Vista Energy SAB de CV (VIST) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vista Oil & Gas Fourth Quarter and Full Year 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Mr. Alejandro Cherñacov, Vista Oil & Gas Strategic Planning and Investor Relations Officer.

Sir, please go ahead.

Thanks.

Good morning, everyone.

This is Alejandro Cherñacov.

We are happy to welcome you to Vista's Full Year 2018 and Fourth Quarter 2018 Results Call.

I am here with Miguel Galuccio, Vista's Chairman and CEO; and with Pablo Vera Pinto, Vista's CFO.

Before we begin, I would like to draw your attention to our cautionary statement on Slide 1. 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 risks and uncertainties that could cause actual results to be materially different from expectations contemplated by these remarks.

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 such as adjusted EBITDA.

Reconciliations of these measures to the closest IFRS measure can be found in the earnings release that we issued yesterday.

Please check our website for further information.

In the figures throughout this presentation, actual results are compared with the guidance, which was provided to investors on an annual basis in February 2018 prior to computing our initial business combination.

All materials previously made public are still available on our website.

For comparison purposes for the Q4 2018, full year figures in the guidance were proportionally adjusted to quarterly figures based on the numbers of days of the 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, although in some cases, they may be affected by seasonal factors, as it is the case for the sales price of natural gas.

Please be advised that for the 2018 full year actual figures, the first quarter of operations of the acquired entities and assets were added on a pro forma basis to Vista's third quarter of operations, which technically only included operations from April 4, 2018, the date of our initial business combination.

Hence, Q1 2018 figures are pro forma volumes and summary financial figures, while Q2, Q3 and Q4 2018 are actual Vista's results.

Our company, Vista Oil & Gas, is a sociedad anónima bursátil de capital variable, organized under the laws of Mexico, registered in the Bolsa Mexicana de Valores.

The ticker of our common stock is VISTA, and the ticker of our warrant is VTW408A.

Miguel Galuccio, our Chairman and CEO, will now present our full year 2018 and fourth quarter 2018 results.

Hi, and thank you, everyone, for joining this call, in which I will present our full year and fourth quarter 2018 results.

We closed last year with 9 months of operation, in which we delivered on our plan, with results on or above guidance across key figures.

I am pleased with the company performance so far.

With a combination of strong operational focus, a novel operating model and an enormous effort on the part of our employees and key suppliers, we achieved solid results in terms of reserve, production and EBITDA growth.

Now before I deep-dive into the fourth quarter results, I would like to share with you the highlights of our first year of operation.

To begin with, we turned around several consecutive years of production decline of the acquired assets and put our company on a neutral, sustained and profitable production growth.

Our operated production, which represented 99% of our total production in 2018 and was [still all] conventional oil and gas, grew 2.5% quarter-over-quarter, mainly as a result of increased activity and improvements in operation and maintenance efficiency as we tied in 18 new conventional wells, completed 13 workovers, reduced losses and refocused our pulling operations since we took over our operation in April.

Sales acceleration activity also positively impacted our proved reserves, which increased by 10.3% compared to 2017 pro forma year-end figure, representing a reserve replacement ratio of 161%.

One of our major achievements was to reduce lifting cost by 70%, evolving from $16.8 per boe in 2017 to $13.9 per boe in 2018 and $12.6 per boe in fourth quarter of 2018.

We were able to rightsize operations and introduce significant efficiency gains through our proprietary ONE TEAM operational approach.

For example, we were able to do the same amount of pulling intervention with 4 pulling units instead of 5, which represented a reduction of 14.3% in cost per intervention in the fourth quarter vis-à-vis the previous quarter.

The successful start-up of Vaca Muerta development in Bajada del Palo Oeste in record time and according to plan was the key milestone of the year.

We achieved top-quartile basin operational performance in our first 4-wells pad.

We have already finished drilling and completed this pad.

It includes the completion of 34 average frac stages per well at an average of approximately 5 fracs done per day.

This is top performer in the basin already in our first part of operation.

Achieving this operational result could only be done because we can attract top talent.

We have staffed our operation with professionals with extensive experience in the basin, and we have combined with top-notch professionals with proven track record leading different processes in different business, providing the right means to deploy an efficiency factory leading approach in Vaca Muerta.

We also managed to add another 15,000 core shale oil acres net to Vista through an asset swap with Shell, by which we acquired a 90% operated working interest in Águila Mora in exchange of 35% non-operated working interest in Coirón Amargo Sur Oeste.

This transaction represents an important step forward for us as we have a new project in the highly prospective northern volatile oil window of Vaca Muerta.

Further, through our strong operational results, we managed to maintain a solid financial position, having successfully managed to extend our debt maturity profile.

And we refinanced $260 million secured 12-month bridge loan with a $300 million unsecured 5-year term loan at an interest rate below government sovereign bond yields.

