Echo Energy plc (LON:ECHO), the Latin American focused upstream energy company, has announced its unaudited interim results for the six months ended 30 June 2022.
H1 2022 Highlights:
· Revenue increase of 6% to US$6.2 million in H1 2022 (H1 2021: US$5.9 million)
· Secured new gas contracts for 2022-2023 significantly above the 2021 annual pricing
· Total net aggregate H1 2022 production of 261,290 boe, including 48,600 bbls of oil and condensate and 1,280 MMscf of gas
· Continued to prioritise production opportunities with swift payback, a key component of the Group’s overarching growth strategy
Post Period-End Highlights
· Agreement by the Santa Cruz Sur partners to a production and infrastructure enhancement plan to materially increase Santa Cruz Sur production by c.40% above average H1 2022 production levels
· Post period fundraising and conditional debt restructuring
Chairman and Chief Executive Officer’s Statement
In the six months ended 30 June 2022, despite a number of legacy challenges resulting from the pandemic, the Company has taken clear steps forward, underpinned by considerable operational and commercial progress. Echo has continued to bolster its financial foundations, facilitating the development of cashflow enhancing rapid return production opportunities, which remains a a key component of the Group’s long-term growth strategy.
The successful negotiation of the new premium priced gas sales agreements, coming into effect in May 2022, are expected to underpin significantly increased gas revenues from the Santa Cruz Sur asset base. The additional cashflows which will be delivered from the Santa Cruz Sur Enhancement Plan announced post period-end will enable the Company to broaden the scope of choices available to bring additional reserves and resources into production from the many opportunities the portfolio presents.
Amid the current favourable macro environment and with the potential debt restructuring on the horizon, Echo remains well-placed to evolve its existing portfolio. Whilst the Santa Cruz Sur assets remain a strategic priority, Echo is also pursuing additional business development opportunities across the full energy spectrum in Latin America, aimed at enhancing the Company’s reputation as a leading sector player in the wider region.
Progress on Production
Echo is highly focused on delivering near term production increases following the prudent financial stabilisation of the business across 2020 and 2021, and the normalisation of operating and trading conditions, albeit against a strong commodity price backdrop, across the energy sector as the impact of the Covid-19 pandemic continues to ease.
In April 2022, the compressor at the Santa Cruz Sur assets was successfully upgraded, and important maintenance was performed whilst the Oceano field was temporarily shut-in. This was a significant and planned operational milestone and the programme has delivered on its target of substantially increasing production from the Santa Cruz Sur assets since the compressor was brought back online, with the full impact expected to be seen in future production figures. Post period additional work at a number of fields has been undertaken to improve power generation capacity as part of the production enhancement plan, and these efforts continue.
Production over H1 2022 has continued to remain strong and reached an aggregate of 261,290 boe net to Echo during the period, including 48,600 bbls of oil and condensate and 1,280 MMscf of gas. Concurrently, net liquids production in Q2 2022 averaged 272 bopd, an increase over Q1 levels (Q1 2022: 265 bopd) despite the 35-day maintenance and upgrade programme on the Oceano field during the quarter.
Net gas production averaged 6.8 MMscf/d during Q2 2022 (Q1 2022: 7.4 MMscf/d), with Q2 2022 production again impacted as a result of the Oceano field production being brought temporarily offline.
Successful Execution of Sales Contracts at Premium Prices
In May 2022, Echo extended its customer footprint, securing two new gas sales contracts (“the Contracts”) at significant premiums to 2021 contracted rates. The Contracts reflect the strong competition amongst customers to secure gas supplies from the Company for the coming year.
Alongside providing the Group with further sales options and flexibility as Echo focuses on increasing competition and prices for specific products, the Contracts demonstrate the continued implementation of the Company’s strategy to leverage the strong upswing in global commodity prices whilst seeking to underpin gas sales from Santa Cruz Sur under secure long-term supply agreements where appropriate.
The Contracts have a term of 12 months, with gas sales under the Contracts beginning in May 2022, and provide for a 65% increase in pricing over average annual contract pricing previously achieved by the Company in March 2021 and a 116% increase on the current summer pricing until end April 2022 under those same March 2021 contracts. Only 2 months of the higher gas revenues under the new contracts is reflected in the interim accounts for the 6 months to 30 June, however, they now create a much more positive outlook for revenue growth in the next 12 month period.
