Torrent Energy (TREN.OB)

Dear Bottarelli Research Member,

This week, Bryan and I are going to begin with something a little different. With the wild intra-day volatility, I’ve had many of you ask me about owning some cheap “portfolio insurance” in case we see another plunge. So today, I wanted to give you a way to protect your small-cap positions in case we witness a re-test of the recent market lows – and this strategy comes in the form of a protective put option on the Dow Jones Industrial Average (DJX).

The DJX is an index that trades for 1/100^th of the value of the Dow, and a put option on the DJX will increase in value if the Dow moves lower. Put option plays like this are something that Bryan does on a daily basis in his Bottarelli Research Options service, and if you have yet to subscribe, I suggest you give it a try. Bryan has a very tight grip on his technique, which has been extremely valuable to those involved. It amazes me how he does it, and I’m sure you’ll find it very profitable as well.

So in the spirit of protecting against any further market downside, let’s apply this successful “protection” technique by adding a cheap DJX put option to your ledger. The specific put option I’d like to recommend is the DJX October 126 Put (DJW VV).This put currently trades between $1.55 and $1.70 per contract, and it offers you the right to sell the DJX for 126 anytime between now and the 3^rd week in October. In terms of gain/loss calculations, this put will increase $0.22 for every 100 points that the Dow falls. Therefore, if the Dow re-tests its August 16^th low of 12,500, these puts could move all the way up to $3.30, good for a 94% gainer. To me, the opportunity to nearly double your money off any market selling pressure is certainly worth the cost to carry this insurance play. So as a way to protect our small-cap portfolio against any market weakness, let’s add this DJX protective put to our ledger. Here’s the play:

Buy DJX October 126 Puts (DJW VV) at or under $2.00, good for the week.

Now let’s get into this week’s new small-cap pick. The company I’m about to give you is one that I’m very familiar with. In fact, I’ve been in and out of this particular company dating back to 2004. When I discovered this tiny little gem three years ago, the investment opportunity was pure speculation. At that time, they were one of the first companies to pioneer coalbed methane production in the Pacific Northwest.

Understanding the tremendous potential of coalbed methane, they acquired large amounts of land with the intention of engaging in extensive drill testing to see if there was economical CBM (Coal Bed Methane) reserves in place. Today, after years of tedious work, this tiny little company just informed their network of beginning-stage investors that they’ve confirmed economic viability of their project. And when I say “economic viability,” I’m talking about a future, un-risked asset between $160 million and $500 million.

Folks, this is nothing to sneeze at – especially when you consider that this company has a current market cap of only $32 million. This one project could be worth 15x what this company is currently valued at – resulting in bowel-shaking returns for early investors like you and me.

This new announcement (which occurred on July 23^rd) is truly a milestone for this emerging company – and now I expect to see them moving rather quickly towards the production and sale of the CBM they have in place. The risks now are miniscule compared to the potential payoff.After all, the proof is in the ground, so the investment timing could not be better. Plus, since it has taken them three full years to gather this information, I feel that every inpatient investor has abandoned this company. Bad move. The time to jump in is now!

The company is Torrent Energy (TREN.OB) and it’s a buy anywhere under $1.00. If everything moves ahead as I expect, we should see this one quickly double. And once they are fully operational in Q3 2008, the returns should be even higher. I’ll turn things over to Bryan for the rest of the story, but first I have some position updates:

Big Cat Energy Corporation (BCTE.OB): Huge news came out of Gillette, Wyoming today! Big Cat Energy announced that they’ve received their first group of approved permits from the Wyoming Department of Environmental Quality (WDEQ) allowing the use of their ARID tool and technology. As a quick refresher, Big Cat Energy has developed a patented technology called the ARID Tool (Aquifer Recharge Injection Device) that is a revolutionary new method that provides coal bed methane wells with the ability to redistribute produced water. This technology will allow coal bed methane operators to process produced water at a fraction of the cost of current technology, and now that the first round of permits are in place I expect the stock to really gain some upside momentum. Folks, the time to load up is now!

Raptor Networks Technology (RPTN.OB): This is a company that I recommended on March 2^nd for $0.89 per share. Over the last few days, the stock has experienced some rather significant buying attention, so I would be adding to RPTN at current levels of $1.25. I still believe they could be the next Cisco, so you’ll want to own a small piece of this company for further upside.

U.S. Geothermal (UGTH.OB): There’s lost of news coming out now as they get closer to the start-up of their Raft River project, so I would make sure you own this stock. We’ve had many opportunities to buy the dips, and I sure hope you have.

