Vista Energy SAB de CV (VIST) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Vista Oil & Gas Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Also, as a reminder, please note, this conference call is being recorded.

I will now like to turn the call over to your host, Alejandro Chernacov. Sir, you may begin.

Thanks. Good morning, everyone. This is Alejandro. We're happy to welcome you to Vista's first earnings call. We will be discussing the results of the second quarter of 2018. I am here with Miguel Galuccio, Mr. Chairman of the board and CEO; and with Pablo Vera Pinto, Vista's CFO.

Before we begin, I would like to draw your attention to our cautionary statement. Please be advised that our remarks today including the answers to your questions may include forward-looking statements. These forward-looking statements are subject to risk and uncertainties that could cause actual results to be materially different from expectations contemplated by these forward-looking statements.

Our financial figures are stated in U.S. dollars and in accordance with International Financial Reporting Standards, IFRS. However, during this conference call, we may discuss certain non-IFRS financial measures including adjusted EBITDA. Reconciliations of these measures to the closest IFRS measure can be found in the earnings release that we issued earlier yesterday.

We will present this initial quarter results against the guidance we presented to the market prior to completing our Initial Business Combination. All the material previously made public is still available on our website, so please visit and check all the documents shared with you there.

The guidance was made for the corresponding metrics on an annual basis. For comparison purposes in our quarterly results, full-year results in the guidance were proportionally estimated for a quarter. Other metrics in our guidance such as daily production volumes and average realized sales price don't need to be adjusted to be compared against quarterly results, though in some cases they may be affected by seasonal factors as is the case for the natural gas sales price or the activity schedule.

Our company, Vista Oil & Gas is a Sociedad Anonima Bursatil de Capital Variable organized under the laws of Mexico, registered in the Bolsa Mexicana de Valores with a ticker of our common stock being VISTA and the ticker of our warrants being VTW408A.

Miguel Galuccio will now present the quarterly results.

Hi and thank you everyone for joining this call, and we will present the result of Vista first quarter of operations. I'm really excited to share with you the detail of our performance, which is progressing in line with our expectation. We have put together a very strong team of top-performing, highly motivated, [hands-on] professionals that push our day-to-day operations.

Thank you to our team, we already identifying more efficiencies and growth opportunities that originally expected and we are ready to capture those opportunities over the coming quarter. Now let's begin with the results of the second quarter of 2018.

In terms of production, we delivered 24,400 barrels of oil equivalent per day, an increase of 1.2% with respect to our guidance of 24,100 barrels per day. This production includes crude oil, natural gas and natural gas liquids, and excludes flare gas, [pre-injected] gas and gas consumed by the operation.

In our operated assets, we are currently drilling with two rigs. One drilling rig is dedicated to the ramp-up of conventional activity and the other rig is dedicated to accelerating our Vaca Muerta project. We will show more detail of this project later.

Revenue for the second quarter were $110.3 million, slightly ahead of guidance for 2018. By the way of clarifications, these revenues do not include the sales of the first week of the quarter of Medanito and Jaguel de los Machos blocks, which are included of net cost in another income.

Adjusted EBITDA came in strong at $49.5 million, 7.3% above guidance. EBITDA margin was 45%, which was also above our guidance of 43%.

Our financial position is very strong. The ending cash balance was $75 million and financial debt stood at $260 million, corresponding to the backstop facility we used to find our Initial Business Combination. The resulting net leverage ratio measure on pro forma LTM EBITDA was a conservative 0.94. Last week, we refinanced the backstop facility with an unsecured five-year term loan of $300 million, and the pro forma net leverage ratio still slightly below 1.

The net term loan takes our current cash position to more than $110 million and having an 18-month grace period on repayment of principal of the new term loan. We are financially well-positioned to ramp-up our development activity.

This has been a very busy quarter for us, closing the Initial Business Combination, staffing up our operational and corporate teams and then rapidly [starting our activities] to deliver on what we have promised all in a period with significant macroeconomic volatility in Argentina. Our initial results are in line or above our guidance across the key metrics, and we are confident that we will be able to deliver on this year's plan.

In this respect, we defined [five] start-up milestone where we shared with our investors during our road show back in February and March 2018. We are now presenting what we have delivered on so far.

