projects as a non-operating working interest partner,
participating in drilling activities on a basis proportionate to the working interest, which would allow the company to spread
the risk associated with drilling programs by entering into a variety of programs in multiple fields with differing economics.
In addition, Torchlight’s management plans to partner major activities, which will allow the company to engage the
services of proven industry veterans only when needed, without adding to long-term fixed overhead costs.

Primary Business Characteristics

• Project Focus: Torchlight targets exploitation and low risk exploration projects in order to reduce risk by tracking
resources where commercial production has already been established but where opportunity for additional and
nearby development is indicated.
• Experienced Management: The company plans to build on the expertise of its senior management, Thomas
Lapinski and John Brda, who have experience in successfully managing risks of projects, finance, and value,
while also receiving guidance from outside advisors and aligning with high quality vendor partners.
• Lower Cost Structure: Torchlight plans to maintain the lowest possible fixed cost structure by partnering out
major activities and engaging the services of proven industry veterans only when needed, enabling greater
 margins and providing opportunities for investment that would not be feasible for higher cost competitors for
lower-risk, valuable projects.
• Limit Capital Risks: The company plans to invest in projects gradually, with only enough capital exposure initially
to add value to a project and determine its economic viability. In addition, TRCH will limit its exposure in any one
project by participating at reduced working interest levels, hence being able to diversify with limited capital.
• Partnering for Excellence: Torchlight plans to partner with highly select and experienced vendors, which would
provide ongoing access to external perspectives, new project opportunities, specialization, networks, operations
support, and the ability to test continuously for more effective and cost efficient services.

Torchlight’s Business Processes

There are three primary business processes that the company must follow in order to be profitable, including Investment
Evaluation and Review, Operations and Field Activities and Administrative and Finance Management. Each one of these
business process also offers the company an opportunity to seek a distinct partner or alliance as the company grows and
expands its operations.

1. Investment Evaluation and Review. This is the first and primary step in the company’s operations as recognition
of quality investment opportunities is key to Torchlight’s growth and profitability. Broadly, this process incorporates
prospect acquisition, regional and local geological and geophysical evaluations, data processing, economic
analysis, lease acquisition and negotiations, permitting and field supervision. This is where the company’s
experienced management team can add the most value as they will be in charge of investment evaluation while
expert or specific technical support will be outsourced as needed. If management decides to invest in a project
and take it to development, only then will additional staff with very specific responsibilities be hired, which should
help to keep fixed costs down. Building a network of advisors is key to the pipeline of high quality opportunities as
many attractive investment opportunities could be presented from outside companies as well as from the large
informal community of geoscientists and engineers.

2. Operations and Field Activities. This business process only begins after the management approval of an
investment and incorporates well site supervision, construction, drilling, logging, product marketing and
transportation. Torchlight’s strategy is to very rarely be the actual operator; instead, the company plans to farm-
out sufficient interests to third parties that will be responsible for these operating activities while TRCH will provide
personnel to monitor these activities and associated costs.

3. Administrative and Finance Management. This business process will be responsible for coordinating initial
structuring and capitalization, general operations and accounting, reporting, audit, banking and cash
management, regulatory agencies reporting and interaction, timely and accurate payment of royalties, taxes,
leases rentals, vendor accounts and performance management that includes budgeting and maintenance of
financial controls, as well as interface with legal counsel and tax and other financial and business advisors. These
services are currently available from a variety of experienced sources; however, the company is working on
identifying a single outsourced vendor that will provide all or a majority of these services.

Torchlight’s Current Projects

Torchlight currently has working interests in two oil and gas projects, the Marcelina Creek Field Development and the
Coulter Field, which we discuss in detail below. These projects represent the in-hand opportunity for the company, which
will begin to generate substantial cash flow from the development of these assets; following this the company plans to
leverage current production to purchase interests in additional, production oriented, oil and gas projects.

Marcelina Creek Field Development

On July 6, 2010, Torchlight entered into an agreement to participate in oil and gas development joint venture with
Bayshore Operating Corporation, LLC, the current holder of an oil, gas and mineral lease covering approximately 1,045
acres in Wilson County, Texas known as the Marcelina Creek Field Development. The agreement provides for the drilling
of four wells, one of which is a horizontal re-entry well within the 280 Johnson Unit (the Johnson #1 well) while the other
three will be vertical development wells at locations to be determined later on within the existing lease property.
The Marcelina Creek Field Development is located over the Austin Chalk, Buda and Eagle Ford Formations, in Wilson
County, Texas. Traditionally, their production is controlled by vertical fracturing of the rock with high productivity in wells
which encounter the greatest amount of fractures; however, with the introduction of horizontal drilling technologies,
numerous opportunities exist in areas and fields that were originally only drilled vertically. Analyzing the work previously
performed by Bayshore, Torchlight believes that the Johnson unit re-entry is one of these opportunities

TRCH paid Bayshore an initial $50k deposit in July 2010 (which was credited to the initial payment due for the Johnson#1
well) and was responsible for 100% of total drilling and completion costs for this re-entry well, in return for a 50% working
interest. The original lateral well was drilled out to about 500 feet when the well encountered a fracture zone and test-at
rates of approximately 300 barrels per day. The operator attempted to drill out further when they experienced a casing
collapse which caused the well to fail. Management believed that sub-paralleling the original well bore should yield a high
probability of similar results.

In August 2010, re-drilling of the Johnson #1 commenced with the drilling of a lateral section of the Buda Formation of
approximately 1,840 feet. The Johnson #1-BH encountered good oil and gas shows and a completion was attempted;
however, the well produced large volumes of water, some introduced by Bayshore during drilling and some from a
different source (either a deeper formation or from a nearby well). In July 2011 a work-over crew was brought in to service
the well, replace a broken rod and re-work the downhole pump. The crew dropped in eight joints of pipe in the hole during
July. The well was damaged sufficiently to be “shut-in” (which means the valves at the wellhead have been closed so that
the well stops pumping) and the service company, Mercer Well Services, was notified of the damage. To resolve this
matter, Mercer agreed to re-drill the lateral portion of the Johnson #1 in May 2012, at their expense, which was completed
in August. The well was re-drilled into the Austin Chalk formation with the lateral leg extending out approximately 2,400
feet and demonstrated excellent oil and gas shows during the drilling and open hole testing, producing over 1,200 barrels
of oil which were sold as test oil. Based on a 24 hour test conducted in August, Johnson #1 produced oil at a stabilized
rate of 18 barrels of oil per hour or 419 barrels per day along with significant associated gas. In October, the company
announced the results of a 30 day test, with the well producing an average of 196 BOPD (barrels of oil per day) from the
Austin Chalk formation. The well became fully operational in Q3 with sustained production rate of over 100 BOPD, which
management believes is sustainable over the next few years.

