Pampa Energia SA (PAM) 2021 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for waiting. I'm Margarita Chun from IR. We would like to welcome everyone to Pampa Energia's Second Quarter 2021 Results Video Conference. We inform you that this event is being recorded. (Operator Instructions)

Before proceeding, let me please read the disclaimer that is located on the second page of the presentation. Let me mention that forward-looking statements are based on Pampa Energia's management's beliefs and assumptions and on 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 in the future. Investors should understand that general economic conditions, 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 video conference over to Lida Wang, our Investor Relations and Sustainability Officer of Pampa Energia. Lida, you may begin the video conference.

Thank you, Margarita. Hello, everyone, and thank you for joining our conference call. I hope you are all safe and well. In the interest of time, I will summarize the latest events and financial figures. For more details, you can check our earnings release or feel free to contact us. Our CEO, Mr. Mariani, and CFO, Mr. Cohen, are both here and joining us for the Q&A session.

Let's start commenting on the quarter's highlights. First, we recorded more than 50% year-on-year sales increase, thanks to the Plan Gas winter peak, Genelba's new PPA and commodity price hikes. Moreover, our E&P business set another record as our flagship block in Mangrullo (inaudible) as our flagship El Mangrullo achieved all-time high gas production of 226 million cubic feet per day 2 weeks ago, contributing to an increase in our overall production. This is a significant milestone for our E&P and the country's peak demand during the winter. The record is more than 30% higher than last year's July and 3x 2016's production level, showing the competitive productivity of high gas formations.

Also the quarter's performance is supported by higher prices, even higher than pre-pandemic levels, explained by winter seasonality, Plan Gas and commodity prices. Legacy prices are also boosted by the long awaited increasing pesos, but the result is moderated in dollar terms as a result of devaluation. Our petchem business achieved another outstanding quarter, not only benefited by prices, but also our recovering demand.

The regulator cleared the sale of Edenor's control and the management change took place by the end of the quarter. Therefore, we ended a chapter and collected proceeds to keep focusing on our power and gas businesses where there is cash generation. The final payment is due one year from closing.

But not -- last but not least, we keep strengthening our financial position by reducing our leverage, thanks to our free cash flow generation reaching almost $1 billion net debt. A healthy balance sheet coupled with a comfortable debt profile makes a great defensive strategy in challenge in Argentina.

Now let's move on the quarter's key financial takeaways. Since Edenor was divested, let's only focus on the continuing business. Revenues increased 52% year-on-year to $456 million in the quarter, mainly driven by Plan Gas winter seasonality, Genelba's new PPA and high commodity prices, both in petrochemicals and TGS' liquid business, though partially offset by lower legacy prices in dollar terms as well as tariff fees and deval effect over utility businesses.

In Q2 2021, roughly over 80% of our sales and EBITDA were dollar dink, mainly from our core businesses, PPA power capacity, followed by E&P. The adjusted EBITDA amounted to $241 million, 79% higher year-on-year, mainly driven by the same reasons detailed before, plus production efficiencies and dilution of peso linked expenses due to the devaluation effect.

Quarter-on-quarter, EBITDA increased by 18%, mainly explained by winter gas prices and the retroactive rates in legacy prices of CTGEBA outages at Plus power units and petrochemical's schedule maintenance in the reforming plant. Therefore, oil and gas is regaining exposure by taking a 48% share, as we show on the right below, like -- while electricity takes 52% of the consolidated adjusted EBITDA. Moreover, in Q2, CapEx was double year-on-year -- more than double year-on-year and 66% up quarter-on-quarter, mainly explained by Plan Gas commitments during the winter and Barragan's expansion, offset by the commissioning of Genelba new CCGT in July last year.

Moving on to the power generation segment. As you see in Slide 5, we posted an EBITDA of $121 million in Q2 2021, 26% higher than last year, mainly contributed by Genelba Plus CCGT, higher B2B electricity sales, legacy prices update and the devaluation impact on our peso denominated expenses. These effects were offset primarily by the dilution of -- in dollars of legacy prices, higher energy purchases to cover the B2B contracts, and operational outages in June. Quarter-on-quarter, EBITDA increased by 5%, mainly due to the spot prices update retroactively to February, offset by the offbeat pricing for spot energy and lower dispatch in Q2 '21.