Our objective was to integrate the acquired entity to an asset. We consolidate operatorship across assets under one operated entity now renamed Vista Oil & Gas Argentina. We managed to build a very strong team, reorganized into three assets focusing in operations teams, incorporating a skill, which we did not have in the acquired entities, particularly around unconventional development including [G&G], drilling and completion, and production.

We have implemented technological changes that would enable us to operate more efficiently. We have already launched projects to digitalize our field operation including real-time operation monitoring and incorporating a new top-notch ERP system. We are also enforcing health safety and security standards.

When we launched Vista, we state our objective to run it as a simple, nimble, lean technology-driven operation company, coupled with rapid decision-making. I'm very pleased to see how that vision is being implemented with a lot of enthusiasm.

Our second milestone was to launch the development in Vaca Muerta. For that throughput, we staffed our top-notch and conventional project team; we hired first-class geologists, drilling operation managers with several years of experience working in Vaca Muerta.

To accelerate the delivery of this project, we've hired a conventional rig and already drilled the two surface and intermediate sections of the first four-well pad in Bajada del Palo. To complete the pad, we've hired a skimming rig, it is drilling as we speak. In parallel, we negotiate a new pay-for-performance contracting model with the drilling and completion companies. What this basically does is align both contractor and operators. The way we achieve this is by defining share objective and defining premium or penalties based on the operational resource of the company. This should impact directly in the drilling and completion time and reduce our work cost. We expect to tie in the first four unconventional wells by early 2019.

The third milestone was to contain conventional base production decline. We produced an average of 24,400 barrels of oil equivalent per day in the second quarter. We represent a slightly decline of only 0.8% compared to the 3.9% decline from Q4 2017 to Q1 2018.

We took several actions to successfully contain decline. Firstly, we drilled four wells of which we already tied in one at a total cost of $1.3 million, approximately 20% below budget. Secondly, we execute four-well workovers. Thirdly, we performed a series of shock to debottleneck our existing facilities so as to capture quick production gain, particularly on the gas side.

Regarding our long-term view on conventional development, we are currently conducting a full review of our exploration and production portfolio. We are excited about the opportunities that we're identifying, which we will believe will further support our profitable growth.

The fourth initiative was to right-size the conventional operation. For this purpose now, we integrate all acquired assets under one single operation company. We are streamline our contract to maximize finishes across assets. We are also working with our suppliers to reuse inefficiency resources on our cost base and to change existing contracting model in such a way that we align operator-contractor interest by paying according to contractor performance. This represent a significant change to the traditional contracting model that exist in Argentina oil and gas industry, but we firmly believe that this new way of working is key to our success. Last but not least, we are carrying out specific cost-saving project that although still in early stage have started to generate impact.

And finally, we are also state our objective of pursuing a regional expansion plan. In May, we made the first regional state by signing [definite] agreements to enter into a joint venture over three onshore blocks in Mexico. We have Jaguar Exploration and Production, [on which two] will operate by Vista.

The transaction is subject to the approval of Mexican national zero-carbon commission, and we're expecting to obtain approval in the upcoming weeks. Upon closing of this transaction, the Mexico operation will initially represent less than 10% of our reserved productions and revenue. In line with our strategy or geographically diversifying our portfolio, we will analyze further growth opportunities in the region and in Mexico in particular.

In the second quarter, we have a good production level support by the ramp-up of conventional activity as explained early including new work and workover. Crude oil production in the quarter was 14,700 barrels of oil per day, 0.7% above guidance. Natural gas production was 1.42 million cubic meter per day, equivalent to 8,900 barrels of oil equivalent per day, which was 2.9% above 2018 guidance. Finally, we produced 65 tons per day of natural gas liquid, equivalent to 744 barrels of oil equivalent per day.

Net sales for the quarter reached $110.3 million of which 74% were crude oil sales, 21% natural gas sales and 2% NGL. Adjusted EBITDA of the quarter was $49.5 million, above our guidance of $46.1 million by 7.3%. Adjusted EBITDA margin was strong at 45%, ahead of the guidance of 43%.

