Vista Energy - Q3 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to Vista's Q3 2023 earnings webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alejandro Cherñacov, Strategic Planning and Investor Relations Officer. Please go ahead.

Alejandro Cherñacov (Strategic Planning and Investor Relations Officer)

Thanks. Good morning, everyone. We are happy to welcome you to Vista's Q3 2023 results conference call. I am here with Miguel Galuccio, Vista's Chairman and CEO, Pablo Vera Pinto, Vista's CFO, and Juan Garoby, Vista's COO. Before we begin, I would like you to draw your attention to our cautionary statement on slide two. Please be advised that your remarks today, including the answers to your questions, may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from expectations contemplated by these remarks. Our financial figures are stated in U.S. dollars and in accordance with International Financial Reporting Standards (IFRS) . However, during this conference call, we may discuss certain non-IFRS financial measures, such as Adjusted EBITDA and Adjusted Net Income.

Reconciliations of these measures to the closest IFRS measure can be found in the earnings release that we issued yesterday. Please check our website for further information. Our company, Vista, is a sociedad anónima de capital variable, organized under the laws of Mexico, registered in the Bolsa Mexicana de Valores and the New York Stock Exchange. Our tickers are Vista in the Bolsa Mexicana de Valores and VIST in the New York Stock Exchange. I will now turn the call over to Miguel.

Miguel Galuccio (Chairman and CEO)

Thanks, Ale. Good morning, everyone, and welcome to this earnings call. Today, I'm pleased to present our results for the Q3 of 2023, during which we record a strong growth on a sequential basis. During Q3, we focused on drilling and completion activity in Bajada del Palo Este. This led to a sequential growth in both oil and total production that allow us to largely replace the production from the conventional asset we transferred in Q1 2023. Total production reached 49,500 BOEs per day during the Q3, which was 6% above Q2. Oil production was 41,500 barrels per day, 6% above Q2. Total revenues during the quarter were $290 million, 25% above the previous quarter.

Lifting costs were $4.8 per BOE, reflecting our successful strategy to fully focus on our higher margin, lower carbon, and short-cycle shallow assets. Capital expenditure was $181 million, mainly driven by 11 wells drilled and 12 wells completed during the quarter. In Q3 2023, adjusted EBITDA was $226 million, a sequential increase of 49% on the back of revenue growth and flat lifting costs. Adjusted net income was $123 million, implying a quarterly adjusted EPS of $1.3 per share. We recorded negative free cash flow of $43 million during the quarter. This was mainly driven by a temporary increase in working capital that impacted cash flow from operation activities. Finally, the net leverage ratio at quarter end was a solid 0.7 times adjusted EBITDA.

I will now deep dive into our main operational and financial metrics. Total production during Q3 2023 was 49,500 BOEs per day, down 2% on interannual basis. This is explained by two factors: First, the transfer of the conventional asset reduced our production by almost 6,000 BOEs per day. On a pro forma basis, adjusting for the transferred asset, total production grew 12% year-over-year. Second, transportation capacity limited our production growth during the first semester. This has been unlocked since June, as we started exporting oil via pipeline to Chile. Our development plan during 2023 was therefore backloaded in terms of new wells connections. The tie-in of 12 new wells in Bajada del Palo Este during the Q3 led to a sequential growth of 6% in total production.

Moreover, the monthly breakdown reflects a solid ramp-up during the quarter, with 53,000 BOEs per day of total production during September 2023. Production ramp-up started in August as the tie-in of Pad Bajada del Palo Este 16 and Bajada del Palo Este 17, corresponding to the Cube Development pilot we were running in Bajada del Palo Este, was delayed to late July. During the Q3 of 2023, we made solid progress in Bajada del Palo Este, where we focus the activity of our two drilling rigs after finalizing the pilots in Aguila Mora and Bajada del Palo Este in Q2. This led to 12 new wells connected during the quarter, Pad Bajada del Palo Este 16, 17, and 18. Additionally, 4-well pad Bajada del Palo Oeste 19, which was completed in September, was tied in in October and is showing very solid productivity.

