When ValueTheMarkets last spoke to Fiona MacAulay, CEO of Echo Energy (LSE:ECHO), the firm had just finished a major farm-in to several Argentinean assets and a £4.7m raise at 17.5p a share to fund development. The agreement with local business CGC saw Echo take a 50pc stake in the Fracción C, Fracción D, and Laguna De Los Capones concessions and the Tapi Aike exploration permit, all based in the country’s Austral basin. With Echo raising £8.5m by placing shares at 12p last week to accelerate its seismic campaign over Tapi Aike, we spoke to MacAulay again to discuss the company’s progress and re-visit it as a possible buying opportunity.
Work in progress
At the time of the farm-in, Fracción C and Fracción D had gross gas production of 11.2m standard cubic ft/day. However, Echo believes there is significant potential to increase production from the two sites to more than 80m standard cubic ft/day. It launched an 18-month work programme for the concessions earlier this year to begin examining their potential.
The programme initially involved the testing of four exploration wells at Fraccion C and the workover of three wells on Fraccion D. Since we spoke to MacAulay in January, work has advanced considerably. In April, Echo successfully flowed gas to surface at CSO-85, the first well in the workover campaign at Fraccion D, and testing is due to complete later this month. The company also encountered oil at its second workover well, CSO-80, where it has suspended development pending the installation of an electric submersible pump.
Following an unsuccessful third workover, the programme has now been completed and is estimated to have come in under budget at a total cost of $1.5m. MacAulay tells she is pleased with the results from the first two workovers and has now begun to line up additional candidates:
‘Currently, we are studying around five or six new potential workover targets. If we can generate anywhere above 20bbls/d of revitalised production from a workover well, then it will be well worth it, economically speaking. We have put together a plan so we can get the workover rig back in and launch a pretty rapid regeneration programme for several wells. We are hoping to deliver a slow and steady track of workover news.’
This month also saw Echo launch its four well back-to-back drilling campaign at Fracción C. 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 with a success rate of between 36pc and 40pc.
Echo’s shares soared this week when it announced that it had discovered gas at the first well in the programme. The ELM-1004 exploration well encountered over 40m of gas shows and Echo is currently running a production casing string in anticipation of the arrival of a completion rig in June. However, it is worth noting that Echo still needs to test the well to determine ‘deliverability of the reservoir’. The rig is now moving to the site of the second exploration well.
MacAulay tells us the Fracción C programme provides an excellent opportunity to increase Echo’s core NAV gradually through low-risk exploration:
‘The piece of the picture that is massively important is that in the success case any of these wells can be brought into production literally within a couple of months of completion. They are all close to infrastructure, and this is about getting incremental barrels into the facilities. The relative operational expenditure for additional gas, for example, is just 14 cents per MMBtu. So, the more we can get going through these facilities that are running at about 10pc of their capacity, the better.’
Echo has moved from a standing start at the beginning of this year to total oil receipts of around $2.7m in Q1 after loading its first export cargo of oil produced from its Argentinean assets in April. MacAulay says this growth could jump much further if the exploration programme at Fracción C meets Echo’s modelling assumptions:
‘In our modelling assumptions, we assume that two out of the four exploration wells are successful, and if we do that, we think we are in line for a 4X growth of EBITDA throughout the year. What that tells you is that we are more than covering OPEX costs, and any new molecules produced have a high impact on EBITDA. Depending on success, we will then look at putting a contingent well into Fracción C at the end of the programme.’
Echo is also preparing a campaign to acquire 2,000km2 of 3D seismic across Fracción C, Fracción D, and Tapi Aike, which it expects to begin in Q3 or Q4 this year. MacAulay told us she had been pleased with the tender process for this campaign so far, with the company receiving a great deal of interest from two Argentine businesses. She said any additional support resulting from the aggressive bidding competition could particularly benefit Tapi Aike.