Crude oil sale reached $83.3 million during the second quarter of 2018, representing [77.4] of the total sales of the company. Crude oil was entirely sold to domestic refineries, primarily Shell, YPF and Pan American Energy. All the crude oil of Vista is Medanito type, light crude oil, and highly demanded by Argentine refineries.

Average oil price of the quarter was an average of $68 per barrel. As a reference, our projection for the year has been build assuming average oil price of $67 per barrel. We remain unsure of 2018 in the context of the material Argentinian peso devaluation and the rapid increase in international crude oil prices, the refineries in Argentina were temporarily unable to pull pass-through this impact to the pump prices with a local market of the crude oil prices hovering around $68 per barrel.

During Q2 2018, natural gas sales were $22.7 million, representing 20.6% of the total sales. Sales were made to a diversified portfolio of the industry, 88% of natural gas sales and the remaining of power generation CAMMESA. The majority of the company sales contracts are $7 and the Q2 2019 average price was $4.8 per million BTU, 2.1% above the guidance.

NGL sales represent 2% of Vista sales. NGL prices are denominated in pesos with an export parity plus of subsidy from the Minister of Energy. The average price for the quarter was $402 per ton.

Operating expenses for the quarter was $31.3 million, 17% below guidance. It was the result of two F.X. Certainly, the effort of our operation team to quickly identify and execute cost saving activity such as the optimization of pulling unit, more efficient use of materials in O&M and deferment of low impact activity. In addition to these, our peso-denominated cost benefit from the devaluation of the local currency in real terms.

Lifting cost were therefore 17% below guidance, $14.1 per BOE against $17 BOE guidance. Our regional capital expenditure was $11 million in the quarter and include the drilling of four conventional new wells in Jaguel de los Machos field of which one was tie-in at a total cost of $1.3 million. The drilling of the surfaces and intermediate sections of four wells pad drilling Bajada del Palo/Vaca Muerta shale oil block.

The execution of four workovers, three in Medanito field, one in Entre Lomas field and the average cost of $500,000 each, and the execution of the debottlenecking plan in existing facilities of $1.6 million.

In this slide, we are showing the top performing Vaca Muerta shale oil well, recently put in production in Coiron Amargo Sur Oeste, CASO, block , a J.V. in which we hold 45% interest and that is operated by Shell. In March 2018, we completed the well CASO.x-1 with 27 frac and its performance have exceeded our expectations so far.

As shown in the bottom left chart, initial shale oil production rate from this well are higher than the (inaudible) average, the well target Vaca Muerta, the Upper La Cocina [La Unson] with a lateral length of 2,000 meters, or 6,560 feet. This result bring forth our enthusiasm because we believe that the results can be extrapolated to the [Vasacale del Palo], which is in the same Vaca Muerta shale oil window as CASO.

At the end of Q2 2018, Vista cash balance was $75 million and the financial debt is $260 million, corresponding to the backstop facilities discussed earlier. The implied leverage ratio measurement and pro forma LTM EBITDA as of June 30 was 1.3 on gross leverage basis and 0.9 when measured on a net leverage basis.

After the closing of the second quarter, the previously mentioned backstop facility were refinanced with a $300 million five-year unsecured term loan that was executed with a bank consortium, providing Vista with additional cash and improving its debt maturity profile. Therefore, the pro forma July 20 cash balance was approximately $110 million, resulting in a pro forma gross leverage ratio of 1.5 and a net leverage ratio of 1.

So to conclude the first part of this call, I would like to point out some concluding remarks. As you have seen, Vista per quarter as an oil and gas operator is showing strong results on both the financial and operation front. We managed to contain the decline of our conventional production by investing in drilling and workover activities.

On the conventional front, we stepped-up our team and we are already drilling the first part of CASO.x-1. Our first Vaca Muerta well was tied in at the beginning of the quarter and is delivering about tied well production. This result strongly support our technical view of the Vaca Muerta play. We are in a solid financial position ready to significantly ramp-up our Vaca Muerta drilling development plan.

Overall, we are maintaining operational financial guidance for 2018. As shown, we are in line or above guidance all key metrics during the second quarter and we believe we will be able to sustain this trend for the remaining of the year.

