YPF - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the YPF Second Quarter 2023 earnings conference call. Today's conference is being recorded, and 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 that time, simply press the star key followed by one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you. I will now turn the conference over to Pedro Kearney, YPF Planning and Finance Manager. You may begin.

Pedro Kearney (Planning and Finance Manager)

Good morning, ladies and gentlemen, this is Pedro Kearney, YPF, Planning and Finance Manager. Thank you for joining us today in our second 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 second quarter results, and finally, we will open up 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 expectations contemplated by these remarks. Our financial figures are stated in accordance with IFRS, but during the call, we might discuss some non-IFRS measures, such as adjusted EBITDA.

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

Pablo Iuliano (CEO)

Thank you, Pedro, and good morning to you all. Let me start highlighting that this was another quarter in which we continued delivering a solid operational performance. During the second quarter, total hydrocarbon production totaled 530,000 barrels of oil equivalent per day, remaining stable quarter-over-quarter and increasing 2% on year-over-year basis, mainly driven by a sound performance in our shale operations, which recorded an internal expansion of 18%. I would also like to point out the positive evolution of our crude oil production, which continued growing, increasing by 1% sequentially, and by 7% when compared to the same period of 2022. Adjusted EBITDA reached $1 billion in the quarter, decreasing 4% sequentially, and 34% compared to the second quarter of 2022.

The lower outcome compared to the previous quarter came especially on the back of a slight decline in domestic fuel prices in dollar terms and further cost pressures, mostly offset by higher seasonal natural gas sales. Our bottom line came in at $380 million in the second quarter, accumulating more than $720 million during the first half of the year. In terms of our investments activities, we continue ramping up our CapEx plan, which expanded 6% sequentially and 52% on a year-over-year basis, accumulating nearly $2.7 billion during the first half of the year, being on track to fully deploy our ambitious plan for 2023.

On the financial side, free cash flow total is at a negative $284 million, primarily driven by the Maxus settlement agreement signed in April, taking our net debt to $6,312 million and increasing the net leverage ratio to 1.4 times. Excluding the impact of this agreement, the free cash flow would have been flat during the quarter. In this regard, let me point out that on August 2nd, following the satisfaction of all conditions and procedural steps, YPF proceeded with the payment of the settlement amount due under the trust settlement agreement, as all relevant actions against the company, including state and federal, were finally dismissed. Beyond economic results, let me briefly comment that during the second quarter, we achieved an important milestone regarding our key strategic goal of accelerating the monetization of our crude oil resources.

During May, the company resumed structural Medanito oil export after 18 years, as the Trasandino oil pipeline was successfully put back in operation, allowing the evacuation of crude oil to Chile. We also continued delivering encouraging results in terms of well construction efficiency within our site operations during the quarter, averaging 260 meters per day in drilling and 194 stages per set, per month on fracking, maintaining most of the efficiencies gained in previous quarters. More recently, in July, we continued setting new records on drilling and fracking performance, averaging 295 meters per day in drilling and over 235 stage per set per month on fracking. We strongly believe that maintaining our focus in the continuous improvement of our well construction operations in Vaca Muerta is key to maximize value generation for all our stakeholders.

Going forward, although the global and local environments are full of challenge in coming months, we will remain committed to exploit the huge opportunities that we have ahead of us. In that sense, the cumulative results achieved in the first 6 months of year permit us to reaffirm our crude growth strategy, while maintaining profitability and financially prudency at the forefront of our decisions. 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 averaged 513,000 barrels of oil equivalent per day, growing very modestly compared to the previous quarter, and increasing by 2% year-over-year. Crude oil production recorded a new sequential increase of 1% during the quarter, representing the 7th consecutive quarter of oil production growth, coupled with a strong internal expansion of 7%, which allows us to remain on track to meet our targets for the year. Beyond crude, natural gas and NGLs production remains stable on a sequential basis, staying at 37 million cubic meters per day and 43 barrels of oil per day, respectively.

