Pampa Energia SA (PAM) 2023 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for waiting. I'm Margarita Chun from IR, and we would like to welcome everyone to Pampa Energia's First Quarter 2023 Results Video Conference. We inform you that this event is being recorded. (Operator Instructions) Before proceeding, please read the disclaimer that is located in the second page of the presentation. Let me mention the forward-looking statements are based on Pampa Energia's management beliefs and assumptions and information currently available to the company. They involve risks, uncertainties and assumptions because they are related to future events that may or may not occur. Investors should understand that general economic and industry conditions and other operating factors could also affect the future results of Pampa Energia and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Lida Wang, Investor Relations and Sustainability Officer of Pampa Energia. Please go ahead.

Thank you, Mari. Hello, everyone, and thank you for joining our conference call. I will try to make it short and skip some parts already explained in the earnings release. So we have plenty of time for Q&A with our CFO, Mr. Nicolas Mindlin and our special guest here, Mr. Horacio Turri, our Head of Upstream. Let's start with the quarter's figures and to strike to the adjusted EBITDA, which amounted to $206 million in the Q1, 8% less year-on-year, mainly because of Barragan's old PPA. TGS' lag tariffs and higher payroll in dollar terms, offset by the addition of PPAs and a solid power dispatch, better gas and spot prices plus Transener's tariff increase.

However, the EBITDA increased 12% quarter-on-quarter because of the PPA additions, Transener's tariff and higher liquid margins in TGS, offset by soft gas sales and lower reforming sales. It is worth to note that 76% of the EBITDA was dollar-linked. As you can see in the right below, the share between electricity and oil and gas is almost even. So power is leading the pipe, thanks to our PPAs. CapEx in Q1, more than double year-on-year mainly because we kicked off a new wind farm in PEPE IV plus the E&P shale drilling and completion PPAs in preparation for the winter peak season.

Moving on to power generation, as seen on Slide 4. We posted an EBITDA of $108 million in Q1, down 11% year-on-year, but up 26% quarter-on-quarter, mainly explained by Barragan's sold PPA that expire in private and higher labor expenses, offset by the addition of wind farms plus the kickoff of Barragan's new PPA in late February of this year and better spot prices, thanks to a special remuneration for legacy CCGTs. Q1 dispatch rose 11% year-on-year about the national power grid 8% growth in response to a hot wave that drove new records of power demand. Barragan's new CCGT contributed most of the increased load factor offset by less Bolivian fuel and forced and scheduled outages at some thermal units restore within the quarter. Availability is essential to collect take-or-pay capacity payment, especially from PPAs contributing most of the EBITDA. In Q1, we reached 93%. This is below last year's almost 98% availability rate due to the thermal outages mentioned before, but still outstanding compared to the greed 69% availability.

Moving on to wind farm expansions. Regarding PEPE IV, the project is highly advanced. In April, we commissioned 18 more. So we have 54 megawatts online out of the 81 total installed capacity. In addition, almost all the remaining wind turbines are assembled, and we estimate to complete the COD by the end of this month. Regarding PEPE IV, we also kicked off the second phase this month, adding 45 megawatts more. So the total capacity will be 140 megawatts by investing $265 million approximately. For the first phase of 95 megawatts, we just started with the civil works for the platforms and the foundations. And for the second phase of 45 megawatts we are procuring 10 additional Vestas wind turbines. We estimate to achieve COD next year, the first phase by Q3 and the second place by Q4. Keep in mind that paper expansions are sold under B2B PPAs also to finance this PEPE IV, we issued in May, our second Green Bond in pesos in the local market, raising an equivalent to $22 million due in 1 year.

In Slide 6, our E&P business posted a total adjusted EBITDA of $62 million in Q1, 10% up year-on-year because of the gas export prices and local oil events, offset by lower gas export volumes and soft retail demand that drove production curtailment, plus the higher cost for payroll and growing activity. However, quarter-on-quarter, EBITDA is down 14%, driven by sale curtailments and newer expenses. Our total lifting costs almost doubled yearly, explained by payroll and increased activity. However, it decreased quarter-on-quarter due to lower facility costs from El Mangrullo by block. Efficiency-wise, the lifting cost per BOE was up 23% year-on-year, but very similar [state] quarter-on-quarter recorded $7 per BOE.

