(Echo, 21.Oct.2019) — Echo Energy 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.”
Subscription
The Company has conditionally raised gross proceeds of approximately £4.85 million (approximately US$6.25 million), through the Subscription, which is being undertaken directly by the Company with certain institutional and other investors, for an aggregate of 193,820,000 new Ordinary Shares (the “Subscription Shares”) at 2.5 pence per Subscription Share. The Subscription Price represents a discount of 8.4 per cent. 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 Subscription comprises:
— a firm subscription to raise gross proceeds of £3.13 million (approximately US$4.04 million) (the “Firm Subscription”) through the issue of a total of 125,200,000 Subscription Shares (the “Firm Subscription Shares”); and
— a conditional subscription to raise additional gross proceeds of approximately £1.72 million (approximately US$2.21 million) (the “Conditional Subscription”) through the issue of a total of 68,620,000 Subscription Shares (the “Conditional Subscription Shares”).
The Firm Subscription Shares are being issued under the Company’s existing authorities and the Firm Subscription is not conditional upon the Acquisition completing. The issue of the Conditional Subscription Shares, the Consideration Shares, the issue of any Ordinary Shares pursuant to any conversion of the Debt Facility and the grant of the Warrants requires the prior approval of Shareholders voting on the Resolutions to be put to Shareholders at a General Meeting.
Application has been made for the Firm Subscription Shares to be admitted to trading on AIM (“First Admission”). It is expected that First Admission will become effective and that dealings in the Firm Subscription Shares will commence on AIM on 22 October 2019.
Application will be made for the Conditional Subscription Shares and the Consideration Shares to be admitted to trading on AIM, inter alia, subject to the passing of the Resolutions at the General Meeting (“Second Admission”). It is expected that Second Admission will become effective and that dealings in the Conditional Subscription Shares and Consideration Shares will commence on AIM on 7 November 2019. A further announcement will be made as appropriate.
The Subscription Shares will represent approximately 15.26 per cent. of the Enlarged Share Capital on Second Admission. The Subscription is not underwritten or guaranteed.
The Firm Subscription Shares, Conditional Subscription Shares and the Consideration Shares will rank, on issue, pari passu in all respects with the existing Ordinary Shares including the right to receive all dividends and distributions paid or made and will be issued free from all liens, charges and encumbrances.
The issue of the Firm Subscription Shares is conditional, inter alia, upon:
(i) First Admission becoming effective by not later than 8.00 a.m. on 22 October 2019.
The issue of the Conditional Subscription Shares is conditional, inter alia, upon:
(i) the resolutions to be proposed at the General Meeting of the Company to be convened shortly being passed without amendment;
(ii) compliance by the Company with its obligations under the Subscription Agreements;
(iii) completion of the Acquisition; and
(iv) Second Admission becoming effective by not later than 8.00 a.m. on 8 November 2019.
Debt Facility and Warrant Issue
The Company has entered into a secured convertible debt facility with Lombard Odier which provides for a loan of €5,000,000 from the Lender which the Company intends to draw in a single amount on or about the time of completion of the Acquisition (the “Debt Facility”). The Debt Facility is repayable in five equal quarterly instalments with the first such instalment being the last business day of March 2021 and has an 8 per cent. interest rate which is payable quarterly. Subject to the passing of the Resolutions, amounts outstanding under the Debt Facility may be converted into Ordinary Shares at the option of the Lender at a price of 3 pence per Ordinary Share (“Conversion Price”).
In connection with the Debt Facility, and subject to shareholder approval of the Resolutions, the Company will also grant a warrant to subscribe for 74,200,000 new Ordinary Shares (“Warrants”) to the Lender with an exercise price of 3 pence per Ordinary Share.
Use of proceeds
The proceeds of the Subscription of approximately £4.85 million (approximately US$6.25 million) and the Debt Facility of €5 million (approximately £4.33 million) will be applied towards the Consideration, the immediate work programme for the Santa Cruz Sur Assets and the working capital requirements of the Group, as follows:
| Use of proceeds | £m | US$m |
| Cash consideration for Acquisition on completion | 5.5 | 7.0 |
| Working capital | 2.8 | 3.6 |
| Transaction costs | 0.9 | 1.2 |
| Total | 9.2 | 11.8 |
Historical information – Santa Cruz Sur Assets
The Santa Cruz Sur Assets are operated and will remain operated by Roch S.A. following the Acquisition. The Santa Cruz Sur Assets have been producing steadily for over 20 years and the Company sees opportunities to offset the natural decline curve with a successful workover programme.
Based on trading in the 12 months to 31 December 2018, the Santa Cruz Sur Assets (70 per cent.) generated unaudited revenues of approximately US$31.9 million, EBITDA of approximately US$8.2 million and an unaudited loss before tax of approximately US$2.5 million.
According to a recent Gaffney Cline & Associates Ltd report, the Santa Cruz Sur Assets had, as at 31 December 2018, 1P reserves of 4.3 mmboe (net to a 70 per cent. interest from a gross reserve base of 30,223 mmscf of gas and 1,292 mbbl of oil) and 2P reserves of 13.7 mmboe (net to a 70 per cent. interest from a gross reserve base of 96,132 mmscf of gas and 3,513 mbbl of oil).
General Meeting
The issue of the Conditional Subscription Shares, the Consideration Shares, the issue of any Ordinary Shares pursuant to any conversion of the Debt Facility and the grant of the Warrants requires the prior approval of Shareholders voting on the Resolutions to be put to Shareholders at a General Meeting.
A circular, which will provide further details of the proposed Acquisition, Subscription and Debt Facility and include a notice convening the General Meeting (the “Circular”) will be sent to Echo shareholders shortly. A copy of the Circular will be available shortly from the Company’s website at www.echoenergyplc.com.
Intended issuance of Share Options
Following the publication of this announcement and the Circular, the Company intends to grant options to subscribe for 12 million new Ordinary Shares, at an exercise price of 6.55 pence per new Ordinary Share, to Martin Hull, Chief Executive. These options will be the first equity incentive package issued to Martin Hull, are intended to vest in December 2021 and will be exercisable for a period of two years following vesting. A further announcement will be made in due course.
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