To conclude, our first year highlights are in line with our plan to establish additional platforms.

We put [investments] into Mexico by entering into a joint venture over 3 on-shore blocks, 2 of which will be operated by us with a Mexican partner called Jaguar E&P.

These achievements of 2018 put us in a great position to continue performing in the coming years in line with our original plan.

I will summarize our full year 2018 financial and operational results in 5 key figures.

Remember that for comparison purposes, they include Q1 2018 pro forma figures, a time which we were not operating these assets.

In 2018, total average daily production was 24,500 barrels of oil equivalent per day, comprised by 60% oil, 37% natural gas and 3% NGL.

Actual total production was 1.7% above guidance of 24,100 barrels of oil equivalent per day, with oil production 0.7% above guidance and natural gas production 4.3% above guidance.

Adjusted EBITDA for the full year was $195 million, 2.6% above guidance we presented a year ago, representing an adjusted EBITDA margin of 45%, 2 percent point above guidance.

2018 full year lifting cost was $13.9 per boe, 19% lower than our $17.3 per boe guidance.

As already mentioned, this reflects cost efficiencies from key initiatives carried out during the second and third quarters of the year, together with the devaluation of the Argentine peso, with diluted peso-denominated operating costs.

In terms of operational ramp-up, we committed to the development -- fast-track development in Vaca Muerta and to containing the decline of our conventional production-based crude.

We were able to achieve production targets, and we were on track to deliver, first of all, Vaca Muerta development in time and having invested almost 10% less than originally planned within the year, with actual CapEx of $130 million compared to the guidance of $143 million, mainly due to us having achieved a lower cost per well in our conventional development.

One of the key highlights for the year was the ability to grow proved reserves by 10.3%, consistent with our plan of profitably developing our assets and sustainably growing our reserve base.

In 2018, we produced our third reserve report with Gaffney, Cline & Associates as our internal audit.

By year-end, proved reserves reached 57.6 million barrels of oil equivalent with a reserve replacement ratio of 161% compared to the pro forma 2017 figure of 52.2 million barrels of oil equivalent.

We achieved 130% (sic) [129%] reserve replacement ratio in oil and 212% (sic) [215%] reserve replacement ratio in natural gas.

Main reserve additions came from improvement in the performance of the base production in our main conventional field, Lotena formation natural gas, and from the 4 wells drilled in Vaca Muerta in Bajada del Palo Oeste.

Now let's deep-dive into our fourth quarter 2018 results.

In the fourth quarter of 2018, our production reached 24,700 barrels of oil equivalent per day, 2.5% above our guidance, 24,100 barrels per day for the year.

Such increase was driven by the growth of our operated production, which represented 99% of our total production.

During the last 3 months of 2018, international commodity prices declined significantly, impacting the domestic sales production of oil.

With [cappers], with weaker natural gas prices driven by seasonality, had some impact on revenues generating in the fourth quarter.

Net revenue of $104.1 million were slightly below guidance.

Adjusted EBITDA totaled $40.4 million, representing an adjusted EBITDA margin of 39%.

In the fourth quarter, as opposed to the previous one, the Argentine peso exchange rate to the U.S. dollar was relatively stable, while quarterly inflation exceeded 10%.

Despite this scenario, we were able to contain the impact of the peso devaluation in real terms and managed to deliver lifting costs for the quarter of $12.6 per boe, 27% below guidance.

We also closed the quarter with a solid financial position with a cash balance of more than $80 million and financial debt of $300 million, resulting in a net debt leverage ratio of 1.1x.

We will get into more details on the abovementioned metrics and developments in the following slides.

Following our previous production figures, on Slide 6, we would like to highlight that, as already mentioned, we managed to grow our net operated production to 24,400 barrels of oil equivalent per day, equivalent to 2.5% growth quarter-over-quarter.

Such production growth we have seen in our past following the third quarter production growth of 0.4% vis-à-vis the second quarter.

We implemented several actions to keep our growth track record, including accelerating our drilling program as well as improving operating efficiency of our pulling and workover programs through our ONE TEAM approach.

Total quarterly average daily production was 24,700 barrels of oil equivalent per day.

In the chart at the top right corner, I want to point it out that average daily production in December 2018 totaled 25,500 barrels of oil equivalent per day, showing an acceleration in our production growth rate of 7.2% from October to December.

Our fourth quarter total capital expenditure was $73 million with the following activity breakdown.

We tied in 4 new wells in the oil-prone formations in Medanito and Jagüel de los Machos blocks.

We started the development of the delineation project targeting the Lotena natural gas formation with 3 new wells in Bajada del Palo Oeste, and additionally, we completed 6 workovers.

Regarding our Vaca Muerta development project, the quarter's CapEx figures only include the dollar amounts invested for the 3 of 4 wells in our first part in the Bajada del Palo Oeste block, and that does not include completion costs, which were included during the first months of 2019.