In Q1, our total production average almost 58,000 BOE per day, assuming crude oil represented 9% of that. Still, it reached 24% of the [segments] revenues, mostly because of the increased local event, offset by the drop in the brand pricing, getting a realized price of almost $68 per barrel. Our gas production in Q1 was similar yearly, but slightly down quarterly. Averaging almost 9 million cubic meters per day, mainly explained again by the weaker retail detail demand vis-a-vis the seasonal contracted volumes under plan gas, in addition to lesser exports to Chile as permits were limited.

Furthermore, though, the country experienced a record high power demand and thermal installed capacity for as much as possible. CAMMESA was not able to procure additional gas because of pipeline bottlenecks. Hence, El Mangrullo output was curtailed during the quarter to 5.7 million cubic meters per day. However, Sierra Chata with 6 drill (inaudible) have been outstanding, dramatically increasing the production. As you can see below, the results of Sierra Chata outperformed the benchmark. El Mangrullo also performs very well within the average among peers. We rely on both blocks to ramp up production, each reaching all-time high supported by excellent results for our shale gas wells. The average gas price of the quarter was $4 per MBTU.

This is 11% year-on-year increase, mainly due to export prices. In Q1, sales were skewed to CAMMESA they were buying gas to up from the high power demand. Exports were lower but remain under take-or-pay contracts until June of this year. The petrochemical business posted $7 million EBITDA in Q1 primarily contributed by styrene and polystyrene sales plus lower cost of propane, offset by a fall in SBR volume and higher labor costs. However, quarter-on-quarter, it shrunk by more than half, driven by reduced supply of raw gas line and export margins. Sales volume was up 13% year-on-year, mainly because last year, some reforming products were dispatched as (inaudible) as volume sold. In Q1, 39% of the total sales were exported.

So moving to the cash flow in Q1, we recorded a free cash flow outflow of $29 million. This is mainly due to the expansionary CapEx that we are doing in power and gas. Higher debt service driven by peso debt through principal gets diluted by devaluation plus worsening of payment collections from CAMMESA that we went from 70 days to 100 days full cycle collection. That represents roughly $80 million of working capital. In addition, we raised $97 million net from the local market. In summary, we generated $68 million of net cash flow in the quarter, achieving $768 million cash in the end of the period. So moving to the Slide 11, we show our consolidated financial position, including our ownerships, the affiliates at ownership, but just let's focus on the restricted group that reflects Pampa perimeter.

We posted a gross debt of $1.7 billion. This is similar to the last quarter. Net debt and leverage ratio decreased, thanks to our solid cash flow position generation, recording 900 – a little bit about $900 million and 1.2x leverage. The average life also reduced to 3.4 years. Taking advantage of the domestic liquidity, we kept diversifying the currency and source. As a result, 81% of the dollar-denominated offshore bearing an interest rate of 8.5%. Peso debt bears an interest rate below trailing CPI. So onshore debt in dollars is zero. Also, as mentioned before, we recently raised a second green bond for ARS 5 billion. That's $22 million roughly and issued $56 million dollar bonds in the local market. This is no [MAP] maturing 2025 at 5%. A few days ago, we announced the redemption of the remaining 2023 bonds for around $93 million. So until 2027, Pampa does not face any relevant debt maturities.

So this concludes our presentation. Now I will turn to Margarita, so she will poll for questions. Thank you very much.

Thank you, Lida. Now the floor is open for questions. (Operator Instructions) Our first question is from Maria Moyano from the Company AdCap.

She would like to know regarding the company situation to access to the official effects for principal of debt payment and import of equipment. What are the company's tools to have access to the official effects of the Central Bank?

