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Should you pile into Echo Energy, up 14% today?

Shares in Latin America-focused upstream oil and gas company Echo Energy (LSE: ECHO) shot up this morning on news that it has managed to get gas to the surface on the first well of its three-well workover campaign at the Company’s Fracción Dasset, onshore Argentina. As I write, the stock changes hands at 15.63p, more than 14% higher than last night’s closing price.

A decent technical outcome

The company said it perforated well CSo-85across the Springhill Formation and gas flowed gas to surface “without intervention,” which I take as a positive sign that the well has decent natural pressure. After that, the well flowed through the rig de-gassing system “at an estimated rate of 2mmscf/d through a 20/64″ choke with a tubing head pressure of 1,100 psi.” The next stage is an extended flow and build-up test and the firm expects the full testing unit on site in the next 10 to 14 days.

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There could be more good news on the way because the Quintana-01rig will “shortly” move to another well — CSo-80— to “commence workover operations this weekend.” The company promises to provide appropriate market updates “as the workover programme advances.”  These are exciting times for investors because news-driven shares like Echo Energy need a good flow of positive news to keep the stock rising. Chief executive Fiona MacAulay said: “We are delighted that the first step of this exciting workover campaign has been safely and successfully completed, re-entering the well and establishing gas flow to the wellhead without any requirement for artificial lift.”

Cuts both ways

However, news can work both ways. Echo doesn’t make any profits yet so investor sentiment relies on expectations of future profits. If the operational news is good, sentiment towards the stock improves and the stock can go up, but if the news falls short of expectations or is plain negative the share price can sink like a stone. This is definitely not a stock for widows and orphans, and if you are tempted to pile in, it’s a good idea to keep your position size modest and as part of a diversified portfolio – betting the farm would be super risky!

Echo itself is doing its best to manage down investor enthusiasm saying that it considers the initial gas flows to be a positive first indication, but is “cautions that they should not be considered conclusive until the extended flow and build-up test is complete.”  The post-test flow rates could be higher or lower than those indicated in today’s announcement. 

To put things in perspective, Echo Energy’s shares were trading above 95p at the end of 2013 and below 1p in the Autumn of 2016. Maybe the firm truly is on the cusp of operational transformation this time that could lead to stronger trading economics and decent total returns for investors. But as you can see, there’s still a lot of risk for investors here. I think ‘right now’ could end up being a good time to embrace this risky stock, but I remain very, very cautious.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.