As you can see the Slide 7, in the fourth quarter, our total production remained above guidance, mainly driven by the ramp-up of conventional activity explained early on, including new wells in oil and natural gas formations and workovers.

The slight decline in oil production against guidance is mainly explained by the previously mentioned asset swap with Shell by which we reduced our working interest in Coirón Amargo Sur Oeste from 45% to 10%.

The growth in natural gas production is the result of the 3 wells drilled targeting the Lotena natural gas formation in Bajada del Palo Oeste block, as mentioned above.

When looking at the breakdown per production site, you can see that the crude oil production in the quarter was 14,500 barrels of oil equivalent per day, 0.7% below guidance, and natural gas production was 1.52 million cubic meters per day, more than 10% above guidance.

We also produced 716 barrels of oil equivalent per day of natural gas liquids.

As you can see on Slide 8, our fourth quarter revenues totaled USD 104.1 million, 7.2% below guidance.

Crude oil sales, which represented 80% of our total sales, drove the reduction in revenues.

A key driver of lower crude oil sales was the regulatory requirement to (inaudible) oil inventory in the [truck pipeline] system for a volume of approximately 12,000 barrels.

Natural gas revenues, which represented 18% of our total sales, were below guidance, mainly due to a seasonal effect of prices of Argentina entered the summer period.

Fourth quarter's average oil sales price was $65.5 per barrel compared to an assumption of oil sales prices of $67 per barrel, which to compare our guidance for the year.

In a domestic context, marked by the highly volatile Argentina peso and the imposition of export duties of ARS 4 per dollar across all exports since September 2018, we were able to maintain our relative prices, measuring dollars at a level that's only slightly below previous quarter despite the collapse in the [Brent] market.

This was the result of having presold oil volumes at $68 per barrel and having managed to secure spot prices that range from $56 to $61 per barrel.

During the fourth quarter, all our crude oil volumes, which is tied into Medanito type light crude oil, was sold to the domestic refineries, with Trafigura and Shell being the main off-takers.

During the quarter, our natural gas volumes were sold to a diversified portfolio of industrial clients and distribution companies, representing 67% and 25% of total gas sales, respectively, with an average realized price of approximately $4 per million BTU, while the remaining volume was sold to the power generation segment by state agency CAMMESA.

Average price for the quarter was $4 per million BTU, which is 14.9% below our full year guidance, which includes both summer and winter seasons.

So the difference is mainly generated because of the fourth quarter is impacted by the summer season, which is when prices are lower in Argentina.

NGL sales represented 2% of our total sales of the quarter.

NGL prices are denominated in pesos linked to our U.S. dollar-denominated debt for parity.

The average price for the quarter was $314 per ton, including subsidy from the Secretary of Energy, which represented 1/3 of the total realized price.

Continuing on Slide 9, you can see that we keep on making progress in our effort to bring down costs.

Total operating expenses for the quarter were at $28.6 million, 27.2% below guidance.

And OpEx per barrel of oil equivalent was $12.6, 27% below our full year guidance of $17.3 per boe, showing significant improvement in competitiveness of our conventional operation.

The small quarter-over-quarter growth was mainly explained by an increasing amount of pulling intervention done.

We moved from 103 interventions in Q3 to 144 in Q4, which represented a total cost incurred of $8.7 million through Q4 against $7.2 million in Q3, reducing the unit cost average intervention by 14%.

This was achieved despite an inflation in the quarter of more than 10% and at practically flat exchange rates.

On an annualized basis, the implementation of our cost efficiency program is generating more than 65% of the reduction in our lifting cost, with the remaining of the reduction coming from the dilution of the peso-denominated costs from the devaluation, and it's impacting our operation spending.

The ONE TEAM pulling initiative launched early in Q4 2018, which aligns incentives of our service providers to our KPI by restructuring the contracts from an hourly rate-based contract to a per job type of contract, has operational impacts, as I mentioned before, with cost per pulling unit dropping by 14.3% from Q3 2018 to Q4 2018.

Moving on to Slide 10, you can observe that mainly as a consequence of the lower earnings, our Q4 adjusted EBITDA was $40.4 million, 15.7% below guidance.

Adjusted EBITDA margin was 39%, 4 percentage points below our guidance of 43%.

As shown on Slide 11, our capital expenditures of fourth quarter were $73 million, adding up to a pro forma total of $130 million in 2018.

During Q4, investments in conventional activity amounted to $14.1 million, while investments in unconventional totaled $31.2 million, representing approximately 19% and 43% of the CapEx in the quarter, respectively.

I will wrap up our Vaca Muerta development.

We are increasing the portion of investments in our unconventional activity from 34% in Q3 to 43% in Q4.

