Echo Energy (LSE:ECHO) dipped 0.5pc to 19p today after announcing that it had begun drilling the final well its current four-well back-to-back exploration campaign. With the news likely marking the beginning of an intense period of results news flow for the oil & gas company, could there be more upside on the way following strong share price performance over the last month or should holders bank some profits?
In today’s update, Echo reported that the well – called Cso-2001d – has been drilled in the western area of the Fraccion D licence, which is operated by the firm in a 50/50 joint venture alongside local gas player CGC. The well is targeting 19bcf gross best case contingent resources, assigned in a recent competent person’s report.
Once Echo has completed Cso-2001d, it will have reached the end of its four well back-to-back drilling programme launched in May and supported by an £8.5m placing at 12p a share, available via the Teathers app. To date, the programme has enjoyed considerable success.
The first well – ELM-1004 – identified over 40 metres of gas shows through the Upper Tobífera with gas peaks of over 195,000 ppm and a full distribution of C1 to C5 hydrocarbons. Following this, well number two – ELA-1 – encountered elevated gas shows of C1 through C4 hydrocarbon indicators across an interval of approximately 40m in addition to some oil staining.
Finally, the third well in the programme – EMS-1001 – interpreted a ‘very significant’ hydrocarbon column between 1722m and 2220m in the Tobifera Formation. According to Echo, if hydrocarbon saturations across this section are confirmed, it might represent an interval of some 500m that could significantly open up the play for the area.
The market has reacted well to the programme so far, with Echo’s share advancing by nearly 50pc from 13p to 19p since the drilling of ELM-1004 was announced at the beginning of May. Given how much the company has already risen in recent weeks, it may be worth taking some profits. However, it may not be worth throwing the baby out with the bath water yet.
What is important to note is that the organisation now enters a new phase that will see it regularly update the market as it tests and develops the potential it has identified at the exploration wells. This is an extensive drilling campaign, and the delivery of good results could see shares climb further. However, if the results disappoint there are clear downside risks.
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. When we highlighted the firm following May’s placing, as shares sat at c.12.5p, the firm’s chief executive Fiona Macaulay told us growth could extend much further if the drilling programme met 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,’ she said at the time.
If Macaulay is correct, then the results and share price performance Echo has enjoyed since this interview took place bode well for the future.
It is also worth remembering that the business is 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. In May, 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.
As for what happens next with Echo’s shares much will depend on the drill results. The company has made good operational progress in 2018, under Macaulay’s leadership, but the increased dilution has changed the dynamic of the share price. The company’s market cap at 19p is now £76.5m. The stock has performed extremely well since the placing and for anyone with a low average it might make sense to bank some profit.
Author: Daniel Flynn
Disclosure: The author of this piece does not own shares in the company covered in this article