TIDMECHO
RNS Number : 7391A
Echo Energy PLC
26 May 2023
26 May 2023
Echo Energy plc
("Echo" or the "Company")
Sale of a majority interest in the Santa Cruz Sur Assets,
opportunity to acquire interests in a Producing Colombian
Portfolio, Equity Issue at a Premium
New Conditional Gas Sales Contracts
Echo Energy, the Latin American focused energy company, is
pleased to announce that, further to the Heads of Terms announced
on 9 May 2023, the Company has now signed binding transaction
documents, subject to shareholder approval, on broadly the terms
outlined in the Heads of Terms.
The Board of the Company is requesting shareholder approval for
the partial sale of its Santa Cruz Sur assets on the basis that
it:
-- Addresses the Company's near-term funding challenges by
providing near term funding, enabling the Company to transfer to
Buyers the significant in-country creditors which had built up
during the COVID-19 period and providing access to funding for the
Santa Cruz assets.
-- Provides continued exposure (both directly through the
retained 5%, the contingent payments, the further 5% option and the
indirect holding in the Operator) to a well-funded Santa Cruz
portfolio, with the concessions likely to be extended as a result
of the provision of guarantee.
-- Provides the company a new platform from which to move
forward with an opportunity to drill an exploratory well on a
strong Colombian portfolio with its corresponding lower risk
jurisdiction and a clean balance sheet whilst still receiving cash
flow from its 5% position in the producing assets of Santa Cruz
Sur.
Transaction Highlights
- Sale and Purchase Agreement ("SPA") signed with Selva Maria
Oil S.A. and Interoil Exploration and Production ASA (the
"Buyers"), conditional on Echo shareholder approval, for the
proposed disposal (the "Proposed Disposal") of 65% out of the
Company's current 70% working interest in Santa Cruz Sur for a cash
consideration of up to GBP1.725 million, consisting of:
- a cash consideration of GBP0.825 million, with an initial cash
payment of GBP75,000 due immediately; and
- contingent cash payments of up to an aggregate of GBP0.5 million; and
- payment in kind of GBP0.4 million via issue of new shares of
Interoil Exploration and Production ASA ("Interoil") upon
completion, providing the Company with additional upside exposure
to the Santa Cruz Sur assets.
- The Company would retain a 5% non-operated working interest,
with significantly lower exposure to ongoing costs and legacy
in-country liabilities.
- As part of the transaction, the Company's remaining 5% working
interest would receive a financial guarantee from Selva Maria Oil
S.A. for a period of 10 years sufficient to meet the requirements
of the Argentine authorities such that all owners of the Santa Cruz
portfolio, including the Echo Argentine subsidiaries, will qualify
for full title to the concessions and qualify for a 10 year
extension to the concessions (the "Guarantee"). The concessions
extension is a critical value inflexion point for the
concessions.
- The parties intend to evaluate the prospect of the potential
future acquisition by the Company of a producing Colombian
portfolio from the Buyers resulting from an option to drill an
exploratory well therein subject to due diligence and future
agreements as to terms (the "Option").
- Interoil to subscribe for 115,384,615 new ordinary shares in
Echo, representing 0.02% of the Company's enlarged issued share
capital, at an issue price of 0.0625 pence per new ordinary share
(the "Issue of Equity"). This price is a 100% premium to the
mid-price on 5 May 2023.
The SPA covering the Proposed Disposal, the ancillary Guarantee
and the Option, is conditional, inter alia, upon Echo shareholder
approval pursuant to Rule 15 of the AIM Rules for Companies and the
Issue of Equity is conditional upon, inter alia, a required capital
re-organisation of the Company to enable the issue of new ordinary
shares at the Issue Price (the "Proposed Reorganisation"). Further
details of the Proposed Reorganisation are set out below.
A circular containing detailed information about the Proposed
Disposal, the Guarantee, the Option, the Proposed Reorganisation
and the Issue of Equity will shortly be published and available
from the Company's website at www.echoenergyplc.com .
Background to and reasons for the Disposal
Given the Company's large creditor position which originated
from the COVID-19 period where the asset was sub-economic, 100%+
per annum inflation in Argentina and Argentine currency exchange
controls, which have prevented funds being withdrawn from the
country without significant penalties, the raising of additional
equity for an Argentine business has been challenging.
Having continued to explore all means of raising required near
term funding, the Directors see the Proposed Disposal as a pathway
to address the Company's near-term funding challenge by enabling
the Company to transfer to the Buyers the significant in-country
creditors that had built up during the COVID-19 period and
providing access to funding for the Santa Cruz assets.
The disposal provides continued exposure (both directly through
the retained 5%, the contingent payments, the further 5% option and
the indirect holding in the Operator) to a well-funded Santa Cruz
portfolio, with the concessions likely to be extended as a result
of the provision of the guarantee.
Furthermore, the disposal provides the Company a new platform
from which to move forward with an option on a strong Colombian
portfolio with its corresponding lower risk jurisdiction and a
clean balance sheet whilst still receiving cash flow from its 5%
position in the producing assets of Santa Cruz Sur.
