H1 2020 Highlights
· Successful integration of the Santa Cruz Sur assets acquired in November 2019
· Revenue increased to US$5.6 million (H1 2019: US$2.7 million)
· Total net aggregate H1 2020 production of 390,844 boe (including 65,203 bbls of oil and condensate and 1,954 MMscf gas)
· Unaudited cash balances as at 30 June 2020 of US$1.2 million
· Completion of first Tapi Aike drill, Campo La Mata x-1 well
· Initial workover success in the Chorrillos block at Santa Cruz Sur
· Identification of an intensive and low cost workover plan at Santa Cruz Sur
· Successful debt restructuring
· Substantial reductions to operational and administration costs
Post Period End Highlights
· Monte Aymond in the Palermo Aike licence matured to commercial project status
· Successful restructuring of Tapi Aike interest in July 2020 line with the Company’s focus within its portfolio on cash generative production and on reducing costs
· Completion of equity placing to raise net proceeds of approximately US$0.6 million to strengthen the Company’s cash position
· Ongoing focus on disciplined cost and cash management
Chairman and Chief Executive Officer’s Statement
The first six months of 2020 have seen significant challenges for companies globally, let alone in the sector, and Echo Energy plc (“Echo” or “the Company”) has adapted swiftly and proactively to protect its workforce, restructure debt, reduce costs, conserve cashflow, and adapt its portfolio with a focus on profitable growth. These important actions have secured the business through recent challenges and strengthened the Company’s position as it looks to the future.
Covid-19 impact on exploration and production
The virus outbreak has caused major disruption to many industries and has also resulted in an unprecedented period of volatility in global energy commodity markets. The Company continues to monitor and proactively adapt to the situation, maintaining a strategy to mitigate issues arising from the Covid-19 pandemic, including its impact on our staff, contractors and the communities in which we operate.
Echo adapted swiftly to changed working requirements, through the implementation of remote-working. The supply of energy in Argentina is an essential service, particularly as the southern tip of Latin America entered its autumn and winter months, and the team have worked hard with our operating partners to overcome the challenges and continue to deliver critical gas supplies to customers whilst ensuring all employees are operating safely and efficiently in the field. By doing so, Echo has continued to enjoy the support of its customers, contractors, local authorities and the communities in which it operates.
At the beginning of the Covid-19 pandemic the Argentine government imposed a series of major restrictions including international travel bans and the curtailment of the movement of personnel and materials between regions. A number of these restrictions remain in force. As a result of these restrictions, Echo and its partners took the necessary and prudent step to temporarily suspend testing of the successfully drilled Campo Limite exploration well (“CLix-1001”). The technical view of the well remains unchanged and the completion and conventional inflow testing of the well site continues to be a commercial priority. As a result of the change in schedule, Echo and its partners successfully utlised the opportunity early in the period, redeploying the Eagle workover rig on a programme of well interventions and maintenance.
Oil price volatility and preserving cash resources
In response to the continuing volatility in the oil markets, Echo put in place a number of initiatives to preserve existing cash resources and refocus on cash generation. With prevailing oil prices and Echo’s expectation of higher gas demand moving into autumn and winter in the southern hemisphere, Echo decided to focus field operations on the production of gas, and as part of this initiative, a significant number of oil producing wells were temporarily shut-in, enabling resources in the field to focus on cash generative gas production. Since the period end, and as a result of improving market conditions, the Company has successfully brought five of these oil producing wells back online.
Substantial progress has been made with cost reduction initiatives in the Santa Cruz Sur assets. Echo reduced monthly operating cash outflows at Santa Cruz Sur, whilst maintaining safe and sustainable operations. At a corporate level, cost reductions were also rigorously pursued in order to preserve cash. The most successful cost reduction was apparent at parent company level, with administrative expenses during the period reduced by US$1.2 million to US$1.3m, a 48% reduction when compared to the H1 2019 expense of US $2.5 million.
During March 2020 Echo undertook a process of restructuring all its debts. This restructuring was successfully completed in May 2020, when holders of the Company’s publicly listed bonds voted unanimously in favour of the restructuring of those securities. As a result, cash interest payments on all the Company’s existing debts have been deferred until March 2021, thereby ensuring the business is robustly positioned in the event of continued pressure on oil demand driven by the recent global events.
