YPF - Q1 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the YPF first quarter 2023 earnings webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. It's now my pleasure to turn today's call over to Pablo Calderone, the investor relations manager. Sir, please go ahead.

Pablo Calderone (Investor Relations Manager)

Good morning, ladies and gentlemen. This is Pablo Calderone, YPF's IR manager. Thank you for joining us today in our first quarter 2023 earnings call. This presentation will be conducted by our CEO, Pablo Iuliano, and our CFO, Alejandro Lew. During the presentation, we will go through the main aspects and events that explain our first quarter results. Finally, we will open up the call for questions. Before we begin, I would like to draw your attention to our cautionary statement on slide two. Please take into consideration that our remarks today and answer to your questions may include forward-looking statements which are subject to risks and uncertainties that could cause actual results to be materially different from the expectation contemplated by these remarks. Our financial figures are stated in accordance with IFRS. During the call, we might discuss some non-IFRS measures, such as Adjusted EBITDA.

I will now turn the call to Pablo. Please, Pablo, go ahead.

Pablo Iuliano (CEO)

Thank you, Pablo. Good morning to you all. We are glad to report a solid beginning of the year across our operational and financial metrics, where our total hydrocarbon production continued with a positive trend, bringing to market over 511,000 bbl of oil equivalent per day, representing an increase of 2% on a sequential basis and 1% when compared with the same period of 2022. Moreover, I would like to highlight the evolution of our crude oil production, which as commented during our strategic outlook presenting a few weeks ago, is the focus of our short-term growth strategy, recording a 3% sequential increase and a robust 7% interannual expansion. Adjusted EBITDA remained strong in the quarter, surpassing once again the $1 billion mark, expanding 12% from the previous quarter and 5% on a year-over-year basis.

Sequential improvements come as a result of higher hydrocarbon production and higher processing levels at our refineries, accompanied also by lower OpEx, partially offset by lower realization prices of our refinery products when comparing to the previous quarter. The solid operating results permit our bottom line to come in positive territory once again, with net income reaching $341 million in Q1. In terms of our investment activities, we started the year investing $1.3 billion, 78% higher than the first quarter of 2022. On track to meet our ambitious plan for the year, where the main focus was once again directed to shale operations, which concentrated more than 50% of the total investment.

On the financial side, free cash flow was almost flat during the first quarter at a negative $17 million, taking our net debt to $6 billion, resulting in a flat net leverage ratio at 1.2x. On a final note, let me briefly comment on the positive recent developments related to the international legal contingencies. In the Petersen and Eton Park case on March 31, the New York court found that YPF has no contractual liability and owes no damage to the claimants, and accordingly, dismissed plaintiffs claim against YPF. We believe this ruling to be of significant value to dissipate to a large extent our potential contingencies, and should plaintiffs seek to appeal the decision, YPF will continue to defend itself in accordance with applicable law.

In the Maxus case on April 6th, YPF and Repsol signed a settlement agreement with the Maxus Settlement Trust, providing for a full release and discharge of all claims in exchange for payment of $287.5 million each, subject to the satisfaction or waiver of certain conditions, including court approvals and other procedural events. We are convinced that this legal decision represents a fair and reasonable outcome for YPF and will allow the company to continue focusing on generating value for all our stakeholders. In summary, we are pleased with the result achieved during first Q 2023, Although we know it is a year full of challenges, we believe we have taken the initial step to deliver on the ambitious goals we set for the year. I now turn to Alejandro to go through some further details of our operating and financial results for the quarter.

Alejandro Lew (CFO)

Thank you, Pablo. Let me begin by expanding on Pablo's comments about the evolution of our oil and gas production. During the quarter, our total hydrocarbon production delivered 511,000 bbl of oil equivalent per day, highlighting a strong internal expansion in our crude production, reaching the highest quarterly mark since 2016 at 238,000 bbl per day. Beyond crude, natural gas production increased 2% on a sequential basis, while NGLs remained essentially flat. The positive evolution in oil and gas production on a sequential basis came once again, and as expected, on the back of the solid increase of 6% in our total shale production.

