Echo Energy, the Latin American focused upstream oil and gas company, announces that it has successfully restructured its relationship with Compañia General de Combustibles S.A. (“CGC” or “the Operator”) on an interest in the Tapi Aike licence (the “Licence” or “Tapi Aike”).
The new agreement, in line with the Company’s immediate focus on optimising capital allocation, enables Echo to cease commitments to ongoing pre-drill expenditure at Tapi Aike, whilst maintaining an option for the Company to re-enter the western cube (Traversia de Arriba) of the Licence (the “Western Cube”) once pre-drill technical activities have been completed by the Operator and Echo has assessed the data available.
In line with the Company’s focus within its portfolio on cash generative production and on reducing costs, while maintaining exposure to exploration and development opportunities, Echo has entered into an agreement with the Operator to reposition the Company’s 19% participating interest in Tapi Aike such that Echo is relieved of all Licence funding requirements including ongoing pre-drill work and remaining Licence commitments (including well costs, abandonment fees and decommissioning liabilities) through a withdrawal from Tapi Aike with an effective date of 1 July 2020 and the grant of an option to the Company allowing the Company to re-enter a 19% participating interest in the Western Cube (the “Option”) ahead of the next well spud in the Western Cube drill programme (the “Relevant Well”) providing access to exploration upside.
The Western Cube and the exploration potential it provides remains strategically important for the Company and while management’s technical view of its prospectivity remains unchanged ahead of final data evaluation, the restructuring affords the Company an opportunity to re-evaluate its ongoing commitment to the Western Cube and to the related future costs and liabilities at a later date – with the benefit of being able to make that commitment with greater visibility of well costs, technical data and market conditions at the time.
Before the exercise by the Company of the Option, the restructuring is expected to save the Company approximately USD 36,000 a month in operating costs and enables Echo to delay and, importantly, possibly avoid all near term costs and future liabilities associated with a participating interest in the Licence. The consideration payable by the Company to the Operator for the entry of the Option of USD 339,000 represents an amount equivalent to a proportion of amounts that Echo would otherwise be required to meet under existing arrangements in respect of technical work which has already been executed on the Licence but not yet settled. This payment is deferred until the earlier of: (i) the Company receiving a VAT cash refund from the Argentine authorities expected to be in excess of US 1 million, (ii) 12 months from the signing of the Option, or (iii) at the point of the Operator spudding the Relevant Well.
The Option is exercisable by the Company at any time up until 30 days prior to the drilling of the Relevant Well for an additional payment to the Operator by the Company of USD 503,000, equivalent to the cost of technical work which has already been completed on the Licence. Prior to exercise of the Option, Echo will be provided with access to all pre-drill technical information, data and the Operator’s interpretations on the then proposed Relevant Well. In addition, and once the results of the Relevant Well are confirmed, Echo will also have a further right to elect to withdraw from the Western Cube for no additional cost or to continue with subsequent exploration wells in the area. The Board of Echo believes that immediate cessation of operating costs paid by the Company to the Operator, will better align the Company and its partners in Tapi Aike, in concluding the ongoing technical work in a timely manner, in advance of a decision regarding the Relevant Well.
Martin Hull, Chief Executive Officer of Echo Energy, commented:
“We have taken a series of steps in recent months to reinforce our financial platform and deliver innovative mechanisms to reduce upfront cost while maintaining both exploration and development optionality. We continue to adapt Echo’s strategy for the current oil and gas price environment, with a clear focus on production, cost reduction and on investing where we can most effectively add value for shareholders. We are therefore delighted to have restructured our relationship with CGC which will enable us to sharpen our near term strategic focus on our low-risk production and substantial development and exploration opportunities at Santa Cruz Sur, while also streamlining our overall operational costs by eliminating immediate expenditure at Tapi Aike. It is important that we retain optionality and can, at the Company’s discretion, participate in the drilling of the next well at Tapi Aike should we elect to following assessment of the technical data and prevailing commercial circumstances.
We have also continued to screen multiple assets in the LatAm region, looking for opportunities to deploy innovative financing solutions and look forward to updating the market on progress right across our portfolio as we look to progress opportunities both in the near term and further out.”
A presentation outlining the new restructured relationship and interest in Tapi Aike is available on the Company website at www.echoenergyplc.com.
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