We also finished drilling Bajada del Palo Oeste 20, a 3-well pad with all the wells targeting La Cocina. This pad is currently under completion and is scheduled to be tied in during November. Finally, we are currently drilling 4-well pad in Bajada del Palo Oeste 21, which we plan to complete and connect before year-end. We expect to tie in a total of 23 new wells during the second semester, driving further production growth. We forecast total production of Q4 2023 at 60,000 BOEs per day, with an exit rate of 65,000 BOEs per day. The tie-in of 23 new wells during the second semester is in line with our activity guidance for the year, and 2 wells above the original guidance.

On an annualized basis, this is an activity target we set for 2024 during our last Investor Day, reflecting our capability to deliver 46 new wells per year. During Q3, we also made solid progress to increase midstream capacity. We completed the upgrade of our crude oil treatment plant, leading to a total capacity of 70,000 barrels of oil per day. Stage one of Oldelval expansion is well advanced, with 7,500 barrels of oil per day of trunk pipeline capacity already available for Vista, and another 5,000 barrels per day planned for mid-2024. The Vaca Muerta pipeline is on track to be commissioned before year-end. This is expected to add another 12,500 barrels of oil per day of trunk pipeline capacity for Vista.

Expansions to our oil treatment capacity and transportation capacity constitute key enablers to our updated strategic plan, which has a production target of 70,000 BOEs per day for 2024, and 100,000 BOEs per day for 2026. Total revenues in Q3 2023 were $290 million, 13% down year-over-year, and 25% above Q2 2023, on the back of higher export volumes and oil realization prices. Realized oil price for the quarter averaged $67.6 per barrel, down 12% year-over-year, and 5% above the previous quarter. The average realized domestic price was $61.7 per barrel, while the realized export price was $74.9 per barrel.

Domestic crude oil prices were impacted by the drop in prices to $56 per barrel again, following the devaluation of the Argentine peso from August 14 until the end of October. This led to approximately $5 million or lower Adjusted EBITDA during Q3 2023. Sales to export market accounted for 55% of oil volume and 61% of oil revenues. We exported 2.2 million barrels of oil, composed by 4 cargos through the Atlantic, including the cargo deferred from Q2, and 0.4 million barrels by pipeline to Chile. Realized gas prices decreased 24% inter-annually to $3.3 per million BTU, mainly driven by lower price paid by clients in industrial segment. The sequential decline in realized gas prices was driven by lower gas export volumes.

Lifting cost was $21.9 million for the quarter, a 37% decrease vis-à-vis Q3 2022. Lifting cost per BOE was $4.8, 35% below the same quarter of last year. These results continue to reflect the positive impact of our new operating model, fully focused on our shale asset, following the transfer of the conventional asset in the Q1 of the year. We expect a similar lifting cost performance during Q4. On this basis, we are on track to outperform our full-year lifting cost guidance by around 5%, with a forecast of approximately $5.2 per BOE for the year. Adjusted EBITDA for the quarter was $226 million, a slight decline of 3% year-over-year.

The inter-annual decrease in revenues was almost fully offset by the lower lifting costs and $20 million of other income generated by the JV with Trafigura. We connected the last 12 wells under the JV during the quarter. During Q3 2023, we recorded a strong sequential expansion of margins. Adjusted EBITDA margin was 78%, an increase of 12 percentage points vis-à-vis Q2. Additionally, we recorded a netback of $49.8 per BOE, 39% above the previous quarter. These results were mainly driven by savings in lifting costs, additional sales volumes, and other income from the JV with Trafigura. We expect Adjusted EBITDA to be between $215 million and $230 million in Q4, noting that Q4 will not include income from the JV with Trafigura.

Also, that there is uncertainty around the realized oil prices, both on the domestic Medanito and international Brent benchmark. During Q3 2023, cash from operating activities was $117 million, reflecting income tax payments of $22 million and a temporary increase in working capital of $66 million. Cash flow used in investing activities was $161 million, in line with the capital expenditures of $181 million for the quarter. During Q3 2023, we recorded negative free cash flow of $43 million. We issue a dollar-linked bond for $70 million at a very competitive term, five-year bullet maturity and 0.99% coupons. We also repaid $22.5 million corresponding to the final installment of our syndicate loan, further reducing the share of our cross-border U.S. dollar debt.