During this quarter, our total conventional production remained flat when compared to the previous quarter, mainly as a result of our continued strategy of extending tertiary production, which recorded an expansion of 7% versus the previous quarter and almost 50% against the same quarter of 2022. In that sense, in Manantiales Behr, our flagship project, tertiary production represents almost one-third of the total production of the block, and in the other three pilots being deployed at Chachahuén in Mendoza, El Trébol in Chubut, and Los Perales in Santa Cruz, we have continued harvesting promising results. Moving to costs, lifting averaged $14.6 per barrel of oil equivalent across our upstream operations, representing a minor increase when compared to the $14.5 in the previous quarter.

More particularly, for our shared core hub operations, lifting costs increased by about 8% as higher activity and energy costs during the quarter overran the expanded production, but still remaining at a very competitive level of $4 per barrel. Regarding prices within the upstream segment, crude oil realization prices averaged $67 per barrel in the first quarter, representing a minor increase compared to the previous quarter, but leading to a significant reduction in the discount to Brent prices, which declined by about 7% in the same period. On the natural gas side, prices remained sequentially flat, averaging $3.1 per MMBTu, aligned with the planned gas prices for the summer season. Zooming into our shale operations, during the quarter, we completed 38 new horizontal wells in our operated blocks.

We also continued increasing the rhythm of drilling activity to enlarge our inventory of drilled and uncompleted wells. In that sense, during the first quarter, we drilled a total of 48 new horizontal wells, 34 of which were in oil-producing blocks and 14 targeting shale gas, representing a new quarterly record mark in terms of drilling activity. It is also worth noting that during this quarter, we continued with a strategy of developing Vaca Muerta beyond our core hub blocks. In that regard, during the first quarter, we tied in four oil wells at our fully owned Loma Jarillosa block, and we have just finished drilling one well at Las Tacanas block, targeting natural gas production. The new tie-ins during the quarter led our shale production into further expansion.

On a sequential basis, our shale oil production increased by 9%, and our shale gas production expanded by 4%, averaging over 92,000 bbl of oil per day and about 17 million cubic meters per day of gas. When compared to the same period of 2022, shale oil production expanded by 31%, aligned with our strategy of accelerating the monetization of our shale oil operations. In terms of efficiencies within our shale operations, during the quarter, we lost some ground in terms of the development cost at our core hub operations, averaging $9.9 per barrel of oil equivalent, primarily on the back of continuous cost pressures, although operating metrics remained healthy.

It is also fair to highlight that the development cost for our core hub operations reported in previous quarters was revised slightly upwards as a result of some retroactive tariff adjustments as well as updated EOR estimates of some specific wells based on actual productivity recorded in recent months. Finally, regarding our investment in facilities required to unlock our shale oil production, in January, we put in operations our third crude oil treatment facility in Vaca Muerta, located at Bandurria Sur, with an initial processing capacity of 4,000 cubic meters per day, which is targeted to be expanded to 12,000 cubic meters per day during the year. Let me now briefly comment on the progress made in relation to the midstream oil projects aimed at unlocking the evacuation capacity of the Neuquén Basin.

Regarding the expansion of the existing system to the Atlantic, Oldelval has made steady progress on its second stage of expansion. Aiming at adding about 20,000 bbl per day of transportation capacity to the system, expected to reach commercial operation during the third quarter of this year. OTE has achieved solid progress in the critical path of its expansion project, having initiated the preliminary works for the construction of two new storage facilities of 50,000 cubic meters each and the offshore terminal at Puerto Rosales. In terms of financing, on top of the large portion of the total CapEx to be funded through prepaid ship or pay contracts, both companies, Oldelval and OTE, tapped the local capital markets with three-year local notes of $50 million each, thus securing a further portion of the funding required by the projects.

Moving to the Pacific route, the Transandino pipeline of the OTA/OTC system responded well to the in-line inspection test, resulting in only minor repairs that were already executed. Thus, the pipeline is now in operating conditions to resume exports to Chile in coming weeks after over 15 years of being idle. In addition, we have continued making good progress in the construction of the Vaca Muerta Norte pipeline that will allow us and other producers of the basin to direct the crude oil produced in the core operations of Vaca Muerta to the Transandino pipeline and further north into our Luján de Cuyo refinery. The project is at about 60% completion and is expected to start operations between September and October of this year.

