Echo Energy plc (LON:ECHO), the Latin American focused energy company, has announced the execution of a binding Term Sheet for a transaction, subject inter alia to shareholder approval, designed to provide much needed funding for the Company through the sale of 65% of the Company’s 70% of the current Working Interest in Santa Cruz Sur to Selva Maria Oil S.A. and Interoil Exploration and Production ASA for a cash consideration of up to £1.725M, an award of an option to purchase a producing Columbian portfolio and the issue of equity in Echo Energy PLC at 0.065 pence per share (a more than 100% premium to the closing price on 5 May). This transaction would enable the Company to retain a much smaller interest in Santa Cruz Sur, whilst also seeing the Company’s liability for the previously announced significant in-country creditors and other liabilities reduced significantly. In addition the transaction would see the Buyer providing in country licence financial guarantees and provides a potentially attractive entry point into Columbia.
The Proposed Transaction
Pursuant to the term sheet and subject to contract, Echo will sell 65% per cent of its current 70% Working interest in the Santa Cruz Sur assets to Selva Maria Oil SA and Interoil Exploration & Production ASA. On Completion the Company Echo therefore will retain a 5% working interest in the assets, will have an option to buy another 5% back and will have an indirect exposure through equity in the Operator.
Total consideration for the sale is up to £1.725M of which:
· Consideration of £825,000 with:
· An upfront payment of £75,000 on execution of transaction documents, with the balance of £750,000 due on completion once shareholder approval has been obtained.
· Payment in kind of £400,000 via transfer of Interoil shares upon completion, providing upside exposure to the Santa Cruz asset via an equity position in the Operator
· Additional contingent payment of £400,000 should production from the assets rise to 4,000 boepd (gross).
· Further contingent payment of £100,000 should production from the assets rise to 6,000 boepd (gross)
Furthermore the Buyers will provide a financial guarantee to cover Echo’s remaining 5% interest which is a critical step to enabling the securing of the licence extension and was not something Echo could easily achieve on its own.
Echo will also retain an option to repurchase a 5% interest in the asset for a consideration of £100,000 over a 6 month period, providing optionality in the event licence extension or other value catalysts are achieved
Additionally the transaction will provide the Company with the option to acquire an interest in Interoil’s Colombian assets (for a consideration and on terms to be agreed in future) after drilling and testing of an exploration well on the Maná Licence. The Company can recover twice the cost of that well from associated production.
Further to the above, Selva Maria Oil SA and Interoil Exploration & Production ASA have agreed to subscribe to approximately 115.38 million shares at a price of 0.065 pence per share (raising £75,000). This represents a more than 100% premium to the closing share price on 5 May, the last trading day prior to announcement. Such an issue of equity would take place following completion and is likely to be subject to a capital reorganisation (likely requiring shareholder approval) and meeting other regulatory obligations.
Benefits of Transaction to Echo
This transaction fundamentally:
· Addresses the Company’s near-term funding challenges by providing near term funding, enabling the Company to walk away from the significant in-country creditors which had build up during the COVID-19 period and providing access to funding for the Santa Cruz assets.
· Provides continued exposure (both directly through the retained 5%, the contingent payments, the further 5% option and the indirect holding in the Operator) to a well funded Santa Cruz portfolio, likely with a licence extension supported by the guarantee.
· Provides the company a new platform from which to move forward with an option on a strong Columbian portfolio with its corresponding lower risk jurisdiction and a clean balance sheet whilst still receiving cash flow from its 5% position in the producing assets of Santa Cruz Sur.
Given the Company’s large creditor position which originated from the COVID-19 period where the asset was sub-economic, 100%+ per annum inflation in Argentina and Argentine currency exchange controls, which have prevented funds being withdrawn from the country without significant penalties, the raising of additional equity for an Argentine business has been challenging. Having continued to explore all means of raising required near term funding, the Directors therefore see this alternative, which addresses the Company’s near-term funding challenge whilst providing continued exposure to Santa Cruz Sur, both through the retained 5% and the equity position in the Operator, and also a pathway to revenue generating assets in Columbia, as highly attractive at this juncture.
Transaction Subject to Shareholder Agreement
The transaction requires additional execution of a Sales & Purchase Agreement and a financial guarantee provided by the buyers for the benefit of Echo for the National Secretary of Energy & the Province of Santa Cruz. In addition the proposed option remains subject to agreement between the parties and completion will then require shareholder approval at an Extraordinary Shareholders’ Meeting of the Company to be held within 25 calendar days from execution of documents by all parties.
Vision For the Future
This transaction puts the Company on a much more financially stable trajectory with the transfer of liabilities associated with the Company’s current working interest in the assets to the buyers. A decision has been made to significantly reduce the Company’s corporate level cost base.
The Buyers will provide a financial guarantee for Company sufficient to meet domestic regulatory requirements. This is expected to help secure a 10-year licence extension for the Santa Cruz Sur assets as the new majority parties can fund the asset requirements to increase production. The Company will continue to have exposure to production upside through the contingent payments, and moving forward will continue to receive its 5% share of production revenue plus has the option to repurchase a further 5% interest at a price of £100,000.
The option to enter Colombia provides an opportunity to rebuild the E&P portfolio in a new territory that does not suffer the macro inflationary and economic factors that Argentina does. It is a much more business friendly jurisdiction with a vibrant small-medium cap E&P sector – an exciting growth opportunity.
The Company confirms that it has received some of, but not all of, the expected c. ARS$ 135 million (c.£0.5m) revenue in Argentina around the end of April. The Company continues to expect that the remaining revenue will be paid to the company and is working with the operator and suppliers to accelerate its payment. The signing of the binding termsheet demonstrating a pathway to a stronger financial footing is considered an important step in this process. Prior to the receipt of this revenue or the completion of the proposed transaction the financial situation at the company remains challenging. Current cash balances in the UK bank accounts are below £50,000.
Production from the Company’s assets in Argentina remains stable. Production over the period from 1 January 2023 to 05 May 2023 was an aggregate of 148,503 boe net to Echo, including 23,104 bbls of oil and condensate and 752 MMscf of gas. Average total daily production during the same period net to Echo was 1,198 boepd, with 6.07 MMscf/d gas and 186 bopd liquid.
Martin Hull, Chief Executive Officer of Echo Energy, commented: ‘This is a transformational moment for the Company as we look to put our recent challenges behind us and create a new, stronger and more financially robust platform from which to take the Company forward. Not only does it immediately improve our balance sheet, it also brings optionality with the Colombian opportunity, as well as giving us continuing revenues, with additional upside should the Buyers of the asset interest be able to deliver the investment and production growth that our financial limitations have prevented us from doing. I am excited about the future and the opportunities that lie before us and look forward to progressing the transaction in the coming weeks and updating shareholders on our progress.’