The positive interannual evolution in oil and gas production came as expected on the back of our total share production, which continued delivering solid results, expanding by 18% on a year-over-year basis, with a remarkable increase of 28% in our shale oil production. On the conventional side, we managed to maintain our oil production stable versus the previous quarter, mainly as a result of our continued focus on tertiary production, which increased 17% sequentially and 32% versus the same period of 2022. The positive evolution in tertiary production came primarily from solid results in Manantiales Behr, our flagship project, which represents more than 70% of our EOR production, and the evolution of the pilots deployed at Chachahuen in Mendoza and El Trebol in Chubut.

Moving to costs, lifting averaged $16 per barrel of oil equivalent across our upstream operations, 10% above the previous quarter, primarily due to higher maintenance and pulling activity, combined with an accelerated inflationary environment, not fully compensated by the local currency depreciation. However, lifting costs for our shale oil core hub operations remain almost stable sequentially, at a very competitive level of $4.1 per barrel. Regarding prices within the upstream segment, crude oil realization prices averaged $63 per barrel in Q2, declining by 5% on a sequential basis. This decrease, however, was less pronounced than that of Brent, thus resulting in a compression of the spread versus export parity in the quarter.

On the natural gas side, prices increased about 30% sequentially, to an average of $3.9 per million BTU, as a result of the seasonal adjustments within the planned gas contracts. Zooming into our shale activity, during the quarter, we completed 41 new horizontal wells in our operated blocks, reaching a total of 79 completed horizontal shale wells during the first half of the year. We also continued increasing the rhythm of drilling activity to enlarge our inventory of back wells. In that sense, during the second quarter, we drilled a total of 46 new horizontal wells in our operated blocks, 20% more than the second quarter of last year, 37 of which were in oil-producing blocks and nine targeting shale gas, aligned with our strategy of prioritizing the monetization of our shale oil opportunities.

The new tie-ins during the quarter led our shale production into further expansion. On a sequential basis, our shale oil and gas production increased by 2%, averaging 95,000 barrels of oil per day and 17 million cubic meters per day, respectively, representing 45% of our total hydrocarbon production. When compared to the previous year, shale oil production recorded a remarkable expansion of 28%, as mentioned before, while shale gas increased by 10%. Besides the continuous improvements achieved within our Vaca Muerta operations, previously commented by Pablo, during the second quarter, we set new records on drilling speed for a well with slim design at Aguada del Chañar Block, reaching 400 meters per day, as well as in a fat design well at Loma Campana, reaching 365 meters per day for a lateral length of over 4,000 meters.

As a result, average development costs within our core hub oil operations remained stable versus the previous quarter, at $9.8 per barrel of oil equivalent, as improved efficiency and enlarged production permitted to compensate higher service tariffs. Regarding investment in facilities required to unlock our shale production, in May, we put in operations a natural gas separation and treatment facility at Rincón del Mangrullo, expanding its production capacity by 2 million cubic meters per day.

Lastly, in line with our commitment to make our operations more sustainable, during Q2, we managed to test a pilot for switching one of the frac sets operating at Loma Campana to run 100% on natural gas, the first of its class in Argentina, aiming at reducing about 40% the CO2 equivalent emissions in comparison to a set run on diesel, thus estimating a pro forma reduction of about 20,000 tons of CO2 equivalent per year. As in the previous quarter, let me now briefly comment on the progress achieved in the different initiatives aimed at unlocking the oil evacuation capacity of the Neuquén Basin. Regarding the evacuation to the Pacific, the Trasandino pipeline of the OTA-OTC system was successfully put back in operations in May, after 15 years of inactivity, allowing us to resume structural Medanito oil exports.

As a result, during Q2, we exported 550,000 barrels of oil. Going forward, export volumes shall increase in the second half of the year once the Vaca Muerta Norte Pipeline is up and running, despite the stoppage that took place for 17 days in July, on the back of heavy rains and flooding in nearby areas. As it relates to the new Vaca Muerta Norte Pipeline, in Q2, we continued moving forward with its construction, which is at the 75% completion stage, and is expected to start operations between September and October of this year. On that regard, let me point out that in May, we entered into agreements with 4 strategic partners that joined our project and have contributed to its financing, either through direct equity injections or through ship-or-pay prepaid contracts.

