YPF - Q1 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the YPF First Quarter 2024 Earnings Webcast Presentation. 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 during this time, simply press Star followed by the number one on your telephone keypad. If you would like to withdraw your question, press Star one again. Thank you. I will now turn the call over to Margarita Chun, Investor Relations Manager. Please go ahead.

Margarita Chun (Investor Relations Manager)

Good morning, ladies and gentlemen. This is Margarita Chun, YPF IR Manager. Thank you for joining us today in our fourth quarter 2024 earnings call. This presentation will be conducted by our CFO, Mr. Federico Barroetaveña, and our Strategy, Business Development, and Control Vice President, Mr. Maximiliano Westen. During the presentation, we will go through the main aspects and events that explain the quarter results, and then we will open the floor for Q&A session together with our senior management. 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 answers 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 expectations contemplated by these remarks.

Our financial figures are stated in accordance with IFRS, but during the presentation, we might discuss some non-IFRS measures, such as adjusted EBITDA. I will turn the call over to Federico. Please go ahead.

Federico Barroetaveña (CFO)

Thank you, Margarita, and good morning to all of you. Before moving to the purpose of this call, as you may know, the company's functional currency is U.S. dollar, and since 2022, we have reported annual financial statements in both currencies, U.S. dollar and Argentine peso. The company believes that reporting in U.S. dollars provides general investors with a better understanding of the company's business and activities and analysis of our financial performance. Accordingly, as of this quarter, the company took the initiative to start reporting quarterly financial statements also in both currencies. Now, let me start the presentation by highlighting that this was a quarter in which we were able to deliver a solid beginning of the year across all our key operating and financial metrics.

Revenues amounted to $4.3 billion in Q1, growing by 3% sequentially and 2% interannually, mainly on the back of better fuel prices in the domestic market and higher exports of oil, partially offset by demand contraction in local fuels and fertilizers. Also, in Q4, our subsidiaries with functional currency in Argentine peso were affected by the deval of mid-December. Adjusted EBITDA recorded a strong evolution during Q1, totaling $1,245 million, 15% up sequentially, mostly driven by the aforementioned factors, in addition to a decreased OpEx after the devaluation and lower imports of fuel, combined with higher processing levels at our refineries. These effects were partially offset by reduced FX regime for exporters and lower replacement costs of our inventories.

Interannually, adjusted EBITDA growth was even higher, particularly boosted by a remarkable 7% expansion in oil production while exporting 23,000 barrels per day to Chile in Q1. The strong operating results enabled our bottom line to become positive at $657 million in Q1, which also almost doubled the $341 million of Q1 2023. Total hydrocarbon production reached 526,000 barrels of oil equivalent per day, rising 3% sequentially and interannually, driven by a sound performance in our shale operations, particularly in shale oil, which recorded a 21% interannual increase. In terms of our investment activities, we started the year deploying $1,252 million, decreasing by 15% sequentially and 4% interannually, mainly due to the devaluation impact mentioned before.

More than 50% of the quarter investment was concentrated in shale operations, in line with our strategy for the short term. On the financial side, free cash flow totaled a negative $394 million, as the deployment of our CapEx, payment of imports deferred from 2023, and debt service were not fully compensated by the positive cash flow from operations, taking our net debt to $7.2 billion, while maintaining the net leverage ratio at 1.7x, fully aligned with the target of the year. Going forward, we will continue monitoring the evolutions of Argentina's macro context, particularly the cost inflation evolution. We will concentrate our efforts to exploit the opportunities that we have ahead of us, reaffirming our shale oil-oriented growth strategy, and focusing on generating value for our shareholders, while maintaining financial prudence in our decisions.

I now turn the call over to Max to go through the operating results for the quarter.

Maximiliano Westen (VP of Strategy, Business Development and Control)

Thank you, Federico. Let me begin by expanding on Federico's comments about our upstream segment. During the first quarter, total hydrocarbon production grew by 3% quarter-on-quarter and year-on-year, driven by shale contribution, which continued on an upward trend, now representing almost half of the total output. Zooming into crude oil, total output continued high in the range of 255,000 barrels of oil per day on the back of shale growth of 31% year-on-year, offsetting the marginal decline in conventional fields. Also, let me mention that on the conventional side, 9% came from tertiary production, increasing by 34% interannually and minimizing the impact of natural decline in mature fields.

Beyond crude oil, natural gas and NGL production grew by 6% on a sequential basis on the back of demand recovery, delivering above 36 million cubic meters per day and 42,000 barrels of oil equivalent per day, respectively, both figures similar to the first quarter last year. Moving to lifting cost, it reached almost $13 per barrel of oil equivalent in the first quarter, 16% below the previous quarter, primarily driven by the sharp devaluation in mid-December 2023, increased production and cost efficiency, such as tariff reduction on supply chains. It also impacted the lifting cost at our shale core hub blocks that stood at $3.4 per barrel of oil equivalent on a gross basis, 15% down quarter-on-quarter, way below the already competitive range of $4 that we recorded during the last year.

Regarding prices in the upstream segment, crude oil realization prices averaged $68.3 per barrel in the first quarter, representing a strong recovery of 15% quarter-on-quarter, mainly as a result of better pricing landscape in the local market. On the natural gas side, prices remained essentially flat at $3 per million BTU, mostly derived from the off-peak season price of plant gas. Zooming into our shale activity, during the first quarter, we drilled 43 new horizontal wells in our operated blocks, mostly oil-producing blocks and only one targeting shale gas. We also completed 29 wells, all of them oil. Moreover, we tied in 39 wells, being 92% of oil. All these metrics are aligned with the company's strategy to monetize shale oil opportunities in the short term, together with the ongoing oil midstream expansions.