Spot energy comprises 59% of our capacity, but represented only 17% of our power generation EBITDA. Therefore, it will be keep shrinking unless the next inflation adjustment outpaces evaluation. Still, it is key to continue with the proper maintenance of this plant's underpay considering the contribution to the grid.

Moving to the operating figures. Power generation in Q2 '21 was 10% up year-on-year, in line with the grid recovery. Like in Q1, nationwide, demand is back to pre-pandemic levels, mainly driven by industries, which is a good news for GDP activity. We recorded higher dispatching Genelba's new CCGT, thermal plants firing alternative fuels, and increasing -- increased load factor from wind farms, offset by lower gas-fired dispatch because there's no gas, limited gas. However, quarter-on-quarter, generation was 14% down, driven by the fall season and outages.

Keep in mind that the power generation business model relies on capacity payment. So lower dispatch does not impact the revenue making as long as the availabilities of scanning, especially for PPA-based energy. The mean availability rate in Q2 '21 reached an outstanding 95.8%, slightly lower year-on-year, mainly due to windmills and Genelba's partial outages in June, which -- they are refilled and resumed last month.

Regarding our expansions, the closing to CCGT at Ensenada Barragan is almost half a way advanced. We are currently working on the boilers, in the cooling tower, water system and completing the centralized building enclosure. You can see in the box. Around 1,500 people are at the site, working with COVID protocols and reviewing the critical equipment to achieve COD by the second quarter of 2022. Once closed, Barragan's total installed capacity will be 847 megawatts, becoming one of the country's most efficient thermal units and Pampa's full operated CCGT.

Moving to E&P results on Slide 7, we posted an adjusted EBITDA of $73 million in Q2 '21, recording a remarkable growth year-on-year primarily driven by Plan Gas, which rebounded the gas prices and volumes because of weaker commitments in addition to higher oil prices and recovery demand. However, more royalties from higher prices and increased well drilling and completion activities offset the rise of the EBITDA.

Quarter-on-quarter, the EBITDA more than doubled due to the winter effects, offset by higher royalties. Efficiency wise, we recorded $25 million of lifting costs, 20% more than last year due to wells drilling and completion reactivation activities, offset by higher productivity at competitive gas blocks such as El Mangrullo, higher oil production and the devaluation. By BOE produced, we kept below $6 of lifting costs, 10% higher year-on-year, but very similar quarter-on-quarter.

Our global production increased 9% year-on-year and quarter-on-quarter mainly, again, driven by the Plan Gas. Oil demand (inaudible) lockdown, but still hasn't reached pre-pandemic levels. As a result, we averaged almost 48,000 barrels of oil equivalent per day, of which 90% is gas.

On the other side, which represented 22% of the revenues in the quarter, volumes sold increased by 11% year-on-year to 4,500 barrels per day explained by export demand. The 40% quarter-on-quarter increase is primarily due to exports concentrated in the Q2. As per crude oil prices, which are driven by the rent, it's almost tripled last year due to the lockdown, while quarter-on-quarter remained similar. Our production is still down 1,000 barrels of oil per day to the pre-pandemic levels. We expect to recover them gradually.

Regarding gas as shown in the next slide, our average sale -- our sales averaged 264 million cubic feet per day in the quarter, 4% up year-on-year, driven by the Plan Gas GSA. Production could have been higher, but blockage during April 2021 affected the output, impacting our employees and equipment stalling the operation. Therefore, our production since May was slightly lower than the GSA commitment, but we still recovered this month, overproducing actually, the target of 320 million cubic feet per day.

In addition, gas producers, including Pampa, were granted force majeure and so no penalties to pay. Quarter-on-quarter, the 9% increase is primarily explained by the beginning of the winter peak season and better B2B sales from industrial demand. On a [color] nationwide gas production during the quarter was only 1% down year-on-year, evidencing the Plan Gas effect. Demand is rising to pre-pandemic levels, driven by the large users and retail consumption.

