Echo Energy plc (LON:ECHO), the Latin American focused upstream energy company, has provided a commercial update regarding the Company’s gas sales from the producing Santa Cruz Sur assets, onshore Argentina.
The Company confirms that, following a successful commercial process for industrial clients, it has secured two new gas sales contracts (the “Contracts”) at significant premiums to 2021 contracted rates, reflecting the strong competition amongst customers to secure gas supplies from the Company for the coming year.
The Contracts have a term of 12 months, with gas sales under the Contracts beginning in May 2022, and provide for a 65% increase in pricing over average annual contract pricing previously achieved by the Company in March 2021 and a 116% increase on the current summer pricing until end April 2022 under those same March 2021 contracts.
The Contracts provide gross 6.0 MMscf/d of committed production, 4.2 MMscf/d net to Echo, at an average price of US$ 4.33 per mmbtu, with the Company able to elect to sell additional volumes of up to 1.25 MMscf/d net to Echo under the Contracts. This optionality, at the election of the Santa Cruz Sur partners, allows for the potential sale of additional volumes under the Contract at Contract pricing whilst also providing the Santa Cruz partners with a degree of flexibility with which to capitalise on attractive spot market pricing.
As a result of the Contracts and at Q1 2022 production levels, approximately 85% of net daily Santa Cruz Sur gas production allocated to industrial customers will now be committed under secured contracts until April 2023. Remaining uncontracted production volumes, where not sold as additional volumes under the Contracts, will be sold into the spot market. The Company believes this balance of contracted versus uncontracted volumes achieves an attractive balance for the Company in securing future sales at fixed prices whilst maintaining a degree of exposure to a buoyant spot market, particularly in light of the Company’s ongoing intention to increase future production as a result of its operational programme.
In addition to receipts from Santa Cruz Sur gas sales outside of the Contracts (including all gas sales from the Santa Cruz Sur Oceano field), the minimum committed gas volumes under the Contracts (excluding associated VAT receipts and any sales of additional volumes, net to Echo, of up to 1.25 MMscf/d under the Contracts at the Company’s election) have an annualised gross value of c.US$ 10m at Contract prices (c.US$7m net to Echo).
It is anticipated that the increased revenues arising from the Contracts will provide additional resources over the course of the Contracts capable of being applied towards the acceleration of the Company’s operational priogramme to increase production whilst also being applied to the outstanding Santa Cruz Sur Joint Venture historical creditor balances. As of 30 November 2021 this Santa Cruz Sur Joint Venture balance is estimated (unaudited) at US$12.9 million gross or US$9.0 million net to Echo’s 70% interest. These Santa Cruz Sur Joint Venture creditor balances are prior to Argentinian VAT credits due to the Company.
The Contracts demonstrate a continued implementation of the Company’s strategy to be leveraged to the strong upswing in global commodity prices whilst seeking to underpin gas sales from Santa Cruz Sur under secure long term supply agreements where appropriate.
As a result, and following completion of the Company’s commercial assessment of the previously announced potential Chilean Vincente Méndez solar project (the “Project”), details of which were announced by the Company on 14 January 2022, the Company has now decided that it will not be exercising its option to acquire an interest in the Project.
Whilst the Company remains strategically committed to pursuing additional opportunities within the renewable energy sector, focus remains on seeking to maximise shareholder returns and Echo’s Santa Cruz Sur assets therefore remain the Company’s priority. In this regard the Board continues to explore means of increasing shareholder value, including through the further acquisition of accretive assets in combination with cornerstone industrial partners, potential further balance sheet reorganisation and additionally considering means of more closely aligning the interests of the Santa Cruz sur partners.
Martin Hull, Chief Executive Officer of Echo Energy, commented:
“I am pleased to be able to report that our strategy continues both to strengthen Echo’s operational and commercial position and to focus on how best to deliver returns for our shareholders. The successful negotiation of the new gas contracts, at large premiums to last year’s pricing, represents an important step forward for Echo. Strong prevailing international commodity prices coupled with our premium priced gas sales agreements are expected to underpin substantially increased gas revenues from the Santa Cruz Sur asset base and demonstrates our strategy in action. Increased revenues will provide further funds to drive forward growth whilst also providing additional Argentinian cash flows with which to tackle the ongoing historical Santa Cruz Sur creditor position. We continue to identify means to enhance cash generation at these fields both through commercial and operational means, and in combination these are strengthening Echo’s financial platform as the commodity tailwinds remain strong.”