On April 15, 2011, Torchlight exercised its option to continue with the development program in Marcelina Creek by
committing to the second well in the program (the first vertical well) called the Johnson #4 well. The company paid
Bayshore the $50k rig move in and paid drilling and completion costs of ~$1.6mm for a 75% working interest in the well.
As per the agreement, TRCH is also required to pay $200k when the well is either completed or plugged and abandoned.
Drilling operations began in July 2011 and the well encountered several pay zones. An attempt to complete in the Buda
Formation was made; however there were several mechanical and pump problems with the well which has delayed
completion. After correcting mechanical problems, the well was acidized (a technique involving pumping hydrochloric acid
into the well under high pressure to reopen and enlarge the pores in the oil-bearing formations) in February 2012 which
has resulted in a more stabilized flow. The well is currently producing 25 to 30 barrels of oil a day but management
believes that further stimulation techniques may need to be applied to enhance production. The company has performed
various tests on the well to estimate its daily deliverability, payout, and reserves and believes that after performing a
single stage frac (which only takes about three days and costs ~$150k) this well should be producing over 100 BOPD as
well.
 Johnson #4 Log Analysis

Source: TRCH Presentation, November 2012

No further action is being done at the Marcelina Creek Field at this time by Torchlight. However, the company still retains
the option to continue with the third and fourth wells stipulated in the participation agreement, at which point TRCH will be
obligated to pay Bayshore $50k at rig move in and $150k when the well is either completed or plugged and abandoned for
each well. The company will be responsible for 100% of the total drilling and completion costs at the third well for a 75%
working interest in the well and for 100% of the total drilling costs and 75% of the completion costs (with Bayshore
responsible for the remaining 25% of the completion costs) for a 75% working interest in the fourth well. Torchlight will
also receive a 75% working interest on any subsequent wells drilled outside of the Johnson unit, with work to be done on
a pro rata basis.

1080 Acres Marcelina Creek, Wilson County, TX Stratigraphic Column, Wilson County

Source: TRCH Presentation, November 2012, MRO

Potential Opportunities and Expected Reserves at the Marcelina Creek

Torchlight’s management estimates that a total of six to seven horizontal wells can be drilled on the Marcelina Creek
acreage to each horizon. There are multiple prospective formations located at the Marcelina Creek, including Austin Chalk
(Natural Fractures Drives Production, Sourced from Eagle Ford, High Variability in Well Performance), Eagle Ford
(Source Rock, Natural Fractures, Well Behaved Geologically, Offsetting and Nearby Production, Requires Massive
Hydraulic Fracing), and Buda (Natural Fractures Drives Production, Produced Vertically, Recent Successes with Laterals,
Possible Structural Component), as well as additional potential formations including , Olmos, Georgetown and Pearsall.
Eagle Ford production has been established on all four sides of the lease property, while there is also Buda production
and Austin Chalk production in the immediate offsetting the lease.

Management estimates a total of 9.33mm barrels of oil in expected reserves at the Marcelina Creek Field, 5.25mm of
which would go to Torchlight as per the working interest agreements (see figures below). We believe that this opportunity
by itself represents over $440mm of potential revenue and in excess of $100mm of potential net income. As a result, we
feel that the Marcelina Creek offers substantial downside protection to investors at current price levels.

Source: TRCH Presentation, November 2012

Coulter Field

In January 2012, Torchlight entered into a farm-in agreement with La Sal Energy, LLC which owns a 100% working
interest and a 75% net revenue interest in certain oil, gas and mineral leases in Waller County, Texas, where the well
known as “John Coulter #1-R” is located. The John Coulter #1-R is a replacement well for the #1 well which had
mechanical problems caused by split casing. Pursuant to the agreement, TRCH acquired a 34% working interest and a
34% net revenue interest in La Sal’s interest in the John Coulter #1-R for the purchase price of $350k, which is expected
to be sufficient to fund the fracing of the well. Once the well reaches production, TRCH will receive 80% of the net
revenue (with La Sal getting the remaining 20%) until the net revenue is an accumulated $437,500. During this period,
any incremental expenses will be split according to actual percentage interests in the well. After the well generates over
$437,500 in net revenue, it will be split according to the actual percentage interests in the well. In addition, the agreement
provides Torchlight with multiple options to acquire additional interests in La Sal’s interest in the well up to a total of 45%.
TRCH exercised the first option and purchased an additional 6% for $50k during Q3 and still has the second option to
purchase the remaining 5% for another $50k out of production. The well was fracture stimulated in February 2012 and
even though it was shown to be capable of production, the results have been uncertain as there was what is believed to
be communication with the original wellbore. The company has cemented off the split casing in the #1-R well and is
currently in final test phase to determine productivity. Torchlight has begun discussions with the gas marketer and is
working on completing the gas contract and the well as soon as possible. Management expects this well to become
operational in Q1 2013 with no significant incremental expenses, as all of the required capex has already been done.
 Coulter Lease - Waller, TX (900 acres)

Source: TRCH Presentation, November 2012

Employees

Torchlight’s operating model does not require significant overhead or personnel, the company currently has only two full
time employees and no part time employees, and it has created leverage on a variable cost basis through the use of five
independent technical professionals under consulting agreements, all of whom work for the company on an as needed
basis. The current model should provide for significant operating leverage, but as the production base and capital base
grows management will likely increase full time headcount slightly to augment the current team

Marketing and Customers

The company expects the oil that it produces to be sold at prices tied to the spot oil markets and natural gas to be sold
under short-term contracts and priced based on first of the month index prices or on daily spot market prices. Torchlight
will rely on its operating partners to market and sell these products.

Company Background

On November 23, 2010, the company entered into and closed a share exchange agreement with the shareholders of Pole
Perfect Studios, Inc. The TEI stockholders transferred all of their shares of TEI common stock to the company in
exchange for 9,444,500 newly issued company shares. In addition, ex-principals of the Pole Perfect Studios cancelled a
total of 14.4mm shares of the company’s common stock in exchange for $270,000. Upon closing of these transactions,
there were a total of 12,251,420 shares of common stock outstanding, with the 9,444,500 shares issued to the TEI
stockholders representing 77.1% of the total.

As a result of these transactions TEI became the company’s wholly-owned subsidiary and the business of TEI became
the company’s sole business. TEI is an energy oriented exploration and production company, incorporated in Nevada in
June 2010. In addition, the company recorded $447,084 of goodwill which represents the estimated fair value of the
consideration exchanged.

On December 10, 2010, the company effected a 4-for-1 forward split of its common stock. On February 8, 2011, the
company changed its name from “Pole Perfect Studios, Inc.” to “Torchlight Energy Resources, Inc.” and its ticker from
“PPFT” to “TRCH,” on February 10, 2011.
Industry Overview

Changing Industry Landscape

The oil and gas industry has undergone a renaissance in both the balance of supply and demand and in technological
advances in recent years, with large petroleum companies migrating their spending toward exploration and production
projects overseas and offshore, predominantly deep water, as well as into downstream projects. These large companies
have consolidated most of their US onshore investments into core geographic areas and follow the rule that 90% of total
revenues come from 10% of properties.

Most majors and large independents are burdoned with high infrastructure overhead, which includes services for human
resources, information technology, accounting, land and division orders, and legal departments. When overhead gets
allocated to these properties, it makes the properties unattractive for additional investment. As a result, many of these
non-core properties were divested to independents and start-up companies. Independents also acquired large areas of
leases, primarily in the Haynesville, Marcelius, Bakken and now the Eagleford shale, which usually required the
companies to drill quickly or lose the leases. The required focus on new drilling programs has left some other on-going
fields without reinvestment. As a result, this migration of spending has left onshore opportunities available for
experienced, nimble, lower cost oil and gas producers.

Business Environment

Over half of the US crude oil is now imported because growth in demand exceeds domestic production and this ratio is
projected to increase further in the foreseeable future. Although crude oil prices have been volatile in recent years, longer-
term global demand, especially from Asia, is expected to offset growth in global supply and create a longer-term upward
pressure on price. In addition, new sources of international oil and gas reserves are located either far inland to existing
port facilities or in very deep water, which demand large capital investments for pipeline transportation and facilities. In the
case of inland discoveries, agreements among sovereign governments may be required, which usually involve lengthy
negotiations and hence result in long lead times from discovery to markets. Similarly, confirmation drilling and facilities
construction require long lead times for very deep water discoveries.