We have also achieved solid progress on the engineering design process for the Vaca Muerta Sur pipeline and export terminal, having achieved about 70% completion. We are progressing steadily with the environmental impact studies for the full project. It is important to highlight that even though the project is and will continue to be led by YPF, we have already initiated conversations with other major players of the Neuquén Basin who already showed interest in participating in the project. Switching to our downstream operations, let me start by highlighting that in 2023, the company has decided to reorganize the business segments considered for financial reporting by separating the downstream activities into those related to the midstream oil refining, transportation of oil and refined products, and petrochemical production into a new segment called Industrialization.

From the commercial activities of refined and petrochemical products, natural gas, and trading activities that were grouped into another segment called Commercialization. This segment reclassification is aligned with the organizational change that separated this business under the leadership of two different vice presidents. Regarding our domestic sales of gasoline and diesel, total dispatch volumes decreased by 3% when compared to the previous quarter, driven by a contraction of 6% in diesel sales, mainly due to the lower seasonal demand in the agro business that was particularly affected by the severe drought that the country experienced in recent months, partially offset by a 2% increase in gasoline demand, which set a new quarterly record. In a year-over-year comparison, diesel demand remained almost flat, while gasoline sales stood 7% above a year ago.

In terms of refinery utilization, the revamping of a topping unit at the La Plata refinery that eliminated bottlenecks in the processing of light crude oil, accompanied by the revamping of the pump station, Puesto Hernández in the Neuquén Basin, allowed us to increase processing levels to 307,000 bbl per day, 5% higher than the previous quarter and 9% above a year ago, achieving the highest quarterly mark in the last 13 years. In addition, during the quarter, we managed to maximize our refinery conversion levels, reaching a record of gasoline and middle distillates production. However, in spite of the higher refinery output, total fuel imports increased during the quarter, representing 12% of total fuel sold in Q1 in order to build up inventories that remain below historical average levels in the preceding quarter.

In terms of prices, during the first quarter, we continued with our strategy of adjusting prices of local fuels in a way to mitigate to the largest possible extent the effect of the depreciation of the currency while reducing or at the minimum, avoid extending the gap between the pricing of local fuels vis-à-vis international parities. Consequently, average fuel prices measured in U.S. dollars decreased 3% sequentially, but stood 16% above Q1 2022. The gap between local fuels prices versus import parity declined to an average of about 20% in the first quarter, while further declining to about 15% in April, and more recently, during the first days of May, to a smaller discount of about 10% on the back of the continuous general downward trend in international prices.

Finally, on the financial front, the beginning of the year resulted in another quarter delivering sound operating cash flow, which increased 12% sequentially to about $1.5 billion on the back of the higher Adjusted EBITDA, coupled with positive working capital contributions. This strong cash generation was almost enough to fully fund our investment plan, payments of interest, and other expenses. Resulting in a slight negative free cash flow of just $17 million. Despite this minor negative free cash flow that led to a marginal increase in our net debt to $6 billion, the higher 12-month rolling Adjusted EBITDA permitted to maintain our net leverage ratio flat at 1.2x.

In terms of financing, during the first four months of the year, we have already raised over $1 billion through tapping the local capital markets in two occasions, in January and in April, and by securing several trade-related loans from relationship banks, obtaining net new funding of over $500 million, $294 million of which took place in Q1 and the balance during April. It is worth highlighting that this funding took place at very attractive financing costs, benefiting from the arbitrage in the local market, as demonstrated by the negative funding cost of -5% achieved on our recent two-year dollar-linked local notes. Furthermore, during March, we entered into a fully committed short-term revolving credit facility denominated in pesos with three local financial institutions for an equivalent of $120 million.

It is worth noting that this is a product that is not widely available in our local market, but that we eagerly pursued as it provides us with flexibility to manage our liquidity more efficiently. All in all, these financings provide the right platform to secure our funding plan for the year, including the liquidity required for the settlement of the Maxus legal case. On the liquidity front, our cash and short-term investments increased to $1.3 billion as of March 31st, compared to $1.1 billion as of the end of December of last year. In terms of cash management, we have continued with an active asset management approach to minimize FX exposure, considering the prevailing regulations that restrict our ability to hold assets abroad.