Moving to the projects to expand the evacuation capacity to the Atlantic, Oldelval has been making steady progress, aiming at adding about 20,000 barrels per day of transportation capacity during Q3 of this year as the second stage within the Duplicar Plus project. In addition, OTE has continued moving forward with the construction of two new storage facilities of 50,000 cubic meters each, as well as with the offshore terminal at Puerto Rosales. Lastly, regarding the Vaca Muerta Sur project, during the second quarter, we achieved about 90% completion stage in the engineering design process for the new pipeline and export terminal, also being well advanced on the environmental impact studies required for the project.

Switching to our industrial and commercial segments, domestic sales of gasoline and diesel remained strong during the quarter, increasing by 3% when compared to the previous quarter, driven by an expansion of 9% in dispatched diesel volumes. Mainly due to higher retail demand and seasonality in the agribusiness and power generation sectors, which was partially offset by a contraction of 6% in gasoline demand, driven by the higher summer seasonal sales in Q1. On a year-over-year comparison, diesel demand decreased by 2%, particularly in the agribusiness segment, while gasoline sales rose 5%. In terms of refinery utilization, we recorded another quarter with historical high processing levels, averaging 305,000 barrels per day, which was essentially flat compared to the previous quarter, and 6% above a year ago.

These high processing levels, combined with maximum conversion levels, led to the highest levels of six-month production of gasoline and middle distillates for the last 16 years. As a result, total fuel imports decreased significantly during the quarter, representing only 6% of total fuel sold in the period. In terms of prices, during the quarter, we continued aiming at mitigating to the largest possible extent, the effect of the depreciation of the currency, while managing to reduce the spread versus international parities, which continued in a downward trend during the period. As a result, average fuel prices measured in dollars decreased by 5% sequentially and stood 8% below a year ago, whereas the gap between local fuel prices versus import parity declined to 13% during the quarter, compared to 19% in the previous quarter, and 37% in the second quarter of last year.

Lastly, the downward trend in international oil prices observed during the period negatively affected the basket of refined products other than gasoline and diesel, resulting in a reduction of 9% vis-à-vis the previous quarter, and 27% below a year ago. On the financial front, the second quarter resulted in another period delivering sound operating cash flow, totaling almost $1.3 billion. The difference between the adjusted EBITDA for the period can be explained by positive working capital variations, such as dividends collected from our subsidiaries and the monetization of a tax credit for income tax, prepaid in 4Q 2022. That more than offset the cash deployed for the Maxus settlement agreement. The strong cash generation allowed us to almost fully fund our investment plan during the quarter.

Moreover, excluding the extraordinary negative financial impact of the Maxus legal settlement, the operating cash flow would have covered not only our CapEx, but also interest payments and other cash expenses, and would have resulted in a balanced free cash flow for the quarter. However, considering the full financial effect of the Maxus settlement, our net debt increased to $6.3 billion, and the net leverage ratio, calculated as net debt over the last 12 months adjusted EBITDA, increased to 1.4 times. In terms of financing, during the second quarter, we continued progressing on our financial plan by securing several trade-related loans from relationship banks and tapping the local capital markets. In this sense, during June, we issued a 3-year hard dollar denominated bond for a total amount of $263 million with a 5% coupon.

All in all, during the first half of the year, we have raised about $1.3 billion, representing net new funding of over $700 million, after deducting the debt amortizations paid during the period. More recently, in August, we signed and disbursed a new cross-border A/B loan obtained from a group of financial institutions led by CAF, for a total amount of $375 million. The new loan served as an early refinancing of the existing loan taken in early 2022, thus alleviating funding needs for the next year by $225 million and extending its average life by almost three years, and also increasing the outstanding facility size by $150 million, showcasing once again, YPF's ability to access cross-border funding.