Financial
The Group posted a Gross Loss of US $1.0 million for the six month period ended June 2020 compared to a profit of US $0.4 million for the comparable period in 2021. Growing production costs are attributable to general inflationary increases and additional expenditure required to get operations back to a more normal environment following the pandemic.
Total revenue for the period was US $6.2 million (H1 2020: US $ 5.9 million), and comprised of US $2.5 million of Oil sales and US $3.7 million of Gas sales.
Financial income of US $2.2 million and was almost entirely the net foreign exchange gains. Finance expense of US $1.8 million for H1 2022 (H1 2020: US $ 3.3 million) and comprised primarily of US $1.3 million unwinding of discount on long term loans..
Total comprehensive loss for the Group for the 6 month period ending 30 June 2022 was US $2.0 million (H1 2020: US $ 1.5 million)
The Company’s cash balance as at 30 June 2022 was US $1.3 million, compared to $0.7 million balance as at 31 December 2021.
Post Period-End Highlights
Post period-end, the Group has continued to build on the positive momentum generated in H1 2022 following the agreement of new gas sales contracts, focusing on proving up the Santa Cruz Sur assets which provide Echo with material production and revenues from a strong reserves base as well as the potential for exciting higher impact projects.
In July 2022, the Santa Cruz Sur joint venture partners agreed to a detailed plan to materially increase production at Santa Cruz Sur by approximately 40% from the levels previously achieved over H1 2022, as well as to improve the quality of sales liquids from the Santa Cruz Sur assets (the “Enhancement Plan”). If achieved, the Enhancement Plan would increase total daily production from Santa Cruz Sur to around 2,000 boepd, net to Echo’s 70% interest in Santa Cruz Sur.
This Enhancement Plan is the agreed next step for production growth from Santa Cruz Sur and is focused on low-risk infrastructure upgrades to sustain the increased production from existing well stock.
Echo successfully installed all three additional power generation units on schedule in the respective fields over August 2022, a key pillar of the Enhancement Plan, with the unit installed in the larger Cerro Molino Oeste field commissioned and available to support existing and future production levels. The Group is planning on delivering upgrades to the workover rig owned by the Santa Cruz joint venture, including an overhaul of the hydraulic system and the blowout preventer stack.
Conditional Debt Restructuring and Fundraising
On 12 August 2022, the Company announced the conditional conversion of an aggregate of €15.0 million of existing debt principal, together with accrued interest thereon, into new Ordinary Shares – the significant majority of which is proposed to be converted into new Ordinary Shares at a price of 0.45p. In doing so, the Company also confirmed that it would be proposing a conditional reduction of the coupon on the remaining €10.0 million of Euro Note debt (the “Notes”) from 8% to 2% with suspension of further cash interest payments for two years and an extension on maturity on the remaining Notes to 2032.
The Company subsequently announced publication of its proposals to restructure the Notes on 5 September 2022. The debt restructuring remains conditional on both the approval of the holders of the Note and on the approval of the Company’s shareholders. The changes are aimed at comprehensively restructuring and strengthening the Company’s balance sheet and accelerating growth.
On 14 August 2022, the Company was also pleased to confirm that it had successfully raised £600,000 (before expenses) pursuant to a placing of new ordinary shares. The net proceeds of this placing provided the Group with additional resources to fund working capital, including expenses related to the proposed debt restructuring, and enable operating cashflows in Argentina to be focused on activities in country in the near term, including the plan to increase production by c. 40% over approximately the next six months.
Outlook
H1 2022 was a productive period for the Group, as we consolidated our asset base in Latin America with significant long term commercial agreements and continued solid output from key licences.
Against the backdrop of strong global commodity prices, the Company has delivered on its key aspirations for the period, accelerating its strategy to deliver organic growth from the Santa Cruz Sur assets, which present material low-risk production upside and has the potential to providing potential additional benefits to all stakeholders.
Looking ahead, management is confident of the Group’s growth prospects as we continue to unlock the potential of Santa Cruz Sur, identify further commercial opportunities, and strive to deliver the important conditional debt restructuring announced in August this year.
James Parsons Martin Hull
Chairman Chief Executive Office