Santa Cruz Sur
Echo successfully completed the acquisition of a 70% interest in the five block Santa Cruz Sur (“SCS”) concessions in November 2019. This marked a return to a balanced, revenue-generating portfolio with significant upside and near-term drilling opportunities. H1 2020 saw the integration of these assets in the portfolio.
The first exploration well on the Palermo Aike concession, Campo Limite (“CLix-1001”) was drilled to a total measured depth of 2,247 metres and wireline logging was completed in January 2020. The targeted Springhill Formation was encountered at 2,124 metres. Initial analyses of the wire log data were completed and highlighted a zone of interest comprised of fine grained sandstones. This unit also coincided with elevated gas shows of 193,000 parts per million (“ppm”) against a background of 20,000 ppm.
The presence of elevated gas shows in the target section combined with encouraging wireline log data, led to a decision by Echo and the operator, Selva Maria Oil and Gas S.A. (“Selva Maria”) to move to the next stage of operations to complete and test the well. Though the well was completed by the Petreven H-205 rig, testing was interrupted by the strict federal restrictions imposed as a result of the Covid-19 pandemic.
Testing of the well remains a commercial and operational priority for Echo, once current pandemic restrictions are eased. The well forms part of a larger gas commercialisation strategy for the Palermo Aike licence, which is focused on bringing existing gas discoveries online either through a hub development or on a standalone basis.
As part of the portfolio of growth activities, the Monte Aymond gas project at Santa Cruz Sur has been matured to commercial project status since the period end and builds on work undertaken last year. This project is located 5.2 km to the west of Campo Limite well, with the Monte Aymond well successfully drilled in 1984, and testing gas and condensate at an initial flowrate of 2.4 MMscf/d, which increased to an average rate of 5 MMscf/d over a longer 10 month period of production. Whilst this well was previously abandoned, the Company believes that the now improved local infrastructure and prevailing gas prices mean Monte Aymond is now a commercial project either as a micro LNG option or via a hub development approach.
In June 2020, the Company announced it had identified an initial portfolio of sixteen low cost workover and intervention operations across Santa Cruz Sur focused on 1P proven developed non producing (“PDNP”) and 2P reserve intervals with the intention of bringing those volumes into production and, therefore, migrating the associated volumes to proven developed producing (“PDP”) reserves. These opportunities are part of a wider portfolio of relatively low cost workover and interventions, which represent potential increases to production and reserves, which continue to be evaluated by the Santa Cruz Sur partners with a view to commencing work in H2 2020, conditions permitting. An initial successful well intervention in the Chorrillos block provided confidence in this opportunity set to increase production in a cost effective way and the initial portfolio of workover and intervention operations remain future operational priorities for the Company.
At the end of the period, the Company secured a six month extension to existing gas contracts at a significant premium to the gas spot price, which reaffirms the support and confidence of key customers towards the Company.
The first exploration well at Tapi Aike, Campo La Mata x-1 (“CLM x-1”) was spud in Q4 2019 and reached a total measured depth of 2,513 metres. On the basis of encouraging initial data from drilling and logging operations, a decision was made with the operator at that time, Compañia General de Combustibles S.A. (“CGC”) to move to complete and test the well. Following completion on the lower secondary target (“D3” or “Anita”) and primary target (“Magallanes 20” or “Lobe C”) in February 2020, Echo announced a non-commercial gas discovery. Following clean out operations, the lower secondary Anita target flowed gas to surface at an estimated average rate of 0.35 MMscf/d while the primary Lobe C target flowed gas to surface at an estimated average rate of 0.25 MMscf/d. To achieve the threshold of commerciality, it was estimated the well would require a stabilised production rate across the intervals of approximately 1.0 MMscf/d, which was not achieved from the Anita and Lobe C targets. Testing further intervals was not ruled out and in the interim period the CLM x-1 well was shut in for evaluation and with well head pressure measured during this time.
Whilst CLM x-1 was deemed a non-commercial discovery, we were encouraged by the acquired data which proved the presence of a working petroleum system on the Chiripa Oeste 3D seismic in Tapi Aike. The data and the information collected to date from the CLM x-1 well will be used to calibrate and further enhance the predictive capability of the 3D data acquired last year to identify other drilling locations that could be commercial.
The Huayco and Rio Salado blocks in Bolivia, where Echo has joint evaluation and technical agreements with Pluspetrol Bolivia Corporation SA (“Pluspetrol”) and Yacimientos Petrolíferos Fiscales Bolivianos (“YPFB”) respectively are deemed as non-core to the current strategy following the completion of the geological and structural model and presentation of the report. However, management continued to evaluate the best route to maximise value from its Bolivian position.