It is also worth noting that shale oil production achieved once again a new record high, delivering 112,000 barrels per day with a 3% sequential growth, accumulating an increase of 60% over the last two years. 87% of our shale oil production came from our core hub oil blocks, Loma Campana, La Amarga Chica, Bandurria Sur, and Aguada del Chañar. In terms of efficiencies within our shale operations, the first quarter we continued setting new quarterly records on drilling and fracking performance, averaging 290 meters per day in drilling and 219 stages per set per month on fracking. These are improvements of 23% and 12%, respectively, versus the first quarter 2023, and fully in line with the guidance we announced during the last annual call.

It is important to mention that during last February, we achieved the highest drilling speed for one well in our Chañar block, reaching 475 meters per day for a well, almost 4,000 meters of horizontal length, which was fully drilled in 15 days. As a result, we posted another quarter of competitive development costs for our core hub oil operations at $10.3 per barrel of oil equivalent, which is slightly above sequentially, due to higher activity to accelerate the development of our core hub blocks rather than Loma Campana, which is our flagship block in Vaca Muerta. Interannually, the improvement was mainly due to a restated figure for the first quarter, 2023, especially on the back of lower performance driven by parent-child effects. In addition, we moved forward with the strategy of exploring new shale opportunities beyond Vaca Muerta.

In that sense, a few days ago, we finished drilling the first horizontal well at El Cerrito block in Palermo Aike formation, which is the second-largest unconventional resource in Argentina after Vaca Muerta. We will advance with the completion in the following months to continue exploring its potential in the coming years. On the conventional side. A few days ago, we started drilling the first offshore ultra-deepwater well, Argerich, located 315 kilometers from the port of Mar del Plata in the province of Buenos Aires. We expect drilling works will take around two months. Before moving to the next section, let me update on the progress made in Project Andes that aims at optimizing the portfolio of conventional assets in our upstream business. We have already appointed the bank to manage this process and move forward with a virtual data room last month.

We expect to receive offers by June, on track with the project's timeline. Now, let me briefly comment on the progress achieved in the oil midstream expansions to unlock evacuation capacity in the Neuquén Basin. Regarding the evacuation to the Pacific, during the first quarter, YPF continued growing oil exports to Chile through the Trans-Andean Pipeline, which is also connected to our core hub blocks through the Vaca Muerta Norte pipeline. We exported almost 23,000 barrels of oil per day, which is 22% more than the fourth quarter, representing 9% of our oil production and totaling net export revenues of around $155 million.

We expect to increase export volumes gradually in the coming months, also raising the mix of shale, which is even lighter than the conventional oil of the Neuquén Basin, since our client successfully completed the testing of its refineries to process the lighter crude oil mix. Switching to the evacuation capacity to the Atlantic, on the one hand, Oldelval estimates to add around 45,000 barrels per day to its system by year-end, and 200 more by mid-2025. On the other hand, YPF is leading the Vaca Muerta South project, a completely new pipeline with export terminal, reaching an initial capacity of over 180,000 barrels per day by 2026, and amounting to more than 360 by 2027-2028.

During the quarter, we obtained the environmental permits for the whole project and launched the EPC tender, expected to be awarded by year-end. Keep in mind that this project has the possibility to expand to more than 700,000 barrels per day by adding pumping stations. Switching to our downstream operations in terms of refinery utilization, processing levels averaged 301,000 barrels per day, increasing by 4% sequentially since the fourth quarter was negatively impacted by program maintenance stoppages at La Plata Refinery. Interannually, processing levels declined by 2%, mainly because during this quarter, La Plata Refinery was affected by Otis Terminal unavailability to deliver crude oil, which was partially restored by the end of the first quarter, in addition to heavy rains and flooding in nearby areas.

This effect was offset in part by better performance at Luján de Cuyo Refinery, where we recorded the highest monthly processing mark in March. Consequently, we reached more than 90% of refinery utilization factor. Regarding domestic sales of fuels, total dispatch volumes decreased by 11% quarter-on-quarter, mainly because of retail demand contraction and lower diesel seasonality, dropping 14% in diesel and 7% in gasoline. Interannually, it was only 2% down as a result of 4% contraction in diesel, affected by lower industrial and agribusiness activity, while gasoline remained almost flat. It is worth mentioning that despite fuel demand drop in Argentina, YPF was able to gain market share, growing 8% in gasoline and 3% in diesel interannually, capturing almost 60% of local fuel market share.

Moreover, and quite important for the downstream margins, lower demand of fuel was translated into lower imports, representing only 4% of total fuel sale volumes, compared to 12% in the first quarter, 2023. In terms of prices, during the first quarter, YPF continued adjusting local fuel prices, aiming at mitigating the impact of the devaluation, while managing to reduce the spread versus international parities. As a result, average fuel prices measured in dollars increased by 11% sequentially, and 5% interannually, narrowing the gap to import parity to 7% in the first quarter, compared to 20% in the previous quarter. On the other hand, local crude oil price recovered in the first quarter, where Medanito price averaged $68 per barrel, representing a discount of 10% versus export parity, compared to 24% in the fourth quarter of 2023.

Thanks to all of you. This is all on my end. I will now turn back to Federico to go through our financial results for the quarter.

