H1 2021 Highlights:
· Refocus of capex away from high-risk exploration into lower risk-production opportunities with swift pay back.
· Gross profit of US $0.4 million (H1 2020: loss of US$ 1.6 million).
· Revenue increase of 5% to US $5.9 million in H1 2021 (H1 2020: US $5.6 million).
· Reduction in cost of sales of 33% in H1 2021 compared to equivalent period in H1 2020
· Total net aggregate H1 2021 production of 304,639 boe (including 37,159 bbls of oil and condensate and 1,605 MMscf gas).
· New gas sales contracts in place from May 2021 with premium pricing from innovative price auction.
· Strong domestic gas prices supported enhanced cashflow generation with a 28% increase in gas price compared to same period a year ago with premium gas prices only coming into effect in last two months of the period.
· Successful completion of the restructuring of both the Company’s EUR 20.0m 8.0% secured notes and the Company’s EUR 5.0m 8.0% secured convertible debt facility loan.
· Echo received a successful VAT cash disbursement from the Argentine Government of US $0.5 million, a further signal that the country is progressing towards more regular activity.
Chairman and Chief Executive Officer’s Statement
The first six months of 2021 have seen Echo Energy plc emerge from the previous year’s challenges both operationally and financially stronger. The Company moved swiftly to successfully restructure its debt, continue to conserve cashflow, begin to reinstate previously shut in production wells, and refocus its portfolio on progressing cashflow enhancing rapid return production opportunities. We have executed our strategy of moving away from high-risk exploration spend into lower risk-production opportunities with attractive pay back periods.
These important achievements and the improving macro environment combined with our commercial successes, including the renegotiation of gas sale agreements at substantial market premiums during the period, are reflected in an improved financial performance for the period.
As Echo continues its return to full liquids production at Santa Cruz Sur, and improved financial flexibility, we continue to identify and progress growth options across the existing portfolio, and the wider region, and work towards overcoming remaining challenges whilst maintaining our commitment to delivering value for our shareholders.
COVID-19 recovery and progress on production
At the beginning of the 2020 COVID-19 pandemic, extreme volatility in the energy markets resulted in the inability of the Company to sell crude oil and precipitated a decision to preserve cash through the temporary shut in of a significant number of Echo’s oil producing wells. However, following continued improvements in market conditions, including a return to regular oil sales, Echo agreed, together with its Santa Cruz Sur partners, to upgrade and debottleneck the existing liquid pipelines that were previously shut in Q2 2020, as a path to returning to full oil production.
Expenditures of approximately US $0.3 million were injected by the Company to replace and upgrade parts of the Santa Cruz Sur infrastructure and reduce maintenance costs. By June 2021, Echo successfully delivered the project, demonstrating the effectiveness of the Company’s in-country operational capability and enabling production previously shut in in April 2020 to be systematically brought back on line. A detailed update on liquid production increases was provided to the market in August 2021 with around a 50% increase in liquids production. This has enabled the Company to benefit from the upswing in global oil prices and the improved macro-outlook, symbolising a strong recovery from the challenges of the previous year. Whilst overall production, including gas remains below pre pandemic levels, the company continues to work towards improving production by undertaking the necessary operational activities and investments. With improved economic tailwinds and new infrastructure installed in the field, Echo now has the capacity to commission incremental enhancement projects within its portfolio. The reinvestment of available cashflow to drive further production increases remains an ongoing focus.
These increasing cashflows are expected to enable further production investments to be funded and demonstrate Echo’s commitment to and confidence in its organic growth strategy within the Santa Cruz Sur asset base.
Successful execution of sales contracts at premium prices
In March 2021, Echo secured two new gas sales contracts at significant premiums to both prevailing spot market rates and 2020 contracted rates, with approximately 70% of gross daily gas production from Santa Cruz Sur allocated to industrial customers now committed under secured contracts until April 2022.
Following the Company’s announcement in March 2021 relating to new gas sales contracts for 2021-2022, the Company agreed summer and winter pricing for its annual industrial clients, with the contracted winter premium providing substantially increased cashflow in the near term, helping to grow future operations through production enhancement work activities supported by infrastructure and compressor maintenance programmes.
In Q2, increasing liquids production represented delivery upon the Company’s strategy to leverage the marked upswing in global commodity prices. With the additional liquids production expected to continue to contribute to a material cashflow increase, Echo continues to benefit from an improving domestic market situation. In May 2021, the Company sold gas to the spot market at an average price representing a 151% increase in prices compared to the March 2021 average spot price. All gas production, as of May 2021, was sold under the new gas sales agreements, reflecting significantly increased winter pricing. Any gas volumes not sold under the long-term contracts was sold to the spot market.