In that sense, in a context of limited available dollarized instruments in the local market, and given our increased liquidity, we ended the quarter with a consolidated net FX exposure of 21% of total liquidity. Finally, when looking into our debt profile, I would like to highlight that our healthy liquidity position comfortably covers our debt amortizations for the next 12 months, giving a very manageable debt profile for the rest of the year. With this, I conclude our presentation for today and open the call for your questions.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from the line of Walter Chiarvesio with Santander. Your line is open.

Walter Chiarvesio (Head of Equity Research)

Hello, good morning, Pablo and team. Congratulations for the results. I have some questions. If you could first develop a little bit more on the export potential for the company. I understand that the company has a twofold deficit in the short term, but still, if there is some potential of exports, given the connection to the Transandino pipeline, and if you can provide some details on the volumes you think that you can deliver to this pipeline this year and the next one, for example. That is one thing.

The other thing is, what do you see in the next six months regarding pump prices, given that we are in an electoral year, inflation is running high, and probably, the company is receiving some pressure, this is a question of course, from the government to try to keep pump prices stable. Thank you.

Alejandro Lew (CFO)

Well, good morning, Walter, thanks a lot for your questions. Let me address first the question about the export potential. As was recently announced in the media, we have reached an agreement with ENAP to take advantage of the availability now of the Trasadino pipeline that after several months of work and after performing inline inspection should be back in operations in the coming weeks. This is a milestone, a key milestone, given the over 15 years that that pipeline has been idle. That clearly is on the back of the increased production, not only based on YPF's production, but also from all the other players in the Neuquén Basin and in the country as a whole.

We believe that that's that will continue to expand the total export potential of the country, and more specifically for YPF, that should allow us to become a structural exporter once again. As mentioned, there is a short-term agreement to start with a volume of up to 40,000 barrels a day, that should start to be pumped as early as the first days of June, so in a few weeks from now. Out of that volume, YPF will probably have a share of about 40%-45%. That total volume should increase

Over time, primarily on the back of the new pipeline that we are building, the Vaca Muerta Norte pipeline, that will connect the core hub with Puesto Hernández, that should allow total pumped volumes to increase. At the first stage, we believe that though, that volume will probably be in the order of about 70,000 bbl a day or so before the end of this year. Hopefully, over time, that should continue to grow as we move along the following months until probably the end of 2024 to the total capacity that the TransAndino pipeline has of about 110,000 bbl a day.

We believe that that's gonna be a structural improvement and a structural export potential that both for YPF and for other players in the Neuquén Basin. Given that, we so far continue to purchase about 20% of the total crude that we processed in our refineries. Clearly, as we continue to expect our oil production to increase in coming months and in coming years, as was also presented in our strategic outlook a few weeks ago in New York, we would expect total purchase volumes to decline over time, while at the same time we increase our exports.

Over time, and as we said, probably in five years from now, we are expecting to reach a percentage of about 35%-40% of our total production, to target the export markets while we reduce our net purchases to a level of about 5%-10% of the total processing volumes. That, as mentioned, just to be clear, that's over time, within the next five years. Moving to your second question, to prices. As was commented during the presentation, we so far managed to increase prices in several locations, you know, for the most part once a month.

We are trying to, at the minimum, keep track of the evolution of the currency and trying to maintain our prices in dollar terms, our net prices in dollar terms, as stable as possible. So far we have managed to achieve that. As mentioned, during the first quarter, the average of our dollar, net dollar prices, was just 3% below the average for the fourth quarter, even though international prices came down further than that. That continues to be the case so far. For the following months, we expect to continue with that strategy of doing or moving or adjusting prices in a way to compensate for the evolution of the currency to the largest possible extent.

Of course, being conscious of the global environment or the local environment in terms of macroeconomic reality and the inflationary pressures. We will remain conscious of that, but still trying to adjust prices in accordance with the evolution of the currency and of course, maintaining a healthy relationship with international prices as well.

Walter Chiarvesio (Head of Equity Research)

Thank you very much, Alejandro.

Operator (participant)

Your next question comes from the line of Carlos Morris with Morgan Stanley. Your line is open.