We are extremely pleased to have had the chance to share our first quarter results with you, and we like to take this opportunity to thank all Vista employees and suppliers for their hard work and commitment to the company. We will now move to the Q&A session.

(Operator Instructions) And our first question comes from the line of Bruno Montanari from Morgan Stanley. Your line is now open.

Good morning, Miguel, Pablo, Alejandro. It's great to have you back now with Vista. Thanks for hosting the call and taking my questions.

The first one is about prices, so I wanted to explore a little bit the pricing environment in Argentina. We're coming from a rather convoluted temporary agreement in crude oil and fuel prices, which I understand is no longer valid, and prices are now free. So I wanted to have an idea of what will be the benchmark for Argentine crude if we should look at Brent, WTI, Permian. And also to which extent can Vista export crude if domestic prices are not that much attractive.

Second question is about Mexico. Obviously the continuation of the energy reform with the changing government very recent, and how does that fit with Vista's plans to grow in the country. And if I can ask a third one on a more fundamental point, I think the unconventional opportunity is pretty clear and very exciting. Your comments and potential upside from conventional assets is very interesting though, so I wanted to get more color on what areas could see higher production, and if you could give us any idea of potential production or incremental recovery rates in those areas will be great. Thank you very much.

Hi, Bruno, this is Miguel and happy to hear you again as well. Thank you very much for the questions, and I will start with the first one related to basically prices of oil in Argentina.

So, as I mentioned during the conference, we basically have seen an effect that we already know was the fact of the further the refinery after the F.X. impact that we have that was coupled at the same time with increase of crude oil prices worldwide. We didn't manage to pass through all that impact through the pump crises, okay. And we know in Argentina that is an effect that you cannot immediately pass and, therefore, it takes a bit of time to normalize the prices at the pump and that, of course, put a pressure on the crude oil prices for the operators and for the one that we are producing.

We have seen and we have seen a normalization of that. We have seen already some pass-through pricing through the pump on. And, of course, that is normalizing.

Your question regards what is our benchmark, what is the benchmark of crude oil price in Argentina is Brent and, of course, is Brent and its export parity. And I think we are seeing again a conversion toward export parity. We are not there yet, but we believe after a few steps, we should be there soon.

Regard Mexico, as you know, I mean, we acquired these three blocks during the campaign, so clearly we have a positive view on Mexico. Of course, mainly in the fact that we believe Mexico is a country with a lot of resources. We believe Mexico is a country where good resources in the sense that our resources today have a low [uptime] in terms of value, and we recognize that.

And also I think we did a very important move on the fact that we didn't move pertaining with the [partner number] we saw is a very [awarded party] in Mexico. And also we bring a bit of the local knowledge that, as you know, we have a [pass] in Mexico, but I think was interesting to partner with [Howard] that already have acquired several blocks. And these three particular blocks we like it a lot.

So after the new government is in place that is not in place yet, we don't expect major changes in terms of the application of oil and gas law. Of course, there could be some changes and highlighted changes, but I think Vista today is extremely well-positioned to navigate whatever changes we have. We are the [third] E&P company to be listed in the stock exchange in Mexico. We have the [Forest] as a measure investor within our structure, so we believe we're very well-positioned. And we are building the team, so we have appointed [additional managers] in Mexico and we are building a team around since we are going to be operating there very soon.

In terms of the conventional production that was your third question, I think a very interesting one, thank you for ask that. Our view on our conventional activity today is much positive than when we acquired those assets. We are spending very important time [and] focus what kind of technology we could apply to rejuvenate the marginal fields. And what we've seen so far is very positive. It's very early probably to put a number to it, but we are clearly seeing much more opportunities than we saw we have in those existing assets.

So, one particularly to mention where we have a bit more of a clear view already is [tie gas], okay? [Tie gas], we identified a formation called [Lotina]. And I think we see that that [tie gas] formation has very good upside, and we believe we can create good margins with existing gas prices that we are realizing today. So I will be not surprised that the technical team commits one of the rigs very soon to drill few wells and in order to start to basically putting a site and have a feeling about how good [Lotina] play is.

Our next question comes from the line of Regis Cardoso from Credit Suisse. Your line is now open.

