YPF - Q2 2024

Transcript

Operator (participant)

Standing by. My name is Mandeep, and I'll be your operator today. At this time, I'd like to welcome everyone to the YPF 2Q 2024 Earnings Webcast Presentation Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Margarita Chun, IR Manager. You may begin.

Margarita Chun (Head of Investor Relations)

Good morning, ladies and gentlemen. This is Margarita Chun, YPF's IR Manager. Thank you for joining us today in our second quarter 2024 earnings call. This presentation will be conducted by our CEO, Mr. Horacio Marín, and our CFO, Mr. Federico Barroetaveña. During the presentation, we will go through the main aspects and events that explain the quarter results, and then we will go to open the floor for Q&A session, together with our senior management. Before we begin, please consider our cautionary statement on slide 2. 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 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.

On the other hand, as of this quarter, the company decided to actively define CapEx, instead of reporting the total PP&E acquisitions as the best approximation. In this sense, we also included acquisitions of intangible assets and excluded items charged to operating costs during the period, among others. It is worth mentioning that this new definition does not alter the accounting standards of the company. It simply provides a clearer view of the CapEx. Therefore, the analysis of CapEx since this quarter and the comparative periods is based on the new definition. I will now turn the call over to Horacio. Please go ahead.

Horacio Marín (CEO)

Thank you, Margarita, and good morning, everyone. Let me start today's presentation by describing the key milestone and development of the quarter. First of all, during Q2, we produced 20% more shale oil than Q2 last year, highlighting our strategy to focus on Vaca Muerta formation. In line with this growth, we are able to export 25% more crude oil through the Transandean Pipeline compared to the previous quarter. This was combined with zero fuel imports in our downstream business, while continuing to reduce the gap between local fuel price to import parity to 5%. Operationally, in the upstream, we hit a new record in drilling and fracking speed, both key metrics in terms of efficiency and fully in line with our guidance for the year. In the downstream segment, we also reached an all-time high production record of gasoline in May at La Plata Refinery.

A few days ago, we made significant progress in the Andes Project. We successfully executed 6 SPAs for 6 clusters, representing a cornerstone for the transformation of our production matrix in order to maximize our profitability. We also started the construction of the first tranche of Vaca Muerta Sur Oil Pipeline, and we are making progress putting together the producing consortium for the second tranche. Finally, together with our strategic partner, we selected the location of the Argentine LNG production in the province of Río Negro. We will be sharing details regarding all the news after presenting the quarter results. Now, I will turn the call over to Federico to go through the details of the second quarter's figures.

Federico Barroetaveña (CFO)

Thank you, Horacio. Revenues reached nearly $5 billion, 15% up sequentially, mainly driven by higher seasonal sales of gas and local diesel demand, as well as better fuel prices and growing oil exports to Chile. These effects were partially offset by gasoline demand contraction and lower conventional production that affected our Patagonia's operations due to extreme snowstorms and climate conditions that started by mid-June and continued until early August. Interannually, revenues grew 13%, mostly on the back of a rebound in fuel prices, plus even higher oil exports, partially offset by a 6% drop in fuel demand. Adjusted EBITDA totaled $1.2 billion, 3% down sequentially due to a cost increase in dollar terms, reflecting the catch up with December's devaluation and a drop in conventional output that I mentioned before.

Interannually, it recorded an expansion of 20%, maintaining a steady EBITDA margin of 24%. This consistently highlights our operational efficiency despite challenging conditions, as we had in Patagonia during this period. Our bottom line continued positive at $535 million, 19% down sequentially, mainly due to lower equity income and increased exploration expenses. Interannually, the bottom line was 41% up on the back of better operating performance, besides lower amortization linked to the impairment of conventional mature fields. Total hydrocarbon production averaged 539,000 barrels of oil equivalent per day, rising 2% sequentially and 5% interannually, driven by a solid performance in our shale operations, which is our core business and current focus.

In terms of investments, we deployed $1.2 billion, 3% up sequentially, and we started with the construction of the first tranche of Vaca Muerta Sur Oil Pipeline, in addition to the investments in refineries to reduce sulfur content. Interannually, CapEx was 6% down, mainly as a consequence of last year's inflationary context. Notably, over 70% of the quarter's investment was concentrated in the upstream, mostly for shale operations. On the financial side, we reported a negative free cash flow of $257 million. Although the adjusted EBITDA was similar to the deployment of our CapEx, Q2 was mainly affected by higher seasonal sales, thus increasing working capital in addition to regular debt service, partially offset by a dividend collection from affiliates.

As a result, we posted a slightly higher net debt of $7.5 billion, while maintaining net leverage ratio at 1.7 times, fully aligned with the target of the year. Now, I will turn back the call to Horacio to continue with the operating performance.