Federico Barroetaveña (CFO)

Thank you, Max. Switching to the financial front, cash flow from operations in Q1 amounted to almost $1.1 billion. Despite the increase in adjusted EBITDA, negative working capital variations affected Q1. There were temporary deferred payment of imported goods and services from last year to Q1, and some delays in the collection from certain gas clients. Given the deployment of our capital expenditure, coupled with a regular interest payments, Free Cash Flow came at a negative $394 million. Consequently, our net debt increased to $7.2 billion, while maintaining a stable net leverage ratio of 1.7 times. In terms of financing, during Q1, we issued an amortizing seven-year export secured bond for $800 million, with a yield of 9.75%.

Part of the proceeds was dispersed to prepay in cash 40% of the 2024 notes for $138 million, while the balance of $208 million was fully paid at maturity on April 4th. Additionally, we continue securing trade facilities, both with local and international banks, and paid at maturity almost $100 million of principal amortizations of international notes. On the liquidity front, our cash and short-term investments increased 15% sequentially to $1.6 billion by the end of March, primarily as a result of the new bond issuance. Finally, when looking into our debt profile, I would like to highlight that our healthy cash position comfortably covers our debt amortization for the next 12 months. So with this, we conclude our presentation and open the floor for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, please press star one to join the queue. Your first question comes from the line of Luiz Carvalho of UBS. Your line is now open.

Luiz Carvalho (Senior Equity Analyst)

Hi, everyone. Can you hear me well?

Operator (participant)

Yeah, we can hear you.

Maximiliano Westen (VP of Strategy, Business Development and Control)

Yes.

Luiz Carvalho (Senior Equity Analyst)

Oh, thank you. Thank you for taking the question, and congratulations on the results. I have basically two questions here. The first one, if you can, I don't know, give a bit more color and provide an update on the divestment process. How do you think that the development has been going so far? What are the potential, I would say, milestones that we should, you know, look in the next, I would say, the next couple quarters? The second question is more related to cost reduction. I think that part of the, let's say, the strategy is to, I don't know, optimize the, let's say, the asset portfolio, but you may have, you know, good opportunities to, I know, streamline the, to the costs, overall.

I would like to get a bit more details how the company is seeing, I would say, the cost reduction journey. Thank you.

Margarita Chun (Investor Relations Manager)

Thank you, Luiz. We will start with the first question regarding the divestment process.

Maximiliano Westen (VP of Strategy, Business Development and Control)

Yeah. Thank you very much. This is Max speaking. I'm gonna update you on the divestment process. First, let me mention that we are on schedule on what we explained during the last call. The progress that we made between the last call and this one is that we've... Yeah, between April 16 and 19, we went to a roadshow that started here in Buenos Aires, in the Canadian Embassy. Then, we've had a meeting in the U.S., in Houston and in Calgary. And with the meeting in Calgary, we finished our pre-marketing stage.

The following week, we've opened a VDR, and at this stage, what I can say is that there are many CAs and a lot of companies working already with the information that we've disclosed in the VDR. So we are quite bullish about this process. And the other thing I can mention is that we are expecting offers or proposals during mid-June, targeting to close on these transactions during the second half of the year.

Margarita Chun (Investor Relations Manager)

Thank you, Max. Regarding the second question regarding efficiency, cost reduction in the quarter, we have here Fede, our CFO.

Federico Barroetaveña (CFO)

Thank you, Bruno. I believe that the question is trying to focus more on the impact-

... on the devaluation in the first quarter and how this is going to be affecting us further along the rest of the year. So, let me tell you that, so far, since the new government took office in December, we see that the main focus has been in stabilizing the macro, following the implementation of these some shock measures. Now, during this quarter, the key developments that we have seen are mainly: number one, is that monthly inflation more than halved from 26% in December to about 11% in March. Second, the FX gap between the official and parallel has tightened from over 200% to approximately 10%. This is the lowest level in four years.

Then the country risk dropped from 2000 basis points to 1200, and again, this is the lowest since 2020. And then the net central bank reserves have increased by about $10 billion since December 2023. And we expect to become, let's say the expectation is that they become positive shortly. So all in all, and finally, and probably as a key driver behind all these results, what we observed is that during the first quarter, the government implemented a strict fiscal policy that achieved fiscal surpluses in each consecutive month for the first time since 2008.

Now, and probably the going to the root of your question, looking for the rest of the year, according to the market expectations survey of the central bank, they call REM in Spanish, is now forecasting, on the one hand, a reduction in monthly inflation rates from 9% in April to 5% by the end of the year. This will result in a total inflation of approximately 160%, our REM, which compares positively with the 211% we had in 2023.

Now, on the other hand, in terms of FX evolution, the same survey expects the continuity of the current crawling peg with some converging adjustments during the second half of the year, but now with the indication that this will be done without considering discrete cuts. Now, all in all, Bruno, assuming that this is a scenario where inflation remains above currency depreciation, the company and the management will continue to monitor strictly all key cost variables, looking for industrial efficiencies in order to mitigate its impacts on margin.

Luiz Carvalho (Senior Equity Analyst)

Okay, thank you. If I, if I may just follow up on this one. If you can maybe provide a bit more general update in terms of the you already mentioned about the excess fuel price parity, but also with regards to new regulations being discussed in the country at the moment, and how I would say you see YPF positioned to potential, I don't know, adjustment of the regulatory framework moving forward?

Federico Barroetaveña (CFO)

Basically, I understand that, Bruno, you would like to have our views on the new legislative measures that are being discussed now in the Congress?

Luiz Carvalho (Senior Equity Analyst)

Yes, exactly. Yeah. It's new next year.