Okay. So as for now, we are not having any issues to access to the U.S. dollars for imports of capital goods and raw materials, but we have seen some delays in the case of services, but nothing significant. For the maturities and interest payments, we have not had any problem so far. So if the central bank stopped selling as U.S. dollar, we will need to finance those dollars abroad. But I think that given the current conditions, it will be a very expensive. So if that happens, I think we should reassess our [analysis] strategy regarding CapEx and investments, but we don't see this happen in the near future.

Thank you, Nico. The next question is from Paula La Greca from TPCG. She has 3 questions. And the first one is, how are collections from the plant gas and the Néstor Kirchner pipeline doing? Has there been any delay?

So the situation with CAMMESA payments and also regarding (inaudible) deteriorated a lot in the last few months, and it has reached a delay equal to the awards that we have seen. That is of approximately 100 days. So as of today, the debt amounts to ARS 40 million approximately in the case of CAMMESA and ARS 2,000 million in the case of (inaudible) subsidy. This [debt accrues] interest for Banco Nacion active interest rate that is around 104%. But to mitigate this issue, we issued everything in pesos in the last few months, taking advantage also of the liquidity in local markets. And these acts like a hedge against a discrete devaluation. So we are hedging this with these instruments and also we can hedge this in the future dollar market.

Thank you, Nico. The second question on Paula is, is there any plan that could enter into the new PPA contract under the Resolution 59? This is the differential remuneration for combined cycle in the spot market.

So yes, besides Loma de la Lata legacy CCGT and Genelba legacy CCGT, we managed to include Ensenada's gas turbines. They are not -- they are part of a CCGT, but they are -- the gas turbines are on their legacy. So they are very important. So we merged to include as they are CCGT. So all in all, we are calculating that the total impact of Resolution 59 will be around close to $19 million in 2023. Though, however, a lot of that is offset by the devaluation curve if there is no any further inflation adjustments to the legacy pricing.

Thank you, Lida. The last question of Paula is regarding E&P business. Do you have any sensitivity analysis of how much an increase of 1% in inflation impact on lifting cost? She has one more in the E&P, but let's focus on the first one.

Okay. Can you hear me now? Okay. Well, this question needs further analysis since now we have most of our costs based in U.S. dollar linked. And what we are seeing is particularly a significant increase in wages and dollar inflation is starting to pick up. But all in all, we understand that probably we will have 1/3 of the inflation being transferred to the lifting cost, not more than that.

Thank you, Horacio. And Paula's last question regarding E&P business is how much more expensive or cheaper is to produce natural gas in shale fields than in tight gas fields?

There is a trade-off there between CapEx and OpEx. In terms of CapEx, obviously, the shale wells are more expensive than tight wells. But from an OpEx standpoint, as you are producing in high pressure rather than medium and low pressure, you don't need any compression. And that significantly reduces the lifting cost in the shale fields vis-a-vis the tight.

Thank you, Horacio. The next question is from Alejandro Demichelis from NAU Securities. He has 2 questions. But the first one is very related to the E&P business. How do you see inflation impacting on the drilling and completion, especially on the shale wells and the OpEx? I think it is covered, but if you want to add something more?

Okay. I think he's particularly asking about drilling and completion. And in that sense, we've seen approximately a 10% to 15% increase in D&C costs always related to dollar-linked when you compare it to last year.

Thank you, Horacio. The second question of Alejandro is regarding power generation business. What is the appetite of the company to join the potential tender of thermal power plants that they are saying in the media right now?

So of course, we will be starting this project to see if we can participate at competitive prices. Since the beginning of Pampa, we have participated in every round to our power generation. But our main focus this year is in our very aggressive investment plan to ramp up gas production and to grow our renewables capacity.

Thank you, Nico. The next question is from Bruno Montanari from Morgan Stanley. He has 3 questions. The first one is regarding the E&P business once more. Can you comment on gas demand in the second quarter of the year? You mentioned in the release that retail demand was soft in Q1, and there were also bottlenecks with pipelines. So we would like to get a sense of how much volume are performing right now. Do you see more space for Pampa to increase export to Chile on top of the additional 0.9 million cubic meters per day recently awarded?