Horacio Marín (CEO)

Thank you, Federico. In the upstream segment, the total hydrocarbon production grew by 2% quarter-on-quarter, and 5% year-on-year, driven once again by shale contribution, which continue its upward trend and now represent more than half of the total output. Net crude oil production continue at high levels, reaching almost 250,000 barrels per day, on the back of a 20% interannual shale expansion, offsetting the drop in conventional production due to extreme climate conditions in Patagonia. Our operational activities were affected by heavy snow that result in the shutdown of our facilities for safety reasons. During June, our production decreased by around 45,000 barrels per day during 13 days. Since the beginning of August, the climate has improved, and we continue to resume activities to normal levels.

Despite this contraction, it's worth highlighting that 9% of the conventional output came from tertiary production, increasing by 6% interannually and minimizing this impact on the natural decline in mature fields. Beyond crude oil, natural gas production grew by 7%, in line with increased evacuation capacity from Neuquén Basin through the new Néstor Kirchner Pipeline. Additionally, the installation of the new turbine expander in Loma La Lata contributed to a 10% increase in NGLs production. Moving to lifting costs, we record $16.2 per barrel of oil equivalent in Q2, remaining stable interannually, but 25% higher sequentially, primarily due to the catch-up of costs in dollar terms with December devaluation, coupled with the lower conventional production already mentioned before.

This cost inflation also impacted the lifting cost of our core hub blocks that is still at $4.7 per barrel of oil equivalent on the gross basis, recording a larger increase due to specific higher pulling and maintenance costs. Regarding prices in the upstream segment, crude oil realization prices averaged $71 per barrel in Q2, 4% up quarter-on-quarter as a result of a better pricing environment in the local market, an upward trend in international prices. On the natural gas side, prices reached $4 per million BTU, mostly driven by the seasonal winter price of Plan Gas that started in May. Now, walking through the performance of our shale activities. In Q2, we drilled 58 horizontal wells in our operating blocks, all of them oil. 35% more than quarter-on-quarter, and 26% more year-on-year.

It's worth noting that shale oil production hit a new record, delivering 130,000 barrels per day. 87% of the shale oil production came from our core hub oil blocks, Loma Campana, La Amarga Chica, Bandurria Sur, and Aguada del Chañar. In terms of efficiency within our shale operation, we achieved another quarter of outstanding drilling and fracking metrics, averaging 292 meters per day of drilling and 237 stages per set per month on fracking, fully in line with our guidance for the year. Also, it's worth mentioning that last June, we achieved the highest lateral length drilling speed for one shale well in La Angostura Sur block, surpassing 1,500 meters in a single day.

Considering all these metrics, we plan to ramp up shale oil production in the second half of the year to achieve the target of more than 120,000 barrels per day on average for 2024. As a final conclusion, let me highlight that today's production has reached nearly 120,000 barrels per day, in line with our target average of the year. Moving on to our downstream segment, processing level averaged 299,000 barrels per day, recording refinery utilization rate of about 90%. Although the processing level was essentially flat compared to the previous quarter, it decreased 2% interannually, mainly due to limited availability at the La Plata Refinery, affected by a shutdown, extreme weather condition, and a brief disruption in the pipeline during a few days, which was already restored.

Despite this decline, let me mention that we set the record high gasoline production in La Plata Refinery, thanks to the new gasoline hydro treatment plant and the revamping of existing units as part of our new fuel specification project to reduce sulfur content and improve fuels quality. In this sense, during Q2, we also continued making progress on the revamping of Luján de Cuyo Industrial Complex, expected to be fully operational by next year. Fuel sale volume experienced a sequential reduction of 2%, mostly due to an 11% drop in gasoline sales, mainly due to a contraction in retail premium demand. It was partially offset by a 5% expansion in diesel sales on the back of the seasonal demand from agribusiness and higher sales to the industrial segment.

It's worth noting that besides the solid performance of our refineries, we effectively addressed the increased diesel demand by reducing inventory levels, thereby avoiding fuel imports. Interannually, fuel sales declined by 6%, particularly affected by diesel demand contraction across both retail and industrial segments. However, let me point out that we are witnessing roughly a 5% demand recovery in July versus June. In terms of prices, during Q2, we continued adjusting local fuel prices, mainly aiming to mitigate the impact of the devaluation and narrowing the gap to international parities. As a result, average fuel prices measured in dollars increased by 3% sequentially and 14% interannually, while the spread versus import parity decreased to 5% in Q2, compared to 7% in Q1 and 13% in Q2 last year.

Lastly, efficiency-wise, since the beginning of the year, we have been focusing on the optimization of our cost structure, implementing several measures, such as the reduction of a specific fuel consumption of boilers and logistic rearrangement, among others. Also, during Q2, we created a new specified and focused team to plan, monitor, and promote the new efficiency and productivity standard within the downstream business. I will now turn the call over Federico to go through our financial results for the quarter.

Federico Barroetaveña (CFO)

Thank you, Horacio. Switching to the financial front, let us start with cash flow evolution. Although our Adjusted EBITDA was similar to the deployment of our CapEx, working capital items pressured the liquidity, such as increased seasonal billing of natural gas, payment of imported goods and services deferred from last year, and higher purchases of crude oil to third parties due to lower conventional production, partially offset by late collections from Q1. These effects were partially offset by dividend collection from affiliates. Considering also the regular interest payments, free cash flow came at a negative $257 million. In terms of financing, during Q2, we paid the amortization of two international bonds for a total of $268 million, and we issued a local hard dollar bond for $178 million at a yield of 6% with a two-year maturity.