The Directors do not see a viable alternative to this
transaction without a significant improvement in the Argentine
macro-economic situation or the availability of alternative
funding.
Vision For the Future
The Company sees significant opportunities at this point in the
economic cycle to secure new oil and gas assets in the region at
attractive valuations. Therefore, whilst this Transaction puts the
Company on a much more financially stable trajectory, the Company
also expects to be very active acquiring new assets and is already
in discussions on various opportunities. The Company is introducing
a series of cash preservation measures to ensure the funding from
this transaction is preserved whilst the Company seeks to grow the
business through the acquisition of new oil & gas and energy
assets and / or the exercise of the existing Options. These
measures include the current VP Exploration and Chief Financial
Officer leaving Company service whilst a new Chief Operation
Officer is being recruited, on a consultancy basis initially. The
Directors also intend to take a portion of both their historic
accrued salaries / fees and their forward salaries / fees in
shares.
The Board views the 10 year concessions extension at Santa Cruz
Sur as a critical value enabler and is therefore delighted that the
Buyers will provide a financial guarantee to the Company sufficient
to meet domestic regulatory requirements which is expected to help
secure the extension. The Company will continue to have exposure to
production upside through the contingent payments and Interoil
shares, and moving forward will continue to receive its 5% share of
production revenue plus has the option to repurchase a further 5%
interest at a price of GBP0.1 million.
The potential to enter Colombia has the potential to rebuild the
E&P portfolio in a new territory that does not suffer the macro
inflationary and economic factors that Argentina does. It is a much
more business friendly jurisdiction with a vibrant small-medium cap
E&P sector - an exciting growth opportunity. The Chief
Executive has extensive experience in Columbia.
Details of the Transaction
Further to the binding Term Sheet announced on 9 May 2023, the
Company has now signed the SPA to sell 65% of its 70% holding in
the Santa Cruz Sur business to Selva Maria Oil SA and Interoil
Exploration & Production ASA. On Completion the Company
therefore will retain a 5% working interest in the assets, will
have an option to buy another 5% back and will have an indirect
exposure through equity in the Operator.
Total consideration for the sale is up to GBP1.725M of
which:
-- Consideration of GBP0.825 million with:
-- An upfront payment of GBP75,000 on execution of transaction
documents (the "Execution Fixed
Consideration"), with the balance of GBP750,000
due on completion once shareholder approval has been
obtained.
-- Payment in kind of GBP0.4 million via transfer of Interoil
shares upon completion, providing upside exposure
to the Santa Cruz asset via an equity position in the
Operator
-- Additional contingent payment of GBP0.4 million should
production from the assets rise to 4,000 boepd
(gross).
-- Further contingent payment of GBP0.1 million should
production from the assets rise to 6,000 boepd (gross)
The Company's subscription for shares in Interoil (the
"Consideration Shares") is subject to lock-up provisions, which
prevent the Company from disposing of the Consideration Shares
during the first 12 months of the lock-up period (without
exception) and then in limited tranches until the end of the
24-month lock-up period. In conjunction with this, the Company,
Interoil and Selva María Oil S.A. have also entered into a 'right
of first refusal' agreement under which, subject to the lock-up
provisions contained in the subscription agreement, where the
Company wishes to dispose of any of the Consideration Shares the
Company must first offer such Consideration Shares to Interoil and
Selva María Oil S.A.
The Buyers will provide a financial guarantee to cover Echo's
remaining 5% interest which is a critical step to enabling the
securing of the concessions extension and was not something Echo
could easily achieve on its own.
Echo will also retain an option to repurchase a 5% interest in
the asset for a consideration of GBP0.1 million over a 6 month
period, providing optionality in the event concessions extension or
other value catalysts are achieved.
Additionally, the transaction is intended to provide, subject to
the future agreement of terms between the parties, the Company with
an ability to acquire an interest in Interoil's Colombian assets
(for a consideration and on terms to be agreed in future) after
drilling and testing of an exploration well on the Maná
Concessions. The Company can recover twice the cost of that well
from associated production.
Further to the above, Interoil Exploration & Production ASA
has agreed to subscribe to approximately 115.38 million shares at a
price of 0.065 pence per share (raising GBP75,000). This represents
a more than 100% premium to the closing mid-market price on 5 May
2023, the last trading day prior to announcement.
In addition to the approval of Echo shareholders, completion of
the Proposed Disposal ("Completion") is also conditional on,
amongst other things, a financial guarantee provided by the Buyers
for the benefit of Echo for the National Secretary of Energy &
the Province of Santa Cruz.
In case the approval of Echo shareholders is not obtained and
Buyers terminate the SPA on that basis, the Company shall reimburse
the Execution Fixed Consideration and pay GBP60,000 to Interoil,
unless the Company decides not to make those payments. In this last
case, a transfer of 10% out of the Company's current 70% working
interest in Santa Cruz Sur business to Interoil will be
completed.
Background to the Buyers
Founded in 2002, Selva María Oil S.A. is a natural resources
exploration and exploitation company, which develops its activities
mainly in the oil sector.
Interoil Exploration and Production ASA is an independent oil
and gas exploration and production company that is listed on the
Oslo Stock Exchange. Interoil is involved in the acquisition,
exploration, development and operation of oil and natural gas
properties in South America.
