YPF Sociedad Anónima Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 11, 2023

There are 7 speakers on the call.

Operator

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 2nd 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 speakers' remarks, there will be a question and answer session. If you would like to ask a question during that thank you.

Operator

And I will now turn the conference over to Pedro Kurni, YPF Planning and Finance Manager. You may begin.

Speaker 1

Good morning, ladies and gentlemen. This is Pedro Kearney, YPF Planning and Finance Manager. Thank you for joining us today in our Q2 2023 earnings call. This presentation will be conducted by our CEO, Pablo Iulano and our CFO, Alejandro Leo. During the presentation, we will go through the main aspects and events that explain our 2nd quarter results.

Speaker 1

And finally, we will open up for questions. Before we begin, I would like to draw your attention to our cash earning statement on Slide 2. 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 state 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.

Speaker 1

Please go ahead.

Speaker 2

Thank you, Pedro, and good morning to you all. Let me start highlighting that this was another quarter in which we continue delivering a solid operational performance. During the Q2, 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 $1,000,000,000 in the quarter, decreasing 4% sequentially and 34% compared to the Q2 of 2022.

Speaker 2

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. And our bottom line came in at $380,000,000 in the 2nd quarter, accumulating more than the $720,000,000 during the first half of the year. In terms of our investment activities, we continue to ramping up our CapEx plan, which expanded 6% sequentially And 52% on an year over year basis, accumulating nearly $2,700,000,000 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 $284,000,000 primarily driven by the Maxus settlement agreement signed in April. Checking our net debt to $6,312,000,000 and increasing the net leverage ratio to 1.4 times.

Speaker 2

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 2, following the satisfaction of all condition and procedural steps, YPF proceed 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 Q2, 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 Trans Andean 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, Averageing 2 60 meters per day in drilling and 194 stage per set per month on fracking, Maintaining most of the efficiencies gained in previous quarters.

Speaker 2

More recently in July, we continued 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, I hope 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 six 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.

Speaker 3

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 inter annual 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 37,000,000 cubic meters per day and 43 barrels of oil per day, respectively.

Speaker 3

The positive inter annual 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 Ver, our flagship project, which represents more than 70% of our EOR production And the evolution of the pilots deployed at Chachawen 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 pooling 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.

Speaker 3

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 $3,900,000 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 DUC wells. In that sense, during the Q2, we drilled a total of 46 new horizontal wells in our operated blocks, 20% more than the Q2 of last year, 37 of which were in oil producing blocks and 9 targeting shale gas, aligned with our strategy of prioritizing the monetization of our shale oil opportunities.

Speaker 3

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 17,000,000 cubic meters per day respectively, representing 45% of our total hydrocarbon production. And 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 Q2, we set new records on drilling speed for a well with slim design at Aguada del Chana block reaching 400 meters per day, As well as in the fab design well at Loma Campana reaching 3 65 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.

Speaker 3

Regarding investment in facilities required to unlock our Shell production, in May we put in operations a natural gas Lastly, in line with our commitment to make our operations more sustainable, during Q2, we managed to test a pilot for switching 1 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 form a reduction of about 20,000 tons of CO2 equivalent per year. As in the previous quarter, let me briefly comment on the progress achieved in the different initiatives aimed at unlocking the oil evacuation capacity of the Neuquina basin. Regarding the evacuation to the Pacific, the Transcendent 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. And going forward, export volumes shall increase in the second half of the year once the Vaca Muerta North pipeline is up and running and despite the stoppage that took place for 17 days in July on the back of heavy rains and flooding in nearby areas.

Speaker 3

As it relates to the new Vaca Muerta North 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 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 prepaid contracts. Moving to the projects to expand the evacuation capacity to the Atlantic, Old El Val 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 2 new storage facilities of 50,000 cubic meters each As well as with the offshore terminal at Puerto Rosales. Lastly, regarding the Vaca Muerta South project, during the Q2, 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.

Speaker 3

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. The high processing levels combined with maximum conversion levels led to the highest levels of 6 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.

Speaker 3

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, we're managing to reduce the spread versus international priorities, 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 Q2 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% visavis the previous quarter and 27% below a year ago. On the financial front, the 2nd quarter resulted in another period delivering operating cash flow totaling almost $1,300,000,000 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.