Additionally, we continued securing trade facilities and other loans. After Q2, we issued a local dollar-linked bond for $185 million at a 0% yield with a two-year maturity and promissory notes for $100 million at 0% yield, with maturities of up to 18 months. On the liquidity front, our cash and short-term investment decreased by 13% sequentially to $1.4 billion as of the end of June. Therefore, our net debt increased to $7.5 billion, while maintaining a stable net leverage ratio of 1.7 times. Regarding our maturity profile, as of the end of June, the company faces debt maturities in the next 12 months for $1.4 billion, mostly short-term trade facilities for $611 million, both with local and international banks, which we are planning to refinance.

The remaining portion includes international bonds for $312 million, and local bonds for $177 million, among other loans. I will now turn back to Horacio to continue with the presentation.

Horacio Marín (CEO)

Thank you, Federico. Let me briefly recap on the progress we made regarding our conventional mature field strategy. Last February, we obtained the approval of our board of directors to exit from around 50 blocks that contributed less than 1% of the company Adjusted EBITDA in 2023, with an investment of around $800 million. This important move allow us to reallocate resources to our most profitable assets located in Vaca Muerta, enhancing our focus on high return shale projects and optimizing our overall portfolio. In April, we launched the first stage called Andes Project, making the official sale of 30 blocks, grouped in 11 clusters. During the virtual data room phase and Q&A session, we attracted significant interest, totaling over 500 interactions from various players. By June, we opened bids and received more than 60 offers from the over 30 local and international independent companies.

Following a 30-day comprehensive analysis of all qualified bidders, this week, we have been able to execute 6 SPAs with different companies for 6 clusters. Also, we are currently progressing on the SPAs of the remaining clusters. Regarding the blocks that are not included in the Andes Project, most of them located in the provinces of Santa Cruz and Tierra del Fuego, we have already initiated negotiation and expected to move forward with direct assignment and/or reversion to the provincial energy companies in the near future. Otherwise, we will consider the possibility to include these blocks in the second Andes Project. As an updated summary of this strategic initiative, we maintain our confidence about closing the transaction for all the blocks by year-end, on track with the prospective timeline and terms approved by our board last February.

Now, let me comment on the progress achieved in the oil midstream expansion to unlock the evacuation capacity in the Neuquén Basin. Regarding the evacuation to the Atlantic, by the end of May, we initiated the construction of the first tranche of what we named Vaca Muerta South Oil Pipeline, or VMOS Project, connecting Vaca Muerta formation to Allen. Currently, Allen serves as the access point to the Del Valle System, facilitating transport to the province of Buenos Aires. Once the second tranche of VMOS is operational, it will also be connected to the oil export dedicated port of Punta Colorada in the province of Río Negro. The first tranche has a length of around 130 km, with a CapEx of roughly $200 million.

We expect this facility to become online in Q1 next year, with a starting capacity of more than 350,000 barrels per day, to be initially utilized currently with Del Valle's ongoing expansion, expected by year-end. The VMOS first tranche's capacity shall be expected to over 450,000 barrels per day by the second half of 2026, when the second tranche starts its operation. The second tranche of VMOS has a length of roughly 440 kilometers, with a CapEx of about $2.5 billion. The design starting capacity is 180,000 barrels per day, planned to be expanded to around 500 by 2027. Also, the pipeline system will be designed to reach more than 7,000 barrels per day of total capacity, if the basin requires.

This project is a game changer for YPF and Argentina, increasing significantly the export capacity and the bottlenecking shale resources of Vaca Muerta formation. This tranche of VMOS will be a fully export dedicated infrastructure, and its offshore terminal will be located at the deep water port that will allow VLCCs, the oil mega vessels that transport around 2 million barrels. Besides lower tariff, this vessel opens up new international market opportunities for all of Argentina producers, such as the Asian market. YPF is currently leading the development of the project as the main shipper, and we are starting it as an export consortium pipeline, by which the local oil producer or operator of Vaca Muerta formation shall be able to commit and secure a portion of transportation capacity.

In terms of progress to date of this strategic initiative, let me share that from the technical point of view, we have already completed the basic design engineering for the pipeline, and we are progressing the design review of the storage terminal and buoy system. Simultaneously, we have secured all key government approvals and environmental permits, and we are in the process of receiving final quotations for the EPC and line pipe supply. Right now, we are focusing all efforts to speed up the progress of receiving LOIs from the different export producers based on terms that will allow us to start the project finance arrangement. So far, we have received LOIs covering around two-thirds of total project transportation capacity, and we are optimistic to conclude this process during Q3. Also, we have the intention to apply for the RIGI once fully regulated.