Federico Barroetaveña (CFO)

Okay. Excellent. Excellent. Well, Bruno, as you know, the new administration brought a radical transformation on the regulation agenda. This was implemented through the Decree 70 and the Bases Bill, both currently subject to the review and approval by the Congress. Now, regarding the Bases Law, the draft bill declares a public emergency in several matters. This is for a period of one year, and it delegates a series of legislative powers to the executive branch during this emergency. Now, specifically for the oil and gas industry in general, and to YPF, the new bill aims to restore the economic balance in the energy sector by introducing three main objectives.

In our view, number one is it removes almost all restrictions of the hydrocarbon sector, aiming to correlating prices to import and export parities. Then it creates an incentive regime for large investment called RIGI, which especially it's critical to YPF, to YPF and to the entire gas industry for the Argentine LNG project. And lastly, the bill reaffirms that international trade of oil and gas should be free of any restrictions. In this sense, it is important to highlight that as the oil market is not formally regulated in Argentina, this new regulatory framework is not a necessary enabler to continue developing our shale oil resources in Vaca Muerta.

Anyhow, the main impact on our business is related to the development of the LNG project, as I said, which depends on the new incentive regime for large investment projects.

Luiz Carvalho (Senior Equity Analyst)

Perfect. That was very clear. Thank you very much.

Margarita Chun (Investor Relations Manager)

Thank you.

Federico Barroetaveña (CFO)

You're welcome.

Operator (participant)

Your next question comes from the line of Bruno Montanari of Morgan Stanley. Please go ahead.

Bruno Montanari (Executive Director of Equity Research)

Good morning, everyone. Thanks for taking my questions. I have three on my side here. The first one on Vaca Muerta Sur. So is the final investment decision taken for the pipeline? And do you have a firm interest from other oil producers already to be equity partners in the project? And I was wondering, how does Vaca Muerta Sur would compare or compete with the potential further duplication of all the value, which could be also on the table here? The second question is about the gas receivables collection. So I was wondering if you could share with us the amount which is currently due, and if you were also having those offers to be paid with bonds at a haircut.

And the third one, if you could comment on the free cash flow outlook for the coming quarters. You began the year, maybe with a little bit heavier negative free cash flow. So the question aims to check whether those pressures could subside now in the coming quarters. Thank you very much.

Margarita Chun (Investor Relations Manager)

Thank you, Bruno. We will start with the first question regarding Vaca Muerta Sur and Oldeval expansion. Here we have Max with us, our VP of Strategy.

Maximiliano Westen (VP of Strategy, Business Development and Control)

Thanks, Bruno, for the question. No, so, so far, the Vaca Muerta Sur is progressing as expected. All of the midstream projects actually are advancing as expected and are on track to bottlenecking our production capacity in Vaca Muerta. With this, we expect Oldeval's first stage to be completed by the end of this year. This will be a key milestone actually, adding about 45,000 barrels per day of evacuation capacity in Vaca Muerta, reaching a total capacity of 345 from the original of 200-225 thousand barrels. Now, for further stages, we will reach a total evacuation of 540,000 barrels. Regarding, I think you asked, Vaca Muerta Sur, what was already FID was the, what we call Tramo Uno.

This is already in construction, and the Tramo Dos, which is the main trunk line, all the way from Neuquén to the port, with a new port facility. What we can tell you at this stage is we already got the environmental permits for this project. This was a key milestone for this, and we are working and in discussions with the rest of the industry. What I cannot tell you much about this, but there's a lot of interest in participating in different levels of this project. So it's on track, and we don't see any delays on this project. And sorry, and I think you also asked your second question was about further expansions in Oldeval, right?

So we believe that Vaca Muerta Sur is the most competitive evacuation route for to monetize the crude in Vaca Muerta. This is because in the port where we are foreseeing to have the facilities, we can get to that port with VLCCs, which have much more competitive transportation costs per barrel. So we believe that this will be, this is the most efficient infrastructure system. So and that, that's why YPF wants to pursue this project, on top of or as a priority on any other project.

Margarita Chun (Investor Relations Manager)

Thank you, Max. I don't know if it was clear, Bruno, for you, and we can go with the second question.

Bruno Montanari (Executive Director of Equity Research)

Yes, super. Thank you.

Margarita Chun (Investor Relations Manager)

Thank you. The second question was about the gas receivables. Max, if you can, Fede is answering the question, our CFO.

Federico Barroetaveña (CFO)

Okay. Hi, Bruno. Well, as you know, this issue is somehow marginal, I would say, for YPF, considering the magnitude of our account receivable and EBITDA. As it is publicly known in recent weeks, CAMMESA has not been able to meet its obligations with upstream companies and power generators for the months of December, January and February. Total figures for YPF is that out of a total receivable of $160 million, we have, we had a past due of around, it's probably 50% of that was past due. Now, last Wednesday, the Secretary of Energy issued Resolution 58, which establishes an exceptional payment regime for CAMMESA past due amounts.

This resolution provides, sorry, that December and January will be canceled with a government bond due 2038. All in all, considering this, and based on the best estimate of the company, the group has recognized a total charge of $55 million, of which 29 were considered a charge to our operating income, and the balance correspond to our subsidiaries, YPF Luz and Barragán Power Plant. So based on this, yesterday, YPF signed an agreement with CAMMESA, by which on the February due amounts were immediately canceled, and the bonds shall be delivered in the coming days. In addition, this agreement provides that, moving forward, payments will be done in accordance with the contractual schedule.

