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Oilman Jim's Private Blog


Echo Energy - Proposed Acquisition

Echo Energy, the Latin American-focused upstream oil and gas company, is pleased to announce that it has entered into a binding conditional sale and purchase agreement (the "SPA" or "Acquisition Agreement") for the proposed acquisition by the Company of a 70 per cent. initially non-operated working interest in the Santa Cruz Sur package of five mature producing blocks (the "Santa Cruz Sur Assets"), with Petrolera El Trebol SA, a subsidiary of Phoenix Global Resources plc (the "Vendor").

The Santa Cruz Sur Assets are located in the Austral Basin, adjacent to the Company's existing Tapi Aike exploration permit, in the Santa Cruz province in southern Argentina.

Acquisition Highlights

·    The Acquisition will add material production to the Company's portfolio, resulting in a diversified portfolio with a blend of significant production, low risk production enhancement opportunities and multi-tcf exploration potential at Tapi Aike;

·    Expected to produce material positive operational cashflows;

·    Existing Santa Cruz Sur Assets gross production of approximately 3,761 boepd in H1 2019 (2,633 boepd, including c.500 bbl of oil net production to a 70 per cent. interest), underpinned by strong local Argentinian gas prices;

·    1P reserves of 4.3 mmboe and 2P reserves of 13.7 mmboe (net to a 70 per cent. interest) as at 31 December 2018;

·    Certified 2P reserve valuation of US$44.5m as at 31 December 2018. Non-contingent consideration of US$8.5m represents a discount of approximately 80 per cent. to this 2P reserve valuation;

·    Significant potential to further increase production including through a programme of well workovers with 15 wells already identified as candidates;

·    Upcoming Campo Limite exploration well (to be part funded by the Vendor) providing potential upside; and

·    In the 12 months to 31 December 2018 the Santa Cruz Sur Assets generated unaudited revenues of approximately US$31.9m (net to a 70 per cent. interest).

The initial consideration for the acquisition is US$7 million in cash and a further US$1.5 million, which will be satisfied by the issue of 39,958,443 new Ordinary Shares in the Company (the "Consideration Shares"), at a price of 2.91 pence per Ordinary Share being the 20 day volume weighted average price prior to the date of this announcement and representing a 6.6 per cent. premium to the closing mid-market price of 2.73 pence per Ordinary Share on 18 October 2019, being the last practicable date prior to this announcement. 

The Acquisition Agreement provides for further deferred cash consideration of US$1.5 million if, as at 1 October 2020, there is an increase in the proven reserves attributable to the Santa Cruz Sur Assets as derived from a relevant competent person's report. 

The Vendor has agreed to enter in a lock-in in respect of the Consideration Shares which provides for a three month lock in respect of 100 per cent. of the Consideration Shares and a further three month lock-in in respect of 50 per cent. of the Consideration Shares.

The Acquisition Agreement also provides for the payment by the Vendor of the costs of the Campo Limite well on one of the concessions which is due to be spudded in Q4 2019.  Echo has agreed to reimburse up to 60 per cent. of these costs in a mixture of cash and Ordinary Shares (such reimbursement not to exceed a maximum amount of US$1.1 million).

The Acquisition Agreement contains certain warranties and indemnities from the Vendor.  It is intended that consent for the transfer of the Santa Cruz Sur Assets is obtained from the relevant authorities in Santa Cruz following completion of the Acquisition. Completion of the Acquisition is conditional, inter alia, upon the receipt of a waiver of certain rights held by the minority co-owner of the Santa Cruz Sur Assets (including a first right of refusal) ("Waiver"). Should the Waiver not be received by the Company prior to 1 November 2019, the Acquisition Agreement will terminate and the Acquisition, the Conditional Subscription and the Debt Facility will not proceed. Completion of the Acquisition is also conditional on the passing of the Resolutions.

To fund the Acquisition, the Company has conditionally raised gross proceeds of an aggregate of approximately £9.17 million, consisting of approximately £4.85 million through the issue of 193,820,000 new Ordinary Shares in the Company (the "Subscription Shares") at a subscription price of 2.5 pence per Ordinary Share ("Subscription Price") pursuant to a direct subscription with the Company (the "Subscription") and a €5 million secured convertible debt facility entered into with Lombard Odier Asset Management (Europe) Limited* ("Lombard Odier") and associated grant of warrants to subscribe for 74,200,000 Ordinary Shares exercisable at 3 pence per Ordinary Share (the "Debt Facility").

Martin Hull, Echo Energy's Chief Executive, commented:

"This Acquisition is a significant milestone for Echo and demonstrates that we are delivering on our growth strategy. On completion, the Acquisition would mark a positive rebalancing of the portfolio to provide both exciting exploration upside coupled with highly material revenues for a company of Echo's size. Not only will these assets broaden our footprint strategically within the Austral Basin, but with material positive cashflow they will add optionality in terms of how we finance the business in the months and years ahead. Importantly, we are acquiring the assets at an attractive price and a substantial discount to proved reserve valuation, with the potential to maximise the upside of the resource base as we look to access the portfolio's 2P opportunities. This value accretive transaction will create a new platform from which to grow Echo and adds many catalysts to our existing drilling programme at Tapi Aike."

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