Unconventional CapEx includes the $9 million bonus paid for the 35-year unconventional concession granted to Vista for the Bajada del Palo Oeste and the Bajada del Palo Este blocks, drilling of 4 vertical section of 8 wells of 2 pads, completed drilling of 4 wells and drilling of the 3 wells at our 10% stake in Coirón Amargo Sur Oeste.

Now switching gears to an update on our Vaca Muerta acreage position in Slide 12.

We divided our acreage position of 134,000 net acres in 4 blocks: Bajada del Palo Oeste, Bajada del Palo Este, Águila Mora and Coirón Amargo Sur Oeste.

On December 21, 2018, the province of Neuquén awarded Vista 2 unconventional flotation concessions for Bajada del Palo Oeste and for Bajada del Palo Este for a 35-year term and with royalties of 12%.

In addition, in November 30, 2018, the province of Neuquén approved the change of operatorship in Águila Mora upon which we became operators of such a position where we have easily obtained a 90% working interest as a result of the swap with Shell in August 2018.

It is important to note that our acreage is located in the core shale oil window of Vaca Muerta, where 95 -- 90% of the acreage is operated by us and [northern part] of our acreage being surrounded by accelerated delineation pilots or in full development mode.

In Bajada del Palo Oeste, where we were granted a 35-year concession and started our full-period development, with plenty of time [starting wells] in 2019 and continue ramping our activity.

In Bajada del Palo Este, where we were also awarded a 35-year concession, we plan to do the pilot starting in 2020 to test a concept of potentially producing Vaca Muerta oil at 25 to 30 API gravity.

If the results are positive, we will fully extend our drillable acreage by almost 50,000 acres.

At the Águila Mora evaluation lot, we don't have the commitments over the full period, with a tighter view by the end of 2019, under which we have the right to request an extension to the province of Neuquén in order to convert it to an unconventional 35-year concession by committing to a delineation time.

Coirón Amargo Sur Oeste, where we've still got a 10% working interest, continued showing solid results in the wells mainly, with productivity levels clearly above 350 type curve.

Moving on to Slide 13, we would like to share with you that Vaca Muerta development is on track and that we will start the first forward path introduction in the next few days.

As we mentioned early in 2018 highlights section, we are not only developing Vaca Muerta, but we are also doing it in the best way possible, making use of cutting-edge technology, such as walking rigs and [elected] technology for [shoestring] and adopting smart solutions for the last mile of shifting, such as sandboxes to reduce non-production time during our fracs.

In our Bajada del Palo Oeste project, we are the early technology adopters.

We were the first operator to implement 100% sandboxes in its first pad, and we were also the first operator in the basin to complete a 4-well pad without realigning and trucking of any water.

We implemented a 22-kilometer-long water [trunket] operation with the [trunk posts].

In the first 4-well pad, we have drilled an average of more than 2,550 meters lateral and already completed all the stages out of 34 frac stages per well.

We have high expectations, and we were able to complete all the fracs with 10 clusters, something never done in the basin before.

Also, I'm very excited with efficiency results we were achieving with our novel ONE TEAM approach.

In our first batch, we reached 5 average frac stages per day, a basin record.

And in February 14, we completed 8 frac stages in 1 single day.

In the second pad, which is a 5-well pad, we have already drilled both surface and intermediate sections, and we are currently drilling the horizontal sections of the third well.

As a sideline, I would like to mention that we were drilling our first well with the new rotary [STD] drilling tool, for which we would have been the first operator to use it for an entire pad outside the United States.

I would like to highlight an example of an innovative approach we're implementing as part of our strategic introduced technology and efficiency with the ONE TEAM sandboxes.

Although it's not quite in use in Vaca Muerta, this technology is an improvement to sand or shift digging in multiple ways.

First, it improves efficiency and reduces fracking cost by eliminating the difficult fulfillment of truck offloading into the [sand shifts].

Second, it is better for the health and safety as it significantly reduces the amount of sand in the air.

And finally, it allow us to store a greater amount of sand on location.

In Coirón Amargo Sur Oeste, we completed drilling the first 4-well pad.

Wells CASO x-2, x-3 and x-4 already drilled are being completed now, while CASO x-1 continues to show good performance of our type curve.

As you can observe in Slide 14, we closed the year with a solid capital position of $80.9 million, coming from $123.3 million at the end of Q3 and $85 million at the beginning of our operation in April 4, 2018.

This was driven by strong cash flow generation from operations that reached $54.7 million in the quarter, 24% more than previous quarter.

$9.9 million were used for investment activities, including the $30.6 million disbursement for working interest acquired in 3 blocks in Mexico.

This includes almost $5 million of refundable VAT and $9 million paid for the granting of Bajada del Palo Oeste and Bajada del Palo Este unconventional concessions.

Financial activities generate negative $0.6 million plus an expected effect of $2.4 million.

As of December 31, our implied net leverage ratio was 1.5 and our net leverage ratio was 1.1.

On February 13, 2019, Vista completed the pending sale of 5.5 million Series A shares and 5 million warrants for $55 million.