Carlos Morris (Analyst)

Hi, everyone. Thanks for taking my questions. I have two questions. The first question is about funding. Can you talk about your funding requirements and strategy for 2023 and 2024? The second question is about the effects of devaluation. How is YPF preparing the company in the event of a sharp currency devaluation? How do you see fuel prices evolving in that scenario to ensure margins remain healthy? Thank you.

Alejandro Lew (CFO)

Good morning. Thank you, Carlos, for your questions. In terms of funding, as commented during the presentation, we have started the year on the right footage. We have already, in the first four months of the year, raised over $1 billion, tapping mostly the local capital markets and relationship banks. As you know, as expected and as commented as it was our funding plan for the year. With that, with those exercises, we have already reached a net funding of about $500 million. We expect to continue with a similar strategy for the remainder of the year. We clearly have tackled most the most relevant international amortizations that we had during the year.

We only have left a smaller amount of international cross-border amortizations for the following months. In that regard, we expect to continue to mostly focus our exercises in the local market where, you know, clearly we see very competitive financing costs. As commented also, you know, both in the January and the April local bonds that we issued, we achieved very interesting funding costs. Also increasing our trade lines. On top of that, there is also a possibility, a high probability of enlarging refinancing and enlarging the CAF-led A/B loan that was secured last year.

We are working on potentially extending that loan, both in terms of tenor and in terms of size, and that we expect to be to finalize negotiations and documentation for that in coming weeks. All in all, you know, clearly mostly focused on the local market and in trade lines, but then also looking into other instruments such as this enlargement of this A/B loan potentially. For the next year, clearly still too early to say, but most likely we believe that there will still be room for us to continue to tap on these two main sources. Of course, we will keep an eye on the international markets as well, depending on how our bonds, our international bonds perform.

We may definitely consider tapping the international markets at some point. In terms of the potential impact of significant effects devaluation, clearly, it's difficult to know whether that's gonna happen and when, but of course we have our sensitivity analysis. What I can comment on that is that although a steep devaluation of the currency will definitely erode our revenues as it impacts a large portion of our revenues which are related to pump prices. Roughly speaking, in the order of 55%-60% of our total revenues come from the sale of local fuels in the local market, which are priced in pesos.

It's also fair to note that a large portion of our costs, both CapEx and OpEx, is also denominated in pesos and should also in that case benefit from a potential devaluation of the currency. All in all, we would say that the net, there is a net impact, negative impact that the devaluation will have on the differential between revenues and costs. That will also depend on our ability to pass that potential devaluation through to pump prices in a rapid way. We would expect, and as commented on the pricing strategy, we would expect to be able to do that in an efficient and rapid way.

That of course will depend on the general environment that will, you know, that will prevail at the time. Of course, depending on our ability to actually do so, that will result in the, in the net impact, that we will end up seeing in our cash flow generation.

Operator (participant)

Again, if you would like to ask a question, press star followed by one on your telephone keypad. Your next question is from the line of Paula La Greca with TPG. Your line is open.

Paula La Greca (Senior Corporate Research Analyst)

Hi, good morning, Alejandro. I have a couple of questions. First, I would like to know how our Plan Gas and our collections day is doing. Can you tell us how much money is pending to collect? A follow-up on this one is, if collections continue to deteriorate based on our earnings calls of peers, and let's say to 115 days, how is it going to impact the plant increase production?

Alejandro Lew (CFO)

Hi, Paula. Good morning, and thanks for your questions. Clearly we have seen some deterioration in collections, particularly in related to the Plan Gas, where we have seen some further delays in collection. From a net or from a nominal perspective, this amounts on the lower seasonality of the Plan Gas invoicing. In terms of actual working capital during the first quarter, we had a positive effect because we've been collecting on high seasonal invoices and while the delays took place on lower seasonality invoicing. From a net working capital perspective, it was a positive variation in the first quarter.

Down the road, we definitely expect and we are doing, you know, our best to try to collect and to get the normalization of the collection on the Plan Gas. In terms of CAMMESA's delays, we are not seeing any major impact there. But all in all, and as you probably recall, you know, our focus is on crude oil production, which clearly has no relationship whatsoever to this collection time frames. Because of course we monetize that through pump prices and there we see no delays in collections.

