The Echo Energy (LSE:ECHO) share price has had a shocking downward run in recent months. Looking at the stock today – now just 2.85p – it’s hard to believe Echo was hitting highs of almost 20p less than a year ago. What put the boot in earlier this year was the disappointing drill result from the EMS-1001 well which caused the stock to dive 50pc to 4.3p. But the decline didn’t stop there, exasperated by a period very light on newsflow, the stock dipped under 3p this week.
So, what do we know? Well, in an operational update last month, the company said its cash balance at 31 Dec was $15.6m and production net to Echo was 865 barrels of oil equivalent per day (boe/d) or 315,825 boe in 2018.
Quick, back-of-the-envelope calculations based on Echo’s stated average sales pricing of $63.8 per barrel (bbl) for oil, and $3.99 per million British thermal units (mmbtu) for gas suggest the following:
31pc of the production was oil which equates to 97,906 barrels at an average realised price of $63.8/bbl. This gives a figure of $6.25m for net oil revenues.
The remaining 69pc of gas equates to 217,919 boe. One boe of gas is equivalent to 5.8 mmbtu. Therefore Echo’s net gas production totals 1,263,932 mmbtu. At a price of $3.99 per mmbtu, revenues from gas were $5.04m. So, reported revenues from the Fracción C and Fracción D licences are expected to be in the region of $11.3m.
Echo’s basic monthly cashburn is around £500k, and it has debt of around £11m. The company’s Market Cap is now less than £14m, so much of the current valuation is backed by cash. However, with seismic underway, and future drilling, the company will likely need to replenish its cash reserves at some point. Ongoing revenues will go so far, but inevitably there will be some level of production decline from existing wells without further investment too.
It would, of course, be hugely dilutive to existing shareholders if a raise was done around or below current price levels. The last placing, which took place in May 2018 and raised £8.5m, was at a much higher 12p level. Holders should hopefully have a fuller picture soon enough, as the firm has announced it will be releasing its 2018 full year results in the week commencing 29th April 2019. For the time being it seems very little of the current valuation is attributed to the assets the company owns.
As you can see on the stock chart, price action has been working its way into a tightening wedge. More often than not, a breakout to the upside follows this type of Falling Wedge pattern. There is a large gap down from 8.3p in February which suggests an obvious price target zone for the stock.
As you would expect with such a sharp price decline, the Relative Strength Index (RSI) is screaming that the stock is very oversold. From a chart perspective, the potential upside is compelling but the potential risk of a further fundraise, particularly if done at a discount, could present further downside.