Bruno Montanari (Executive Director of Equity Research)

Got it. Quick follow-up. On this $29 million, was this charged in the first quarter already?

Federico Barroetaveña (CFO)

Yes.

Margarita Chun (Investor Relations Manager)

Yes.

Bruno Montanari (Executive Director of Equity Research)

Okay. And this, you did not normalize for that when you presented your EBITDA, is that correct?

Margarita Chun (Investor Relations Manager)

It impacted the EBITDA. It was in the line-

Bruno Montanari (Executive Director of Equity Research)

Oh-

Margarita Chun (Investor Relations Manager)

... of the commercialization cost. So-

Bruno Montanari (Executive Director of Equity Research)

Mm-hmm

Margarita Chun (Investor Relations Manager)

... it is included in the EBITDA. If we wouldn't have this impact, it would have been $30 million higher.

Bruno Montanari (Executive Director of Equity Research)

Okay. Yeah, perfect.

Federico Barroetaveña (CFO)

Thank you.

Margarita Chun (Investor Relations Manager)

Um-

Federico Barroetaveña (CFO)

Okay, and-

Margarita Chun (Investor Relations Manager)

Well, we can go with the last question of Bruno. His question was about the free cash flow, the negative cash flow that we started with the year, and the pressure or maybe the outlook for the coming months.

Federico Barroetaveña (CFO)

Okay. Well, what happened in the first quarter, Bruno, it's a combination of, I would say, three factors. Number one, let's say, the composition of the negative free cash flow, it's number one, the payment of interest of the company that amounted to probably half of that. And then the rest is composed out of two main issues. One is this delay in payments that we just mentioned on gas and fuels.

And the other one is that, if you remember, by the end of last year, we have deferred payments of imports of goods and services that we canceled along the first quarter with or through buying securities from the government that allowed us to cancel these past due payouts. So that was a combination during this quarter. Now, moving forward, even though we expect a strong recovery in our EBITDA levels during 2024, this on the back of new fuel pricing strategy are very implemented and our growing shale oil production, we expect a CapEx target of $5 billion for 2024, and that will push the free cash flow into the negative territory.

This will be more or less in line with the same range that happened in 2023. Nevertheless, as the expansion of EBITDA levels should be higher than the increase of our net debt, we should be ending the year with a net leverage ratio below 2023. That means something in the range of 1.6x-1.7x.

Margarita Chun (Investor Relations Manager)

I don't know, Bruno, if we answered your question?

Bruno Montanari (Executive Director of Equity Research)

Yes, very clear. Thank you very much for that.

Margarita Chun (Investor Relations Manager)

Thank you. We can advance with the next question.

Operator (participant)

Your next question comes from the line of Daniel Guardiola of BTG. Your line is now open.

Daniel Guardiola (Executive Director of Equity Research)

Thank you, and good morning, guys. I have a couple of questions here. My first question is on the asset disposal plan. And I hear you mentioning that you already did a roadshow in Canada and Houston and Argentina, and I wanted to ask you if you could provide us the feedback you have received so far from potential buyers of these conventional fields. And also potential pushback that maybe you have received from government entities or provinces in Argentina, where these fields are located? So that's my first question. And the second one is on the Exxon exit or disposal plan, and I wanted to know if YPF is actively looking into these assets that Exxon is planning to sell in Argentina.

Margarita Chun (Investor Relations Manager)

Thank you, Daniel. We can start with the first question.

Federico Barroetaveña (CFO)

Hi, Daniel. How are you? Well, regarding the asset disposal plan, we call it the Andes Project. The feedback that I can tell you we got is we are already working there, above 70 companies working that signed CA and are working in the VDR. This is above our expectations. On processes where I've worked in the past, I've never seen that so that many companies. So I think that the market was expecting and looking forward to this process.

But on the potential pushback, what I can tell you is that for this project, we started, and Horacio, our CEO, started from the very beginning, working with all of the different stakeholders, with the governors, different governments, with the unions and with everyone else, before going out to the market. So we did the homework before going out, and we don't see... So far, we haven't had any pushbacks on the clusters that are published or released within the Project Andes. And regarding the Exxon process, there's not much I can tell you. The only thing I will tell you is one of our pillars is Vaca Muerta.

We're gonna focus most on our assets that have the highest margins, and we are becoming and we are continuously looking to any opportunity that has synergies within our operations where we want to grow. So, that's everything I can comment at this stage.

Daniel Guardiola (Executive Director of Equity Research)

Okay, great. Thanks. And if I may squeeze just another one very quickly. You did mention during the call that you drilled or you're planning to drill a ultra-deep water well offshore in the northern part of Argentina. And if I'm not mistaken, this is an extension of a major discovery that was found in Namibia two years ago by Shell and Total. And maybe you can give us a notion of how big this new frontier could be for Argentina?

Margarita Chun (Investor Relations Manager)

Sure, Daniel. Maybe you are referring to the Argerich.

Daniel Guardiola (Executive Director of Equity Research)

Yes, that one. Exactly.

Federico Barroetaveña (CFO)

I'll go for it. It's not in northern part of Argentina. It's the Argerich is the first ultra-deep water exploration well in Argentina, and it's located about 300 kilometers offshore from the city of Mar del Plata. This is Buenos Aires, at the water depth of 1,500 meters. The block is called CAN-100 in the North Argentine Basin. We started drilling this well at the end of April. And we do have a 35% equity stake. The operator of the well is Equinor, who's one of our partners in this joint venture. The other one is Shell with 30%.