Good morning, Miguel, Pablo, Alejandro. Thanks for taking the question and congratulations on your first results. Two questions from my side, one regarding CapEx efficiency in light of the F.X. devaluation. So basically I wanted to know how do you see CapEx per well or CapEx per lateral foot, whatever other CapEx efficiency metric you could use to compare your original plan, and the picture as you see now after the recent peso devaluation. And I'm asking this because I understand at the relevant part of the CapEx is actually peso-denominated.

And then the second question would be on M&A because you mentioned you're currently evaluating other attractive growth opportunities. I wanted to understand what are the characteristics of the assets you are looking for, so what are the important features that any asset for you to consider acquiring, what are the important features these assets must have. Thank you.

Thank you very much for your question and glad to talk to you again. So, look, related to the first question, there is basically the impact of the devaluation on our CapEx. We said clearly the peso devaluation have a positive effect on our P&L. Now, it probably have lesser effect in the CapEx than in the OpEx. Our CapEx is probably 70% in dollar term and 30% pesos term.

OpEx is probably the other way around. Therefore, we have seen and you saw in the presentation, we basically we're having an impact in the lifting cost that have two main components. The main one and the more important one was related to all the initiatives that we implement in the field in order to reduce the OpEx and we reduced the OpEx probably in $2.1 per barrel due to those initiatives. And also we got an additional impact that was related to the peso devaluation probably of a similar effect, okay, and this is what you've seen in the presentation that we have a significant reduction in OpEx, therefore that is for sure is playing also a role on an increase on the margins and EBITDA.

Now, back to your question on CapEx, I think the more important theme for us for CapEx will be on the unconventional side, the fact that we have managed to put together a very experienced and professional team, and we are doing the start-up, which have drilled the surface and the intermediate section with a conventional rig that is more cheaper than the unconventional rig for the four wells that we have target for the first part for this year and has been basically a seamless operation and with very good numbers.

We see reduction on CapEx also on conventional. We have drilled a few wells on the conventional that are basically been executed most of them below budget. The number I can give you is 20% below what we're planning.

Now, the other thing that we're glad to see is the start-up of the unconventional operation on the drilling side. This week it's going to be drilling as we speak, so I don't have a number for that, but I think that is going to be important.

One on the fact that we are probably -- or exciting to see is the fact that we are going to be drilling longer lateral that the one that we planned at the beginning. We planned 2,000-meter lateral length. I think our guys are going to go a few hundred meter above that. That, for sure, will have a positive impact on the development cost and on the NPV of those well.

So, if you turn me from the unconventional point of view, the main impact that we could have on the CapEx side will be the fact that we are able to demonstrate that we can go for longer laterals and a very cost-efficient way. And I think we are pretty much well-suited to do that and to deliver that.

On the M&A question, I think we are very active at the moment. It's very difficult for us to give you any particular target, but we look for materiality, okay? We are now going to entertain anything that's no material. And therefore, we note that in Mexico, in particular, we have materiality. We are beefing up the B.D. team and the operational team at the moment.

There are three opportunities that today we are looking in Mexico. One is [Pemex] farm-out. The other one is [round] 3.2, okay. It's another round that is the 3.3 that is focused on unconventional but also we are going to look in quite detail based on the fact that probably we are the guys with more experienced in the unconventional in Latin America. So we are looking at the three of those. We are ready to play in September, but that has been delayed until February next year, what is giving us an extra time to look at into those opportunities in more thorough ways.

Perfect, very clear, Miguel. If I can just do a follow-up, you mentioned on CapEx, one of the things that seems very interesting in current operations is that you have a conventional rig drilling the first phases of the unconventional wells. And I understand you have two rigs drilling at the moment, one of which drilled this first part of the unconventional wells. Is this a strategy you invent or you can continue to do going forward to have a conventional rig drilling part of the unconventional targets or is this conventional rig in addition to the other one dedicated to completions and workovers? But is this conventional rig focused more on conventional target or is it made to continue drilling the unconventional target? Thanks.

Yes, thank you, Regis, for your question. To be completely honest with you, this is something that we did not plan that it come from innovation and creativity of our people in the field. It's not that we have not done a pad drilling in the past. This is a technique that we have used in the past our self in several moments of our career, Juan Garoby, the CEO of Vista has a lot of experience on that. And this was a tactical move.

