Echo Energy plc (LON:ECHO) Chief Executive Officer Martin Hull caught up with DirectorsTalk to discuss the new gas contracts, delivering on strategy, improved creditor situation, their recent production update and progress in 2023.
Q1: Martin, could you give us more detail on the news regarding the gas contracts that you released, and explain why it is so helpful to Echo Energy?
A1: We’re really pleased with these contracts, they reflect the hard work we’ve done with our partners to get the best commercial deal.
So, what we actually announced was two new gas sales contracts where we have locked in prices and volumes for the next 12 months. The sales under these contracts actually start in May this year and they will end in April 2024. The committed volume is 4.8 million cubic feet a day and the weighted average price is $4.48 per MMBtu. Importantly, that’s an increase on last year.
Another really important feature, and it’s really a very positive feature, is that the buyers will pay a cash advance of $1 million gross. That money is available to us now, even though sales don’t actually start until May and there’s no financing costs associated with that cash.
Additionally, we’re building flexibility in terms of the volumes so we’ve got a guaranteed buyer and a price but lots of flexibility to makes sales on the spot market if those prices go higher.
Q2: What can you tell us about the impact on the company and how it helps deliver on your strategy?
A2: These contracts deliver 3 key things:
- The price is up on last year. In a tough market where international prices have recently weakened, that’s a real win and increased prices means increased revenues and it’ll boost our cashflow, that goes straight to shareholder value,
- Also, we’re getting the upfront cash advance of $1 million gross. That is paid now without any costs, and that’s a great way to fund a business like ours and fund our growth strategy. We can put that money to work straight away driving production growth.
- Lastly, there’s the volume flexibility and the advantage of that is huge. In some ways we’re getting the best of both worlds, we’re getting downside protection with the guaranteed price but we’re also getting upside exposure with the flexibility around the volumes. In a seasonal gas market like Argentina, where there are big swings between summer and winter gas prices, that flexibility allows us to trade our gas and to take advantage of the best possible price at any given moment.
Q3: Now, your creditor situation is also improving materially, could you talk us through that, and what it means for your overall financial position?
A3: It is clear that the pandemic was a difficult time for the business, like many other companies we couldn’t sell some of our products and hence our revenues declined. That resulted in building up a trade creditor balance.
Now, things have changed and we are in a very different position. As we have discussed, demand for our product is up and we’re securing good or even very good prices. We are seeing that progress come through to our balance sheet so at the end of June 2022, our latest interims, our share of JV creditors was about $12 million, today we are estimating that it is now reduced to $9.3 million at year end. That is a significant move and it’s a move in the right direction. More than that, if we’re using the current international exchange rate, that falls much further still to less than $5 million, again that’s a real change from where it was. Now, I think that demonstrates the real progress that we’re making in the business and it’s turnaround from the problems of the pandemic.
The other thing I think we announced and it’s worth noting is that cash balances, we had cash balances of more than $1 million at the beginning of this year, again real progress.
Q4: I saw your recent production update, it seems like encouraging progress. What are your thoughts?
A4: Yes, you’re very right, it was really an encouraging production update that we gave, and it’s positive to see production growing and the benefits of the efforts that we’ve been making over the last 12 months really coming through.
I guess I’d highlight two things:
- Over the whole year of 2022, the company produced a total of more than 530 thousand barrels of oil equivalent, most of that was gas but the metrics is barrels of oil equivalent. That’s a substantial number, it really is, for a company of our market size.
- Beyond that the Q4 figures were up, again, and significantly up on the quarter before. Total volumes were up quarter on quarter by around 13%. Even more positively, Q4 represented the 9th consecutive quarter of liquids growth, that again is real progress.
Of course there is much more to do, we’ve already set out our near term plan to grow production beyond 2,000 barrels a day equivalent and we’re continuously working towards that. Obviously growing production takes time and investment, and like all companies we have been seeing some cost inflation in the business, at least in Argentine Peso terms. These increases in revenues through the new gas contracts and also the upfront payments and the reduction in creditors all enable us to advance that growth and drive forward the production increases.
Q5: So, it sounds like a really good start to 2023?
A5: Absolutely, definitely a good start with strong and growing production, increased prices and an improving balance sheet.
We consider Echo Energy to have real potential, our assets deliver multiple growth options through the workover campaign and the infrastructure upgrades. We continue to have a very large reserve position, relative to our current production, and with the success of balance sheet restructuring last year, we are now excellently placed to really capitalise on those opportunities.
So, again, a very good start to 2023.