To complicate matters further, the US government placed a moratorium on deep water drilling from May to October 2010
following the BP oil spill in the Gulf of Mexico. It is hard to estimate the long-term impact on oil price as a result of this
memorandum; however, the short-term effect is that various companies that had budgeted for offshore capital projects for
2011 and 2012 had to invest in other exploration and production projects elsewhere. We believe that as a result, the
companies that were operating predominantly offshore had to shift some attention to onshore projects.

Prices for natural gas in the US have declined substantially recently due to warm winters for the past two years that have
reduced heating demand; industry’s ability to increase gas production from shales with horizontal drilling, as well as
increased production from the Gulf of Mexico. We expect natural gas prices to be volatile going forward, subject to
climatic conditions such as early cold winters. This situation provides an opportunity to acquire producing properties from
numerous small producers who are impaired by high fixed overhead and significant debt loads from earlier years.

As a result of these industry shifts, we believe that there are multiple potential opportunities that could be exploited by
small producers and opportunistic companies like Torchlight given the ability to source project financing on a timely basis.

The Emerging Industry of Unconventional Resource Plays

The evolution of the unconventional energy segment is largely the result of increased global demand for hydrocarbons
coupled with more recent technological advances in drilling, which allows these deposits to be accessed in an economic
manner. The implementation of new drilling technologies allows exploration and production companies to reach deposits
in geologic formations that had been previously impossible or cost prohibitive to access. Current shale deposits in the US
currently exceed 800 trillion cubic feet of recoverable natural gas, largely contained in the predominant “shale plays”: the
Marcellus Shale, Haynesville Shale, Eagle Ford Shale and Barnett Shale. While the 800 trillion cubic feet estimate is
significant, it should be noted that those deposits continue to increase as discoveries are ongoing and technology
continues to evolve, potentially enabling the broadening of the geologic surveys. These unconventional deposits are
accessed primarily through hydraulic fracing and horizontal drilling efforts, in which extraction is predicated on the use of
high pressure fluid mixtures of water, proprietary chemical mixtures known as “frac fluids” and proppants, the combination
of which are used to fracture and create fissures in a rock layer that allows oil or gas to then be extracted.
The following charts illustrate the relative size and the rate at which industry participants believe these unconventional
plays should be developed. There is a tremendous amount of strategic value to these reserves as the contribution from
them presents the US with a material opportunity to begin to reduce its foreign energy dependence.

Increasing Shale Production Anticipated Production in Select Shale Plays

Source: EIA “Annual Energy Outlook 2011” April 2011; Quantum Energy Partners: Wood MacKenzie, Deutsche Bank, DOE/EIA

Addressable Market in Existing Shale Plays

Hydraulic fracturing has been used over the past 60 years to produce more than 600 trillion cubic feet of natural gas in the
US, largely from conventional oil and gas deposits, according to Halliburton. In the past decade significant technological
advancements in horizontal drilling have allowed E&P companies to pursue deposits in unconventional formations. In the
United States this refers largely to the primary shale formations. According to the US Energy Information Administration
(EIA), there are over 800 trillion cubic feet of recoverable gas reserves within the three largest known shale plays, the
Barnett, Haynesville and Marcellus. The chart below illustrates the total well development in 2011 in which 11,400 wells
were drilled. The EIA projects the largest increase in production in the United States will come in shale gas as production
supply is expect to triple over the next 20 years.

2011 Shale Well Statistics

Source: HEK Filings

Regulatory Oversight – Risks and Opportunity

The oil and gas industry is a highly regulated and hotly contested area as it relates to the environmental impact of their
practices. The 2005 energy bill contained what is now known as the “Halliburton Loophole” which removed the EPA
authority to regulate the hydraulic fracturing drilling practice under the Safe Drinking Water Act. Recent grass roots efforts
and social outcry has spawned controversial documentaries which have reached the conclusion that fracing has had a
pollutive impact on the drinking water in several communities. More recently an EPA report produced in 1987 highlights an
incident from 1984 in which a fractured natural gas well contaminated the local drinking well with fracture fluid and natural
gas “rendering it un-potable.” The culmination of these concerns has lead the EPA to conduct a study, beginning in mid-
2011, that will focus on the safety of natural gas drilling techniques and the impact on local drinking water. This study will
be conducted in the Haynesville and Marcellus Shale with retroactive studies conducted on the Bakken and Barnett
Shale; with preliminary results expected by mid-2012. With water being the world’s most precious commodity, we
encourage the EPA effort to conduct impact studies and we hope that these initial studies can bring a scientific approach
to what has been an emotional battle. In the near term these studies may result in some negative impact on production
rates, but what is more likely is that post-study, Congress will increase regulatory oversights on the industry in the hope of
improving practices and reducing any negative environmental impact.

Additionally, multiple studies and research have been devoted to climate change and global warming, and climate change
has become a major political issue both in the US and globally. Certain research suggests that greenhouse gas emissions
contribute to climate change and pose a threat to the environment, with more recent scientific research focusing on
carbon dioxide and methane incidental to oil and natural gas exploration and production. As a result, many states and the
federal government have enacted legislation directed at controlling greenhouse gas emissions, while future legislation and
regulation could impose additional restrictions and favor the use of alternative energy sources, which could affect
operating costs and demand for oil products.

Company Analysis

Project Focused Approach

Torchlight’s operating strategy is to focus on low risk oil and gas exploitation projects. The company plans to focus
primarily on oil projects but will also consider gas projects if it views the economics as favorable. Torchlight’s management
will first identify and evaluate each project, contracting expert or specific technical support as needed, and only after the
project is approved the company will secure a third party operating or financial partner. Each opportunity will be evaluated
on a stand-alone basis for both technical and financial value, with higher risk exploration projects viewed less favorably
than lower risk projects. The company would consider high risk / high reward exploration in connection with exploitation
opportunities in a project that would reduce the overall project economic risk; however, management expects such
projects to be a minor part of the overall portfolio.

Management plans to limit the company’s interest in large capital projects, subject to capital availability. Initially, TRCH
plans to allocate a large percentage of its assets to the Marcelina Creek Field Development and the Coulter Field;
however, after the company is able to secure sufficient capital (either through operations or a raise), the goal is to diversify
its overall portfolio of assets so that no more than 25% to 30% of capital is allocated in a particular project. An exception
to this rule would be an acquisition of a producing property with positive cash flow or smaller investment opportunities, in
which case Torchlight might allocate a higher percentage of its total capital.

Torchlight will be actively seeking new investment opportunities and believes that due to its focus on lower risk
exploitation vs. higher risk exploration projects these projects will come from the many small producers who are currently
under-funded or over-extended and therefore vulnerable to price volatility. Once the company is able to generate sufficient
capital, its financial ability to respond quickly to opportunities should ensure a continuous stream of projects and will allow
the company to negotiate from a stronger position to enhance value.

Since the company’s strategy is to acquire and often redevelop properties, the types of projects in which Torchlight plans
to be involved can vary from increased production due to simple re-engineering of existing wellbores to step-out drilling,
drilling horizontally and extensions of known fields. In addition, recompletion of existing wellbores in new zones,
development of deeper zones and detailing of structure and stratigraphic traps with three-dimensional seismic and
utilization of new technologies will also be part of Torchlight’s strategies. However, the company’s preferred type of
projects are in-fills to existing production with nearly immediate cash flow and / or adjacent or on trend to existing
production. To reduce its risk profile and proliferate diversification, Torchlight plans to focus on projects with moderate to
low risk, unrecognized upside potential and geographic diversity.

