Where next for Echo Energy as it gears up for work at potentially game-changing Tapi Aike licence?
Shares in Echo Energy have declined by around 41pc over the last two months following the failure of a key well on one of its Argentina-based oil and gas assets. With the firm gradually increasing production and gearing up to begin work at its potentially game-changing Tapi Aike exploration licence, we ask whether it is worth a punt at its current share price just shy of 10 pence.
This year has been one of significant strategic change for Echo. This shift began in January when the company bought a 50pc stake in several Argentinean gas and oil assets from a respected local partner called CGC.
Among the sites included in the £6.4m deal were two concessions called Fraccion C and Fraccion D. At the time of the purchase, these licences were producing c.11MMscfe/d. However, Echo believes they could contain enough upside potential to increase this to more than 80MMscfe/d within five years.
The deal also saw Echo take a 50pc position in an exploration permit called Tapi Aike. More than 40 leads have been identified here over three independent plays, each of which is thought to typically contains gross prospective resources of 50-600Bcf at the best estimate level. The largest two are estimated to hold 3.8Tcf and 2.6Tcf in the high case while three others are also thought to contain more than 1Tcf.
This year has broadly seen Echo shift its focus away from its existing Bolivian assets and onto establishing its position in Argentina, where it hopes to take advantage of strong local gas prices.
This focus saw the business carry out a three-well workover campaign at Fraccion D in the first half of the year, which it completed ahead of time and under budget. One of the workovers, at well CSo-85, resulted in a gas discovery that Echo is now looking to develop into a commercial gas project following a successful extended well test.
In May, the firm also began carrying out a four-well back-to-back exploration campaign across Fraccion C. By August, it had announced the successful production of gas-to-surface during the testing of the first of these wells (ELM-1004), where it is targeting estimated gross gas initially in place of 38bcf.
Echo has also found hydrocarbons at another two of the exploration wells- EMS-1001 and ELA-1 – where it is targeting 60MMbbls of prospective unrisked oil and 40Bcf of unrisked gas initially in place respectively. However, it is yet to confirm whether testing has completed on either.
Following CSo-85’s success, Echo announced in June that it would substitute the fourth well in the programme for a well on Fraccion D called CSo-2001(d), targeting 19bcf of contingent resources. Despite encountering a promising Tobifera gas column, testing in August ultimately found that long-term production from an adjacent field had caused significant pressure depletion. As a result, Echo announced that the well would be unlikely to ‘contribute economically’ to Fraccion D, leading shares to crash by 13.3pc.
Finally, it has recently begun a pilot project at the Canadon Salto Field at Fraccion D, carrying out a series of pulling jobs and well interventions to increase production.
Alongside its work at Fraccion C and Fraccion D, this year has also seen Echo begin work at Tapi Aike. Indeed, in May, it carried out an £8.5m placing to, among other things, fund an accelerated 2,000km2 seismic acquisition campaign over the asset. By October, seismic crews and equipment had been scheduled to be on location at Tapi Aike in the first half of December 2018, with the programme set to complete in around five months. Echo expects the processed results to be ready by the second half of next year and hopes to be drill-ready by ‘late 2019’.
Echo’s shares have been in severe decline since it announced CSo-2001(d)’s failure, dropping from 16.9p to their current 9.9p. This price gives the company a market cap of £47.1m, which is well covered by its £26.1m cash balance as of 30 June 2018. The business has also suffered from souring investor sentiment towards Argentina amid ongoing currency turmoil, although it is worth noting that it has taken steps to protect itself here. All-in-all, there is an argument to be made that some good news could see Echo re-rate.
The reality is that CSo-2001(d) was just one of many opportunities for Echo across its producing assets. The small production increases Echo is making through low-cost workovers and well interventions can at least partly offset the impact of its failure. What’s more, if Echo’s quoted estimates are to be believed, then the resources it is targeting at its exploration wells could carry some significant weight.
The real jewel in Echo’s crown is, of course, Tapi Aike, which could contain a company-making amount of hydrocarbons. The road to developing this area may be long, but if Echo can access even half of its estimated potential, then it may be well worth the wait.
Over the shorter-term, numerous potential share price catalysts lie on Echo’s horizon. These include the results of well testing at EMS-1001 and ELA-1 and the beginning of its seismic programme. Of course, results-based updates like these could always end up damaging shares. However, if you fancy a punt on the business’s luck changing and are willing to wait out progress at Tapi Aike, then Echo could look attractive at its current price.
In August Andrew Scott spoke to oil and gas companies expert Malcolm Graham-Wood.
The author was remunerated yet does not hold shares in the company