Speaker 3

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, I wouldn't have resulted in a balance free cash flow for the quarter. However, considering the full financial effect of the Maxus settlement, our net debt increased to $6,300,000,000 and the net leverage ratio calculated as net debt over last 12 months adjusted EBITDA increased to 1.4 times. In terms of financing, during the Q2, we continued progressing on our financial plan by securing several trade related loans From relationship banks, I'm tapping the local capital markets. In this sense, during June, we issued a 3 year hard dollar denominated bond For the total amount of $263,000,000 with a 5% coupon.

Speaker 3

All in all, during the first half of the year, we have raised about $1,300,000,000 representing net new funding of over $700,000,000 after deducting the debt amortization paid during the period. And more recently in August, we signed and disbursed a new cross border AB loan obtained from a group of financial institutions led by CAF for a total amount of $375,000,000 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 $225,000,000 And extending its average life by almost 3 years and also increasing the outstanding facility size by $150,000,000 showcasing once again, YPF's ability to access cross border funding. On the liquidity front, our cash and short term investments increased to almost $1,500,000,000 by the end of June, compared to $1,300,000,000 as of the end of March, as we pre funded part of the financing needs for the second half of the year. And 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 Q1.

Speaker 3

With this, I conclude our presentation for today and open the call for your questions.

Operator

Thank you. We will take our first question from Ann Noemi with Bank of America. Your line is open.

Speaker 4

Thank you very much. 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. And then 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 YPS.

Speaker 4

Thank you very much.

Speaker 3

Hi, Ian. 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. So we would expect to continue focusing primarily 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 Q2, we ended up 7% above the Q2 of the last year.

Speaker 3

And so we expect to we still expect to be at around 8% for the full year. And particularly, we expect oil growth to accelerate in the second half, primarily in the Q4, probably expecting the Q3 to be relatively flat and further growth to materialize in the Q4, where we expect Q4 over the Q4 of last year to remain in line with guideline at about 10% growth. On the other side on natural gas, given the lower demand 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 in, as I said, in terms of natural gas. So basically the old infrastructure that is being deployed will serve mostly the purpose of Allowing for this expansion in crude oil production, while natural gas and As presented before, early in the year, we are clearly prioritizing crude over gas And hence, we are again, not that much concern 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 it's hard to predict, but we expect that given the strategic positioning that Vaca Muerta has and has been commented by several different candidates in the presidential elections, we believe that our policy should remain supportive for the constructive development of our sector, we just expect to 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, assaulted the bottlenecking of Vaca Muerta and as the different producers in the basin and in the Neuquina basin, continue with our growth plans and as was presented by YPF, Particularly in our view to double up our oil production in 5 years' time.

Speaker 3

So given those given that opportunity, we would expect Policy to remain supportive for our sector.

Speaker 4

Okay. Thank you.

Operator

And we will take our next question from Walter Chiarvisio with Santander. Your line is open.

Speaker 5

Hi. Hello. Good morning. I have two questions on the cost front. The first one is To SG and A that at least for me it was negatively surprising.

Speaker 5

It has been taking a higher share Revenues in the last couple of quarters. And I would like to note from you, this is just salary increases for payroll, Because it has been increasing quite a lot of inflation in 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 you're going to do something about that? That is the first question. The second question is related to listing cost.

Speaker 5

We can see that listing cost in the Comfab is relatively stable We'd lead us to conclude that the conventional leasing cost is growing. Is that because of the tertiary recovery cost in Maranteles Ver? And if that is going To be a norm looking forward. Thank you.

Speaker 3

Hi, Walter. Good morning and thanks for your questions. As it relates to the first question on SG and 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 and A In the Q2 growing sequentially at a similar pace that the average OpEx for the company. And definitely 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.

Speaker 3

In general terms, in terms of head We have not experienced any particular swing. And so I would tend to say that that's the result primarily of the general cost pressures in line with the rest of the OpEx. In terms of lifting, what I can comment is that clearly in the core hub, we managed to compensate the higher costs with the particular increase in shale production, particularly shale oil, that's compensated that's clearly what allowed us to manage to compensate the higher Costs with higher production and hence maintaining the lifting relatively stable at the core half. 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. So 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.

Speaker 3

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

Speaker 5

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

Speaker 3

Well, margins are based on different variables, right? So clearly, we continue to See further cost pressures on the cost side. And as I said, we are working across all our business units to get efficiencies to get costs under control. And hence, we will expect at least To maintain for the most part, OpEx we are working to maintain OpEx at least stable in the second half. In terms of revenues, well, that will depend on different variables, right?