Success of the Johnson#1 Well Shows Strong Potential for the Whole Marcelina Creek Field Development

Following some technical issues that we discussed previously in this report, the Johnson#1 well was re-drilled into the
Austin Chalk formation with the lateral leg extending out approximately 2,400 feet and produced 419 BOPD based on a
24-hour test conducted in August and 196 BOPD during a 30 day test conducted in October. Torchlight decided to drill the
Austin Chalk because of excellent shows encountered in the original wellbore. The success of Johnson#1 not only added
substantial revenue and cash flow to the company which will be used to fund additional drilling, but more importantly this
well further substantiates the company’s belief that the entire Upper Cretaceous section, Austin Chalk, Eagle Ford and
Buda, are one resource play with numerous sweet spots. Management feels that the whole lease covering approximately
1,045 acres should have multiple producing zones that could produce from both lateral and vertical drilling. In addition, by
producing from the Austin Chalk, TRCH now has two producing formations on the lease, with several behind pipe. Finally,
this well immediately increases the company’s proved un-developed (PUD) drilling locations (along with the already
established PUDS on the south side of the lease) as well as Probable locations. Torchlight is currently in the process of
evaluating and ranking these locations in order to put together a development drilling plan which will be implemented as
soon as the company acquires the necessary financing.

Recent Operational Performance

Q3 2012 Results

Torchlight generated revenues of approximately $275k during Q3 2012 compared to no revenues during the same quarter
last year. The Johnson #1-BH well began production in Q3 at a sustained rate of over 100 BOPD and was responsible for
the majority of revenues generated during the quarter. The company sold 2,848 barrels of oil at an average price of
$95.52 per barrel in Q3 and recorded COGS of ~$142k.

TRCH also recognized approximately $457k in G&A expenses during Q3, up from ~$183k during the same quarter last
year, as a result of higher consulting costs and non-officer compensation. G&A expenses primarily consisted of
compensation expense, most of which was non-cash or deferred, accounting and administrative costs, professional
consulting fees and other general corporate expenses. The company also recorded depreciation, depletion and
amortization of approximately $88.5k in Q3 as the Johnson wells began commercial production. TRCH reported a net loss
of ~$475k in Q3, or a loss of $0.03 per share, compared to a loss of $189k, or $0.01 per share, reported in Q3 2011.

9M 2012 Results

Torchlight generated revenues of approximately $550.5k during 9M 2012 compared to only $24k during the same period
last year. The increase is due to increasing production rates from the two Johnson wells in the Marcelina Creek Field. The
company recognized COGS of approximately $406k and $25k for the 9M of 2012 and 2011, respectively. TRCH also
recognized approximately $1.9mm in G&A expenses during 9M 2012, up from ~$1.5mm during the same period last year,
as a result of higher consulting costs and compensation. Non-cash compensation, which includes stock-based
compensation and other non-cash compensation, totaled $1.3mm for the 9M 2012 and $1mm for the 9M 2011. TRCH
reported a net loss of ~$2mm during 9M 2012, or a loss of $0.14 per share, compared to a loss of $1.6mm, or $0.12 per
share, reported during the same period last year.

Forward Looking Projections

We expect the company to generate approximately $5mm in revenues over the next twelve months. We would like to
point out that this is a very conservative estimate which the company can achieve without incurring any meaningful
incremental expenses on drilling additional wells or entering into any new agreements. As a result, this estimate is driven
by our assumption that Johnson#1 well will continue to generate over 100 BOPD over the next twelve months, Johnson#4
well will come on line during Q1 2013 with a sustainable production rate of approximately 100 BOPD and that John
Coulter #1-R well will become operational in Q1 2013 as well, in line with company’s expectations. We also assume that
oil and natural gas prices will not fluctuate significantly from current levels. Any other developments like drilling Johnson#2
and/or Johnson#3 well (which should only take about 30 days to drill and cost approximately $2.2mm each) or entering
into any new agreements would be incremental to our current estimates.

We also expect gross margins to steadily ramp up closer to 75% once the company achieves sustainable operations in its
three wells and G&A to remain at approximately $500k per quarter until the company begins generating significant cash
flows, at which point management plans to allocate approximately 5% of cash flow for exploration and new developments.
As a result, we expect TRCH to become cash flow profitable during 1H 2013 and to generate approximately $0.09 in EPS
(on a fully diluted basis) for the full year 2013.

Capital Structure

Basic Shares Outstanding

Following the retirement of 1.6mm shares owned by Mr. Lapinski (Torchlight’s CEO) in August 2012, there were
approximately 13.56mm common shares of TRCH outstanding as of November 19, 2012, with insiders owning 5.65mm
shares. In addition, there are approximately 1.6mm shares that were issued but are not considered outstanding that are
currently held in escrow to secure a land deal as per an agreement with a land group to acquire leases in Wilson County,
Texas. These shares will be returned to the company and canceled if TRCH will be unable to find a buyer.

Warrants

There are currently 3.023mm warrants outstanding with an exercise price of $1.75 or above.

Future Capital Needs

Torchlight is an early stage growth company whose future success will be in part dependent on the company’s ability to
access growth capital. The company will continue to investigate strategic and opportunistic acquisition opportunities and
in the event that these opportunities exceed current capitalization the Company may choose to source external financing,
under the assumption that any investment made would be materially accretive to earnings and a long term value creator
for shareholders.

Liquidity and Capital Resources

As of September 30, 2012, TRCH had a working capital deficit of approximately $1.6mm, consisting of current assets of
~$200k and current liabilities of ~$1.8mm. As of the end of Q3, Torchlight had ~$860k in total debt, $800k of which was
from non-related parties comprised of convertible and non-convertible promissory notes carrying 10% annual interest rate
and $51k of non-interest bearing promissory notes issued to the company’s CEO that are due upon demand. The
company had total assets of approximately $4.2mm and shareholder equity of $2.5mm.
Management & Board Overview

Thomas Lapinski (CEO) and John Brda (President) are currently the only full-time executive officers at Torchlight, as the
company relies on the assistance of outside advisors and consultants to supplement its management in order to reduce
overhead and fixed costs. Once adequate financing is secured, TRCH plans to add other executive officers to its
management team, as well as additional non-executive staff once current projects have scaled up in order to allow current
management to refocus on strategic development.

Thomas Lapinski – CEO and Chairman of the Board

Mr. Lapinski served as the company’s CEO, Interim Principal Financial Officer and Director since November 2010. He
also previously served as the company’s President from November 2010 to January 2012. Mr. Lapinski is the founder of
Torchlight Energy, Inc., TRCH’s wholly owned operating subsidiary, and has served as its CEO, President and Director
since its inception in June 2010. Prior to that, since 2002, he has engaged in consulting work on various projects, both
international and domestic, including the purchase of energy related businesses, focusing on evaluating exploration and
re-development opportunities in the Rocky Mountain Region, Texas Gulf Coast, Mid-Continent, the Middle East, and
South America. From September 1996 to June 2002, Mr. Lapinski served as President of Stephens Energy International
of The Stephens Group, LLC., where he was involved in oil and gas exploration and production project development. Prior
to that, he spent over 30 years in senior positions with Amoco Corporation where he held numerous positions, including
Division Geophysicist for Rocky Mountain Area, Regional Geophysicist for Africa and the Middle East, Exploration
Manager for North and West Africa, President-Amoco Morocco, President-Amoco Turkey, General Manager-Amoco
Kenya, Exploration Manager Gulf Coast, Regional Exploration Manager for Southern and Eastern U.S. and Manager for
Resource and Business Development in Southern Rocky Mountain Area before retiring. His primary expertise lies in
project evaluations, operations management and strategic planning and his ability to identify and evaluate opportunities is
vital to Torchlight’s success. Mr. Lapinski received a degree in Geophysical Engineering from the Colorado School of
Mines in 1966.