We do not have any other pending capitalization to the company.

Now after reviewing what I believe was a very successful 2018 performance during our first years of operation, I would like to present our updated guidance for ongoing year.

First of all, given the several domestic and international factor may potentially continue affecting volatility of key macro drivers, we decided to take a cautious stand and put together 2019 CapEx program that is fully funded with our cash in hand and projected cash flow from operations.

As stated 1 year ago, we are now reconfirming that we will target the growth reduction at a year-on-year rate of 24% in 2019 to reach an average of 29,900 barrels of oil equivalent per day.

We are adjusting our guidance to reflect lower lifting cost level.

We'll revise guidance target that is below $13 per BOE, representing a 15% reduction for our previous 2019 guidance.

Regarding the adjusted EBITDA, at the previous guidance, oil prices was $64.1 per barrel and natural gas sales price of $4.6 per MMBtu, which we expect is around $300 million EBITDA, however, in the currently prevailing lower commodity price environment and given the impact of export duties in the domestic pricing of crude oil, our core EBITDA guidance is set at around $225 million, reflecting an oil sales price of $55 per barrel and natural gas sales price of $4 per MMBtu.

Drilling activity remains at a similar level as high-efficiency is already being captured allow us to plan the CapEx program of USD 300 million for the year, 20% lower than our previous guidance of USD 366 million meeting the same production growth trajectory.

To conclude the first part of this call and before opening the line for questions, I want to thank again the entire team of Vista for its hard work and also thank everyone that support us during our conditional year, including investors, suppliers and natural and traditional authorities, helping us to achieve the solid result delivered by Vista in 2018 in a challenging context.

In line with our plan, the operational ramp-up of Vaca Muerta development project is progressing well with a strong drilling and completion performance in the first pad.

We are connecting the well as we speak.

So stay tuned for future production update and we expect to share production results of our first part in the next few months.

In Mexico, we have taken the first step in our regional growth plan by successfully closing farming to 3 onshore blocks.

We expect to launch our operation in this 2 block within Q1 2019.

On the financial front, and despite the high levels of volatility we faced by the Argentine economy since April 2018, we were able to refinance the $260 million secured 1-year bridge loan $300 million unsecured 5-year term loan with competitive interest rate, allowing us to significantly expand our financial position.

During this year, 2019, we expect to deliver strong production growth mainly driven by our Vaca Muerta project in Bajada del Palo Este entering in the production phase with the full CapEx program that we plan to execute will lower development cost than initially planned.

Finally, we expect our plan to deliver growth in EBITDA and EBITDA margin expansion even with lower sales prices than last year than originally planned by leveraging the improvement in our lifting cost and the additional revenue from our growing production.

I'm excited with outlook for 2019 despite the macro environment that continually complex both in domestic and international level; the fact that operational result went strongly in 2018, particularly on the cost performance side and the ramp-up of Vaca Muerta development is progressing according to plan makes me very confident that we are up to the challenge and we have everything it takes to deliver our ambitious plan.

Thank you for allowing me to share Vista full year and fourth quarter 2018 results with you.

We will now continue with this call with a Q&A session.

(Operator Instructions) Our first question comes from the line of Pedro Medeiros with Citigroup.

Congratulations on the results for the year and for the quarter.

So I have -- I actually have many questions, okay.

I'll try to limit them and maybe come back after.

But the first one is Miguel, do you mind your comment on the performance for Bajada del Palo first 4 wells drilled and how the current pace of activity is progressing on the block, like -- I saw the press release you put out on the presentation but it will be interesting to understand the pace of growth and how does that compare with the original business plan.

My second question is considering the performance the company has achieved in exploiting the conventional resources in terms of extracting efficiencies and drilling more wells, would you be looking for any potential upside risk for the activity levels that are planned for 2019 on the conventional side of the business?

Third question is, is the new gas formation at Bajada del Palo will that be added to production in 2019?

And the last one is whether do you see more room to reduce lifting cost throughout 2019?

Okay, those are my questions.

Pedro, thank you very much for the question.

Thank you for your interest.

So look, I think four question are very relevant.

I'll start with the first one.

Yes, definitely, I mean we have to put in context that the first part for us is still our first part even though we have drilled many wells.

At least we take that [up].

In the last 6 months, we bid a company, we attract talent, we have new contractors, we set new contracts and more importantly, we set a new way of working that, of course, we thought that it was going to be good but we want to see it in motion.

So first of all, I would like to say that the contract model that we have is working.

We have this ONE TEAM approach, where in drilling we have put together mainly [Neuquén], Schlumberger and ourselves.

And on the completion side, we have put together ourselves, also Schlumberger for completions, fracing mainly, and a company called [Brent], that is the one that have delivered sandboxes.

With an addition of a huge amount in terms of logistics.

So if you would split, I would say the performance has been excellent.

