Echo bets on gas: CEO interview [NGW Magazine]
Argentine junior Echo Energy has reinforced its focus on natural gas in the wake of the coronavirus pandemic, motivated by resilient prices and strong long-term prospects, its CEO Martin Hull tells NGW.
The London-listed company was launched just over three and a half years ago and has since acquired a portfolio of five licences in Argentina covering 2,693 km2, as well as an option for a 19% interest in an exploration block in the country. It has additional interests in neighbouring Bolivia.
Hull took the company’s helm in 2018, after almost 20 years working as an oil and gas investment banker at Rothschild & Sons in London. Since then Echo has completed some “innovative deals” to rework its portfolio.
“We have reframed the portfolio moving away from pure exploration to a more balanced gas-focused E&P company with substantial production,” Hull says.
Echo ramped up output significantly through the acquisition late last year of 70% stakes in five Santa Cruz Sur blocks from UK-based Phoenix Global Resources. Norway-listed Interoil acts as their operator.
The assets have been in production for two decades, but still grossed an output of nearly 3,800 barrels of oil equivalent/day of mostly gas but also some oil in the first half of 2019. Echo added 13.7mn boe to its proven and probable reserves through the deal, while almost doubling its revenues in H1 2020.
The company paid $7mn in cash and $1.5mn in shares, saying at the time that this was a “substantial discount” on the assets’ value. Since then, the market outlook has of course changed dramatically.
Oil prices tanked in April as coronavirus lockdowns were imposed and Russia and Saudi Arabia began an ill-timed price war, before agreeing to co-ordinate on supply. Echo had to respond to the crisis quickly.
“There are many positives to being a small company, being nimbler and more commercially innovative,” Hull says, “but it also means you don’t have the luxury of having a huge balance sheet behind you. You have to move fast.”
Echo “grasped the nettle quickly” Hull continues, in terms of preserving cash, cost-cutting and the rescheduling of work programmes. In April the company announced a 50% reduction in operating cash outflow at Santa Cruz Sur versus 2019 levels.
Echo’s revenues from oil have been harder hit by the crisis than its revenues from gas. The company sells its crude on the spot market, trucking its supplies to storage terminals, from where they are transported to Rio Gallegos and then loaded onto tankers.
However, the price it sells gas at on the domestic market has “held up very well,” Hull says.
The company’s realised oil price averaged $34.7/barrel in H1 2020, versus $52/barrel a year earlier, while monthly volume weighted average gas prices ranged from $2.10-2.77/mn Btu.
Good appetite for gas
Echo sells 70% of its gas under long-term contracts and 30% on the spot market. At the onset of coronavirus in April, the company fortunately renewed two supply agreements, at a significant premium to the spot price.
Argentina is a significant gas user, accounting for nearly 30% of all Latin American consumption, although it is still heavily reliant on imports, meaning domestic production is prized. The market is highly seasonal, with prices supported in Argentina’s coldest months of June through August by increased heating.
An added benefit to Echo has been the decline in this year in Argentine oil production as a result of low prices, removing some associated gas supply from the market.
Echo opted in April to close in oil wells, freeing up resources to spend on extra gas production.
“We have always been gas-focused in both Argentina and Bolivia,” Hull says. “But the volatility in the oil market in March 2020, and subsequent drop in demand during the pandemic certainly reinforced our focus.”
Given the current volatility, Echo cannot provide firm guidance on future production. “This allows us to be flexible and jump on commercial opportunities as and when they arise,” he says.
Echo’s short-term goal is to restore production to the pre-pandemic level of 2,500 boe/d at the start of 2020 It averaged just above 2,000 boe/d in the year up to late September.
There is considerable growth potential at Echo’s Santa Cruz Sur acreage, Hull says, which contain prospects that were overlooked by others when the Argentine gas market was far smaller. One such project is Monte Aymond, found in 1984 when a well achieved a 5mn ft3/day rate of production but was never developed.
With much higher gas prices and improved infrastructure today, Echo is considering ways of exploiting the discovery, Hull says. It is looking to either tie the project to the domestic market or hook it up to processing facilities across the border in Chile. Echo estimates it would be able to recoup the $570,000 cost of the second option in just three months, assuming a $3.5/mn Btu gas price.
A third option is micro-LNG production, whereby Echo would truck the LNG to power generators. This plan would have much lower up-front costs and would also enable Echo to sell gas sooner and potentially at a higher price.
Echo is looking to test its Campo Limite well some 5 km from Monte Aymond as soon as coronavirus restrictions are eased in Argentina. Depending on results, the two prospects could be developed together to drive down unit costs.
While there is no firm schedule, Hull sees a potential final investment decision being taken within the next six months. A farm-out is possible if the project proves to be large enough that a partner is needed.
The Argentine government is supportive of the gas industry, Hull says, citing its recent announcement of a national plan to stimulate domestic production. Authorities have also fixed local oil prices at $45/b to provide some relief to producers.
The ex-investment banker is eager to grow the company and sees opportunities for acquisitions in Argentina and Latin America, taking advantage of distressed companies seeking divestments. Coronavirus restrictions are an obstacle to deal-making, however.
“I feel very strongly you need to understand who your partners are, especially in places where you’re still learning. You need to look them in the eye,” Hull says. “That’s how these deals get done and that’s much harder in the current world.”