On the liquidity front, our cash and short-term investments increased to almost $1.5 billion by the end of June, compared to $1.3 billion as of the end of March, as we pre-funded part of the financing needs for the second half of the year. In terms of cash management, we have continued with an active asset management approach to minimize FX exposure, ending the quarter with a consolidated net FX exposure of 13% of total liquidity, down from 21% as of the end of the first quarter. With this, I conclude our presentation for today and open the call for your questions.

Operator (participant)

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star and then the number 1 on the telephone keypad. We will pause for just a moment to compile the Q&A roster. We will take our first question from Anne Milne with Bank of America. Your line is open.

Anne Milne (Managing Diector of Emerging Markets Corporate Research)

Thank you very much, and thanks for the call today, and thanks for taking my question. Given the relatively flat production for the year, although you did have strong growth in shale, I was wondering if you could give us some, I don't know, guidance or some framework for looking at the additional infrastructure that you're putting in place right now that you did review, and what we should expect for year-end. That's my first question. The second question is, what will you be watching in terms of the upcoming primary elections and then presidential elections in terms of policies that could affect YPF? Thank you very much.

Alejandro Lew (CFO)

Hi, Anne. good morning, and thank you for your questions. As per your first question, we briefly mentioned in the presentation that in line with the guidance provided earlier on in the year, we believe that the results so far are a good advance towards those estimates. We would expect to continue focusing primarily in in our growth in oil production. We continue to expect to be at around 8% growth year-over-year by the end of the year, which so far in the second quarter, we are, we ended up 7% above the second quarter of the last year. We still expect to be at around 8% for the full year.

Particularly, we expect oil growth to accelerate in the second half, primarily in the fourth quarter, probably expecting the third quarter to be relatively flat and further growth to materialize in the fourth quarter, where we expect a fourth quarter, over the fourth quarter of last year, to be, to remain in line with guideline at about 10% growth. On the other side, on natural gas, given the lower demand that we that we saw in the first half of the year, we will probably see some lower growth or actually to be probably relatively flat on a full year basis compared to last year, that is, as I said, in terms of natural gas.

Basically the all the infrastructure that is being deployed will will serve mostly the purpose of allowing for this expansion in crude oil production, while natural gas, and as presented before, earlier in the year, we are clearly prioritizing crude over gas. Hence, we are again, not that much concerned about this lower growth in natural gas that we expect for the rest of the year. In terms of policy-...

After the elections, I believe I mentioned in the past that, we, you know, it's hard to predict, but, we expect that given the strategic positioning that Vaca Muerta has, and has been commented by several of the different candidates in the presidential elections, we believe that a policy should remain supportive for the constructive development of our sector.

Which is a sector that could, as mentioned before in several occasions, could provide a significant swing in the balance of payment, through not only the substitution of gas imports, but also through the further, incremental oil exports, as all the bottlenecking of Vaca Muerta and as, you know, the different producers in the basin and in the Neuquén Basin, continue with our growth plans, and, you know, as was presented by YPF, particularly in our view, to double up our oil production in 5 years' time. Given those, given that opportunity, we would expect policy to remain supportive for our sector.

Anne Milne (Managing Diector of Emerging Markets Corporate Research)

Okay, thank you.

Operator (participant)

As a reminder, press star one if you would like to ask a question. If you are on a speakerphone, it may be necessary to lift the handset before pressing star one. We will take our next question from Walter Chiarvesio with Santander. Your line is open.

Walter Chiarvesio (Head of Equity Research)

Hi, hello, good morning. I have 2 questions on the cost front. The first one is related to SG&A that, at least for me, was negatively, negatively surprising. It has been taking a higher share of, of revenues in the last couple of quarters. I would like to know from you if this is just salary increases or payroll, because it has been increasing quite above inflation the last couple of quarters. What is the outlook for the rest of the year? If there is any actions that the company could take to reduce that, and if there, if you're going to do something about that? That is the first question. The second question is related to lifting costs.