Net leverage ratio stood at 0.7 times Adjusted EBITDA at quarter end. Finally, cash at the end of the period was $174 million. To conclude this call, I will summarize today's key messages. During Q3 2023, we made robust progress in Bajada del Palo Oeste. The tie-in of 12 new wells leave us well on track to deliver 31 tie-ins for the year. This activity increase has led to a substantial production ramp-up during the quarter. Considering that another 11 wells tie-in are scheduled for Q4, we are forecasting 60,000 BOEs per day of total production during such quarter. This could leave us well placed to achieve our 70,000 BOEs per day target during 2024. We have made solid progress in increasing treatment and transportation capacity, which are key pillars of our growth plan.

Our oil treatment plant has recently been upgraded to 70,000 barrels of oil per day. The Oldelval expansion has recently added 7,500 barrels of trunk pipeline capacity for Vista, which will be increased further by the Vaca Muerta Norte project and the completion of the second part of stage one of Oldelval expansion. Finally, we recorded strong financial metrics reflected by earnings per share of $1.3 and an adjusted EBITDA margin of 78%. To wrap up, and before we open the call for questions, I wish to thank our employees for their hard work and commitment during the quarter. I also thank our stockholders for their continued trust in our company. We will now move to Q&A. Operator, please open the line.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Rodrigo Nistor from Latin Securities.

Rodrigo Nistor (Institutional Sales)

Hi, good morning. Congrats on the results. I have two questions. Given Argentina's current political and macroeconomic landscape, how do you anticipate the trajectory of domestic prices? And then also, what are your expectations regarding discounts on export prices, and how you're positioning to optimize profitability in these conditions? Thank you.

Miguel Galuccio (Chairman and CEO)

Hi, Rodrigo. Thank you for your question. Look, at pricing going forward, we are seeing, first, probably important, we are seeing export pricing with upside at least of $2 or $3 more than Q2, as consequence of, higher Brent. And also, we believe the discount of, on export pricing will be probably for Q4, below probably $2-$3. In terms of local prices, October, we are still selling at $56 per barrel. November and December, we are under negotiation with the refineries. The gap, today between export parity and domestic prices is around 40%. Therefore, the local market need to start to normalize. Definitely the normalization, it will be very important to drive investment in Vaca Muerta and generate more volumes, for the country.

I expect that November and December, there should be a push for normalization in the local market.

Matheus Tostes (Research Analyst)

... Okay, yeah, that was really clear. Thank you.

Miguel Galuccio (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Walter Chiarvesio from Santander.

Walter Chiarvesio (Head of Equity Research)

Hello, good morning. Congratulations for the results, and thank you for taking my question. My question is regarding the, this differentiated FX scheme that the government just introduced for the oil and gas companies. What, what is the impact for the Q4, and what do you think this could evolve? Well, actually, for the Q4, because we have the elections in the middle. And if you think that this could continue in the Q1 or Q2 next year, what is your view about it? Thank you.

Miguel Galuccio (Chairman and CEO)

Hi, Walter, and thank you for your question. Yes, this is the program that we call the oil and gas dollar. In the program, we export an equivalent of $135 million, which we liquidate 75% through the central bank and 25% through the Blue Chip Swap. That will generate for us additional revenues of around $55 million and, our calculation in financial income, we expect around a net income impact between $10 million and $30 million. Regarding the continuation of this program after the elections, to be honest with you, I don't know. It will all depend more on the macroeconomic program that the next president put in place.

Walter Chiarvesio (Head of Equity Research)

Thank you very much. And, a follow-up question, if I may, is, how this dynamic is impacting, your production cost, vis-a-vis higher revenues due to this differentiated currency? In terms of margin looking forward, I mean, I guess that for the Q1, the Q4, the, the pressure on cost on dollars may be, higher, I guess. Is that the case, or?

Miguel Galuccio (Chairman and CEO)

No, Walter, I don't think it will impact our margins, not at all. I think this will be more related to financial incomes, but no, not the margin per se.

Walter Chiarvesio (Head of Equity Research)

Okay, perfect. Understood. Thank you very much.

Miguel Galuccio (Chairman and CEO)

You're very welcome.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Oriana Koval from Balanz.