Echo continues to make selective and highly targeted investments to build our production and development base whilst maintaining our strategic focus. The Company has put in place cost saving measures without sacrificing its operational capability.
The Group posted a loss after tax for the period of US$5.7 million for the six-month period ended 30 June 2020, compared to a loss of US$7.7 million for the comparable period in 2019, demonstrating the benefits of a successful cost savings drive for the period ended 30 June 2020.
During the first half of 2020, total revenue achieved was US$5.6 million of which US$3.5 million related to gas sales and US$2.1 million related to oil sales. This compares to revenue of US$2.7 million in the 2019 interim period, and US$5.4 million in the year to 31 December 2019 (when considering both continued and discontinued operations revenue). Oil prices realised averaged US$34.7/bbl versus US$52/bbl for H1 2019, reflecting the dramatic drop in oil prices in March 2020 which resulted in the management’s decision to temporarily shut-in mainly oil producing wells to concentrate on gas production. Monthly volume weighted average gas prices for the period to 30 June 2020 ranged from US$2.10-US$2.77/mmbtu.
H1 2020 finance expense is composed of interest payable, amortisation of debt fees, effects of unwinding of the discount on the debt, and foreign exchange losses bringing finance fees to a total of US$3.2 million. The derivative financial income figure of US$0.64 million represents movement in the embedded derivative fair value, associated with the long term €5 million debt facility (the “€5m Loan”) held by Lombard Odier Asset Management (Europe) Limited (“Lombard Odier”).
The Company’s cash balance at 30 June 2020 was US$1.2 million.
In March 2020 the Company entered into negotiations with all holders of its debts to extend the loans or defer all cash interest during 2020. By 22 May 2020, all negotiations were successfully completed delaying all debt payments to March 2021. The Company agreed a two-year extension to its £1 million loan (the “£1m Loan”), held by Spartan Fund Limited, whereby the interest rate remained unchanged and further agreed that interest payments at the annual rate of 12.0% accrued and, at the end of each quarterly interest period until March 2021, be added to the aggregate principal amount, for payment on maturity on 8 March 2022.
On 14 May 2020 Echo announced concluded negotiations to amend its €5million Loan to defer 2020 interest payments such that no interest will be due prior to 31 March 2021. On 22 May 2020, the Company further announced that the holders of the €20 million five-year secured bonds (the “€20m Bond”) gave their consent, with votes cast unanimously, to defer quarterly interest payments which would otherwise be due in 2020, such that 2020 interest payments will be payable on maturity of the bonds in May 2022. The Company will continue to be required to make quarterly payments for the €20m Bond in 2021 and 2022. In addition, the Company granted security in the form of a charge over 100% of the shares in Echo Argentina Holdings Limited. Such security will be shared pari passu between the holders of the €20m Bond and Lombard Odier in its capacity as lender under of the Company’s €5m Loan.
The movement between 31 December 2019 and 30 June 2020 long term loan balances (US$3.6 million) reflects the net effect of unwinding of the discount effect in accordance with the loan terms, and interest payable.
Corporate & Post Balance Sheet Events
In line with the Company’s growth strategy, Echo continues to evaluate acquisition opportunities against its rigorous requirements with the aim of delivering transformational value.
Echo entered into negotiations with CGC to reposition the Company’s 19% participating interest in Tapi Aike. Post period, in July 2020, an agreement was reached relieving Echo of all licence funding requirements, including on going pre-drill work and remaining licence commitments (including well costs, abandonment fees and decommissioning liabilities). A withdrawal from Tapi Aike with an effective date of 1 July 2020 was agreed, with the grant of an option allowing Echo to re-enter a 19% participating interest in the western cube ahead of the next well spud. This solution provides access to exploration upside while allowing Echo to sharpen its strategic focus, preserve cashflow and concentrate its immediate resources on production and substantial development and exploration opportunities at Santa Cruz Sur.
Echo continues to carefully monitor events as operations cautiously return to a pre-pandemic footing. During these challenging times, however, against the oil market turmoil and the Covid-19 pandemic Echo has reacted quickly, adapted, and redeployed its resources to navigate the current global crisis. With our dedicated team and the support of our partners and investors, we are well placed to weather this storm and continue to implement our growth strategy for the benefit of all stakeholders.
James Parsons Martin Hull
Chairman (Non Executive) Chief Executive Officer, Echo Energy