Also now as we are gonna move forward with a portion of our production being exported, also it's completely, you know, separated from the realities of what is more a natural gas issue related to both CAMMESA and the government payment on the Plan Gas program. I would say that all in all, of course, it could potentially have an effect in future working capital balances. It does not affect our production growth plans or our investment plans as it has less of an impact on YPF than it might have in other companies that have a larger proportion of gas in their businesses or in their plans.

I would say that so far, we are not seeing or expecting any relevant impact in our activities or in our investment decisions. We continue to focus mostly on assigning most of our capital investment to our crude oil opportunities.

Paula La Greca (Senior Corporate Research Analyst)

Understood. Thank you. I have another question that is, regarding the contract with ENAP. If you could tell us what was the price agreed of crude oil and or in terms of revenue, how much is it going to represent in the second quarter?

Alejandro Lew (CFO)

Yeah. Well, in terms of the commercial agreement, it's a formula, but that basically relates to export parity prices at Puerto Rosales. On top of that, it adds some logistics premium basically taking into consideration to share the benefit of the improved logistics that both of sides will have, both, you know, the suppliers, not just YPF, but the other producers as well, versus ENAP that is substituting imported crude from sea, you know, imports to this inland imports through pipe.

Basically, it's gonna be an export parity plus, pricing on this commercial agreement, at least for this initial agreement, that is for the first, two months. In terms of impact for revenues during the second quarter, it's gonna be, very marginal because as mentioned before, we are only gonna start pumping, in the first days of June. It's gonna be only less than one month of exports that will actually, be recorded in the second quarter. Even in the third quarter, it's gonna be limited to this smaller amount, or the smaller volume until the, Vaca Muerta Norte pipeline is up and running, which is expected at some point in late September or early October.

We should start seeing the full benefit of these new exports into Chile by the fourth quarter of this year, where it should start representing around 10% of our total production.

Paula La Greca (Senior Corporate Research Analyst)

Perfect. Thank you so much.

Alejandro Lew (CFO)

You're welcome, Paula.

Operator (participant)

Your next question comes from the line of Luiz Carvalho with UBS. Your line is open.

Luiz Carvalho (Managing Director and LatAm Head of Research)

Hi. Thanks for taking the question. I have basically two here. The first one is about infrastructure bottlenecks. I mean, there has been some discussions about, you know, the construction of pipelines and, of course, how this will tie in terms of the production growth over the next couple of years. If you may, I don't know, give a bit more color in terms of what are the main challenges that you're seeing in terms of potentially, I don't know, suppliers or, I don't know, licenses and so on would be great. The second question, in, you know, in the past, I mean, Argentina announced some specific rules for the export on, you know, agri of soft commodities in terms of, I would say, accessing the, let's say the FX rate, for example, right?

The company, you know, YPF has, you know, potentially becoming a larger exporter of oil. It would be great to hear your views on the conditions that the company is seeing in terms of the rules to follow to match additional levels of oil exports and, you know, and potential revenue dollars from now on. Thank you.

Alejandro Lew (CFO)

Hi, Luiz. Good morning. In terms of bottlenecks or pipeline expansion, again, as commented, we are seeing very good progress and we are, we are very comfortable with the progress that we are achieving, directly and indirectly, right? Because some of these projects are being executed directly by YPF and some of them by third parties like our participating companies, Oldelval and OTE. In both those cases, we are making good progress. You know, as expected, the Transandean pipeline should be up and running and in operations now in late May, early June. So that's a key milestone.

We are making good progress on the construction of the Vaca Muerta Norte pipeline, which we are still seeing or expecting a COD in early fourth quarter or late September, early October. We are making good progress there. Clearly, you know, access to or the flow of imports is somewhat more troublesome these days, of course. At the end of the day, the relevancy of these projects finally get things moving and we are not expecting any major impact from this particular situation in the finalization of these projects.

Then in terms of Oldelval and OTE, again, we follow that from our side, but clearly those projects are being run by those companies. We are seeing good progress there, both in terms of the actual construction or the actual works that are being performed, as well as the financing. You know, as we mentioned, both companies tap the local market, and they are making good progress in terms of their financing as well. At this point, we feel comfortable. We believe that the potential restrictions or noises related to imports, we so far don't expect them to have a significant impact in the evolution of these projects.