Metalline Mining (MMG – AMEX), Minera Andes (MNEAF.OB), Polymet Mining (PLM – AMEX) & Idaho General Mines (GMO – AMEX): Each of the metal plays listed above has rebounded, just as I predicted in last week’s update. Make no mistake, these are the very best small-cap metals plays on the market, and they’re all extremely undervalued at current levels.

China Unicom (CHU – NYSE): This is one of our “Wish I” stocks that has rebounded very well. I still think we’re in the first inning of China’s mobile phone growth, and CHU is one of the top players in this segment.

Star Maritime Acquisition (SEA – AMEX) & Oceanfreight (OCNF – NASDAQ): You’re getting some very strong entry opportunities on each of these dry bulk shippers. Bryan and I both feel these two are going to move higher during the close of 2007 and into 2008, so continue to accumulate SEA and OCNF.

And on that note, I’ll turn it over to Bryan. Have a great week, and don’t forget to get some downside protection via our new DJX put hedge. If the Dow falls another 500 points, you’ll be glad you have them!

Sincerely,

New results confirm the economic viability of the Coos Bay project with future asset value of between $160 million and $500 million

“We are confident that Coos Bay will not only be well worth the wait, but will serve as a strong base for Torrent’s expansion strategy by establishing solid positive cash flows for many years to come.”

- Torrent President and CEO John Carlson

As we all know, Mark is the master at identifying small-cap picks in the oil, energy, and commodity sectors that are on the verge of a big announcement (or new release) that’ll push shares aggressively higher. Today’s play on TREN is no exception.

As you learned above, Torrent Energy is a coalbed methane company finalizing plans to begin commercial production at their promising Coos Bay location. Based in Portland, Oregon, TREN holds approximately 118,000 acres of coalbed methane land 200 miles south of the Columbia River and 80 miles north of the California border. They also hold 100,000 acres in Washington. But to fully understand the opportunity offered by this $0.72 stock, let’s begin with a brief natural gas sector overview.

As you probably know, America is facing a severe energy crunch. One of the biggest factors contributing to this energy crunch is the fact that known gas supplies in northern Alaska and northwestern Canada have no pipeline access. A pipeline to Alaska’s gas supply is 12 to 15 years away, and a pipeline to Canada’s gas supply isn’t slated for completion until 2009.

Another contributing factor to our energy crunch is the fact that U.S. natural gas production peaked in 1971. As a result, we’ve been forced to get our gas imported from Canada. But in 2002, Canadian gas production began to decline, and this set the groundwork for the energy supply/demand imbalance that we’re struggling with (and that’s getting worse) with each passing day.

While demand for natural gas in Canada, the United States, and Mexico keeps increasing, the suppliers continue to produce less and less. That’s why it probably won’t surprise you to learn that 80% of all new wells in the U.S. are drilled for gas as opposed to oil. Nevertheless, despite the increased drilling, gas supplies have still not increased.

Why is this such a huge problem?

For starters, 60% of all homes in the United States are heated with gas. What’s more, 70% of new homes in the U.S. are designed and built for natural gas consumption. And because of its clean burning qualities, natural gas is the fuel of choice for electric power production. In fact, 90% of all new power plants were gas-fired back in 2002, and I’m sure that percentage is even higher today. With statistics like this, it’s easy to understand why finding new domestic sources of natural gas has become such a critical national priority. That’s why coalbed methane is such an attractive solution.

By definition, coalbed methane is a form of natural gas extracted from coal beds. Because it lacks hydrogen sulfide, CBM is sometimes referred to as “sweet gas.” Since CBM is often discovered lying trapped at shallow depths, it’s different from other resources because it’s both generated and stored within the actual coalbeds. According to the U.S. Geological Survey, coal stores 6 to 7 times more gas than the equivalent rock volume of a conventional gas reservoir. Since coal acts like a sponge, this makes CBM an attractive U.S. resource. After all, coal is the most abundant fuel in the United States. Some have even called the U.S. the “Saudi Arbia of Coal.”

But as we all know, coal is environmentally unfriendly. In fact, it’s filthy. That’s why coalbed methane gas is such an attractive alternative. The U.S. Geological Survey predicts that more than 700 trillion cubic feet of methane is available in the U.S. That means our nation’s CBM volume is worth around $4.37 trillion! Combine that with the abundance of the resource, the low cost of drilling at shallow depths, and declining conventional gas reserves, and it’s easy to understand why domestic CBM production is steadily increasing. What’s more, the statistics show that domestic CBM production is still in the very early stages of growth.