Continue our focus on growing oil export, accelerating evacuation to the Pacific. During Q2, we increased our oil export to Chile, delivering 29,000 barrels per day through the Transandean Pipeline, reaching an export revenue of nearly $220 million. Note that this is 25 more than Q1, and represent now 11% of our oil production. This export one year ago were only 3%. Before ending our presentation and going to Q&A, let me briefly comment on the progress made regarding our LNG process so far. By end of July, YPF and its strategic partner defined the location of the project in Río Negro, the province of Río Negro. The decision was taken after a deep analysis of technical, economic, environmental, geographic, fiscal, regulatory aspects. In this sense, YPF decided to hire, at its expense, Arthur D. Little, who reconfirm our analysis conclusion.

Also, let me recall the importance of this project, which once completed, is expected to contribute around $15 billion annually to Argentina export revenues, significantly boosting the country's balance of payments. I will mention in previous call, we expect to own between 25%-30% of the total LNG capacity, engaging the rest of the industry to join this project. On the other hand, it's worth mentioning that a few weeks ago, the Incentive Regime for Large Scale Investment, also known as RIGI, was enacted, providing a series of incentive we consider the key way to place Vaca Muerta shale gas in the global market, transforming YPF Argentina in a world-class LNG exporter. So with this, we conclude our presentation and open to the floor questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you've 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'd like to withdraw your question, simply press star one again. If you're called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset, ensure that your phone is not on mute when asking your question. For today's session, we ask that you please limit yourself to one question and one follow-up question. Again, press star one to join the queue. Our first question comes from the line of Bruno Montanari with Morgan Stanley. Please go ahead.

Bruno Montanari (Analyst)

Good morning, everyone. Thank you for taking my questions. I have two quick ones here. The first one, would the company still be interested to look at potential shale oil acreage, which is available for a sale in Argentina? It's widely known that Exxon is leaving the country, so to the extent you could comment on that, it would be great, how it would potentially complement the company's portfolio and, and much more focused on shale. And the second question is about lifting costs. We understand the reasons behind the increase in the quarter.

So, looking for any trends you can provide us for the coming quarters, if lifting costs would remain stable at the levels from Q2, or if there could be any relief into the coming quarters, that would be great. Thank you very much.

Horacio Marín (CEO)

Okay. Thank you very much, Bruno. First question, as you mentioned, the pillar one of YPF is to focus in the more profitable-

... asset or, or, it what is Vaca Muerta oil. So in, for our goal, always we are going when there is selling of very good asset, because it's a way to improve the profitability and the, and the profitability for all the shareholders. Saying that, this is a confidential process, so I cannot - Sorry about that, but I cannot give you more information on that, okay? Regarding the lifting cost, in this quarter, we had particularly issues and, but your question is for what I think that it will be in the second half, and we are foreseen and we are working to have an average for all. I would, we think that we will have a different pri - lifting cost in both quarters, but we are increasing.

Remember that we are producing today. Yesterday, our production of unconventional, the daily rate, the daily report was 127 barrels per day. So this is very good increase. We are foreseeing that for the end of the year, we will have 140,000 barrels a day of non-unconventional, what is totally our focus right now. And we foreseen that the lifting cost for the second half, it will be $4.4 per barrel. It sounds okay, the answer for you?

Bruno Montanari (Analyst)

Sure. Just to follow up, this $4.4 per barrel is just for core shale hub, right?

Horacio Marín (CEO)

For core, yeah. Yeah, yeah. What is important for our EBITDA is the unconventional.

Bruno Montanari (Analyst)

All right.

Horacio Marín (CEO)

Remember that we have the Andes Project, and we are going out of our conventional deals.

Bruno Montanari (Analyst)

All right.

Operator (participant)

Our next question comes from the line of Luiz Carvalho with UBS. Please go ahead.

Luiz Carvalho (Analyst)

Hi, everyone. Hi, Horacio, Federico, Margarita, thank you for taking the questions, and congratulations on the results. I would like to touch base on two, two main points here. The first one is about the, I would say, the free cash flow profile for the next couple of years, right? I mean, the company's unlikely to generate cash this year, of course, because of the investments that have been made. But when I look to the, let's say, the debt profile, in 2025, you had something close to $2 billion to be, you know, to be paid, and sequentially in 2026 and 2027.

So my point here is that I would like to understand from you how you see the external risks, like if the crude prices drop or if there's any delays in terms of the production ramp up or the, let's say, the pipeline construction, you know, being implemented in order to allow you to flow the production, or any kind of other bottlenecks that could put your, I don't know, your balance sheet in a bit more dedicated situation, you know, a bit forward. The second thing is about the, let's say, the crude and fuel prices.

Of course, we've seen a significant improvement, you know, when we compare to the past, but when we look in terms of CapEx and OpEx, it seems there is still, I would say, at a bit higher level. So if you can share a bit your expectations in terms of CapEx and OpEx reduction or, you know, efficiency gains, for to the second half of this year and 2025, would be great. Thank you.

Margarita Chun (Head of Investor Relations)

Thank you, Luiz.

Horacio Marín (CEO)

Hey, the-

Margarita Chun (Head of Investor Relations)

And start with the first one.