This is an exploratory well, but what I can tell you, it's targeting a very big structure. The potential of this I cannot tell at this stage, but of course, we are looking for something very quite material. We are looking -- You mentioned something about Namibia. What we are looking here is the same Roca Madre. What's the translation of Roca Madre?

Mother-of-Rock.

Mother rock from Namibia, and that's true. And we're gonna be drilling this well during the next two months. And our estimation is that we could, of course, after ... If we have a discovery, then we need to do one to assess this. But we're targeting at the end of the road to produce maybe about 200,000 barrels per day. But this is again, it's exploratory, so this is only in case of having a discovery and good results in the appraisal wells.

Daniel Guardiola (Executive Director of Equity Research)

Okay. Thanks a lot, guys.

Margarita Chun (Investor Relations Manager)

Thank you, Daniel.

Operator (participant)

Your next question comes from the line of Alejandro Demichelis from Jefferies. Please go ahead.

Alejandro Demichelis (Managing Director of Latin America Equity Research)

Yes, good morning. Thank you very much for taking my questions. Couple of questions, please. First one is, Max, I think you talked about the pipeline, the Vaca Muerta pipeline. Could you give us some indication of the cost of the project from, say, Tramo 1, Tramo 2, plus the port? That's the first question. Second question is, when you update us on the strategy, you indicated bringing three extra rigs by the end of this year. Could you please indicate how you're progressing on that, and can we see some acceleration in your Vaca Muerta developments?

Margarita Chun (Investor Relations Manager)

Thank you, Alejandro. We can start with the first question maybe, with Vaca Muerta South, the tranche, the first and second tranche, cost.

Federico Barroetaveña (CFO)

Tramo uno, which is already FID'd, it's gonna cost about $250 million. The Tramo dos, the, between the pipeline and the terminal, it's gonna cost about $2.2 billion. And the second one, I, I'm not sure if, if I heard it right, but I think you asked about our acceleration in the Vaca Muerta and our development plans in Vaca Muerta. Is that right?

Alejandro Demichelis (Managing Director of Latin America Equity Research)

Yeah, yeah, and potentially bringing some new rigs to the basin and to Argentina.

Federico Barroetaveña (CFO)

Perfect. Yes. So we are currently drilling with 14 rigs, and we are planning on adding the 15th rig by June, I think. By June, yes. And by June. And also, we are gonna be working with four frack fleets in order to accelerate. So far, we are with the guidance that we provided in the last call, we are on track. And we're gonna plan on a... And we are - sorry, and, and, and we - Oh, this is... Yeah, I don't know if I addressed the question.

Alejandro Demichelis (Managing Director of Latin America Equity Research)

Okay. So just to be clear, of the three rigs that you mentioned that you were adding this year, you already have two working, and you have one extra coming in June?

Federico Barroetaveña (CFO)

That's correct, yes.

Alejandro Demichelis (Managing Director of Latin America Equity Research)

Okay, great. Thank you. And sorry, is there potential to bring more rigs than that?

Federico Barroetaveña (CFO)

Yes, but yes, but at this stage, we cannot because we may get to a bottleneck by the end of this year. So we are carefully accelerating. Once all the well system is the... Yeah, once the, no, not fully the bottleneck, but once the first stage of this adding the capacity by the end of the year is COD, then we will be able to accelerate and further grow next year.

Alejandro Demichelis (Managing Director of Latin America Equity Research)

That's great. Thank you.

Margarita Chun (Investor Relations Manager)

Thank you, Alex.

Operator (participant)

Your next question comes from the line of Bruno Amorim of Goldman Sachs. Please go ahead.

Bruno Amorim (VP of LatAm Energy, Transportation & Infrastructure Equity Research)

Thank you very much for taking my question, and congratulations on the results. Just wanted to follow up. I think you have made it very clear what's the plan for this year and next. Just wanted to ask your thoughts on when shareholders should expect to receive, you know, dividends. I understand you're going through a turnaround process, you are investing for the future, but just wanted to, you know, to hear from you when you think, you know, the company will start paying meaningful dividends to shareholders as a result of all the measures that you are implementing. Thank you very much.

Federico Barroetaveña (CFO)

I'll take it next. Hi, Bruno, and thank you for your words. Well, in terms of dividends strategy for this year and for next year, considering and given the strong growth in prospects of our shale oil development, particularly for the upcoming years, dividend payments shouldn't be or are not a top priority for this immediate to next years. However, we do believe that we have to normalize, and we are conscious that we need to normalize dividend payments down the road, considering that the company has not distributed dividends to shareholders for more than five years. So we are quite conscious of this. And so even though it is too early to comment, we may consider, and we are considering, and we will...

It's one of our drivers to resume dividends as soon as possible. So this year, I would say that we know that it's going to be negative free cash flow. We are expecting next year to be to target for a much more neutral year in terms of cash flow. And definitely, 2026 should be a year in which will be our top priorities to reassume this dividend leaving this dividend situation. So we have in our agenda normalizing this situation as I explained. Right now, we understand that the way to maximize the value to our shareholders is to improve as much as possible and to increase as much as possible the monetization-

... of the Vaca Muerta reserves. And in order to do that, we need to heavily invest along this year. But we have this in our agenda, and it will be one of our priorities.

Bruno Amorim (VP of LatAm Energy, Transportation & Infrastructure Equity Research)

Thank you very much.

Margarita Chun (Investor Relations Manager)

Thank you, Bruno.

Operator (participant)

Your next question comes from the line of Marina Mertens of Latin Securities. Please go ahead.