Going back to our quarter production performance, El Mangrullo lead the quarter's production growth, contributing close to 70% of our overall gas. This block is wholly owned and operated by us with the outstanding productivity, boosted by the temporary production facility we installed back in May and reached all-time high record by the end of July.

During the quarter's -- second quarter '21, our average price was $3.9 million per million BTU, double year-on-year and almost 40% up quarter-on-quarter, again explained by the Plan Gas winter peak. The B2B and spot prices out of this GSA also reflected the seasonality, but haven't reached the Plan Gas levels. As you can see right below, the year-to-date sales are more diversified, similar to the country's breakdown. Gas retailers are also part of Plan Gas and stored during winter because of their priority, increasing its share to 30% compared to the last year's -- last quarter's 18%. Also we are working to grow our B2B sales with positive results, increasing our market share, as you can see in the slide. The only segment shrinking is exports, which will be resumed from October with a take-or-pay deliveries to Chile.

Regarding our E&P operation subject, we strengthened our investment recording $55 million during the quarter, almost 3x higher than last year. This quarter was quite active, drilled and completed 11 dry gas wells, in line with the winter peak. As I said in the previous call, we are building the second gas treatment plant in El Mangrullo, which will more than double the current capacity to reach 290 million cubic feet per day by the first half of next year. In all, we drilled 4 wells and completed 5, all from (inaudible).

Moving to the petrochemical business. This segment delivered another solid quarter, achieving 4x last year EBITDA, mainly explained by the significant rise on international prices, higher local virgin naphtha supply and demand growth linked to industry recovery, offset by increased raw materials costs influenced by the said reference prices and Plan Gas impact. The year-on-year sales volume increase was significant for all the products. Still quarter-on-quarter decreased 22% because of the reforming plan seasonal maintenance. In addition, roughly 40% of the quarter sales were exported. Since the international prices are very volatile and seasonal, we do not expect this outperformance for the second half of the year.

Before getting into cash and debt, we must highlight the solid cash flow generation reported during the quarter, supported by the outstanding operating performance from all the 3 businesses and improved profitability, thanks to the higher realized prices. During Q2, free cash flow resulted roughly $72 million, $50 million more than last quarter. Notice that -- the last year's quarter. Notice that the working capital was negative, mainly driven by seasonal -- higher seasonal billing and Plan Gas effect, and to a lesser extent the increase in collection days from CAMMESA. In addition, we collected Edenor's second sale installment and former Plan Gas receivables for a total of $64 million. We repaid $71 million of mostly debt maturities and brought back shares for $11 million. So in total, we generated a net of $54 million, achieving $462 million of cash position by the end of the quarter.

Moving on to Slide 11. This slide shows consolidated figures, including our affiliated ownership, but let's keep focusing on the restricted group for covenant purposes. Since Edenor was deconsolidated, Pampa under IFRS is equivalent to the restricted group. The gross debt continued to increase, amounting to $1.5 billion as of June 2021, 96% is in dollars, up from the 91% last March. As we've been paying down all the short term -- most of the short-term debt in pesos. The dollar debt bears an average interest rate of 7.4%, while the peso debt averages less than 37% interest rate. The average life remained at 4.6 years. As we said before, the cash amounted to $462 million. This is 13% higher quarter-on-quarter. So the net debt decreased to $1 billion. In addition, the net leverage ratio improved from 2.3x to 1.7x due to the higher EBITDA.

In the next 12 months, the company only faces less than $100 million of maturities, most in local currency. Moreover, our last peso bond matures by the end of this month, roughly $65 million. Therefore, we expect to keep reducing short-term debt, strengthening our balance sheet. As a result, we can see Fitch Ratings upgraded our bonds to B minus. Fee Argentine Coopers are above the sovereign ceiling.

So this concludes our presentation. Now I will turn the word to Margarita, who will open the floor for questions. Thank you.