Horacio Marín (CEO)

Yeah, it's a lot of well, I would say, for a second language guy, it's a very long question, okay? Luiz, and thank you for the question. I know you, I know you personally, so I remember you. If I not answer what you are expecting, please ask me again, because it was a long question. But I tell you the I try to answer the first part of the question. Our expectation of net cash flow are exactly the same as when we arrived here, and we are follow very well the track of the results. For 2024, we will be balance of neutral in operational point of view.

So our net cash flow, it will be negative because of our interest payments, okay, or debt, okay? For next year, we are foreseeing that it will be neutral, in the order of neutral, but we are working so hard, so hard, so hard that maybe you will have some difference, okay, for going up, okay? Because we are working so hard in efficiency. From there on, we are foreseeing positive cash flow. All of that is without not talking about LNG, that we are looking for project finance. No, not invest a lot in the next year, so we will be different. And also, it will be without M&A, okay? Regarding the prices, if the pricing goes up, okay, you will have much better results, okay?

Much better results. And why we decide to go out for the mature field? Because we are not efficient on that, because in that way, this company with lower price will not be resilient. But from next year on, because our program, our focus and where we are going, we will be resilient for very low prices, because we'll be almost, I would say almost, now an unconventional company with very efficient way of work. We are the best company in the results of the operational. So I'm very happy to work in this company, work hard with all the team, because we are going to have very low efficiency. We start to... It's not in the question, maybe for everybody and to share with you.

For the upstream side, we started a new program, what we call Toyota Well, and we signed a contract with the Toyota company. We are going to try to put the, the efficiency of the car industry in the world. That is very disruptive program. Everybody is very happy on that. And also, I would say, the, the service company come to see me from United States, the CEOs, and from Europe, and everybody knows that it will be a change in efficiency in, in Argentina. It's very disruptive, and it will be extraordinary, for the efficiency way of work, because we will be focused in, in reducing the, the well cycle, and that, it will deliver much more EBITDA for the coming years from now.

From the downstream part, we already have a very, very ambitious program that is called Growing by Efficiency, that we have more than 100, 100 initiatives in the La Plata. We do the La Plata Refinery, because it's the biggest that we have, and the biggest of this in Argentina, and it's a very big refinery. We have more than 100 initiatives that they will put the margin much more up. My role when I come with YPF and all the team of downstream is to have the margin in this refinery and the refinery, YPF, in a very good benchmark with the American refinery. So we need to increase by efficiency our margin, and we are in there, okay? I don't know if I answer your question or you need...

If I lose something that you ask me, please repeat, and I will answer.

Luiz Carvalho (Analyst)

No, no, Horacio, very clear and, and thanks for, for the complete answer, and looking forward to seeing you in person again, soon. Thank you.

Horacio Marín (CEO)

Okay. Thank you.

Operator (participant)

Our next question comes from the line of Vicente Falanga with Bradesco. Please go ahead.

Vicente Falanga (Analyst)

Hello, everybody. Thank you for taking my questions. I have two also. You know, the first one, congratulations on the drilling speed metrics. Do you think there's still room to increase the 1,500 meters per day, or are you already close to a limit? What will be your dream target here in terms of meter drilled, drills per day? Then my second question, when will YPF and the other interested parties decide on how to split the interest on the Vaca Muerta Sur pipeline? Could we have a decision already this year, maybe next? Thank you very much.

Horacio Marín (CEO)

First of all, I would like you to know, thank you, Vicente, for the question. But first of all, I would like for you to know me, because I am a crazy guy, okay? I've, I'm not using Adidas in my life. I'm sorry if I say took Adidas, but I love. Impossible is nothing in life. So what I'm going to, the technical limit for me is the ceiling. I don't care after if I cannot improve, but I push, and always when you push, always you obtain something. Every time that you think I arrive the limit, you have to go out of the company. That means that you are. I am an old man, but means that you are an old man from the mind. So, I like you to know me.

I am a crazy guy. I don't want, I don't like that you arrive to the, to the limit. For me, it's not the limit. The guys on downstream, they don't imagine what I'm here. As soon as we have that margin, we will have another new program. Okay, that is for the first part. For the second part, you ask me?

Margarita Chun (Head of Investor Relations)

Taking Vaca Muerta.

Horacio Marín (CEO)

The Vaca Muerta. Okay. We have already signed two-thirds of the compromise for that project. I'm totally focused, I'm focused in everything, but we are totally focused on that because I don't want to make losing money for the shareholder that pay me my salary, and so we cannot delay one day. Okay? You know that we are discussing with one big company in United States, and we are in a good shape, but we will, as soon as we have an agreement, I will tell you. But we, we are, our program is to mobilize the equipment in November, and that the program is the program.

Yesterday, we said that we are doing that with all the industry in the same, in the same table, and we think that in a couple of weeks, we will have 100% already signed, and it's our focus. From the part of the split, remember, YPF has to lead the industry, and we are leading the industry. And we that our idea is to do as simple as possible. The more simple, because the midstream is not the focus of our company, of any company, of the upstream, the others. So the focus is to make and increase a lot the production. We are going to increase a lot the production and conventional.