On the drilling side, I believe we have been average overall.

Nevertheless, we have seen few wells, the potential of what we can do just adopting new technology.

As we mentioned on the presentation, we use a new rotary tool called [Maxiping].

This is a particular tool where we can drill all the way without basically have to drip when we get to the landing point.

Very interesting tool.

It is showing a lot of promise, a lot of something that we need to do in order to use in the other part.

On the completion side, we probably have better performance in the rates than ever.

So this has been a fantastic ride.

I think there have been a lot of planning ahead done in order to get the results that we got.

And also we took a lot of risk applying a lot of technology.

We have 1 day where we managed to produce 8 stages in 1 day.

People in the [waiting] are asking if that's true or not.

The reality is on the record, it's true.

We did 8 stage in 1 day and with the average of 5 stages in the whole part.

Interval technology, as I mentioned, we're using sandboxes, it's going to make a big difference but basically what it does is we don't have to transfer sand.

We store it, we transport and we deliver sand to the blender with the sand on the box, okay?

It's the first part where we have used 100% sandboxes.

They have been tested -- it has been tested the technology before but we have really adopted and we've got the efficiency from that.

We set ourselves the target not to track water.

So we didn't have any water tracking.

We will -- water storage facility is very close and then we use flexible hose and we deliver 100% of the water that we used through flexible hose.

Imagine if you have to track water.

That would mean 7,000 trips that we have to do in order to track the first part.

So overall, very -- I mean, very encouraging result.

Of course, we are already planning the next one, so we are -- I believe, this is just the start and we see a lot of upside potential.

When it comes to the conventional reserve, I see clearly we have seen better results on the reserve replacement ratio.

160% is a super good number and that comes of course, from many fronts.

One were the Lotena well, but the -- we have gas, some gas that we try on.

This is still a promising play.

Never seen -- well we showed, we managed to flatten the production it's been declining 10% per year.

So we managed to flatten this cash and the production even to grow a bit.

That, of course, impacts our reserve number.

And last but not least, we have some reserve on the unconventional wells on our reserve number.

Something I didn't mention in the presentation but we [shattered capper] pilot at the same time that we are putting our conventional wells of waterflood.

So we have a new waterflood pilot in (inaudible).

We see -- it's too early to say but I mean the data we have response we will see how that comes, not that it has not impact the reserve.

But we managed to have water flat projects in our existing field that are successful that will also be a good sort of production and also reserve.

Your last question was related to lifting, okay?

The lifting is a fantastic story.

We have a very aggressive lifting plan.

So can we go further down?

It's going to be tough.

I believe I've seen our guidance.

It's pretty much where we believe we could be, it's a stretch target.

Now you have to take into consideration that also we are bringing new production into line.

So lifting is not only about basically cutting OpEx, but also it's about increasing production and unconventional now is going to be a source of production.

When we did our first model, we thought that the maximum we can go down to 12, okay?

Clearly, if you now look at it, what we can do and the data we read 55,000 barrels per day and depending on the lifting -- artificial lifting that we use, we clearly need 11 or 10 fuel moving forward.

But I think for 2019, I will stay to my guidance.

Okay, perfect.

Just one last follow-up, okay?

When we look at the current oil price performance, Brent is moving closer to the catch that was temporarily enacted in Argentina in 2018.

Would you be planning or considering to potentially hedge a part of your production for 2019?

How is the strategy on that front in terms of realization of prices?

Yes, Pedro.

Look, we always open to hedge but we will hedge when really it makes sense.

Today, we are a bit hedged with the type of contract that we have, with our refineries, okay?

Partially hedged, I would say.

But of course, we are open to hedging.

We have not seen an opportunity for hedging so far.

I think it has been costly.

But I think we are, as I said, partially set with the contract that we have.

And we will look in the future for opportunities to hedge if it makes sense.

Our next question comes from the line of Bruno Montanari with Morgan Stanley.

Congratulations on the results.

Good to see the company continue to report progress.

First question, interesting to see the reserve addition.

Just wondering how early would you say you are in the process of booking reserves?

And if we can expect a more pronounced bookings through 2019 as more of the unconventional areas are derisked?

The second question following up on the pad discussion, can you comment on how perhaps you see the efficiency in drilling completion?

I understand from the remarks that it's being quite efficient, but how does it compare to your own initial expectations and perhaps if you could try and compare it to mature shale plays in the U.S.?

So we get a sense of how much efficiency could improve.

And last question, the natural gas market in Argentina seems to be in constant adjustment as the government struggles with the subsidy program.

So do you think the recent auction we have seen is a good indication of where prices can stabilize of around the $4 level you have on the budget?

Or would you expect more volatility and use flow on natural gas pricing going forward?

Thank you very much for the questions.

So starting with the first one, I think yes, you will see more reserve addition coming as we have production results in our wells.