Speaker 3

Clearly, the way we managed to work on our pricing policy and also how the evolution of the currency Takes place in coming months.

Speaker 5

Okay. Thank you very much, Alejandro.

Speaker 3

Sure. Thank you,

Operator

as a reminder, it is star 1 if you would like to ask a question. And we will take our next question from Luis Carvalho with UBS. Your line is open.

Speaker 6

Hi, everyone. Thanks for taking the question and glad to talk to all of you. I have basically three points that I would like to hear and get a bit more color. The first one is the lifting cost trend. We saw lifting cost close to, I don't know, dollars 13 per, I don't know, per BOE last year.

Speaker 6

And now we are headed to close to 16. When you're seeing some, I don't know, industry mainly on the service industry cost pressure. So we'd like to hear in terms of what are the perspectives on the lifting costs. The second thing is about the funding. I mean, the company burn a bit of cash this quarter and Very comprehensive, but 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 Europe, the company is thinking about the funding, mainly that By 2024, you have almost $1,200,000,000 Of that, we understand that can be postponed, can be negotiated, but just trying to understand, let's say, the Probably 18 months funding strategy.

Speaker 6

And lastly, if I may, on the pricing front, the company did a great job over the past year reducing the gap between the domestic The prices in the import parity, right? It came from, I don't know, 40% 30% last year to an average of, As you pointed on the slide, of 13% right this year over the last 3 months. So just trying to understand how we should look this forward, mainly with the current FX in it and the current oil environment. So how we can how can you guys what do you see in terms of dry severity scenario for the next couple of quarters?

Speaker 5

Thank you.

Speaker 3

Good morning, Luis. Thank you very much 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 managed to Reduce the gap to international parities over the last 12 months, reaching a low level of 13% GAAP in the 2nd quarter, down from 19% in the 1st quarter I'm from over 30% in the Q2 of last year. Clearly, that was a combination of our strategy to Increased prices in peso terms to at least compensate for the evolution of the currency, which in In the beginning of the year, we only managed to do it partially successfully as our prices declined by about 8% By the Q2 compared to the Q4 of last year.

Speaker 3

But 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 of the pump That have not fully managed to pass through the evolution of the currency. And hence, by today, we are standing about 10% below The dollar prices of the end of last year. And then further to that, given the rally in international prices, our GAAP today stands probably closer to 30% to international parties.

Speaker 3

So that will be the negative news. Now what we expect for the rest of the year, we would continue To look for adjustments of the pump, trying to mitigate the evolution of the effects And to the largest possible extent to looking at reducing the gap to international parties. However, we are cognizant of the realities of the macro environment of the inflationary level. And as we've been saying 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.

Speaker 3

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 $1,300,000,000 Further to that, we have raised on a net basis, given the prefunding or the refinancing of the cash led loan, which provided for about $150,000,000 in net funding, we have added another Over $200,000,000 roughly $250,000,000 since the end of the Q2. And so with that, we expect, I would say 2 thirds The funding program for this year to have already been secured. And further to that, given the LDO refinancing of the CAF loan, we managed to reduce total amortizations for next Here by about $225,000,000 So roughly speaking, the maturity profile for next year Comes down from the $1,200,000,000 to about $1,000,000,000 So we in terms of tackling our needs for the next 12 to 18 months, we will continue prioritizing the local market, Which we believe that provides an interesting arbitrage for funding costs. And 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.

Speaker 3

So I would say that we have been tapping on relationship banks. We believe that there is some further room there, although more limited. And we do believe that still the local market can provide Significant further opportunities. And beyond that, as mentioned, we will remain vigilant on opportunities in the international market. Finally, on your first question about the lifting cost trend and similar to what I responded Walter, we clearly seen an increase given the cost pressures Related to the general inflationary trend that runs above the devaluation of the currency.

Speaker 3

And again, as we expect our crude production to grow significantly in coming months, particularly in Q4, We expect to compensate any further cost pressures, although we will work towards stabilizing our nominal cost. But if anything, any further cost pressures, we would expect to compensate that through higher production levels. And thus we would expect for the second half lifting cost to remain relatively stable.

Operator

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

Speaker 3

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

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