So as simple as it is, what we are doing is the following: the percentage of your paying is the percentage of your capacity. We are going to make, like, an SPV for with all the companies, and at the beginning, we are saying not to have a lot of partners. Any partner that have more than 10% of the share, he will have a chair in the board of that company. If you have less than 10%, we are not to have a board, because if not, it will be very difficult to manage the company. Okay, I think I answered your question. Tell me if you are comfortable, or you need more detail.

Vicente Falanga (Analyst)

Yes. No, that's, that was very complete and interesting. Thank you, and, and looking forward to meeting you soon. Thank you very much.

Operator (participant)

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

Alejandro Demichelis (Analyst)

Hi, good morning, all. Thank you very much for taking my questions. Well, actually two questions, if I may, please. The first one is, you mentioned the sales growth that you're expecting by the end of this year, 140,000 barrels a day. What can we expect, say, for 2025, 2026, 2027? That's for the first question. Then the second question is, you gave us a good update on Andes, but also when we look at the quarter, you mentioned that some of the margin, refining margin impact was because of third-party oil purchases. So once you are out of those conventional fields, should we also expect that your refining margin is structurally lower because you need to buy more third-party oil?

Margarita Chun (Head of Investor Relations)

Thank you so much. We can start with the first question, Ale, and then we, if you can, you can repeat the second question, if you don't mind. The first question was about the shale production.

Horacio Marín (CEO)

Okay.

Margarita Chun (Head of Investor Relations)

25 onwards.

Horacio Marín (CEO)

25 onwards. We are working, thank you, Alejandro, for, for the question. We are working in short term, medium term, and long-term strategy all day. I would like—I prefer to give you the guidance, and I compromise here, with you and also with all the guys that they are in this call, that the day you invest on next year, I give you the guidance for the three years with very good... It's not that I cannot tell you, because there are some issues or things that I will have a better idea for by the next of the year. I prefer, if you don't mind, in March, I think it's in March or March, I prefer there, I give you a very clear answer for everybody, and with my personal compromise on the result, okay? If you don't mind. Is it okay for you, or?

Alejandro Demichelis (Analyst)

Yeah, it is okay. But can you give us then how many more weeks do you expect to add, say, in 2025, then?

Horacio Marín (CEO)

Okay. It depends on several questions that you have, that was today. Today, we think that it will be 15, because next year it will be a year of not growing, because there will be a growing on capacity on Vaca Muerta. Remember that Vaca Muerta, by the end of December, they will increase the total capacity for all the industry in the order of 15,000 barrels a day, and in April, 200,000. And so we are going to always, we are going to go efficiency, reducing working capital as much as we can, so and fill our capacity.

If we have a spare capacity and we don't have the reach, for sure we are going to agree in. Remember that is an open access here, okay? And also, always I will look at the EBITDA, CapEx and profitability of the company. I'm not going to be crazy into higher risks and not deliver efficiency for all the shareholders, okay?

Alejandro Demichelis (Analyst)

No, that's great. Thank you. And, yes, sorry. The second question that Margarita asked me to repeat was, once you get out of the conventional fields, you will need to buy more conventional oil from third parties for your refineries, right? So the question is: Would that also put a bit of an impact or pressure on your refining margins structurally?

Horacio Marín (CEO)

Yes, but remember that in that I have to talk about Argentina. Argentina, we are almost now in international prices. The policy of Argentina, the change of Argentina in the oil, is to grow in that region. So, they will be not different to have or not to have that. And remember also that we have an increase in our production, and also we are with some exit that we have in the Andes. We have some agreements of buying the oil. In the Mendoza part, we are for everybody, the best way, efficiency to sell the oil is to YPF, because it's a hinterland that is like closed. It's not easy to open that.

So that is more easily to the other, it will be to, as it is today, they will be at the refinery. But our role is because we are going to increase the production in the next years. I cannot say next year because it will be the other. It will—We are focused also in the export. As soon as we increase a lot, I think that question doubt, it will be out, because you realize that we are going to be a company that we can buy here easily, and we can and we can explore a lot, okay?

Alejandro Demichelis (Analyst)

Okay, that's great. Thank you very much.

Horacio Marín (CEO)

Oh, thank you.

Operator (participant)

Our next question comes from the line of Andres Cardona with Citi. Please go ahead.

Andres Cardona (Analyst)

Hi, good morning, Horacio, Fede. Congrats on the results. I have two questions. The first one is about any progress on non-core asset divestiture beyond the conventional crude processes that you have mentioned. If we can expect any announcement over the next 12 months. I remember you wanted to focus on the core business and mention some assets that could be divested there, so any update? And the second one is, there were some interesting highlights about early results on Palermo Aike. So if you can share some thoughts about those. Thank you.

Horacio Marín (CEO)

Okay. Thank you, Andrés, for your question. You hear Margarita, and I don't know why she tell me Andrés, because I know that you're Andrés. But anyway, all right. Remember, because they don't like my English, so that's why they always repeat me the names on that. But sorry about my English, it doesn't matter. I put the best that I can, okay? For the first, you are talking about pillar two, but I'm totally. I make always a control on myself.