So we shall tie in our 4 wells 2 days ago.

I was looking to the dynamic pressure crude of the first 2 wells that we put in production 2 days ago.

They are looking good.

So we flush out the water.

We'll have a clear indication of their performance and for sure you will see a further increase in production as we complete those well as we put this well on production and we complete the rest of unconventional.

The second question was about efficiency gain.

Look, my feeling is there's a lot to do, okay?

We have a very good performance.

I think based in 3 or 4 main pillars, the first one is the fact that we have a good contractual model.

I always believe that there's too much to gain in performance and red money, but serving and aligning with a service company was a way to go.

I think partially, the result of this part is demonstrating that.

Second, we have top-notch professional people on the ground, okay?

So the level of experience that we have on the ground, including everybody that's reporting directly to me, including me, is clear, is making a difference.

Third, I believe we have take a position of being super aggressive with technology.

So I'll give you another example, we are using soluble plots, okay?

You usually -- we usually -- we use soluble flat but we retain the coil tubing so we use technology but we take the time to put the coil tubing on the top and to rotate the flat.

In the first part, we decided that 2 wells we are going to open.

We are going to be believe in technology here and we are now going to curtail those plans.

So it's a lot of technology going through.

I mentioned rotary stable.

I mentioned sandboxes.

So we have a lot of firsts done in this part and I believe there's more to do.

On the third question, when it comes to natural gas, I believe the $4 is simply a representation where the market we probably set.

You remember we have this discussion when I did the stock, there was a lot of investor telling me, why are you using this in gas acreage and why are you investing in oil?

My answer was, I didn't believe that subsidy is going to be there for long, okay?

And I believe I was right.

Nevertheless, I believe we will have a premium compared with the gas prices that you see in U.S. here in Argentina, okay?

The demand is still strong.

The industry needs gas, okay?

And I believe at some point of time, we will have the option also to spot.

So I believe the $4 per barrel is a clear view, is a clear guidance of where we see the market stabilizing.

Our next question comes from the line of Regis Cardoso with Credit Suisse.

Two main questions.

First one, in terms of your progress you've made so far in regards to the business plan, particularly in regards to Vaca Muerta.

So how do you -- I mean, after first well has been completed and after 1 year of operations nearly in the company required, how close to plan do you think -- did it go?

I mean -- and what were the main differences in Vaca Muerta?

Was it the date we start drilling?

Was it the drilling and completion times?

Is it the fact you're going for longer laterals that you've achieved lower cost?

I mean, I wanted you to, if possible, make a balance between what you have achieved so far in your revised plans to what were the original plans at the time of the acquisition and destacking?

Second thing I wanted to touch base on is regarding the second rig.

When do you expect to bring the second rig to Argentina?

Have you delayed plans after the announcement of the export tariff in any way?

Regis, thank you very much for the question.

Good questions.

So related to the first one, what have changed compared with the plan, I believe many changes -- many things have changed for better.

As you remember, in our first model, we have 2,000-meter lateral length.

We decided to go on the first part to 2,500 which we feel comfortable with the technology.

We feel comfortable with the rig and the reach and of course, we saw that -- I mean we know that this somehow give us better economics.

On the completion side, something I didn't mention, I mean I said we did many first.

So this was the first time that we did stages with 10 clusters, okay?

So that means not only we drill longer laterals, we did more cluster per stages.

That means we have same perforations along the [75] meters I have on staged that we believe also it could make a difference on the production side.

Our lifting cost is now lower than we planned.

We really outperformed on the lifting cost arena.

We have clearly a different mode on how we are building this well.

The [further] rig due to the delay of the rig, the neighbor rig that we were bringing from the U.S. came at -- come up as a fantastic solution that came from a crisis that basically was a delay of the rig.

And now this product has pretty much been part of the process.

We drill [certain things further] and then we come with a working rig and we drill horizontal.

That is the difference.

It makes a difference compared with the plan.

Yes, we thought that due to the longer lateral, we probably didn't need the second rig as soon as we plan, okay?

So the second rig is going to be up and running probably around October time.

Therefore, of course, we are encouraging in more CapEx because we are drilling longer laterals, but we have delayed the arrival of the second rig.

So you saw that our CapEx number, we will finish with 20% less CapEx than the one that we were planning, $300 million, all right.

So does that answer your question?

I don't know if you have anything else.

Very complete answers.

And can you explore a little, I mean what are your main concerns and risks at this point in time?

Is it pricing?

Do you think if Brent prices would come down that would further push downward prices in Argentina?

Do you think there's some cushion to accommodate in terms of the export tariff in any way you would see upside to that?

Or is it more on the well results?

I mean, what are the main points to watch in terms of risks at this point?

Yes.

Regis, so look, I mean oil prices -- we have given you the guidance and probably I mean to be completely plainly honest here, we know us better than you know today, okay?

This is a number that we believe -- many people believe is in conservatively.