All right. Well, demand is picking up in the past week. We are starting to see some low temperatures. And we foresee that probably we will go to the 9 million cubic meters per day that was mentioned before to around 11 million cubic meters per day during next week and stabilizing in around 12 million cubic meters, which is what we force had forecasted for this time of the year. We will keep on increasing our production, reaching 15.6 with the commissioning of the Néstor Kirchner pipeline. So this is what we can say about our projected production for the coming months. Regarding exports to Chile, we have already been awarded additional 900,000 cubic meters a day, May and June, and an additional almost 900 more million cubic meters per day, July, September. I don't foresee any additional exports being granted to Pampa in that period rather than that. So we will be exporting around 2.2 million May, June, and we will go to $900,000 July, September.

Thank you, Horacio. The second question of Bruno is regarding CapEx. How much of the 2023 and 2024 projects are already fully constructed in terms of equipment and also prices? And do you see any challenges with securing the necessary equipment? Or are you seeing any inflationary pressure?

Okay. What we committed for 2023, which basically is the additional 4.8 million for the commissioning of the nearest pipeline. It's all of it drilled and already cemented and cased. We only are missing the completion of approximately 60% of the wells, which we think and are confident in delivering by the commissioning of the pipeline so that's -- I think that answers the first topic of the question. Second was, if we have to secure equipment, we don't think that's going to be necessary until the beginning of next year. We already have contracts with drilling and completion companies that secure our campaign until September of this year, and we will restart our negotiations for long-term ventures particularly with completion companies to secure equipment for '24 and '25.

Thank you, Horacio. The last question of Bruno is regarding macro side. It sounds like Argentina could be getting closer to a material official currency devaluation. Can you help us understand how Pampa is preparing itself for the day after the potential devaluation?

So firstly, around 80% of our income is U.S. dollar-linked and the rest is adjusted by inflation that is also affected by a devaluation. I think the main negative impact for us would be regarding the outstanding debt of CAMMESA that if it's already depending, it's just also via an interest rate in pesos. But will be affected negatively if we have a discrete devaluation. On the other hand, as I mentioned before, we have a big amount of debt in pesos that we issued in the last month, taking advantage of the liquidity in the local market, and that there will also be diluted in case of a devaluation. So as our relative pesos is higher than our credit, I think the net impact should be positive for us. We are also hedging our credit with CAMMESA in the U.S. dollar future market in (inaudible). And also an important part of our liquidity is in dollar-linked corporate bonds. So I think we are prepared for that scenario.

Thank you, Nico. And the next question is from Matías Castagnino from BCP. The first question is regarding spot energy combined cycle differential remuneration. This is Resolution 59 in which currency is being collected, if it's in pesos, what is the increase?

So basically, in general, last year, the Secretary of Energy already scheduled increases and they schedule to one of 25% in general for all the legacy units in pesos. There's another one upcoming in August, and that's it, it's accumulated in 2023 of 60%. Of course, the valuation is higher than that. So we expect further increases to match it up. Beyond that, CCGTs at the legacy scheme, they are granted a partial dollar pricing. It's a way to hedge their costs in dollars. Dollar-wise, right now, they are a little bit ahead, but it's not that significant. So yes, for example, in a discrete evaluation, they will be better because partially they are dollars. So this remuneration, partial remuneration dollars starts in March of this year -- started already in March of this year.

Thank you, Lida. Matías second question is also regarding power generation. If in dollar terms, Energia and the legacy energy got increased, and the PPAs are dollar-linked, why the average price in dollar per megawatt term decreased?

Well, unfortunately, this quarter, we experienced some outages in the thermal units in [Noma] with the commissioning process, it's in Ingenierol and so on. So availability is very important. As you know, it's 93% in this quarter, but it's already sold. And in the Q2, it's close to 100% that we usually do. But the lower footprint on the availability affected the take-or-pay side of the remuneration that is basically contributed to the EBITDA. And then also for those contracts that they are not undertake or pay that is [Mater], especially Mater , the wind farms dino perform very well in the wind side capacity factors as not as we expected. So basically, that's the 2 reasons behind why the average pricing was weaker this quarter.