The board of directors approved last month, and we start the process of seeing proposal, and after we come back, but to sell is YPF Brasil, which is a lubricant company, YPF Chile, which is a, we are selling some lubricants and ship. Those are, if you see the EBITDA, is not for YPF. So we are going to sell that. Also, we are in a process to see and sell Refinor, that for us is not a key asset. We start the negotiation and going to the way to go out there, because it's not for YPF also. For if you are talking about Metrogas, we are going to sell, but not today, because there, if I sell today, I'm-...

I think I'm now doing my job for you, for the shareholder properly, because I'm selling with when, when Argentina, we will improve a lot in the macro and when the, is reducing the, the macro will be stabilized, the, the price of Metrogas goes up. So, it's not like I'm not focused on that in this, in this company. The guy that is working on the general manager has totally the idea that, we are going to sell. But we are waiting on that because I think there, as, as I will repeat, it's better for you and for all the shareholders, okay?

Profertil, what is, you can say also in the downstream, but we call it in gas energy business because Profertil uses our gas, it is very, very profitable. And so because it's very profitable, it might incoherence in saying focusing our here, but in energy. But I have now a good slogan to maintain, that is gas that make food, so energy making food. So in there, I take out my idea. But it's very profitable, so we are going to maintain, we are going to see what happened with the selling on the other. And at that moment, we're going to look at partners to duplicate the plant. But this is, you don't need to put money there.

It's the project finance or with a new partner, we will see how to do that, okay? And in Y-TEC, what is the research and development company, we are totally focused now in energy. There is no more talking about harvest or crops or nothing to do with that. And also last month or last weeks, I don't remember exactly the date, sorry for that, but it was, I think two weeks ago, we started a new program, or we call Más or Plus, in English, Plus Vaca Muerta. What is to work with the oil industry to solve a common problem for the industry. I don't know if it's okay for you, or you need more detail from me?

Andres Cardona (Analyst)

This is great color, and I just wanted to ask about YPF Luz. What are your thoughts on that asset?

Horacio Marín (CEO)

YPF Luz, sorry, I forgot YPF Luz. YPF Luz is a wonderful company, and we always have a positive EBITDA. It is good, we are growing. They don't need capital from YPF Group. We always finance with the new projects, and we are growing now. We are a company that produce renewable for 700 megawatts, and we are an oil and gas company that consume 420 megawatts. So we are in a good shape in the transition period, okay? You can make the numbers there.

Palermo Aike, and Palermo Aike, sorry, I forgot that, but Palermo Aike is one week ago, I would say we are producing only water, but it's not I'm saying that it will be water, okay? Because one week ago, we take out very low water percentage of the fracture. We are in less than 5% of total water that we use in the treatment. It has a very good pressure, very good pressure. The pressure is double the water, what means similar to shales that produce. The reduction on pressure with we have in a choke of 4 millimeters is very good. It's comparing with my experience in another shales.

The well is in the order of 700 meter, 760 meter, and the rate is very good. We are in 4 millimeters in 100, and if I no remember, one is 150. Is 150 cubic meter, what is 1,000 barrels a day. And so we are expecting and really, I cannot tell you, I cannot tell you it will be oil. The pressure is a very good index on that, and I think in the coming weeks, you will see the result, and we are expecting that the first oil, if it come in the next weeks. Okay?

Andres Cardona (Analyst)

Thank you. Thank you, guys, and congrats on the progress in your business.

Horacio Marín (CEO)

Thank you.

Operator (participant)

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

Marina Mertens (Analyst)

Hi, good morning. Thanks for taking my questions. I have two questions. So the gap between local prices and international parities has narrowed significantly. If Brent continues to decline, how do you foresee local prices adjusting? Could they converge or even exceed export parity? And the second one, regarding the downstream segment, this quarter, it showed higher prices, reduced volumes, and normalized margins. How do you anticipate these dynamics to play out in the next quarters? Thank you.

Horacio Marín (CEO)

Okay. First part of the question, with the current prices of today, our weighted average is in the order of 3% lower than import parity products. If they continue to reduce, that is your question, we will reach import parity, and when you have import parity, if you are a free market, you have to take into account the free rider could make you in a problem because they can import and make money, okay? So, we have to understand, and then I understand that you are abroad, and for you, it's very difficult to now say what happened in Argentina. But so far, where we are going is in a free market.

And here we have, you can imagine that the thing that happened is the same in the United States, for example, a country. So if we reduce a lot, I always declare that I will be the first guy to reduce the gasoline. But also, if the price increase a lot, I will increase the prices. Sometimes when there is a spike in prices to the roof, very, very high, it happen in all the countries, that you cannot in one day to increase that, even in different countries also. But we have to, and we are working as it will be free market and decide by demand and supply, and see what is the competition and on that, okay?

I understand that for everybody, it's difficult to understand that, but we are doing that. The second part is with the margin, Marina, and the second part, you ask me for the margin of the downstream, no? Yes?