We take a picture of today.

We are Brent $66.

Therefore, you should see our live price or our sales price around $60, okay?

Therefore, today, we are only fairly conservative.

But I mean we have a long run until the end of the year.

So we will keep it that way.

If we had to revise it because we've been so conservative, we'll do.

The export tax hit, now we got -- it's a fact -- it's done.

It something that was done across the board of industries in Argentina, okay?

They're more denominated in pesos so if ARS 4 per dollar, it will apply for 2 years and we have numerous discussions with the government on that, okay?

I believe this -- it is what it is and it's going to dilute us.

We move forward, okay?

Now I believe part of the main theme that we saw in our P&L, is a sure reduction that we have in lifting cost.

And I don't want to say that we can -- that has pretty much balanced the impact on the export tax.

But I don't want to say that we can go much lower than that.

But I believe it doesn't -- don't take it as a guidance.

I believe we can operate unconventional well with a much better lifting cost that we have operate our conventional wells in the past, okay?

Of course that's -- it's far to be demonstrated, but if this is the case, not only will we bring new production, unconventional production to the mix, we are going to bring unconventional production wherever it is to the cost of the mix, okay?

So we should see that we have also progress to be done on that front and moving forward.

Our next question comes from the line of Frank McGann with Bank of America.

Two questions if I could.

One just kind of going back to the cost story.

Just get your views on what the factors are that you're -- that are driving -- or will likely to drive cost going forward, whether it's more FX or you're seeing inflation that essentially ticking up and potentially having an effect that could limit some of the other benefits that you're getting?

And labor cost also, I'm just wondering how you're seeing the potential for greater productivity improvements on the labor side.

And then in terms of pricing for gas, just the -- obviously, prices have come down from what they were as you indicated.

And obviously, it seems as if your returns you still think are acceptable.

I was just wondering how the change in price over the last 9 months or so has affected your plans to invest in gas, if that really is a major factor or if the cost structure is such that it would have been acceptable anyways at the lower prices that you're seeing now.

Frank, thank you very much for your questions.

Look, I mean when it comes to the cost and the driver to reduce cost, I mean we not only have a fantastic (inaudible).

As you can see we have also of 17, it went almost down to 11.

We thought that was going to be normalized around 12.5.

What's happened, okay?

So these are real numbers.

We -- the efficiency comes from different manpower.

For more efficiency on the pulling unit, from different contracts, different contract alignment with our contractors and there's a lot more to do, okay?

So for example, I have to mention but we have a digital field initiative.

We will have out 17% of our wells being remote and monitor it.

A lot going on, happening there.

I briefly mentioned something that I believe that we implement today.

If you walk through Vista offices, you not only have oil and gas expert.

You have people that have worked in that automotive, manufacturing, people that come from different industries, that help bring a lot of processes into play and only to challenge what we have done in the past.

Well, I think it's a very healthy exercise.

Those guys are making a huge impact.

When it comes to drilling, I think we are in the first of what we can do.

Okay, again, the contract model is working.

I think we are in a start-up mode.

So our learning would have just start even though we are starting from where everybody is today.

But I believe we are starting.

So I believe there's a lot of thing to be done.

I mentioned rotary stable.

We saw one running well that was fantastic.

Of course, that doesn't take in account and we need to do all of them the same.

But I believe there's a lot of technology out there that we are not using it that has not been present in Argentina.

And based on the contract model that we have and the commitment that we have with our partners, we will be able to get more from that.

We're still waiting for the production of the wells.

That is not cost.

That is going to -- it's very important to the equation of creating the IRR that we are looking for to return to our investor.

In terms of gas, first of all, we are -- we don't have future exposure to gas today.

And it's going to diminish as we move forward.

Today, it's around 20% of our revenues is gas.

As we move into more development of unconventional, we will dilute that percentage further down.

Nevertheless, I believe in the $4 per MMBtu market in Argentina, even probably for the first 2 years, higher -- a bit higher during winter.

But we are adopting that as a guideline as another for the rest of the year, okay?

Okay, so I mean -- from that, it sounds as if your future plans will minimize your exposure to gas.

I mean you're not seeing the gas market even over the medium to long term as becoming more interesting with this kind of pricing?

That, Frank, has been our speech from day 1, okay?

When we did the start, the question was why you don't go to gas because -- the world of gas look more profitable.

I said oil is open market today.

Gas has a big percent of the subsidy.

So when you look at our average Bajada del Palo Oeste, Bajada del Palo Este, CASO and what we see in Águila Mora, it's all in the oil window.

It could be lighter or heavier, but it's in the oil window.

So we have very little portion going forward to that.

(Operator Instructions) I'm not showing any further questions at this time.

Well, thank you very much, everybody, for showing in the call.

Looking forward to talk to you again next quarter.

Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program and you may now disconnect.

Everyone, have a great day.