We can see that lifting costs in the core hub is relatively stable, which lead us to conclude that the conventional lifting cost is growing. Is that because of the tertiary recovery cost in Mallin-Llao well? And if that is going to be a norm looking forward? Thank you.

Alejandro Lew (CFO)

Hi, Walter. Good morning. Thanks for your questions. As it relates to the first question on SG&A, at least on the way I'm looking at the numbers, and we can definitely come back to that later on, but we see SG&A in the second quarter, growing sequentially at a similar pace at the average OpEx for the company. And definitely that's, that's a result of the general context of increasing costs, primarily inflation running above the devaluation of the currency, and that pushing our dollar costs higher. In general terms, in terms of headcount, we have not experienced any particular swing.

I would, I would tend to say that, that's, that's the result primarily of the, the general cost pressures, in line with, with the rest of the OpEx. In terms of lifting, what I can comment is that clearly on the, in the Core Hub, we managed to compensate the higher costs, with, the particular increase in, in shale, production, particularly shale oil. That's compensated, that, that's clearly what allowed us to manage to compensate, the higher costs with, with higher production, and hence, maintaining the lifting, relatively stable, at the Core Hub.

Opposite to that, in the rest of upstream, not only conventional, but also in shale gas blocks, we have seen an increase in per unit costs, clearly related to on the one hand, the incremental OpEx costs, nominal OpEx costs in dollar terms, and then also in conventional, particularly in conventional gas, a reduction in total production. All in all, what we can say is that as long as we continue to succeed in growing our total production base, we will definitely expect to stabilize, and at some point manage to reduce overall lifting costs on an aggregate basis, for as long as we also manage to get under control the different OpEx, particularly in the upstream segment.

Of course, that, that's a challenge, but that's something that we are clearly focused on in, in obtaining and in reaching efficiencies in our cost basis to, to get our per unit costs stable and ideally to decline.

Walter Chiarvesio (Head of Equity Research)

Thank you. Just to follow up, would you expect an improvement in margins during the second half of the year or, or stable?

Alejandro Lew (CFO)

Well, margins are based on, on different variables, right? Clearly, we, we continue to see further cost pressures on the, on the cost side. As I said, we, we are working across all our business units to get efficiencies, to get costs under control, and hence, we would expect at least to maintain, for the most part, OpEx, or we are working to maintain OpEx at least stable in the second half. In terms of revenues, well, that, that will depend on, on different variables, right? Clearly, the way we manage to work on, on our pricing policy and also how the, the evolution of the, of the currency takes place in coming months.

Walter Chiarvesio (Head of Equity Research)

Okay, thank you very much, Alejandro.

Alejandro Lew (CFO)

Sure. Thank you, Walter.

Operator (participant)

As a reminder, it is star one if you would like to ask a question. We will take our next question from Luiz Carvalho with UBS. Your line is open.

Luiz Carvalho (LatAm Head of Research and Managing Director)

Hi, everyone. Thanks, thanks for taking the question, and, glad to talk to all of you. I have basically three, three points that I would like to, to hear and get a bit more color. The first one is the lifting cost trend. You know, we saw lifting costs close to, I don't know, $13 per, I don't know, per BOE last year, and now we are, you know, headed to close to $16. We are seeing some, I don't know, industry, mainly on the, on the service industry cost press, you know, pressure. Would like to hear in terms of what are the perspectives on the lifting costs. The second thing is, is about the funding. I mean, the company, you know, burned a bit of cash this quarter, and, and, you know, very comprehensive.

When, when we look to the projects and mainly on the logistics front, I would like to, I don't know, to have a bit more visibility how you're, the company's thinking about the funding, mainly that by 2024, you have, I don't know, almost $1.2 billion, you know, of that. We understand that, you know, can, can be postponed, can be negotiated, but just trying to understand, let's say, the probably 18 months, funding strategy. Lastly, if I may, on the pricing front, the company did a great job over the past year, reducing the gap between, you know, the domestic prices and the import parity, right?