John A. Brda – President, Secretary and Director

Mr. Brda served as the company’s President, Secretary and a member of the Board of Director since January 2012. He
worked as the Managing Member of Brda & Company, LLC since 2002, which provides consulting services on IR, equity
and debt financings, strategic business development and securities regulation matters to public companies with a focus in
the oil and gas sector. Mr. Brda brings extensive experience in transaction negotiation and business development,
particularly in the oil and gas sector, as well as an extensive network of industry professionals and finance firms to
Torchlight.

Randall D. Keys – CFO

Mr. Keys has recently joined Torchlight as CFO. Prior to joining Torchlight, Mr. Keys has previously served as a CFO for
several public companies and has a broad-based experience in all areas of finance, investor relations, corporate
governance and accounting management for public energy companies. His experience includes M&A, strategic planning,
SEC matters and capital financing. Mr. Keys began his financial career as a Senior Auditor at KPMG Peat Marwick where
he worked from 1980 to 1984. He then worked as a Controller at Midland Southwest Corp. from 1984 to 1987, held
various managerial positions at Santa Fe Energy / Adobe Resources from 1987 to 1994 and worked as a Treasurer and
CAO at Norcen Explorer, Inc. (Subsidiary of TSE) from 1994 to 1997. He served at 3DX Technologies, Inc. as a VP of
Finance and CFO from 1997 to 1998. Between 1998 and 2011, Mr. Keys served in the CFO or interim CFO capacity with
several companies including Coherence Tech / Core Lab, Transmeridian Exploration, BPZ Energy, Inc., Far East Energy
and Fram Exploration, SA. In addition, since 2006, Mr. Keys owned Canyon Mesquite LLC, a specialty wood products
manufacturing company. Mr. Keys holds a BBA in Accounting from the University of Texas at Austin and he is a certified
CPA since 1982.

Kenneth I. Danneberg – Director

Mr. Danneberg served as a member of the company’s Board of Directors since June 20, 2011. He brings over 45 years of
experience covering all aspects of oil and gas exploration and operation in the US and Canada and is a member of the
Rocky Mountain Oil and Gas Hall of Fame. For the past 15 years he worked as the President and CEO of Danneberg Oil
Inc., a company engaged in the drilling and production of oil and gas wells. Mr. Danneberg was a founder of Zoller and
Danneberg, Inc which later became Premier Resources, Ltd., an AMEX listed company conducting oil and gas operations
in the U.S. and Canada where he served as CEO. He has also previously served on the boards of numerous companies,
including Alco Oil & Gas (predecessor to Ladd Petroleum, a GE Subsidiary), Premier Resources, Ltd, Zoller & Danneberg,
International Bank of Denver and Great Horn, Inc.

Wayne Turner – Director

Mr. Turner served as the company’s director since March 2011. He is currently the Managing Partner of JEBCO Seismic,
LP, a position which he has held since 1989, and is the Managing Partner of Big Thicket Oil & Gas, L.P., a position he has
held since 2001. JEBCO is a fully independent international geophysical data acquisition contractor, which non-exclusive
surveys and third party datasets represent a unique and readily available source of information for both mature and
frontier regions. JEBCO has operated both offshore and onshore in the U.S. and Canada and has also conducted surveys
in the North Sea, Africa, Asi, and South America. The company was active in Russia, Kazakhstan, Uzbekistan and
Azerbaijan both before and after the break-up of the USSR, providing oil and gas exploration information to the industry,
assisting in license rounds and in direct negotiations for oil and gas properties in these countries. Mr. Turner spent
significant time in these countries and personally negotiated all relevant agreements.

In 2001, Mr. Turner started Big Thicket Oil & Gas, L.P., which is currently active in oil and gas exploration in Texas,
Louisiana, Oklahoma and New Mexico. The company conducts most of its activity through partnerships, which allows it to
remain small in staff but have access to expertise in different areas. Big Thicket does not operate wells, but is involved in
generating and evaluating prospects.

Mr. Turner graduated in 1971 from the University of Houston with a degree in Electrical Engineering and his expertise in
the oil and gas industry make him an excellent fit for the Torchlight’s Board of Directors.

Valuation

We feel that there remains a tremendous, niche oriented, market opportunity for a more nimble E&P company like
Torchlight, with access to capital the company should be able to build a highly profitable portfolio of low-risk producing
assets with highly visible cash flows. Because the company is just entering the production stage, we have decided to
value shares based on the discounted value of its current assets; once the production phase ramps up we would expect
investors to shift their valuation paradigm to a multiple of cashflow. The Marcelina Creek Field Development, one of the
company’s two current projects, has total expected reserves of 9.33mm barrels of oil, (5.25mm of which would go to
Torchlight as per the working interest agreements). We believe that this represents approximately $100mm of current
value to shareholders, which after applying a 10% discount rate customary for proven reserves translates to an NPV of
~$90mm, or approximately $5 per share using a fully diluted share count of 17.2mm.

We believe that this base asset valuation offers the downside protection to investors while the execution of near term drill
programs transform this from an asset story to a growth and earnings story, meaning that valuation will likely shift from a
discount to the value of the assets on hand to a multiple of the cash flows being generated from those assets. It is
important to note that this valuation is based solely on existing assets and opportunities presented by those assets; as the
production programs move forward, or if the company were to enter into new leases or working interest agreements, we
would expect to adjust our earnings estimates and price target accordingly.
Risks

a) The company had not yet reached consistent profitability from its operations and has accumulated losses of $4.6mm
since inception, combined with very limited revenues to date and limited assets as of the end of Q3, there is substantial
doubt in TRCH’s ability to continue as a going concern; b) As a result of substantial net working capital deficit and very
little cash on hand at the end of Q3 we expect that the company will need to raise additional capital in the near future; c)
Limited operating history and future growth dependent on acquiring adequate funding and identifying successful projects
makes it almost impossible to create estimates and projections with any degree of certainty; d) To date the company has
not implemented various corporate governance measures like an audit committee and other independent committees of
its Board of Directors; e) Ineffective internal controls as of the last annual filing; f) Company’s shares are very thinly traded
and it has a very limited trading history; g) Torchlight is a non-operator and as a result development of successful
operations relies extensively on third-parties; h) Due to a speculative nature of oil and gas exploration, there is risk that
the company will not find commercially exploitable oil and gas and that its business might fail; i) Business success and
profitability depend on the price of oil and natural gas which historically have been volatile; j) Potential for unexpected
liabilities or damages due to inherent dangers involved in oil and gas operations; k) Operations are heavily dependent on
environmental regulation, changes in which are impossible to predict; l) Unexpected loss of key personnel, specifically the
company’s CEO (Thomas Lapinski) and President (John Brda) would significantly affect the company’s operations and
profitability; m) Affiliates control a significant percentage of total outstanding common stock and their interests may
sometimes conflict with those of other shareholders; n) Board’s ability to issue 5mm shares of preferred stock without any
further vote or action by shareholders could adversely affect the rights of stockholders.
Financial Models