Finally, on the Vaca Muerta South or Vaca Muerta Sur project, we are making good progress on the engineering. That's a project that should help or contribute to the debottlenecking of Vaca Muerta from 26 onwards. Clearly we do have time, but of course, that doesn't mean that we don't need to continue to making good progress and keeping a close eye to that project in the current, you know, right now, not just in the future. In that case, we are also making good progress. We are finalizing the environmental studies, and we expect the public hearings for environmental approvals to take place in coming months.

That should be a key milestone for that project that goes into a new territory and involves potentially a new port. That will be a milestone to follow or to watch. Once that is done, then the rest of the project will be mostly related to construction. In those fronts, we feel comfortable with the progresses that we are making. In terms of export regulations, well, the Secretary of Energy has already allowed for firm exports into Chile to clearly take advantage of the Transandean Pipeline.

In terms of currency regulations, we at this point don't expect any specific regulation related to crude exports, but rather, you know, to be affected or to be within the current regulations that, you know, require exporters to bring dollars into the country and to sell those at the official FX. Although, you know, as you know, there is another regulation that was enacted last year, not yet fully implemented, that provides for specific or benefit or access to the official FX to oil and gas companies for several, you know, uses related to our incremental production compared to a base year in 2021. That should provide for a specific benefit, not just related to exports, but mostly related to increased production.

That should be a great tool to access and to manage FX access. We are still waiting for the full implementation of that regulation, which is still lacking.

Luiz Carvalho (Managing Director and LatAm Head of Research)

Okay. No, super. Thanks very much and very clear. Thanks for the answers.

Alejandro Lew (CFO)

Thank you, Luis.

Operator (participant)

Your next question is from the line of Marcelo Gumiero with Credit Suisse. Your line is open.

Marcelo Gumiero (Equity Research Associate)

Good morning, everyone. Thanks for taking my questions. I have two from my end. The first one is on costs. We saw, you know, lifting costs almost flat sequentially, but I mean, coming from an increase compared to the last year. I would like to know, I mean, how do you see lifting cost evolution looking forward into 2023 or 2024? I mean, as we advance and have more, you know, unconventional production in the mix, should we expect lifting costs to reduce? And the second question, sorry, is on fuel imports. We've saw, you know, an increase of imports despite an increased refinery utilization rate. You explained that you were, like, building up inventories during the quarter.

I just wanted to understand what should we expect from that side going forward? Should imports go down or should YPF keep the current level? Thank you very much.

Alejandro Lew (CFO)

Good morning, Marcelo, thank you for your questions. In terms of costs, we are working hard in trying to contain cost pressures. Clearly we've been mostly successful during the 1st quarter. However, you know, we continue to see cost pressures affecting our overall performance. As you have said, the higher proportion of shale or unconventional within our total portfolio should allow us to over time, decline the average cost, the average lifting cost for our total upstream operations. All in all, even within both sides, well, clearly on conventional, we have seen our costs in previous quarters increasing, that was mostly related to the decline that we were experiencing in production.

ed to maintain production stable within crude, conventional crude and mitigate to some extent the decline in conventional natural gas. We should also see or be able to contain the increase in lifting costs there to a large extent. While we do that and we increase the share of total shale within our portfolio, then as you have said, even though we might continue to see some cost pressures, we would expect the average lifting to trend downwards over time. In terms of fuel imports, clearly, as you mentioned, the main reason for having continue to have a relatively large percentage of imports related to our total sales was mostly related to the buildup in inventories

We are now on at average historical inventory levels. We got to a point where we are comfortable with inventory levels. For the following quarters, particularly the third quarter, we might also see import levels relatively high compared to historical averages, mostly because of program maintenance on our refineries. I would say on average for the year, we should be close to somewhat below the current level of imports. With some potential reduction in the second quarter, probably some increase again in the third quarter. That's...

That will also depend on the overall level of demand and whether we, beyond the program maintenance, you know, how we continue to perform on our processing capacity, which as commented, you know, will reach a historical high in the first quarter. We will do our best, outside or besides this program maintenance, to maintain processing levels to the maximum possible extent.

Marcelo Gumiero (Equity Research Associate)

Awesome. Very clear. Thank you very much.