Thank you, Lida. Matías, third question is regarding gas production. Considering the quarter-on-quarter decrease in gas production, the release refers to commercial issues that seem to affect the future expansion of Vaca Muerta, we thought that any additional surplus production could be destined to export if local demand is satisfied.

Okay. The nature of consumption in Argentina is highly seasonal. What we saw during the past summer was a reduction of the retail demand and an increase in CAMMESA demand, but particularly. Now the problem is that CAMMESA did not retain enough firm transportation. So it was not able to acquire all the natural gas that is needed. And this finally impacted in the need to burn liquid fuels during the summer season. So the issue was that our reduction in sales was linked to the – and availability of transportation from CAMMESA.

Now for the future, we don't foresee that problem happening partially at least with the commissioning of the Néstor Kirchner pipeline and the future expansions of the transportation system. Now regarding the question of exports to Chile, now we are exploring all of the transportation capacity that is available to Chile. What we will see probably in the coming future is a possibility of exporting additional volumes to Chile through another pipelines that connect Argentina and Chile in the Central region and also in the North. But with the restriction of first having to redirect the gas flows from the north to the south in the [North] pipeline and turning it from Vaca Muerta into the north of Argentina and further into north of Chile.

Thank you, Horacio. The next question is regarding petrochemical business. This is the fourth question of Matías from BCP. Considering the decrease in the sales funnel retail petchem business compared quarter-on-quarter, do you see any pressure on the prices on margins in this segment?

So there are different factors affecting EBITDA this year in comparison to last year. First of all, during the first quarter, we have processed less virgin naphtha in the reform. The situation has already normalized for the second quarter, also international spreads between virgin naphtha that we process [an optanic] basis that we sell and also between benzene and styrene have worsened this quarter. And our fixed cost in dollars have increased also because of the impact of inflation against the valuation. On the other hand, local premiums in prices in styrene and polystyrene have risen here in current local macro conditions.

Thank you, Nico. Matías last question is regarding the debt market. Why are you executing that in pesos at a variable rate and not dollar link? And yes, that is the question.

So first of all, dollar rate is lower than inflation. Secondly, we are also issuing that in taking the vision pesos from local banks at fixed interest rates that are below inflation. And third, we also issued a dollar link almost $100 million this year. And in the case of evaluation, it's much better to have them in pesos than dollar link. So if we take into account the current situation, we prefer now to have more than debt pesos even at a floating rate that is below inflation and that is negative in real terms than in dollar-linked

(technical difficulty)

I think it was already covered.

Yes. Thank you. So it was already covered. And the second question is, could you please comment on the media report that mentioned that the government would not extend expiring hydro concessions?

Well, not much to comment on that. Basically, we've been asked for information. We have 2 hydropower plants that are due next year, June and October, the Mendoza are power plants and the other one, (inaudible) it matures in late 2029, I think. So basically, they're far away from now, but we've been asked for information, not more than that. We provisioned some expecting what happens with the concession, but the concession agreement says that if it adds we part our ways. We don't get anything, and we don't have to pay anything for the concession.

Thank you, Lida. The next question comes from Andrés Cardona once more for the E&P business. What have you learned so far from shale wells in terms of drilling cost per well completion, lifting potential EUR per well?

Well, so far, the experience with the shale wells for Pampa was very successful particularly in terms of productivity, we were able of finding sweet spots, both in Mangrullo and Sierra Chata. And we were surprised with the performance of the wells. As Lida showed before during the presentation, we had one of our flagship wells in Sierra Chata with an output of more than 1 million cubic meters per day, which ranks top 3 in the Neuquen Basin. So from a productivity standpoint, we feel pretty confident in going or proceeding with the development of Vaca Muerta. In terms of potential [EUR], it depends on where you're looking at Mangrullo and Sierra Chata but that would range from 20 to 27 Bcf per well. So also looks like very promising. Regarding cost per well and drilling, we are still in very early stages. We are running the pilot programs right now. So probably, we will see a significant decrease in our investment per well in the development phase.

