South and Central American oil and gas company Echo Energy (LSE:ECHO) has mobilised the rig for its much-anticipated three-well workover campaign in Argentina. The rig is under contract to the firm’s local partner CGC and is expected to reach Echo’s Fraccion D site within three days. After this, it will begin to workover three selected existing wells.
The workovers are expected to take ten days each and will consist of abandoning the previously producing oil zones and then completing discovered but uncompleted gas zones. After this, each well will be put on an extended well test for up to 30 days to obtain further gas volume data before agreeing on commercial development, which would require the construction of a 29km pipeline. The total cost of the rig operations and testing comes in at around $550,000 per well. Echo’s shares were up 2.9pc, or 0.4p, to 12.5p at the time of writing.
Fiona MacAulay, chief executive officer of Echo, said: ‘We are delighted to be moving into this exciting workover campaign and look forward to updating our shareholders as the programme progresses. Alongside these workovers, we continue with the detailed engineering work programmes that are now being finalised for the back to back four well exploration campaign at Fracción C, where the drilling rig due to arrive on location in early May.’
The workovers form the first step of Echo’s 18-month work programme for its 50/50 farm-on with CGC on several Argentinian assets. After completing the workovers, Echo plans to drill four back-to-back exploration wells across its producing licences in Fraccion C and Laguna De Los Capones.
The wells have a combined post-tax unranked net present value to Echo of $112.2m (c.£81.1m) and are expected to take around 15 days to drill, costing some $1.8m each. All four exploration wells have an expected success rate of between 36pc and 40pc. Echo has already received approval for one of the wells and hopes to get permits for the other three by April. The business has already secured a rig for the drilling programme, which it said has an excellent operation and safety track record and has been on contract to CGC since 2016.
In the fourth quarter of the year, Echo then expects to initiate a seismic programme at its prospective Tapi Aike exploration block, as the first step towards a planned first exploration drill in 2019. A previous Competent Persons Report of the reservoir identified an inventory of 41 leads with five of these individual leads containing more than 1Tcf and up to 3.8Tcf of gas. The pool is expected to hold more than 22Tcf of gross unranked potential gas in total.
As we wrote earlier this year, the total farm-in agreement offers significant potential upside and two of the projects already producing oil and gas. Furthermore, the company has more than enough cash on its books to cover the estimated £26.9m total costs of the farm-in agreement. As a result, it could be well worth taking advantage of Echo’s current 12.6p share price and £48.8m market cap.
Speaking to ValueTheMarkets.com, Macaulay was naturally bullish about the scale of the opportunity Echo is pursuing.
‘We have a definite first-mover advantage in Argentina. There are very few places in the world that equity investors can invest in our sector in this country. We have an excellent local partner and a fantastic team on the ground. With the financing now in place our goal is to seize the initiative here to deliver outstanding shareholder returns,’ she said.
Macaulay, who has 24m options exercisable at 16.1p ensuring her interest is heavily aligned with shareholders, believes the market will soon see the value of an early entry into Argentina as Echo continues to deliver strong newsflow.
‘We have a really exciting year ahead of us, with lots of anticipated news flow. We will be conducting near field exploration drilling at 4 to 5 locations, any of which could prove to be a catalyst for a significant rerate in our company’s valuation. Our cash balance was already strong, and we further bolstered that a month ago, meaning we our planned work programme is fully funded,’ she added.