We thought that we can gain time. We thought that we will put us in a more, I will say, comfortable place to deliver what we promise. And really it has worked extremely well, so not necessarily something that we will continue doing in the future. Clearly, we will evaluate it. It worked pretty well, but we have now our unconventional rig in place, that is a fit for purpose rig, so we'll see how it goes.

Clearly, what we are looking at that now we can really -- we are going to deliver the four-well tie-in the [third] quarter of 2019, and we promised and we are working very comfortable. Where I'm sure there's people in the field will compare cost and efficiency and so on, and they may come with something of the nature that you described, but it's not the plan at the moment.

Our next question comes from the line of Frank McGann from Bank of America. Your line is now open.

Okay, thank you. Good morning. Just a couple of questions on the natural gas side if I could, one is I'm just wondering if the mix of your sales in natural gas should be consistent of what you reported in the second quarter where the 88% being industrial as you go into the third and fourth quarters or if there potentially could be some change there.

And then secondly, in terms of pricing for natural gas, there's some discussion about possibly making some changes to certain types of natural gas prices for certain types of sales, and I was wondering what you are expecting at this point could be announced related to that.

Hi, Frank. How are you doing? Look, the first short answer to your question is yes, okay this is -- we will basically have in the forecast those numbers so we don't expect any changes. And related to the gas mix, we have 80% for industrial and 12% for power, so also I think that mix is pretty much well-maintained.

One nice thing about what I said to [Lotina] is that with the prices that we are realizing today that have no subsidy, we believe for the [tie gas] are going to be pretty good enough for us to have good margins on the development that we have.

On the unconventional side, as you know we are more on the oil window, so therefore, the gas have a much lesser impact. But no, yes, what you answered -- the answer is yes and I think that mix that we have between industry and power we maintained during the next five years.

And our next question comes from the line of [Andres Cardona] from Citigroup. Your line is now open.

Hey, good morning guys. Thanks for taking my question. You already have the chance to share with us the outlook for oil prices, but on the gas side, there is an event that is taking place about potential changes for industrial and households. Can you please share with us your view about gas prices going forward?

Thank you, Andres, for your question. Look, yes, as you said for sure today there may be dynamics to play in the future in terms of gas prices. The realities for our strategy today we are much more oil-based. I think gas have a lesser impact. And again as I mentioned to Frank, the gas prices that we are having today doesn't come from any [plan] that is backed up in a subsidy. We are really having -- realizing the full price.

And between the two main components of our pricings, we don't believe industry is going to be affected in the future for any of the decisions that can be done in that pricing. Probably the [third person] power could have a bit of effect, but we don't see also that component to play a very important role on our P&L.

So, I think it's too early to set what is going to happen on gas prices in the future for Argentina. Clearly, Argentina continue in high need of gas. I mean, we continue importing LNG, and I think the cost of [replanning] of LNG will continue to play a role in the future. And we know that LNG somehow is linked to the brand in certain form on the contract and we see those prices going up.

Now, again for Vista, it has a lesser impact on the fact that we have very little impact on the future development with gas except for [Lotina]. And we are realizing today prices where we are having the price fully commercialized, 88% industry and [shut] 12% power.

Okay.

And by the way, like I mentioned in the presentation, but it's around $4.8 per million of BTU.

Sorry, guys, one follow-up question. Your gas exposure, are you [mounting] receivables during the second and potentially during the third quarter because of devaluation and gas prices or [are you] --

No, we are not. We have a very short years [off] for those.

(Operator Instructions) And I'm showing no further questions. I would now like to turn the call back to Miguel Galuccio for further remarks.

Thank you very much. Look at, again, we are very excited that we have executed the second quarter of Vista the way that it had been done. I would like to thank you everybody for attending to this conference. Thank again all Vista employees once again for delivering the results. We are very exciting about the future and are looking forward to having you again on Q3 in October. Thank you very much, guys.

Ladies and gentlemen, thank you for your participation in today's conference call. This concludes today's program and you may all disconnect. Everyone, have a great day.