Oriana Koval (Senior Equity Research Analyst)

Hi, good morning. Thanks for taking my questions. This is Oriana Koval with Balanz. I have three. If we could go one by one, that would be great. The first one is just a follow-up on the expected volumes for the Q4. Recalling the guidance that you have set for 2023, 55,000 barrels per day, it seems that you might be running a tad behind with 60,000 barrels per day expected for the Q4. So I just wanted to understand if we should expect a lower production number for the full year, and what could additional drivers be there for increased volume? Thanks. That would be the first one.

Miguel Galuccio (Chairman and CEO)

Thank you, Oriana, for your question. So let me first start with a recap of Q3. So Q3 production in barrels of oil equivalent was 49.5 thousand barrels of oil equivalent per day. It was pretty much flat with last year, and quarter-on-quarter was 6% increase. In terms of oil production was 41.5. So that was driven by the tie-in of the two wells, as I explained in the call from Bajada del Palo Este, and we have the delay of the tie-in of the cube to late July. This cube supposed to be tie-in early July, and that was basically the delay that we are having and the shortage that we're having on production.

On pro forma basis, and this is basically after the transfer of conventional asset, the production increased year-on-year 12%. And if you look at the monthly breakdown, in July, we were 44.5 thousand barrels of oil per day, 49.9 thousand barrels of oil per day in August, and 53 thousand barrels of oil per day in September. So, in Q4, we will connect additional 11 wells, which we expect to be more or less at 60 thousand barrels of oil per day by Q4 average. So our exit rate in order to be 60 average, you can assume it will be probably around 65 thousand barrels of oil equivalent per day.

This will leave us well on track to deliver our 70,000 barrel of oil equivalent per day average for the next year, 2024, as we have defined as target. So I think this is pretty much what is playing. The only delay that we have in production was, as explained, coming from cube.

Oriana Koval (Senior Equity Research Analyst)

Yeah, that's very clear. Thank you. Another one, and understanding the natural gas business is rather marginal to Vista, but I would notice this decrease in prices for the industrial segment. So if there's any color that you can share on this regard, vis-a-vis the planned gas prices, that they were very differentiated? Thanks.

Miguel Galuccio (Chairman and CEO)

Yeah. No, no, no, no additional colors as everything that you know. I mean, commercial gas prices were lower due to the Argentina current situation and devaluation and so on. No, no more to read into.

Oriana Koval (Senior Equity Research Analyst)

Okay. Just one last one. Regarding the working capital drag on your free cash flow generation, and any insights in terms of this increase in receivables that we saw quarter-over-quarter? Is this normalizing already through early Q4?

Miguel Galuccio (Chairman and CEO)

It's normalized, as you know. I mean, this is the export that basically was delayed, the collection from September to October and is normalized.

Oriana Koval (Senior Equity Research Analyst)

Perfect. Thank you very much.

Miguel Galuccio (Chairman and CEO)

You're welcome.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Matheus Tostes from Citi.

Matheus Tostes (Research Analyst)

Hi, good morning, and congratulations for the results. I'd just like to hear some of your thoughts regarding the devaluation after the peso and how is that playing vis-a-vis your lifting costs. And how do you think that could, I mean, move forward, especially after the elections, if there's another devaluation, too? Thank you.

Miguel Galuccio (Chairman and CEO)

Hi, Matheus. Thank you for your question. Look at, a devaluation could help to reduce lifting costs marginally. And, and we always, after the devaluation, we have an impact on, on expenditures and particularly lifting costs. But, of course, in the different cycle of Argentina, it start to catch up, again. And, and I think you can assume that, in a period of a year, usually have a neutral effect. But the main impact on lifting cost reduction will come from production increase, as we have seen and demonstrated many times in the past. And we will start to see partially that impact in Q4. So if you have to, basically put an impact in lifting costs, you should look at the production increase.

That is what is going to drive the lifting costs down.

Matheus Tostes (Research Analyst)

Perfect. Thank you. Thanks a lot.

Miguel Galuccio (Chairman and CEO)

You're welcome.

Operator (participant)

Thank you. I would now like to turn the call back over to Miguel Galuccio for closing remarks.

Miguel Galuccio (Chairman and CEO)

Well, thank you very much. It was a good quarter. I would like to continue thanking you for the support and the participation on this call, and looking forward to see you in Q4. Have a very good day.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.