Alejandro Lew (CFO)

Thank you.

Operator (participant)

Your next question is from the line of Ezequiel Fernandez with Balanz. Your line is open.

Ezequiel Fernandez (Credit and Equity Research Director)

Good morning. This is Ezequiel Fernandez from Balanz. Thank you to the whole YPF finance team for the materials and for staying late in the call to take my questions. I have three questions. I would like to run them one by one, if you do not mind. The first one is related to the Vaca Muerta South project that you mentioned. If you could provide us a little bit more details about potential pipe capacity, port upgrades, if this is going to be geared toward Suezmax or VLCC exports. Anything that might be worth mentioning.

Alejandro Lew (CFO)

Hi, Ezequiel. Good morning. Well, let me address it with information that we can comment at this point. This is a project that is still on a design stage, although we are moving fast with it. As we commented, we are well advanced with the engineering design process. So far what we expect this project to be is a project that could be expanded over time in a way to address the growing need for evacuating Vaca Muerta's production from 2026 onwards. So far, we are looking at a project that could go from a minimum flow of about 30,000 cubic meters a day to be expanded to a total of about 120,000 bbl a day once it's fully expanded.

Sorry, cubic meters per day. From an initial of 30,000 cubic meters a day to a total of 120 thousand cubic meters a day once it's fully expanded. That will be an efficient way from a capital perspective to handle that and move along with that project while we and the rest of the industry will likely continue to see the expansion of Vaca Muerta's operations from 26 onwards. In terms of the, you know, the design of that project, we are seeing the pipeline that will for the most part go parallel to the existing old well pipeline, connect to a new port further south.

Location is still being fine-tuned, but most likely, and as commented before, is gonna be a new port in an area in the province of Río Negro, where we can exploit or we can take advantage of natural deeper waters that should allow for the entrance of VLCCs and hence, making exports more efficient. That's the general idea of that project.

Ezequiel Fernandez (Credit and Equity Research Director)

That's great. Sorry, but I would like to go into another project that you might not be able to fully comment on. Regarding the offshore initiatives in either the Austral Basin or off the coast of the province of Buenos Aires, what else can you share about this initial maybe testing wells and if they're gonna be geared toward gas or oil? Anything on economics would be useful too.

Alejandro Lew (CFO)

Yeah. Economics is definitely still too early to comment. What we are seeing there is, well, clearly on the project outside of the coast of Buenos Aires, of Mar del Plata, that's a key project where we are targeting to drill the first deep water exploratory well ever in Argentina. That's a project that is in the block CAN 100. Where we are partners with Equinor and Shell. That's a project that is being, or a block that is being operated by our partner, Equinor. As mentioned, we are expecting and working towards being able to drill or to start drilling before the end of the year or at the latest early next year.

Well, we have high expectations for such a project. There's still much work to be done to be able to comment on, you know, the, all the potential that we expect there. Even though as we have already disclosed or mentioned, we are targeting resources in the order of 7 billion bbl of oil. Clearly the focus there is oil. The expectations are very high for that project. In terms of the Austral Basin, we are looking into some opportunities there to enter into some existing concessions that some other players have. We are looking into that, and in that case, mostly for gas.

Again, there it's an analysis that we are performing. It's, it's a little too early to comment.

Ezequiel Fernandez (Credit and Equity Research Director)

Okay, great. I don't know if you have anything to add on PETRONAS and the LNG project.

Alejandro Lew (CFO)

Well, not much to add. We continue to work together with them in performing both the technical and economic analysis to get us comfortable with a final investment decision. As previously commented, we are still away, you know, from that decision. There's still much work that has to be done. You know, at best, we will expect to have to enter into an FID not before the end of next year. So there's, as mentioned, still much work to be done there to be able to move on with the actual development of the project.

Ezequiel Fernandez (Credit and Equity Research Director)

Oh, that's great. That's all from my side. Thank you very much.

Alejandro Lew (CFO)

Sure. My pleasure.

Operator (participant)

There are no further questions at this time. I will now turn the call back over to management for closing remarks.

Alejandro Lew (CFO)

Well, thank you very much everyone for joining this call and for keeping your continuous support. We definitely remain open for any further questions that you may have. Have a great day.

Operator (participant)

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.