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Shares in Echo Energy are off by 5% at 14.5p mid today on the back of the bad news on the drilling front from Sound Energy (SOU). But do they have further to fall? On fundamentals yes they do.
The common feature is that both companies are run by James Parsons. As i noted earlier, in his AIM career he has not - to dat4e - put a foot wrong. Until Badile today it seemed as if Lady Luck was with him all the way. He is undoubtedly a skilled promoter and thus shares in his company traded at a massive premium to fair value.
Echo, for instance, has cash - as we speak - of c£25 million. But its market cap is £54 million on a fully dilured basis. Its only asset is in Bolivia and is an 80% stake on one piece of acreage. To earn that 80% stake it must drill one well bearing 100% of the costs - that is called farming in. There is 3D sesimic on the property and Echo says that inficates multi TCF gas formations. But Sound said the same about Badile. Here is a release from early 2011
Badile is a 185 Bcsf (gas case) / 23 MMbo (oil case) exploration prospect onshore in the Po Valley some 30 km southeast from the geologically analogous Villafortuna-Trecate field (estimated recoverable reserves of ~250 MMbo). The prospect has an independently assessed success case NPV10 of US$410 million (gas case) or US$266 million (oil case). The exploration well is forecast to cost some €20 million plus contingency.
That statement is not a crime. It is true. That is what the seismic indicated by the acid test is drilling and today we discover that Badile is sub commercial. I woulld never have been valuing a bit of acreage in South America at c£30 million but until today some folks argued that his spotless record meant there should be a "Parsons premium."
Supporters will say that Parsons has other deals. I bet he has. He is a good operator. But they will be similar. farming into 3D backed plays. Upfront consideration norra lot, you pay to play with drilling costs. This may all work out. Echo may find gas aplenty in South America in which case the shares will - with hindsight - have been cheap at 14.;5p today. But it may not. Even with good 3D the odds - as Badile shows - are against you.
That fact is not priced in for Echo at currtent levels. Plus, as Lucian Miers (who is short) pointed out HERE, there is a stock overhang. fair value for this one is well south of 10p until the drilling bears some results.
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