Marina Mertens (Head of Corporate Debt Research)

Hi, good morning. Thanks for taking my questions. I have two questions. The first one regarding the pricing dynamics at the pump. So considering that the government has delayed the adjustment to the tax on liquid fuels, do you consider there could be any potential constraints to implement further price increases at the pump? And the second one, given the progress in the Project Andes to divest these mature fields, could we expect YPF to proceed with any other sale of non-core assets?

Margarita Chun (Investor Relations Manager)

Thank you, Marina. We can start with the first question.

Federico Barroetaveña (CFO)

Hello, Marina, how are you? Since the end of last year, we have been developing an active fuel price recovery strategy, that resulted in prices increasing at the pump almost about 200% in ARS. That allowed us to translate the devaluation that took place in mid-December of last year, and to increase prices in dollar terms, reducing the discount to international parities down to 7%. Although local macro variables and the normalization of international spreads could reduce future results due to that, we are addressing a demanding cost reduction and margin improvement plan in our downstream business, in order to sustain business margins. That's where we are focusing.

Besides, it's hard to predict, mostly due to the volatility in international prices. The company still needs to preserve the prices, both to compensate for the evolution of Argentine pesos, and to adjust to local prices to import parity levels. Regarding the Project Andes, I think that this is... The short answer is yes, but we are gonna—but not now. I mean, we are focusing on the Project Andes at this stage.

Marina Mertens (Head of Corporate Debt Research)

Perfect. Thank you.

Margarita Chun (Investor Relations Manager)

Thank you, Marina.

Operator (participant)

Your next question comes from the line of Leonardo Marcondes of Bank of America. Please go ahead.

Leonardo Marcondes (VP of Equity Research)

Hi, everyone. Thank you for picking my questions here. My first question is regarding the natural gas segment. Is the rise in natural gas prices from MetroGAS for residential use already embedded into your estimates for the year? And what could we expect from this increase in terms of results for the next quarter? My second question is regarding the stock variation we saw during this quarter. I was wondering if you could provide a bit more color on the dynamics that led to this impact of around $125 million this first quarter. And maybe if I can do a third one here. It seems that the drilling and the frac efficiencies have significantly improved this year already, right?

I was wondering if you could provide a bit more color on your target for this drilling and frac speed metrics, and what has been done to improving so fast? Thank you.

Margarita Chun (Investor Relations Manager)

Thank you, Leo. We can start with the first question regarding the tariff adjustment at MetroGAS and the view on the outlook of the year. Please give us one second.

Federico Barroetaveña (CFO)

Yes. So the tariff adjustment is what I can comment is that it was transitory and allowed us to, MetroGAS to pay for all of its operating costs and any financial interest that they had to pay for. That's all on the... And the second question, sorry, I,

Margarita Chun (Investor Relations Manager)

Yes, and the second question was about the stock variation in the quarter. Maybe, Leo, you can detail a little bit more about that, because you know, the stock variation, we cannot have a fundamental analysis about it. You know, it depends on the macro condition in Argentina also. So maybe we cannot share a deep opinion from our management regarding that.

Leonardo Marcondes (VP of Equity Research)

Sure, maybe we can discuss this impact after the call. But I-

Margarita Chun (Investor Relations Manager)

Yeah

Leonardo Marcondes (VP of Equity Research)

... maybe just to highlight here, I wanted to understand maybe the dynamics that led to this... to this impact of around $105 million in this quarter from this effect, what has led to what has impacted this line? Because it was somewhat strong, right, so.

Margarita Chun (Investor Relations Manager)

Well, you know, that is a general reaction in the market. You know, the new management started just by the end of December last year, and there have been many good news in the company regarding the pricing in the downstream business, the Andes Project. There have been many news about it.

Federico Barroetaveña (CFO)

It's just to understand, Leo. Let's say, are you referring to the reduction in the operating cost along this quarter? Is that ... Because-

Margarita Chun (Investor Relations Manager)

Your question?

Federico Barroetaveña (CFO)

We didn't understand what probably your question.

Leonardo Marcondes (VP of Equity Research)

Well, under the total order costs here, we saw a very strong stock variation, but maybe we can discuss this because it's more accounting discussion than a strategic one, right? So maybe we can leave to discuss this afterwards.

Margarita Chun (Investor Relations Manager)

Yes. Leo, maybe I got your question. This is a stock variation inventory, right?

Leonardo Marcondes (VP of Equity Research)

Yeah.

Margarita Chun (Investor Relations Manager)

Because I.

Leonardo Marcondes (VP of Equity Research)

Right.

Margarita Chun (Investor Relations Manager)

- understood, like... Yeah, yeah. Okay. You know, there have been-

Leonardo Marcondes (VP of Equity Research)

Yeah, yeah.

Margarita Chun (Investor Relations Manager)

Huge devaluations, so that is why this is an exceptional evolution in the stock variation. Also, you have to consider that in terms of OpEx, since the new management started, there have been some cost efficiency already achieved. You know, in the upstream business, there have been some tariff reduction in the transportation, also in the downstream business. So in that sense, I think, if we have to analyze specifically the inventory, I have to tell you that the main variation reason was the exceptional devaluation.

Leonardo Marcondes (VP of Equity Research)

Very clear, very clear. Thank you. Apologies for the confusion here.

Margarita Chun (Investor Relations Manager)

No, no, no.

Leonardo Marcondes (VP of Equity Research)

There's the last one-

Federico Barroetaveña (CFO)

Sorry.

Leonardo Marcondes (VP of Equity Research)

drilling and fracking efficiency, right?