Tapi Aike is an exploration permit in the foothills of the Andes Mountains. A Competent Person’s Report has identified 41 leads over three independent plays at the site, with prospective resources of up to 600 billion cubic feet of gas at the best estimate level. The most significant two leads potentially contain 3.8 trillion cubic feet and 2.6 trillion cubic feet of gas in place. Three others are expected to hold more than 1 trillion cubic feet of gas.
Last week saw Echo announce that it had raised £8.5m by placing shares at 12p each to accelerate its commitment to a wider seismic acquisition campaign at Tapi Aike. MacAulay told us that carrying out 3-D seismic across the whole of Tapi Aike in one go will save up to $7m and could lead the site to become drill-ready by as soon as mid-2019:
‘Fully completing the 3-D seismic at Tapi Aike will be a transformational piece of the picture for Echo. We have done some independent analyst economic modelling that goes along with our thoughts on the site’s potential and believe that it could generate a value net to Echo of about $500m. Just one discovery there could be incredibly valuable and lead us into a different sphere of valuation.’
With Echo operating in Argentina, investors will have likely been on tenterhooks watching the collapse of the country’s currency, the peso, in recent weeks. After losing more than a quarter of its value against the US dollar over the previous 12 months, the peso has sunk to new record lows in May. The fall has come despite significant state intervention, with Argentina’s central bank spending around $4.3bn in five days to defend the currency as well as hiking rates by 3pc to 40pc.
Argentina is suffering from growing fears that President Macri will not be able to deliver on his promise to bring down inflation from a whopping 25pc. These fears have stemmed partly from the worst drought the country has seen in five decades, flooring its thriving agricultural sector and, in turn, harming efforts to curtail sizeable national trade and fiscal deficits.
Argentina’s central bank has managed to temporarily halt the peso’s plunge by selling up to $5bn of reserves and requesting assistance from the International Monetary Fund to improve its liquidity. However, these are controversial moves and, while they may improve things over the short-term, it is likely that investors will continue to pull money from Argentina until more concrete plans are in place.
For its part, Echo issued a statement earlier this month confirming that it does not hold Argentinean pesos and that the company has no borrowings linked to domestic interests. With Argentina’s government confirming last week that $30bn worth of near-maturity bonds will mostly be rolled over, MacAulay told us she remains confident:
‘The FX exchange risk in Argentina is kind of under control. The country’s government has to control the peso and ensure it comes down to an appropriate value to get funding from the IMF. There is no longer any short-term requirement to pay back bonds that had been due to expire imminently, and we have had a settling of the peso/dollar rate over the last few days. That gives us a good indication of where things lie. It is not ideal for the volatility to have occurred, but Argentina is an emerging market, and these things happen. I think the responses that the government have made and the speed at which they have made them show they are working effectively, as far as the outside world is concerned.’
Time to buy?
Echo’s shares have fallen from nearly 15p to 12.5p since last week’s placing, despite edging up slightly throughout the year thanks to stellar newsflow. At this point it is worth remembering that MacAulay has 24m options exercisable at 16.1p, aligning her with shareholders and those 17.5p placement participants.
Of course, Echo cannot guarantee success, but it is encouraging when a management team has a realisable and lucrative personal target to hit, especially when the market trades at a discount to the exercise price. MacAulay told us she is not worried about the share price as it stands. She believes that Echo’s valuation will advance as the firm do what it said it would do:
‘At the end of the day, I need to build a strong enough core NAV to ensure we have an appropriate valuation. We are doing that slowly but surely by transferring prospective resources into contingent resources and even reserves. We intend to build up a strong offering that is difficult to knock back. Once we get that intrinsic value, we will slowly bring the value up.’
With the company delivering on everything it said it would do so far this year, it is hard to argue against MacAulay in this respect. Echo is fully-funded and has a lot of potential for exploration upside and production growth, promising plenty of newsflow going forward- something that is crucial to success on AIM.
Author: Daniel Flynn
Disclosure: The author of this piece does not own shares in the company covered in this article