Income Statement
Torchlight Energy Resources (OTCBB: TRCH)
Income Statement
All Figures $000, except per share FY 2010a Q1 3/11a Q2 6/11a Q3 9/11a Q4 12/11 FY 2011a Q1 3/12a Q2 6/12a Q3 9/12a Q4 12/12 FY 2012E Q1 3/13 Q2 6/13 Q3 9/13 Q4 12/13 FY 2013E
Oil and Gas Sales - - 24.2 - - 24.2 24.2 251.4 274.9 769.5 1,320.0 1,174.5 1,518.8 1,518.8 1,518.8 5,730.8
% growth year-to-year 941.0% 5365.5% 4750.1% 504.1% 452.5% 97.4% 334.1%
Cost of Goods Sold - - 25.3 - - 25.3 16.5 247.2 142.2 384.8 790.7 469.8 379.7 379.7 379.7 1,608.9
% of Revenue 104.6% 104.6% 68.2% 98.3% 51.7% 50.0% 59.9% 40.0% 25.0% 25.0% 25.0% 28.1%
% growth year-to-year 3028.6% 2743.3% 53.6% 167.0% -1.3% 103.5%
Gross Profit - - (1.1) - - (1.1) 7.7 4.2 132.7 384.8 529.3 704.7 1,139.1 1,139.1 1,139.1 4,121.9
% of Revenue -4.6% -4.6% 31.8% 1.7% 48.3% 50.0% 40.1% 60.0% 75.0% 75.0% 75.0% 71.9%
% growth year-to-year 9060.3% 27078.8% 758.3% 196.1% 678.7%
General and administrative expenses 645.3 550.4 759.7 182.8 379.8 1,872.7 231.2 1,219.7 457.0 400.0 2,308.0 450.0 500.0 500.0 500.0 1,950.0
% of Revenue 7753.6% 954.8% 485.2% 166.3% 52.0% 174.8% 38.3% 32.9% 32.9% 32.9% 34.0%
% growth year-to-year 190.2% -58.0% 60.6% 150.0% 5.3% 23.2% 94.6% -59.0% 9.4% 25.0% -15.5%
Depreciation, depletion and amortization 88.5 90.0 178.5 95.0 100.0 100.0 100.0 395.0
% growth year-to-year 13.0% 11.1% 121.3%
Operating Income (645.3) (550.4) (760.8) (182.8) (379.8) (1,873.8) (223.5) (1,215.5) (412.8) (105.3) (1,957.1) 159.7 539.1 539.1 539.1 1,776.9
% of Revenue -3150.0% -7758.3% -923.1% -483.5% -150.2% -13.7% -148.3% 13.6% 35.5% 35.5% 35.5% 31.0%
% growth year-to-year 190.4% -59.4% 59.8% 125.8% -72.3% 4.4% -171.4% -144.3% -230.6% -612.2% -190.8%
Interest Income 0.1 0.1 0.0 0.0 0.2 0.0 - 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
% growth year-to-year
Interest Expenses (37.4) (40.6) (6.6) (10.0) (94.6) (61.6) (49.6) (62.3) (62.3) (235.9) (62.3) (62.3) (62.3) (62.3) (249.3)
% of Revenue -167.9% -391.7% -254.6% -19.7% -22.7% -8.1% -17.9% -5.3% -4.1% -4.1% -4.1% -4.3%
% growth year-to-year 64.8% 22.3% 841.9% 522.2% 149.3% 1.1% 25.6% 0.0% 0.0% 5.7%
Total Non-Operating Expenses - (37.3) (40.5) (6.6) (10.0) (94.4) (61.6) (49.6) (62.3) (62.3) (235.9) (62.3) (62.3) (62.3) (62.3) (249.2)
% of Revenue -167.7% -390.9% -254.5% -19.7% -22.7% -8.1% -17.9% -5.3% -4.1% -4.1% -4.1% -4.3%
% growth year-to-year 65.1% 22.5% 848.0% 522.9% 149.8% 1.1% 25.6% 0.0% 0.0% 5.7%
Income Before Taxes (645.3) (587.8) (801.3) (189.4) (389.8) (1,968.2) (285.2) (1,265.1) (475.1) (167.6) (2,193.0) 97.4 476.8 476.8 476.8 1,527.6
% of Revenue -3317.7% -8149.2% -1177.6% -503.2% -172.8% -21.8% -166.1% 8.3% 31.4% 31.4% 31.4% 26.7%
% growth year-to-year 205.0% -51.5% 57.9% 150.9% -57.0% 11.4% -134.2% -137.7% -200.3% -384.5% -169.7%
Income Tax Expense - - - - - - - - - - - - - - - -
Tax Rate % 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
% growth year-to-year
Net Income Available to Common Stock Holders (645.3) (587.8) (801.3) (189.4) (389.8) (1,968.2) (285.2) (1,265.1) (475.1) (167.6) (2,193.0) 97.4 476.8 476.8 476.8 1,527.6
% of Revenue -3317.7% -8149.2% -1177.6% -503.2% -172.8% -21.8% -166.1% 8.3% 31.4% 31.4% 31.4% 26.7%
% growth year-to-year 205.0% -51.5% 57.9% 150.9% -57.0% 11.4% -134.2% -137.7% -200.3% -384.5% -169.7%
Earnings per share - fd $ (0.07) $ (0.05) $ (0.06) $ (0.01) $ (0.03) $ (0.14) $ (0.02) $ (0.08) $ (0.03) $ (0.01) $ (0.15) $ 0.01 $ 0.03 $ 0.03 $ 0.03 $ 0.09
% growth year-to-year -56.6% 9.8% -334.5% -158.8%
Weighted Avg. S/O (mil)-fd 9,403 12,925 13,853 14,281 14,281 14,288 14,762 14,928 14,156 14,156 14,501 17,179 17,179 17,179 17,179 17,179

adjusted EBITDA (332.3) (118.4) (186.8) (147.8) (314.2) (767.3) (206.6) (125.5) (119.5) (15.3) (466.9) 254.7 639.1 639.1 639.1 2,171.9
% of Revenue -773.5% -3176.8% -853.1% -49.9% -43.5% -2.0% -35.4% 21.7% 42.1% 42.1% 42.1% 37.9%
% growth year-to-year 130.9% 74.4% -32.8% -19.1% -95.1% -39.2% -223.3% -609.3% -634.6% -4290.6% -565.2%
Non-Cash Comp 313.0 432.0 574.0 35.0 65.0 1,106.0 - 1,106.5 204.5 - 1,311.0 - - - - -
% of Revenue 4579.2% 0.0% 440.1% 74.4% 0.0% 99.3% 0.0% 0.0% 0.0% 0.0% 0.0%
Depreciation & Amortization - - - - 0.5 0.5 16.9 (16.4) 88.7 90.0 179.3 95.0 100.0 100.0 100.0 395.0
% of Revenue 2.2% 69.9% -6.5% 32.3% 11.7% 13.6% 8.1% 6.6% 6.6% 6.6% 6.9%
% growth year-to-year 461.1% -710.1% 12.7% 11.1% 120.3%
Balance Sheet

Torchlight Energy Resources (OTCBB: TRCH)

