Echo Energy plc (LON:ECHO) Chief Executive Officer Martin Hull caught up with DirectorsTalk to discuss passing a challenging period, bond restructuring, benefitting from higher commodity prices, projects coming to fruition, increased demand for oil and what investors should be looking out for in the coming weeks.
Q1: Now, this has been a big week for Echo Energy, do you feel people are starting to see a different company after a challenging period?
A1: Well, I certainly hope so and I think we’ve made a lot of progress operationally and commercially in recent months. Of course, underpinning some of that, there’s been a much more supportive commodity price environment and that environment has enabled us to consider how best to reinvest cash flow to unlock some of the material opportunities we see in the portfolio and which you and I have discussed previously.
Additionally, I think the positive changes and the decisions we have made in the past year which has been a challenging year, those decisions, those changes have left us leaner and better able to benefit from the now improved markets. Clearly, we’re hoping that those efforts will now bear fruits quickly.
Coupled with that, in the last week, we’ve made some announcements about the debt process and that process to restructure our debt is getting closer to a conclusion and that’ll be a very important landmark for the company going forward.
Q2: Can you tell us a bit more about the bond restructuring and how it will help the company?
A2: It’s been an ongoing process but after some very constructive discussions, we’ve now published our restructuring proposal, of course there’s still a meeting to come. That meeting will seek approval from note holders so we cannot assume what the outcome will be but we are hopeful and you’ll remember that we received 100% backing previously.
If and when the approval goes through, it will greatly improve our financial platform, it will limit our interest payments and will set back the maturity of the bonds back to 2025 and that will have a very big positive impact on our cash flows.
Q3: Yesterday’s release suggested that the higher commodity prices were really starting to support increased investment in the portfolio. Can you tell us how you expect production to benefit from that and additional CapEx this year?
A3: Because of those improved conditions, we’ve agreed, together with our partners in the Santa Cruz Sur asset, to upgrade and de-bottleneck the existing liquids pipeline and this will enable us to accelerate the return to full production.
So, the cost of this upgrade is not huge, net to the company, it’s about $275,000 but it will enable us to upgrade around 23 kilometres of pipeline. The benefit of that is once it’s operational, it will add production or restore production in our daily liquids production to somewhere between 480 and 600 barrels of oil equivalent a day gross to the partnership.
Critically, this upgrade will also provide additional capacity for future production enhancement projects and that’s something that we, and I, are very focussed on and again, we’ve talked through what some of those opportunities within the portfolio look like.
Of course, we’ve done a lot of analysis on this and in the current market, this infrastructure is considered a very attractive investment with the ability to result in strong cash flow generation and a short payback period of literally months.
The maths is pretty easy, the revenue boost of 400 additional barrels per day of $60 brent is really very significant for the company and can only be a positive.
Q4: What other projects might be coming to fruition now?
A4: As I mentioned, with the pipeline upgrade in place, this will really allow us to accelerate the ongoing production enhancement efforts with a goal of boosting future production, not just bringing back the existing production to full capacity but also going after those future barrels that we see, that we can grow the production base in the future.
That work to identify and work now on the production enhancement, it is ongoing and has been for a while and with the pipeline, we can really accelerate those efforts so it’s good news both for immediate production and also for the future.
Q5: You also mentioned in today’s announcement that there was increased demand for you oil?
A5: Yes, that’s right and it’s frankly very good to see. The improving macro-economic environment and outlook, and specifically the increase in the oil prices from the start of 2021, has meant that there is increased demand for our Santa Cruz Sur oil and has resulted, for us, in improved pricing and, in some ways more importantly more frequent oil sales. Regularly selling substantial amounts of oil at good prices is a big boost for our revenue and critically, it also complements the strong cash flows from the gas production.
If you remember, that gas production has been consistently delivering revenue for us even when the oil markets are tough. Now, we’ve got both streams on and that’s a great positive for the company.
Q6: What else should investors look out for from Echo Energy over the coming weeks?
A6: The first thing, we’re now going to implement the pipeline project, bring on stream that additional production and continue to accelerate the production enhancements for all of those identified upsides that we talked about.
The timing of the testing of the Campo Limite exploration well is something that we’re discussing with our partners and it remains a clear potential upside for us. In addition to the work in Santa Cruz Sur, we’re also continuing our discussions with our partners in Bolivia.
We remain very much of the view that there are exciting opportunities for profitable growth across the energy spectrum including renewables, that’s across Latin America, we’re starting in Bolivia but it’s across Latin America, and we believe we’ve got the right platform to be very well placed to take advantage of that. Those are things that we are looking forward to working on.
As we talked about at the start, the ongoing bond process is coming towards a conclusion, important meetings taking place in March and we’ll be making announcements around that.
So, it’s a very busy time, I think it really is a very exciting time for the company and all its stakeholders.