Thank you, Horacio. The next question comes from Daniel Guardiola. This is regarding the Néstor Kirchner pipeline. Can you comment on the progress of the Néstor Kirchner pipeline? And what is the EBITDA generation expected for Q2 and Q3? Daniel Guardiola is from BTG.

Okay. Néstor Kirchner pipeline is doing pretty well. We probably see the pipeline being commissioned by the end of June, first days of July. So it's -- will be on schedule. We are ready to deliver the gas that we committed for the Plan Gas for this new demand, which is approximately 4.8 million cubic meters per day of additional gas. And well, that will obviously have a significant impact in the EBITDA generation for the second and third quarter of the 2023.

Thank you, Horacio. Alejandro Demichelis also asked regarding the Néstor Kirchner pipeline that we already covered. Daniel Guardiola has another question, but this one regarding power generation. Is there any other PPAs expiring this year or next? What is the expected effect in terms of EBITDA generation? So in this question, we don't have PPAs expiring in the next few years. The next expiration is in 2026. And of course, most of the EBITDA is dollar link because PPAs are in dollars, and they generate roughly more than 75% of the generation of the power generation business.

Yes. So the next is just one PPA expiring in 2026. This is a small one, but a big chunk is 305 megawatts. It's in 2027. And the next one is in 2035, ‘38 and ‘40. So we have plenty of time.

Thank you, Lida. And the next question comes from Anne Milne from Bank of America. She has a question regarding new tariff schedule for legacy power plants, which plants are benefiting and how much additional revenues or cash flow will be generated on an annual basis. Is there any condition or additional CapEx expenditure required?

So basically, again, the benefit. And this is intended to raise, as I mentioned before, the availability that the system is declining. Actually, we are one of the all-time lows in a few years. We are right now at 69%. So the government wants to keep it up, ramp up the [limited] rates, especially. So there are no excuses for maintenance. They are partially converting in dollars for the CCGTs. We are including here Loma De La Lata, (inaudible), legacy plants and Ensenada. This implies around $19 million of additional revenues for Pampa though, however, if there's a further with the devaluation group that we're experiencing and assuming that there's no further increases in general for royalty prices, matching the inflation. That $19 million alludes to merely $5 million for the year. So basically, it's very important that the legacy prices keep up with inflation.

Thank you, Lida. The next question comes from Ludovic (inaudible) from Autonomy. And during which month or weeks during which months or weeks, would you reach your gas production target of 15.6 or close to 16 million cubic meters per day?

Okay. As we mentioned before, this will happen with the commissioning of the pipeline, and we foresee that happening by the end of June or first week of July.

Thank you, Horacio. The next question comes from [Jim Muse] from (inaudible). This is the E&P business question. What is the average IP initial production rate for wells in shale gas? What is the average lateral length? What is the breakeven price to support lifting CapEx and provide a good IRR?

Okay. Well, this depends very much on which field we are talking about. If we look at Mangrullo, probably you're looking at initial IPs of around 0.5 million cubic meters. If you go to Sierra Chata that will probably raise up to 700,000, 800,000 cubic meters per day. The lateral length of our Vaca Muerta wells is 2,500 meters. And we're drilling and completing wells only of the lateral length. We haven't explored any longer lateral wells yet. Regarding the price, I would say that we've been beating at prices that are reasonable for us to our reasonable rate of return.

Thank you, Horacio. Please wait while we poll for more questions. So thank you for waiting. This concludes the question-and-answer section. So we will turn to Lida for final remarks.

Okay. Thank you for all joining us in this quarter. Unfortunately, our CEO wasn't here, but our special guest, our Head of E&P here. I hope all the questions that you have been answered. If anything, it's [outstanding] just contact us, Margarita and I and all the other IR team are freely available for you. Thank you. Have a good day. Have a good week, and see you next time.