You see, CBM only accounts for 7.5% of total natural gas production in the United States. This figure looks almost certain to increase as CBM plays a more important role in addressing America’s burgeoning energy needs. And this leads directly into the investment opportunity in Torrent Energy. Right now, TREN is developing two rather large CBM locations in the Northwestern United States, and each of these two projects could return uncommon returns for TREN shareholders – starting very soon. Here’s a run-down on each location:

LOCATION #1: Torrent’s flagship operation is their Coos Bay project in southwest Oregon. An independent report by Sproule Associates just estimated 1.2 trillion cubic feet of gas-in-place to be within Torrent’s 118,000 acres, which promoted TREN to initiate exploratory drilling programs in three different project areas – totaling 11 drill wells within this 118,000 acre location. As it turned out, all 11 wells encountered multiple gassy coal seams between 50 and 70 feet. According to those close to the company (including Mark), this is TREN’s most significant milestone to date.

You see, TREN holds an 83.5% net revenue interest at Coos Bay, and early estimates show that TREN’s 300 wells could generate annual cash flow of approximately $23 million. What’s more, these new results confirm the economic viability of the Coos Bay project. At full development, TREN could be sitting on a future asset value between $160 and $500 million. (This range takes into account coal depth, drill spacing, and costs of technology.)

And that’s the exciting part: Now that Torrent has completed their initial operations on the Coos Bay test wells, they’re ready to begin the initial development on a 50-well project. Assuming a 30% recovery of what’s in the ground, the company says that the entire project could see a cash potential as high as $754 million. Considering TREN currently carries a market cap of $32 million, this single project could prove to be the mother load for TREN shareholders. And remember, that’s only the first of TREN’s two promising locations.

LOCATION #2: Torrent’s second gas play is in southwest Washington’s Chehalis Basin, where their land portfolio exceeds 176,000 acres. Torrent just began a three-well exploratory drilling program in April of 2007 which revealed permeability that is geologically comparable to other historically prolific CBM basins in the United States. (Permeability is a measurement that defines the ability of gas to flow within the coal matrix.) These results have allowed TREN to estimate a potential asset value on this project anywhere between $60 and $240 million.

Now I admit: There’s a big difference between outlining potential and actually seeing true life results – and that’s why Torrent Energy could be “in play” very soon.

You see, on Monday July 23^rd, TREN announced that material progress has been achieved on a number of mission-critical fronts required to bring its Coos Bay project into commercial production. These milestones include:

• Third party reservoir modeling (which lends further credibility to internal field potential calculations).
• Completion of successful testing for a waste water disposal plan.
• Completion of initial design work to serve the first five Westport wells.

With all of the pieces now in place, TREN’s Coos Bay project is ready to enter the home stretch. That’s typically when stock plays like this begin to take off. In fact, according to Torrent’s President and CEO John Carlson, “We now have a complete reservoir data set and operational solutions related to gas and water production to fully evaluate the economic viability of the Westport CBM resources identified in our Coos Bay project. Under a scenario of expected capital and operating costs and local gas pricing mechanisms we can now calculate potential reserves and values on a per unit well basis that illustrate the positive rates of return on a full field development project.”

Carlson added, “We realize that this has been a long haul for investors, management and staff involved in the project, but not unexpected for a new CBM basin located in an area considered to be a frontier location. Now that we are closing in on the final details before going to commercial production, we are confident that Coos Bay will not only be well worth the wait, but will serve as a strong base for Torrent’s expansion strategy by establishing solid positive cash flows for many years to come. The next few months will be an exciting time as we prepare for commercial production once the final water permits are received and pipeline construction starts.”

THIS LEADS TO THE INVESTMENT CONCLUSION: As you read this, TREN carries a market cap of $31.08 million. If either of their two projects live up to their potential, TREN could get re-valued for 3x, 5x, or even 10x its current value. After a three year wait, the Coos Bay project in southwest Oregon is now ready to begin initial production, and this alone cold spark a flurry of investor activity in TREN. The time to buy TREN is now.

Currently trading for under $1.00 per share, the risk/reward scenario is squarely in your favor, so let’s add this potentially explosive small-cap company to our ledger immediately.

PLAY: Buy shares of Torrent Engery (TREN.OB) at or under $1.00, good for the week.

Sincerely,