It came from 40%, 30%, 30% last year to an average of, as you pointed out, of 13%, right, this year or the last three months. Just trying to understand how we should look this forward, mainly with the current FX in it and the current oil environment. How, how can you guys, what, what do you see in terms of price parity scenario for the next couple of quarters? Thank you.

Alejandro Lew (CFO)

Good morning, Luiz. Thank you very much for, for your questions. Let me start with the last one in terms of what to expect in terms of pricing. As you have said, we, we managed to reduce the gap to international parities over the last 12 months, reaching a low level of 13% gap in the second quarter, down from 19% in the first quarter, and from over 30% in the second quarter of last year.

Clearly, that was a combination of our strategy to increase prices in peso terms to at least compensate for the evolution of the currency, which in the beginning of the year, we only managed to do it partially successfully, as our prices declined by about 8% by the second quarter compared to the fourth quarter of last year. Clearly, given the downward trend in international prices, that helped alleviating and reducing the gap between local prices and international prices. Since the end of the second quarter, given the recent rally in international prices, both in crude and in spreads, we have seen the gap increasing once again.

On the one hand, given that we have continued moving forward with increases at the pump that have not fully managed to, to pass through the evolution of the currency. Hence, by today, we are standing about 10% below the dollar prices of the end of last year. Then further to that, given the rally in international prices, our gap today stands probably closer to 30% to international parities. That, that would be the, the, the negative news. Now, what, what we expect for the rest of the year, we would continue to to look for adjustments at the pump, trying to mitigate the evolution of the, of the effects and to the largest possible extent, to looking at reducing the gap to international parities.

However, we are cognizant of the realities of the macro environment, of the inflationary level. As we've been saying, you know, for several months now, we will do the best that we can, but maintaining in mind the realities of our client base and the affordability of our products. So it's hard to predict mostly due to the volatility in international prices, how the gap to international prices will continue to evolve, although we continue to look for reducing that gap to the lowest possible level. In terms of going to your second question, in terms of funding, as was mentioned in the presentation, we managed so far in this first half of the year to raise about $1.3 billion.

Further to that, we have raised on a net basis, given the pre-funding or the early refinancing of the CAF-led loan, which provided for about $150 million in net funding. We have added another over $200 million, roughly $250 million, since the end of the second quarter. With that, we expect I would say two-thirds of the funding program for this year to have already been secured. Further to that, given the early refinancing of the CAF loan, we managed to reduce total amortizations for next year by about $225 million. Roughly speaking, the maturity profile for next year comes down from the $1.2 billion to about one.

We, in terms of tackling our needs for the next 12 months-18 months, we will continue prioritizing the local market, which we believe that provides an interesting arbitrage for funding costs. Of course, we will remain vigilant on the opportunities that the international market could provide to expand the funding sources, to fully secure the funding needs that we have for the next 18 months. I would say that we have been tapping on relationship banks. We believe that there is some further room there, although more limited. We do believe that still the local market can provide significant further opportunities. Beyond that, as mentioned, we will remain vigilant on opportunities in the international market.

Finally, on, on your first question about the, the lifting cost trend, and similar to, to what I responded to, to Walter, we, we clearly seen an increase given the, the cost pressures, related to, related to the general, inflationary trend that, that runs, above the devaluation of the currency. Again, as, as we expect our production, to grow significantly in coming months, particularly in the 4th quarter, we will expect to compensate any further cost pressures, although we will work towards, stabilizing our nominal cost. If anything, any further cost pressures, we will expect to compensate that through, higher production levels, and thus, we would expect for the second half, lifting costs to remain, relatively stable.

Operator (participant)

Ladies and gentlemen, there are no further questions at this time, so I will now turn the call back to Mr. Alejandro Lew for closing remarks.

Alejandro Lew (CFO)

Well, thank you very much, everyone, for, for joining the call today, have a great day.

Operator (participant)

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.