Marina Mertens (Analyst)

Yes. Yes.

Horacio Marín (CEO)

Okay. This quarter, particularly because of several problems, no, because of maintenance stoppage, also because of the problems in the weather in the south, we could not refine, even though we have a record, we could not refine all the quarter as is expected because we didn't have the oil to do that, because of that problem, but problem and maintenance, okay? So, as you make two numbers, because you cannot reduce in the figure, and so that's why our margin, I don't like also, okay? Our margin was a little less than expected.

What we have is, you have to spare for the second half, is that it will be better than that, but don't imagine to duplicate. Duplicate is our program, what we call Growing by Efficiency. That it will take times, we are working hard. So I think I answered the question. Tell me if it's okay for you, or you need more details.

Marina Mertens (Analyst)

No, it's okay. Thank you.

Margarita Chun (Head of Investor Relations)

Thank you, Marina. Since we are running out of time, we are gonna take the next question as the last one.

Operator (participant)

Our final question comes from the line of Leonardo Marcon with Bank of America. Please, go ahead, please.

Leonardo Marcondes (Analyst)

Hi, guys. Good morning. Thanks for taking my questions. My first question is related to the divestment of the conventional assets. Although the sales for some assets under the divestment plan have already been signed, do you guys see any risk for the conclusion of these sales as they still need to be approved by the provinces? And my second question is more regarding the capital allocation. With the conclusion of all the assets under sale, their cash generation should improve by around $750 million in the next year, right? So I would like to have a better grasp on what could we expect from the company in terms of capital allocation in the next year.

So if you could provide more color on what are the expectations here, if we could think about dividends or if this cash should go to accelerate projects in Vaca Muerta. Thank you.

Horacio Marín (CEO)

Uh-

Margarita Chun (Head of Investor Relations)

Thank you, Leo, and-

Horacio Marín (CEO)

Thank you, Leo. But, sorry, Leo, but I was lost in some of the further question. To be fair with you, it will be open the microphone, and I will ask Margarita to tell me in Spanish. So everybody know Spanish, you will know that Margarita, explain me your question, and after I answer the question in English. So once again, go ahead.

Margarita Chun (Head of Investor Relations)

... Yeah, [Foreign language].

Horacio Marín (CEO)

Okay.

Margarita Chun (Head of Investor Relations)

[Foreign language]

Horacio Marín (CEO)

Okay.

Margarita Chun (Head of Investor Relations)

Capital allocation.

Horacio Marín (CEO)

Okay, okay. Thank you, Leonardo, for the question. The, tell me the first thing you told me. Thank you. Yeah, but see, don't be. That is life or is life? Okay, I'm not ashamed because I have to ask you, dig up. Okay. We already signed six. I think in six clusters of eleven, I think in the... I would say in the couple of days or more, I expect it, if not, I will very, how you say, very-

Leonardo Marcondes (Analyst)

Optimistic.

Horacio Marín (CEO)

No, very optimistic. No, I will be disappointing with the guy that work in mergers and acquisitions, okay? So I think we are going to sign two more in the next week. The other that they have there, there is one that is important because we have first to discuss a contract, a export contract with, we are trying to give default contract to another company, and after, it will be already out. The other two, we are negotiating, and I think we are going to be out. I'm going to be out. First of January, we will not have those, if not, I don't know what I will do with the guy of mergers and acquisitions, but it will be good.

I'm sure that we will have out of there. Regarding the provinces, as soon as we have that, we discuss with them, and so when we sign, we know that we expect, because I have to say that we expect that it will be approved, okay? So, I think that we are in very good shape, really very good shape. Well, the only thing that I received from WhatsApp and from people in the industry is congratulations because what we did, people in Argentina think that we are superb. I'm not superb. The guy of mergers and acquisitions, sometimes they are superb, sometimes they are not, but in that way, they are superb. So, I'm very happy on that.

After that, we have two provinces that we are discussing, and also, I am very positive that we are going to be out of that. So what we are doing with the capital? If I can put all that capital in Vaca Muerta, I will put there. If not, it will be a safer capital for you, because if I save the capital and make a more EBITDA, but I have the opportunity to put more production on board, I'm going to lose your money. But next year, because we are going to have, like, a bottleneck in the capacity, if we have to save the money, the save for the next year, we will save for the next year, okay? But we are not going to waste your money, never in my life.

Leonardo Marcondes (Analyst)

That's very clear.

Horacio Marín (CEO)

It's okay?

Leonardo Marcondes (Analyst)

Thank you for the... Yeah, yeah, yeah.

Operator (participant)

That concludes our Q&A session. I will now turn the call over to Horacio Marín, CEO, for closing remarks.

Horacio Marín (CEO)

Okay. Thank you very, very much for all the question, and we are very happy to have the work that we are doing in YPF. Also, we are very happy of your question because it's a way that allow us to improve. Our goal is to improve the profit for you, okay? This is our goal. There is no other goal. Thank you very much.

Operator (participant)

This concludes today's call. You may now disconnect.