(Operator Instructions) Our first question comes from Bruno Montanari from Morgan Stanley. He has 2 questions. The first one is, with the conclusion of Edenor disposal, what is the company's mindset for potential future corporate moves? Would Pampa be more likely to buy something or sell something? Any particular asset type that will be preferred on the purchase side? That is the first question.

While reading your question, it came to my mind the joke about the portfolio manager that now (inaudible) will go up and down, but not sure in which order. So I think for Pampa it is the same. We've been all our life thinking about our portfolio of assets and rebalancing our own portfolio of assets. So -- and so the M&A is part of our -- the M&A activity is part of our DNA. So I'm sure we will continue in the future. And honestly, the only thing that I can tell you that we are actively working today is what has already been disclosed on the -- this interest of gas from -- in our E&P assets. So we continue our discussions with them. Whether that will materialize in the transaction or not is yet to be seen. And there's not much as although we are all the time analyzing opportunities and there's nothing more concrete on that front.

The second question of Bruno was, can you comment on expectations of the new hydrocarbon law and the access to the U.S. dollars?

Now regarding the hydrocarbon's law, there's not much that I can tell you that what is already in the media. About a couple of months ago, the government did a round with all the players and explained the basics of the law, and that went into the media show well after. And since then, I heard that they continue working on the law. We have minor changes or minor adaptations to what we have seen and what has been published. But not sure about the timing when the executive power will finally present its proposal to Congress. I hope the sooner the better. It seems there are a few things in that law that makes that positive for the sector, several things in the law that are positive for the sector. So the sooner that that goes through, the better especially before all of us start defining our investment plans for next year. But I have no idea when it will -- when the government will move forward with that.

Our next question comes from Frank McGann. He has 3 questions, but the first one is already answered because it has to do with M&A opportunities. The second one is about the payment chain in power generation from CAMMESA. Can you give us more update on that?

Okay. Thank you for the slide. As you can see on the presentation, collection dates from CAMMESA have deteriorated a little bit in the last few months, reaching a high of 90 days. Just to clarify, this 90 -- this doesn't mean there's 90 days of delays. It's 90 days since invoicing. Actually, CAMMESA pays at 40 days, 45 days after invoicing. So the delay from CAMMESA is an average of 45 days, not 90, as you can see here in this picture.

Anyway if you see the pattern, last year around this time of the year was the worst moment and then CAMMESA improved the collection days a little bit. That is basically because during the winter, those are the toughest months for CAMMESA as they have to pay for the purchase of gas -- of diesel oil, fuel oil and LNG. So those are the toughest months for them. And we hope that as it happened last year, the collection days will go down again as we approach during the third and fourth quarter.

Just a clarification, CAMMESA doesn't only affect power generation, in our case it also affects the E&P business as well as the significant part of what we sell, we sell-through through CAMMESA.

Okay. There is one more question from Frank McGann. What is the Q3 gas price expectation, Q3 this year?

Sorry. We expect the price on the third quarter to go slightly up of the second quarter because we continue in the winter. In the fourth quarter, it will go down, basically following the pattern of the Plan Gas pricing scheme. In the third quarter, not only price will go -- average price will go up, but also volume will go up vis-a-vis the second quarter.

Our next question comes from Constantinos Papadias from (inaudible). He has 3 questions. The first 2 questions are related. It has to do with a view on the local gas market evolution in the midterm. In the midterm, what is the expectation in the prices and volume? And the second question is regarding CAMMESA tenders. They have been raising more than 17 million cubic meters per day for August at Plan Gas prices, amid a dry season that will perhaps affect next year as well. Do you see any additional Plan Gas or something similar or perhaps more frequent short-term tenders of the sort?

The last part of the question wasn't heard.

So the last part of the question. So the last part was -- the second part was regarding CAMMESA tenders. They have been raising more than 17 million cubic meters per day in -- for August at Plan Gas reference prices and if we see any additional tenders or something similar in a more frequent basis in the short term.