Proposed Reorganisation
In order to proceed with the Issue of Equity, it is proposed
that the existing ordinary shares in the capital of the Company
("Existing Ordinary Shares") will be sub-divided into one New
Ordinary Share with a nominal value of 0.0001 pence and one 2023
Deferred Share with a nominal value of 0.2499 pence. As the New
Ordinary Shares will have a lower nominal value than the Existing
Ordinary Shares, the Company will be able to undertake the Issue of
Equity at the issue price of 0.0625 pence and otherwise be capable
of issuing further New Ordinary Shares in the future at price(s)
below 0.25 pence (being the nominal value of the Existing Ordinary
Shares).
The number and percentage of New Ordinary Shares held by each
shareholder following the Proposed Reorganisation will be the same
as the number and percentage of Existing Ordinary Shares held by
them. The rights attaching to the New Ordinary Shares will be
identical in all respects to those of the Existing Ordinary Shares,
including voting, dividend, return of capital and other rights. The
2023 Deferred Shares shall have limited rights. Namely, the 2023
Deferred Shares will not be entitled to receive any dividend out of
the profits of the Company available for distribution, nor shall
they be entitled to receive notice of or attend any general meeting
of the Company, nor vote on the resolutions at the same.
The Proposed Reorganisation remains subject to shareholder
approval.
New Conditional Gas Sales contract
As previously announced on 18 April the Company's Argentine
subsidiaries previously made an application to Argentina's National
Secretary of Energy under the Gas Plan regime (Gas Plan 5.2). The
company is delighted to report it, and its joint venture partners,
have now received the response that the application was successful.
This is illustrative of the value which can be created at the Santa
Cruz Sur assets in the event the portfolio is properly funded.
The new conditional contract under Gas Plan 5.2 (Santa Cruz Sur
Basin) is with ENARSA (Energía Argentina Sociedad Anónima) and is
for production volumes outside of those delivered under the
existing gas contracts with industrial clients, as announced on 2nd
February 2023.The new contract is applicable across all the assets
in Santa Cruz Sur and will be in force over the period May 2023-Dec
2028. It has a base volume and an incremental volume. The base
volume of 1.06 MMscf/d (gross 100% JV) attracts a price of US$3.46
per MMBTU. Any incremental production volume delivered above this
base volume, and above the existing gas contracts with industrial
clients, would achieve a gas price of US$9.975 per MMBTU until
April 2026, a price of US$ 9.50 per MMBTU from May 2026 to Dec 2026
which reduces to US$ 5.90 per MMBTU for the remaining period of the
Gas Plan Contract to December 2028. These prices are materially
higher than the existing average sales prices achieved by the
Company.
Achieving these incremental production volumes requires an
additional investment of around US$ 5.3 million with an operational
programme that includes approximately 13 individual workovers/well
interventions, which the Company believes will be enabled by this
transaction due to the Guarantee and the funding status of the
Buyer.
The Company has therefore granted authorisation for the Operator
of the Santa Cruz Sur assets to accept on behalf of the Company the
terms of the Gas Plan 5.2 contract. The Company views this as one
of many future value accretive consequences of the Proposed
Divestment.
General Meeting
The Proposed Disposal of the Working Interest in Santa Cruz is
subject to Echo shareholder approval pursuant to Rule 15 of the AIM
Rules for Companies. A circular containing detailed information
about the Proposed Disposal of the Working Interest in Santa Cruz
will shortly be published and available from the Company's website
at www.echoenergyplc.com . A notice convening the General Meeting
will be set out at the end of the Circular.
Recommendation and Voting Intentions
The Directors consider the transaction to be in the best
interests of the Company and its Shareholders as a whole and do not
see a viable alternative to the transaction without changes to the
Argentina macro economic situation or a significant new external
funding source. Accordingly, the Directors unanimously recommend
that the Shareholders vote in favour of the Resolution to be
proposed at the General Meeting
Martin Hull, Chief Executive Officer of Echo Energy, commented :
"I am delighted that we have progressed from the Head of Terms
agreed recently to the signature of binding transaction documents.
The transaction's strategic importance to Echo is reinforced by the
new gas contract we also announce today, through which the
resulting new investment by the purchasers in the Santa Cruz Sur
assets will secure exciting additional commercial upside for Echo.
The contract also serves to demonstrate the positive future
potential ahead for the company should we complete the transaction
and see a step change in operational activity across the portfolio
from which all parties in the transaction will benefit. With the
completion of the transaction we will put the challenges resulting
from the Covid pandemic behind us, and I look forward to updating
shareholders on our further progress."
For further information please contact:
For further information, please contact:
Echo Energy via Vigo Consulting
Martin Hull, Chief Executive Officer
Vigo Consulting (IR & PR Advisor)
Patrick d'Ancona
Finlay Thomson +44 (0) 20 7390 0230
Cenkos Securities (Nominated Adviser)
Adrian Hadden
Ben Jeynes +44 (0) 20 7397 8900
Zeus (Corporate Broker) +44 (0) 20 3829 5000
Simon Johnson (Corporate Broking)
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