Delivery of successful debt restructuring preserving cash resources
In March 2021, Echo undertook a process of restructuring its debt to build a solid financial platform for reinvestment of its increasing cashflows into the Company’s assets to deliver growth. The restructuring was successfully completed in April 2021, when holders of the Company’s publicly listed bonds voted in favour of the restructuring of those securities. As a result, cash interest payments on the Company’s listed bonds have been deferred until mid-May 2025. The completion of the bond restructuring also fulfilled the remaining condition of the Lombard Odier debt restructuring, which similarly pushed back maturity and preserved cash resources.
The company’s balance sheet remains highly leveraged, and trade creditor levels are elevated reflecting the challenges presented by the pandemic, but the restructuring, along with the increased oil production following the ongoing infrastructure upgrades, provides a markedly improved and outlook for shareholders.
In May 2021, Echo received a partial VAT repayment from the Argentine Government as it resumed normal activity following months of COVID-19 related shut down. This process provided both material cash funds and further evidence of the normalisation of in-country activities following delays in 2020 caused by COVID-19.
Campo Limite remains a potentially material well for the Company which could increase reserves and resources in the Palermo Aike concession and open up additional commercial options in the area. Well testing activities remain an operational and commercial focus and work remains ongoing to optimise commercial arrangements to enable activities to resume once pandemic constraints (which were in place throughout H1 2021) are lifted.
At the start of the year, the Company announced a five-year Cooperation Agreement with GTL International S.A, which has interests in both the hydrocarbon and renewables sectors. Both companies continue to collaborate and combine skill-sets to jointly promote their business development initiatives in the wider region, and identify and assess new business development opportunities across the full energy spectrum.
The six month period ended 30 June 2021 has seen Echo successfully manage value chains, enabling the Company to improve efficiencies at both corporate and asset level.
The Group posted a gross profit of US $0.4 million for the first time since the acquisition of the SCS asset for the six month period ended June 2021 compared to a loss of US $1.6 million for the comparable period in 2020, attributable to a decrease in cost of sales from US $7.3 million in H1 2020 to US $5.5 million in H1 2021, demonstrating enhanced operational efficiency and commodity prices.
Total revenue for the period was US $5.9 million (H1 2020: US $ 5.6 million), and comprised of US $2.1 million of Oil sales and US $ 3.8 million of Gas sales. Oil prices realised in H1 2021 were on average 21% higher during the period than in H1 2020. Volume weighted average realised gas prices increased by 28% compared to H1 2020.
Financial income of US $3.1 million recognised the interest gained on the Argentine VAT paid to the Group in May 2021 of US $0.24 million and net foreign exchange gains of US $2.9 million. Finance expense of US $ 3.2 million for H1 2021 is on a par with the prior comparable period (H1 2020: US $ 3.2 million).
Total comprehensive loss for the Group for the 6 month period ending 30 June 2021 was US $1.5 million (H1 2020: US $ 5.7 million)
The Group’s balance sheet and overall financial positioning has materially strengthened during the period due to the successful debt re negotiation of its bonds and debt facility and the reduction in short term loan liabilities from US $2.3 million at 30 December 2020 to $0.14 million at 30 June 2021.
In January 2021, the Company’s EUR 5.0m 8% secured convertible debt facility maturity date was extended to April 2025, with no furthercash interest payments due until maturity date. In addition, in April 2021, the Company’s Luxembourg listed EUR 20.0m 8% secured bonds were successfully structured, extending the maturity of the notes to May 2025, and removing all cash interest payments prior to maturity date.
The Company’s cash balance as at 30 June 2021 was US $ 0.9 million, a substantial increase from the balance as at 31 December 2020.
A 30% reduction of Trade and other payables from 30 December 2020 to 30 June 2021 is primarily due to the renegotiation of the Bond and debt facilities, but also reduction in joint venture payables.
Post Period End Highlights
The positive market changes seen in H1 2021 continue post period, and coupled with the restructuring completed in H1 2021, enable the Company to operate from a significantly more stable platform.
At the Santa Cruz Sur asset level, successful commissioning of the liquids pipeline enabled the Campo Molino oil field to be brought back online, contributing to an almost 50% increase in total liquids production in August 2021.
The maturation of the Company’s investment in Santa Cruz Sur, and ongoing careful cost management have increased cashflows, enabling development in our producing asset, and release of capital which can be invested into the business to support business growth, maximising value for shareholders.
James Parsons Martin Hull
Chairman Chief Executive Officer