Okay. Thank you, Constantinos, for the question. As you know, because of the Plan Gas, there's been a significant change in the market. Last year, we had a -- if you want, more spot market with prices regulated by -- basically by CAMMESA and Secretary of Energy. Today we have a contracted market. So most of our -- during the winter 100% of our sales goes through the contracts of the Plan Gas, either with CAMMESA and with CAMMESA, with the industry and with the distribution companies. So those 17 million cubic meters of tenders that CAMMESA has done or CAMMESA does every month is almost somewhat irrelevant in terms that that tender is not binding neither for -- it doesn't have any take-or-pay or deliver pay. So you offer your gas there. So in case you have an excess of supply that is not sold through the Plan Gas or to the industry and if you have done excess, you can sell it to CAMMESA but only if you don't have a better alternative. And it works the same way for CAMMESA. So those auctions, those monthly auctions, they reflect the spot price as long as there are transactions. During the winter, there are no transactions. So it's not a good reflection of the market.

Margarita, can you leave the question there? Thank you. In the short and medium term, what do we expect? This winter, there's been -- as you know, thanks to the Plan Gas, the industry recovered, production recovered from last year. And -- but still, there was an excess capacity in the pipelines going from the Neuquen Basins to -- going out of the Neuquen Basins of around 6 million cubic meter of gas per day. So what we expect to happen is that the government will call for the third round in order to fulfill the transportation capacity out of the Neuquen Basin. That is a win-win situation because we continue increasing the local production of natural gas, displacing more expensive imports of liquids or for LNG or eventually Bolivia. So we expect that's a round of -- to happen the sooner the better. So the industry can prepare and be ready to deliver that gas next winter.

What else do we expect is in the -- our volumes in the third quarter of the year, I mean the first quarter of next year, the expectation was -- we are currently producing or delivering 9 million cubic meters. That is what has been contracted in the Plan Gas. In the fourth quarter of the year and the first quarter of next year, what we have committed or what -- is 7 million to the Plan Gas. So volume should -- our sales should go down during that period. That might be somehow moderated by the fact of the extreme drop here, by extreme weather in the south of Brazil, especially the draught -- the draught in the south of Brazil. So we might be able to export about 2 gigawatt of electricity from Argentina to Brazil. That is a big consumption of gas that is around 10 million cubic meters of natural gas per day. So if Brazil needs this energy from Argentina, it will be a significant improvement of consumption of gas internally, and that could improve our volumes in the fourth quarter and in the first quarter of next year. I think...

Yes. There is one more question from Constantinos. On top of that, there is the state budgeting -- adjusting the budget that includes gas main pipeline expansion. Do you see that positively affecting the business in the near term?

Yes. Good question also. We think it's great news to hear that the government is working and going forward in expanding the capacity, the transportation capacity. It's not going to impact our business in the near term because building this pipe will take about 2 years. But as we always said, Argentina imports a lot of gas from Bolivia throughout the year, all year long. That makes a lot of sense that the local industry replaces those imports. And Argentina also imports heavily and very extensively during the winter. And it also makes sense we have the reserves, we have the capabilities to replace those imports with local production, but we need infrastructure, infrastructure that will be -- that makes a lot of sense and will be quickly replaced with savings in imports of energy. So the sooner that the country does it, the better. So to answer shortly your question, it's not going to impact -- it won't have an impact in the short term, but it may have a significant impact in the medium and long term over this.

Our next question comes from Alejandra Andrade from JPMorgan. Do you still expect CapEx of $200 million and between $200 million and $250 million for a year for the restricted group? Before answering, keep in mind that we don't give guidance.

The significant amount of CapEx this year is essentially related by some infrastructure CapEx on the E&P business, plus additional wells in order to achieve high levels of production. So assuming no changes for next year, the amount of CapEx should be decreased from the current year based on the infrastructure that we want this year and the level of new production that we already reached. So any differential from this expected decrease would be if we enter into new E&P business. But as of today, it's not budgeted.

Our next question comes from Anne Miller from Bank of America. Now that plan gas is implemented and your thermal plants are almost near completion, what are the next strategic steps for Pampa Energia? What is the CapEx for the remainder of the year and preliminary budgets for next year? Before answering, keep in mind we don't give guidance.

