Echo Energy defaults on bonds

Echo Energy defaults on bonds

Asset Management Bonds Debt Capital Markets Corporate & Sovereign Strategy Fixed Income Funds Energy Argentina Latin America

Echo Energy, an oil and natural gas exploration company focused on Argentina, has defaulted on a 20 million eurobond, one of the first victims in the country of a plunge in international oil prices. 

The London-based company failed to make an interest payment on the €20 million Luxembourg-listed listed 2022 8% secured notes by March 31, according to a securities filing with the London Stock Exchange. 

Echo Energy, which has assets in Argentina and Bolivia but is most active in the former, said it will call a meeting of the bondholders to restructure them “as soon as is reasonably practicable.” 

The company added that it is also seeking to defer interest payments due this year on a 5 million, 8% secured convertible debt facility, adding that the negotiations “continue to progress well.” Echo, however did say it was able to amend the company's £1.0 million 12.0% loan facility and that "no further payment will be required of the Company under the £1m Loan prior to 31 March 2021."

On March 25, Echo Energy warned creditors about its financial problems, saying it wants to preserve cash resources after a plunge in global oil prices.

Brent, the international reference price followed in Argentina, plunged below $23 per barrel at the end of March from nearly $59 in mid-February. On Thursday it rose $5.20, or 21.0%, to settle at $29.94 a barrel, the biggest one day gain on record after US President Donald Trump said the expectation is for Saudi Arabia and Russia to settle their oil price dispute and agree a major oil production cut.

Saudi state media reported the government is calling for an emergency meeting among OPEC members. Crude oil futures surged as high as $36.29 per barrel in intraday trading. The spread of the deadly novel coronavirus has slashed oil demand around the world, sparking concerns of oversupplies. 

Echo Energy said it is working with its partner in Santa Cruz Sur, Argentina’s Roch, to cut field costs so that production can be sustained at cash flow positive at current oil prices.

“Echo is proactively managing its assets and cost base with a clear strategy in place to reduce costs and conserve existing cash,” CEO Martin Hull said in the filing. “If fully implemented, these actions would lead to a sustainable and cash positive business in the current environment and position the company well for the future.” 

It may not be easy. With the plunge in prices, cash flows have gone into negative territory in Argentina, where most fields have operating costs of around $20 per barrel, said Hugo Giampaoli, a partner at GiGa Consulting, a energy consulting firm based outside Buenos Aires. 

At the same time, domestic demand has plummeted because of a government-ordered lockdown of the economy to try to slow the spread of the coronavirus. The lockdown started March 20 and will run until April 13, but with the number of COVID-19 cases not expected to peak until the end of April or mid-May, the economy may take longer to start recovering, economists warn. The number of confirmed cases topped 1 million on Thursday, according to the Johns Hopkins University Coronavirus Resource Center.

This doesn’t bode well for the oil sector. State-backed YPF, the country’s biggest oil producer and refiner, said it is running 30% to 40% less crude through its refineries because demand has tumbled since the start of the lockdown, with diesel down 50%, gasoline 70% and jet fuel 90%.   

“All of the fields are operating at a loss,” Giampaoli said of Argentina. “I think that there will be a lot of companies thinking of closing wells.”

Echo Energy acquired a 70% stake in Santa Cruz Sur in December from Petrolera El Trebol, a unit of UK-based Phoenix Global Resources, another company that is starting to struggle financially. On March 31, Phoenix said it has entered into discussions to restructure a convertible credit facilities agreement  with its controlling shareholder Mercuria. Like Echo Energy, Phoenix said it will cut costs with the view to getting back on track with its loan payments.