Echo Energy announces farm-in agreement in Argentina

11/1/2017

OKLAHOMA CITY -- Echo Energy plc, the South and Central American focused upstream gas company, is pleased to announce that it has entered into a binding farm-in agreement with Compañía General de Combustibles S.A. (CGC), a privately-owned subsidiary of the Argentinian conglomerate Corporación América International, for the acquisition by Echo of a 50% interest in each of the Fracción C, Fracción D, Laguna de los Capones and Tapi Aike licences, onshore Argentina.

The Fracción C, Fracción D, Laguna de los Capones and Tapi Aike licenses all sit in the prolific Austral Basin of Santa Cruz province in Argentina and cover a total of 11,153 sq km. The transaction will provide the company with a compelling blend of multi-Tcf exploration potential, appraisal and production.

Completion of the Transaction is conditional, inter alia, on receipt of third party, legal and regulatory approvals or consents in relation to the Transaction, including Echo shareholder approval.

The Transaction is expected to deliver:

  •      A material position in Argentina with a well-respected local strategic partner.
  •      Access to multi-Tcf exploration potential on the Tapi Aike license.
  •      Access to transformational exploration and appraisal potential across the Fracción C and Fracción D licenses.
  •      Existing gross production of approximately 11.4 MMcfd on the Fracción C & D licences, with potential to significantly increase current production to approximately 80 MMcfd, underpinned by strong local Argentinian gas prices.
  •      First drilling in Q1 2018, followed by a period of significant drilling and operational activity.
  •      Technical operatorship of the Fracción C & D licenses.

Tapi Aike Licence. The Tapi Aike licence, which is one of the largest new block awards in Argentina (5,187 sq km), benefits from 3,400 km of existing 2D seismic and three existing gas discoveries. The company internally estimates that Tapi Aike block has multi-Tcf exploration potential (unrisked gas originally in place).

The consideration for Tapi Aike is:

  •      No upfront cash consideration.
  •     Echo to carry CGC for 15% of total Tapi Aike work program costs during the initial work program period of three years (four in the event of tight gas classification).
  •     The work program over that period comprises reprocessing of selected existing 2D and 3D seismic, acquisition of 1,200 sq km of 3D seismic and the drilling of four exploration wells. Echo's carry of CGC for the entire work program anticipated to be in the order of $9 million (anticipated gross work program costs in the order of $60 million).
  •     Work program in the first year following completion of the transaction is anticipated to comprise re-processing and seismic acquisition planning and initiation.

Fracción C & D Licenses. Fracción C, which surrounds the Laguna de los Capones licence, is a 5,288 sq km area and includes 3 existing production facilities and a gas export pipeline connecting directly to the main pipeline to Buenos Aires (Transportadora de Gas del Sur S.A.). The license area benefits from 1,192 sq km of 3D seismic in addition to extensive 2D seismic coverage and existing gross production of 11.0 MMcfd. The company internally estimates that exploration potential in the block is in excess of 1 Tcf on a gross unrisked gas initially in place basis.

Fracción D is a 280 sq km license with existing production facilities and a small initial level of production. The company has identified significant development, appraisal and exploration potential with the field, estimated by the company to contain gross unrisked gas in place of a mid-case of 183 Bcf (341 Bcf upside case, 98 Bcf low case). The area has a proven gas cap already penetrated by a number of wells. The work program is designed to explore, appraise and bring into production these resources utilizing existing production facilities and a 28 km pipeline to the gas metering point.

All discoveries across these licenses are expected to be brought on stream rapidly and with low incremental costs due to the proximity to existing infrastructure.

The consideration payable for Fracción C, Fracción D and Laguna de los Capones will be:

  •      $2.5 million cash on signature of the farm-in.
  •      Echo to meet 100% of the costs of the initial 18 month work program (the carry by Echo of CGC's 50% working interest estimated to be between $9 million and $12 million) which will include:

o  Reprocessing and analysis of existing 3D seismic in the Laguna de los Capones licence.

o  Acquisition of 500 sq km of 3D seismic on the Fracción C license.

o  Drilling and testing of four exploration wells on the Fracción C license and their completion as producing wells following a success case.

o  Workover of three wells on the Fracción D license and the drilling, testing and completion (or abandonment) of one new well in Fracción D contingent on satisfactory results arising from the workovers.

o  Acquisition of 230 sq km of 3D seismic in the Fracción D license subject to satisfactory results arising from the workovers / contingent development well. This seismic requirement may be transferred to the Fracción C license.

  •      A deferred cash payment of $2.5 million on completion of the initial term work program.
  •      After the completion of the initial term work program, the company has the option to progress to the second term on the licenses for which a provisional work program has been envisaged including expanding the total seismic acquisition across the blocks (including that acquired in first term) to 2,000 sq km and drilling a further eight exploration wells across the licenses.
  •      On election by the company to progress to the second term, the total carry of CGC's interests by Echo (including all expenditure in the initial term) would be capped at a total of $35 million and during the term a second deferred payment of $5 million would be payable which may at the election of the company be deferred to development costs.    
  •     CGC and the company will enter into a joint operating agreement on completion of the transaction with Echo being appointed as technical operator of the Fracción C, Fracción D and Laguna De Los Capones license areas.

The initial consideration payments and the initial term work program costs under the Transaction can be met from the company's existing cash balances.

Should the Transaction not be completed by Dec. 29, 2017 or a subsequent date which the parties may mutually agree, the farm-in will lapse uncompleted and the initial $2.5 million payment in relation to Fracción C and D will not be refundable, other than to the extent of $0.5 million in certain limited circumstances. In the event that the company fails to gain Echo shareholder approval for the Transaction, a further sum of $2.5 million will be payable by the company to CGC. This additional $2.5 million payment would be refundable in certain limited circumstances.

Suspension of Ordinary Shares. By virtue of its size, the Transaction constitutes a reverse takeover under Rule 14 of the AIM Rules for Companies. Accordingly, the company's Ordinary Shares will remain suspended from trading on AIM, pending publication of an AIM admission document or an announcement that the Transaction has been terminated.

As part of the AIM admission document a competent persons report in respect of the licenses is being prepared by the internationally recognized Gaffney, Cline & Associates.

Further announcements will be made, as appropriate, in due course and, following completion of the Transaction, investors will be invited to view the company's new Argentinian portfolio in forthcoming investor trips to the region.

This announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

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