Thanks for the reminder. Strategic steps for Pampa, within the sector that we work and room for growth today, we clearly see it on the E&P business to continue developing our assets there. And as explained before, it depends basically on 2 things. One, is a new round, a new bidding round for -- on the Plan Gas and we expect that to happen rather soon. And medium term, the expansion in transportation capacity. Otherwise, the industry itself won't have much room to grow. We may be able to gain market share because we have very competitive assets, very competitive portfolio of assets in our E&P sector. And in power generation, we might be able to expand on our portfolio of renewables. We are analyzing whether to build a fourth wind farm that could be sell to the market, so B2B to the industry. And those are basically what we are foreseeing in the short term.

Our next question comes from Florencia Mayorga from MetLife. She has 3 questions. The first one is, do you have any update on the refinancing of the 2023 bonds?

Yes. As we mentioned in previous calls, that's something that we monitor constantly. It's also related to Central Bank regulations and at some point we expect to do something that it may be either paying the bond or refinancing as the Central Bank rules allow.

And the second question come -- is about the legacy energy. After the 29% hike announced in May, any update on potential adjustment for next year?

No, we have no clue about next year adjustments. There are currently minor requests from the industry to adjust not the price itself, but the industry is claiming for a few changes in the regulation 440, that there being -- especially with those equipments that are less dispatched, so like steam turbines -- mainly for steam turbines. But those discussions that are going on with the Secretary of Energy, but so far nothing has been decided that we know.

The last question from Florencia is regarding any update about the hydro concessions that are maturing in the next 3 years?

Unfortunately, 3 years is like eternity in Argentina. We're always discussing next quarter, not the next 3 years. Unfortunately, we have no clarity of what the government is thinking. I don't think that at this point, the government is -- has this issue on their mind.

Okay. Our next question comes from Ezequiel Fernandez from Balanz. He has 2 questions. The first one is about the export to Chile of gas. In case you have not commented on this earlier, do you have any update on the possible gas export deal to Chile you mentioned during the first quarter call.

Yes. Maybe we forgot to mention that or not -- we did, yes. But as Lida mentioned during the presentation, we have been awarded the contract to export in firm to Chile, 1.5 million cubic meters of gas per day since the 1st of October until 1st of April of next year. So that export will go through beginning in October. What else is in the question? Is that it?

Yes. The next question from Ezequiel, that was the last one, is regarding any sign of demand from corporate in the matter, the renewable private market that could help unlock new greenfield investment in renewables?

The demand from corporate, obviously, is there. The issue is about the pricing. So we are evaluating. Unfortunately, the cost of building a wind farm has gone up because of the prices of commodities -- especially because of prices of commodities going up in the world. So that's why we are re-evaluating this. We have requested prices from the suppliers and we are evaluating that. But the demand, obviously, from the corporate sector is there to acquire renewable energy.

Please wait so that we can poll for more questions. We have one more question from Ezequiel from Balanz on Edenor. Just confirming that the June 30 balance already reflects the cash collected from $50 million payment.

Yes. In that respect, we already collected $50 million and there is a remaining $40 million payment for next year.

Please hold while we poll for questions. Thank you for waiting. Our last question comes from Rafael Elias. Assuming no modifications to your PPAs, do you have any intentions to tap international capital market in order to extend maturities, but mainly to reduce your cost of debt in U.S. dollars?

Yes. With today's debt profile and cash position, we feel comfortable in that respect, although we are active managing our debt profile in the event we see any changes in our business projections.

This concludes the question-and-answer section. We will turn to Lida for final remarks.

Thank you, everybody, for joining us. I don't know Gus, Gaby, would you like to make some comments? Did we cover well petrochemicals or whatever you feel that we didn't cover. This is 1-hour call. If you have more questions, we will be very happy to follow-up with you. You can see this replay afterwards. Any questions, just contact us. Margarita here. We are always available for you. Thank you so much. Have a good day.

Bye-bye.

This concludes today's presentation. Thank you for joining. You may disconnect at this time. Goodbye.