Balance Sheet
All Figures $000, except per share FY 2010a Q1 3/11a Q2 6/11a Q3 9/11a Q4 12/11 FY 2011a Q1 3/12a Q2 6/12a Q3 9/12a Q4 12/12 FY 2012E Q1 3/13 Q2 6/13 Q3 9/13 Q4 12/13 FY 2013E

Assets

Cash 278.2 898.5 218.4 40.7 518.3 518.3 45.1 0.5 1.0 (112.7) (112.7) 178.5 749.1 1,391.0 1,966.3 1,966.3
Accounts Receivables, net 17.3 17.3 17.3 17.3 25.0 74.6 150.0 162.7 162.7 144.8 187.2 187.2 187.2 187.2
Debt issuance cost, net of amortization 50.8 33.9 16.9 - - - - - - -
Prepaid expenses 1.0 25.8 18.6 22.3 16.3 16.3 23.2 20.5 20.5 20.5 20.5 20.5 20.5 20.5 20.5 20.5
Other current assets - - - - - - -

Total Current Assets 279.2 924.2 254.2 80.2 551.8 551.8 144.0 129.4 188.5 70.6 70.6 343.9 956.9 1,598.7 2,174.1 2,174.1

Property and Equipment, Net 1,115.0 1,196.4 2,822.4 3,197.3 3,182.1 3,182.1 3,706.3 3,822.7 3,612.5 3,522.5 3,522.5 3,427.5 3,327.5 3,227.5 3,127.5 3,127.5
Goodwill 447.1 447.1 447.1 447.1 447.1 447.1 447.1 447.1 447.1 447.1 447.1 447.1 447.1 447.1 447.1 447.1

Total Assets 1,841.2 2,567.7 3,523.7 3,724.6 4,181.0 4,181.0 4,297.4 4,399.2 4,248.1 4,040.2 4,040.2 4,218.4 4,731.5 5,273.3 5,748.7 5,748.7

Liabilities 20.4 25.4 18.6

Accounts Payable 252.0 192.3 131.8 187.7 45.0 45.0 22.9 198.3 300.3 260.0 260.0 340.8 377.1 442.2 440.8 440.8
Related party payable 40.0 258.8 258.8 300.0 420.0 540.0 540.0 540.0 540.0 540.0 540.0 540.0 540.0
Convertible promissory notes, net 216.0 262.5 262.5 262.5 262.5 438.3 389.4 412.5 412.5 412.5 412.5 412.5 412.5 412.5 412.5
Promissory notes, net 184.8 325.6 325.6 346.0 371.4 390.0 390.0 390.0 390.0 390.0 390.0 390.0 390.0
Promissory notes, related party 59.0 59.0 59.0 59.0 59.0 59.0 59.0 59.0 59.0
Interest payable 6.2 0.2 6.8 14.6 14.6 32.0 50.9 71.0 71.0 71.0 71.0 71.0 71.0 71.0 71.0
Other current liabilities 157.5

Total Current Liabilities 476.7 414.5 552.1 457.0 906.5 906.5 1,139.2 1,489.0 1,772.8 1,732.4 1,732.4 1,813.3 1,849.6 1,914.7 1,913.3 1,913.3

Asset retirement obligation 11.4 11.4 11.4 11.9 12.2 12.6 12.6 13.0 13.4 13.8 14.2 14.2

Total Liabilities 476.7 414.5 552.1 457.0 917.9 917.9 1,150.6 1,501.0 1,785.0 1,745.0 1,745.0 1,826.3 1,863.0 1,928.4 1,927.4 1,927.4

Shareholders' Equity
Common Stock-par Value 3.2 3.9 4.6 4.9 5.2 5.2 5.3 15.5 13.9 13.9 13.9 13.9 13.9 13.9 13.9 13.9
Additional Paid in Capital 2,006.6 3,382.4 5,001.4 5,486.3 5,871.5 5,871.5 6,040.1 7,046.6 7,088.1 7,088.1 7,088.1 7,088.1 7,088.1 7,088.1 7,088.1 7,088.1
Retained Earnings (645.3) (1,233.1) (2,034.4) (2,223.7) (2,613.5) (2,613.5) (2,898.7) (4,163.8) (4,638.9) (4,806.9) (4,806.9) (4,709.9) (4,233.5) (3,757.2) (3,280.8) (3,280.8)
Accumulated Other Comprehensive Income
Total Shareholders' Equity 1,364.5 2,153.3 2,971.7 3,267.6 3,263.2 3,263.2 3,146.8 2,898.2 2,463.1 2,295.2 2,295.2 2,392.2 2,868.5 3,344.9 3,821.2 3,821.2

Total Liabilities & Shareholders' Equity 1,841.2 2,567.7 3,523.7 3,724.6 4,181.0 4,181.0 4,297.4 4,399.2 4,248.1 4,040.2 4,040.2 4,218.4 4,731.5 5,273.3 5,748.7 5,748.7
Cash Flow

Torchlight Energy Resources (OTCBB: TRCH)

Cash Flow
All Figures $000, except per share FY 2010a Q1 3/11a Q2 6/11a Q3 9/11a Q4 12/11 FY 2011a Q1 3/12a Q2 6/12a Q3 9/12a Q4 12/12 FY 2012E Q1 3/13 Q2 6/13 Q3 9/13 Q4 12/13 FY 2013E
Operating Activities
Net Income (645.3) (587.8) (801.3) (189.4) (389.8) (1,968.2) (285.2) (1,265.1) (475.1) (167.6) (2,193.0) 97.4 476.8 476.8 476.8 1,527.6
Non-cash compensation 313.0 432.0 574.0 35.0 65.0 1,106.0 - 1,106.5 204.5 - 1,311.0 - - - - -
Accretion of promissory note discount 31.3 34.0 - 2.2 67.5 27.3 35.5 92.5 - 155.2 - - - - -
Depreciation, amortization and accretion - - - 0.5 0.5 16.9 (16.4) 88.7 90.0 179.3 95.0 100.0 100.0 100.0 395.0
(Increase)/Decrease in Current Assets & Liabilities:
Accounts Receivable - (17.3) - - (17.3) (7.7) (49.6) (75.5) (12.7) (145.5) 17.9 (42.4) - - (24.5)
Prepaid expenses (1.0) (24.8) 7.2 (3.7) 6.0 (15.3) (7.0) 2.7 - - (4.3) - - - - -
Debt issuance cost (67.7) 67.7 - 16.9 16.9 - - - - -
Accounts Payable 252.0 (99.6) (60.5) 55.9 (102.7) (206.9) (22.2) 175.5 42.0 (40.4) 154.9 80.9 36.3 65.1 (1.4) 180.8
Related party payable 40.0 - 157.5 (157.5) 218.8 218.8 41.3 120.0 120.0 - 281.3 - - - - -
Interest Payable 6.2 (5.9) 6.6 7.8 14.6 17.4 18.9 20.1 - 56.4 - - - - -
Other
- -
Net Cash from Operating Activities (41.4) (242.8) (112.3) (253.1) (192.2) (800.3) (286.8) 195.5 17.2 (113.7) (187.7) 291.2 570.6 641.8 575.4 2,079.0

Investment in Oil and Gas Properties (1,115.0) (81.5) (1,626.0) (374.9) 26.0 (2,056.3) (524.2) (116.4) (16.7) - (657.2) - - - - -

Net Cash from Investing Activities (1,115.0) (81.5) (1,626.0) (374.9) 26.0 (2,056.3) (524.2) (116.4) (16.7) - (657.2) - - - - -