Margarita Chun (Investor Relations Manager)

Yes. So your last question was about drilling and fracking efficiency improved, and compared to the targets that we announced in March, right?

Leonardo Marcondes (VP of Equity Research)

Yeah, yeah.

Federico Barroetaveña (CFO)

Well, regarding that, during the first quarter, we've improved our drilling speed materially from two to 290 meters per day. That's 9% above the last quarter. So that's sequentially. And regarding the frac speed, we also improved about 11% to 219 stages per set, per month. So due to that, that's where we are putting most of our efforts in the unconventional business in order to accelerate, but very focused on efficiency.

Leonardo Marcondes (VP of Equity Research)

Very clear. Thank you.

Margarita Chun (Investor Relations Manager)

Thank you, Leo. We can go with the last question since we are running out of time, maybe.

Operator (participant)

Your last question comes from the line of Ezequiel Fernández of Balanz. Please go ahead.

Ezequiel Fernández (Head of Research & Strategy)

Hi, good morning, everybody. This is Ezequiel Fernández from Balanz. Thank you very much for the materials that the IR team provided. Very complete to get the quarterly picture. I have four questions, but they should be quick. Sorry if it's a little bit lengthy on the final one. So, we already discussed a little bit the non-core sales, potential sales. I was wondering if you have any specific plans for YPF Luz, Profertil and YPF Lithium. And I would like to go one by one of the questions, if you don't mind.

Margarita Chun (Investor Relations Manager)

Sure. We can start.

Federico Barroetaveña (CFO)

On these assets, at this stage, no, we don't have any plans.

Ezequiel Fernández (Head of Research & Strategy)

Okay, great. My second question is related to some of the midstream upgrades in place. I understand that there are no ports in Argentina at the moment that can receive VLCCs. I was wondering if there is any work being done on any of the existing ports, or if it's something that you will leave for the Vaca Muerta pipeline?

Margarita Chun (Investor Relations Manager)

Yeah, Eze, we can start with that question. Keep in mind that Punta Colorada is a port that used to be used by the mining industry. And in our case, we are building an offshore facility, not exactly using the port.

Federico Barroetaveña (CFO)

Yeah, that's the case. So this will work only for the new infrastructural system, which I commented, which is Vaca Muerta Sur, and in Punta Colorada, offshore of it, VLCCs will be able to get to that port.

Ezequiel Fernández (Head of Research & Strategy)

Okay, that's great news. And I have two more questions on the downstream side. The first one here is, there seems to be intentions by the government to fully liberalize prices and eventually internal prices, crude prices in Argentina to match Brent with the applicable discounts, of course, and then for anybody to be able to import fuels. If that situation materializes, I think that puts the general downstream sector in Argentina a little bit. I wouldn't say in a bind, but it's gonna be hard to compete with, you know, imported fuels. How do you see that? Do you agree with that view, or refiners in Argentina should be fine even in that scenario?

Federico Barroetaveña (CFO)

Hi, Ezequiel. Well, in order to answer these specific and detailed questions, I will use the opportunity that we have together with us here Mauricio Martin. He's the Vice President of Downstream and Commercialization, so he will be giving a much more detailed answer to you. So I'll pass the microphone to him.

Mauricio Martín (VP of Downstream and Commercialization)

Hello, good morning, everyone. According to your question, we are increasing our local prices according to our philosophy of converging to the import parity levels. Together with that, we are also increasing the local price, crude oil prices, just matching both streams in order to keep our market supplied with local fuels. In that sense, of course, for the future, we are going to reduce our gap in international prices, and that's because we are deploying in downstream sector and a strong optimization plan in order to increase our productivity. Because of that, we intend, and we are making huge efforts in order to keep our margins green.

In that way, I assume that during this current year, we are going to save $2-$3 per barrel in order to keep that margin in values.

Ezequiel Fernández (Head of Research & Strategy)

Okay, so you're saying those $2-$3 per barrel in savings would keep local refiners, or at least the competitive, the YPF refiners-

Mauricio Martín (VP of Downstream and Commercialization)

Right.

Ezequiel Fernández (Head of Research & Strategy)

Competitive vis-à-vis import fuel competitions?

Mauricio Martín (VP of Downstream and Commercialization)

Right. Right.

Ezequiel Fernández (Head of Research & Strategy)

Okay, perfect. My final question on the downstream side is, this discussion is a little bit muted in Argentina, but outside it happens everywhere, which is the impact of electric vehicles in local fuel demand. I don't know if you have any preliminary estimates about when will this start to be a relevant factor for YPF?

Mauricio Martín (VP of Downstream and Commercialization)

Thank you for asking your question. It's quite interesting. We are constantly viewing what the electric cars are making or doing around the world. We have the time machine, I said, because we are looking what is happening in Europe, what is happening in U.S., and of course, in Latin America. So, for our current business plan, that the electricity, the electric vehicle is not really an issue for us. Nevertheless, we are deploying some electric chargers through our station, just as a pilot and just to foresee what the impact of this new mobility model. But for us, it's not an issue. Nevertheless, we are constantly surveying what is happening around the world.

Ezequiel Fernández (Head of Research & Strategy)

Okay, that was great, guys. Thank you very much. That's all from my side.

Operator (participant)

That concludes our Q&A session. I will now turn the conference back over to Margarita Chun and Federico Barroetaveña, please, for the closing remarks.

Federico Barroetaveña (CFO)

Well, thank you, everyone, for participating in this call. We appreciate the questions, and we took time. It's cool. Thank you. Thank you very much.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.