Financing Activities
Issuance of promissory notes 250.0 - 262.5 (262.5) 647.5 647.5 214.0 - - - 214.0 - - - - -
Payment of promissory note - (250.0) 250.0 (250.0) (250.0) - - - - - - - - - -
Issuance of 10% Convertible Notes - - (250.0) 250.0 - - - - - - - - - -
Payments of 10% Convertible Notes - - 262.5 (262.5) - - - - - - - - - -
Shares issued to management 10.0 56.0 (56.0) - - - - - - - -
Shares issued for private placement 1,444.5 944.5 1,045.7 450.2 258.8 2,699.2 67.7 (67.7) - - - - - - - -
Cancellation of common shares (270.0) - -

Net Cash from Financing Activities 1,434.5 944.5 1,058.2 450.2 643.8 3,096.7 337.7 (123.7) - - 214.0 - - - - -

Net Change in Cash 278.2 620.3 (680.1) (177.7) 477.6 240.1 (473.2) (44.6) 0.6 (113.7) (630.9) 291.2 570.6 641.8 575.4 2,079.0
Cash - Beginning Balance - 278.2 898.5 218.4 40.7 278.2 518.3 45.1 0.5 1.0 518.3 (112.7) 178.5 749.1 1,391.0 (112.7)
Cash - Ending Balance 278.2 898.5 218.4 40.7 518.3 518.3 45.1 0.5 1.0 (112.7) (112.7) 178.5 749.1 1,391.0 1,966.3 1,966.3
Analyst Contact Information

________________________________________________________________________________________________

Joe Giamichael Dmitriy Shapiro

Giamichael@UMBresearch.com Shapiro@UMBresearch.com
(212) 531-6002 (212) 531-6001
________________________________________________________________________________________________

DISCLOSURES / DISCLAIMERS

Umbrella Research LLC is currently engaged by this company to provide research and advisory services designed to help
small cap companies communicate their investment characteristics.

This equity research report is prepared for informational and educational purposes only and was paid for by the company
portrayed in the report. Umbrella Research LLC takes steps to ensure its independence by collecting annual fees in
advance and establishing a fixed coverage term that cannot be unilaterally terminated to make sure the company cannot
withhold payment if it disagrees with any part of the report. Umbrella Research LLC maintains full editorial control of all
research and timing of the release of the report, and is protected contractually from any liability for negative
determinations.

Umbrella Research LLC, its members and employees make no warranties, expressed or implied, as to the accuracy,
adequacy or completeness of any of the information contained in this report. All such materials are provided on an “as is”
basis, without any warranties as to the accuracy thereof or fitness for a particular purpose or use, nor with respect to the
results which may be obtained from use of such materials. The analysts contributing to this report certify that the views
expressed accurately reflect their personal opinions about this company and industry. This report is not intended to be a
complete description of the company, industry, securities or developments referred to in the materials. Any forecasts
contained in this report were independently prepared unless otherwise stated, and have not been endorsed by the
management of the company which is the subject of this report. Umbrella Research LLC, its members and employees
have no responsibility or liability for any errors or omissions contained in the information made available through the report
nor shall they be liable for any damages, whether direct or indirect, special or consequential, even if they have been
advised of the possibility of such damages.

Any “forward looking statements” are the best estimates and opinions of Umbrella Research LLC based upon information
and representations that are publicly available and that it believes to be correct. There is no guarantee that the forecasts
will materialize. Actual results may and likely will vary. Forward looking statements regarding the company and/or
performance of securities inherently involve risks and uncertainties that could cause actual results to differ from such
forward looking statements. Factors that would cause or contribute to such differences include, but are not limited to: (a)
continued acceptance of the company's products/services in the marketplace; (b) acceptance in the marketplace of the
company's new product lines/services; (c) competitive factors; (d) new product/service introductions by others; (e)
technological changes; (f) dependence on suppliers; (g) systematic market risks; and (h) other risks discussed in the
company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the
various securities regulators. By making these forward looking statements, Umbrella Research LLC undertakes no
obligation to update these statements for revisions or changes after the date of this report.

NOTHING PUBLISHED BY UMBRELLA RESEARCH LLC SHALL BE DEEMED TO BE A RECOMMENDATION AS TO

THE ADVISABILITY OR INADVISABILITY OF ANY PARTICULAR TRANSACTION IN SECURITIES. IN READING THIS
REPORT, YOU ACKNOWLEDGE THAT UMBRELLA RESEARCH LLC IS NOT REGISTERED AS AN EXCHANGE,
BROKER-DEALER OR INVESTMENT ADVISOR UNDER ANY FEDERAL OR STATE SECURITIES LAWS, AND THAT
UMBRELLA RESEARCH LLC HAS NOT PROVIDED YOU WITH ANY INVESTMENT ADVICE OR PERSONALIZED
INFORMATION. ANY INFORMATION PROVIDED IN THIS REPORT HAS BEEN PROVIDED FOR INFORMATIONAL
AND EDUCATIONAL PURPOSES ONLY AND IS NOT TO BE TREATED AS INVESTMENT ADVICE.
ANY INFORMATION RELATING TO SECURITIES IS IMPERSONAL, AND AS SUCH, IS NOT TAILORED OR
DIRECTED TO YOU OR TO ANY OTHER INDIVIDUAL. IN NO EVENT SHALL UMBRELLA RESEARCH LLC BE
RESPONSIBLE OR LIABLE FOR THE ACCURACY OR SUITABILITY OF ANY INFORMATION TRANSMITTED OR
MADE AVAILABLE THROUGH THIS REPORT AND/OR ON ITS WEBSITE, AND SHALL NOT BE LIABLE FOR ANY
INVESTMENT DECISIONS OR TRADING ACTIVITY BY YOU ARISING FROM SUCH INFORMATION.

ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR HIS/HER USE OF THE
INFORMATION. YOU ACKNOWLEDGE THAT YOU ARE AWARE THAT INVESTING IN SECURITIES IS AN
INHERENTLY RISKY AND SPECULATIVE PRACTICE. TRADING IN SECURITIES CAN RESULT IN IMMEDIATE AND
SUBSTANTIAL LOSSES OF INVESTED CAPITAL.

YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR BEFORE MAKING ANY INVESTMENT DECISION OR
ENGAGING IN ANY SECURITIES TRANSACTION BECAUSE INVESTING IN ANY SECURITIES MENTIONED IN THIS
REPORT MAY OR MAY NOT BE SUITABLE TO YOU OR FOR YOUR PARTICULAR CIRCUMSTANCES. WHETHER A
STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON A NUMBER OF FACTORS, INCLUDING BUT NOT
LIMITED TO THAT PERSON’S RISK TOLERANCE, OBJECTIVES, SITUATION, AND RETURN ON OTHER
ASSETS. ONLY THE INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A
PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR
PORTFOLIO.

UMBRELLA RESEARCH LLC, ITS MEMBERS AND EMPLOYEES MAY, AND IN MANY INSTANCES DO, HOLD
POSITIONS IN SECURITIES MENTIONED IN ITS REPORTS, AND MAY, AND IN MANY INSTANCES DO,
OTHERWISE EFFECT THE PURCHASE OR SALE OF SECURITIES, INCLUDING THOSE MENTIONED IN ITS
REPORTS. THESE FACTS SHOULD BE TAKEN INTO CONSIDERATION BY YOU IN CONNECTION WITH ANY
DECISION TO INVEST IN SECURITIES.