Vista Energy SAB de CV (VIST) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Vista Oil & Gas Second Quarter 2019 Earnings Conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to Alejandro Cherñacov, Vista Oil & Gas Strategic Planning and Investor Relations Officer.

You may begin.

Thanks.

Good morning, everyone.

This is Alejandro Cherñacov.

We are happy to welcome you to Vista's Second Quarter 2019 Results Call.

I'm 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 2. 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 include certain non-IFRS financial measures such as adjusted EBITDA.

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

Please check our website for further information.

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 and in the New York Stock Exchange.

The tickers of our common stock are VISTA in Mexico and VIST in New York.

The ticker of our warrant is VTW408A in Mexico.

Miguel Galuccio will now present our second quarter 2019 results.

Good morning, everyone.

Thank you for joining this call in which we present our second quarter 2019 results.

As in previous quarter, we have exciting news to share regarding our Vaca Muerta development in Bajada del Palo Oeste.

With our first 4-wells pad now on production for more than 150 days, we are confirming that the productivity in Bajada del Palo Oeste is among the best in Vaca Muerta, performing in line with the top quartile wells of the basin's history.

During the quarter, each of the 4 wells contributed more than just 1,200 barrels of oil equivalent per day.

In terms of operating efficiency in our second 4-well pad which was completed during June, we have reduced drilling and completion cost by 9% vis-a-vis our first pad.

In this pad, we completed an average of 7.6 frac stages per day, setting a new record for the basin.

We will deep dive into our Vaca Muerta development at the end of the presentation.

Let me now walk you through the main consolidated figure of the quarter.

In the second quarter of 2019, our production was 29,016 barrels of oil equivalent per day, 19% above the same quarter of the previous year, boosted by the production of our first pad in Bajada del Palo Oeste.

Our Vaca Muerta production drove our net revenue up to a total $120.4 million, 9% above Q2 2018.

In turn, it was the main driver of growth in our adjusted EBITDA that reached $51.5 million, 5% above Q2 2018 and 39% above our previous quarter.

Our adjusted EBITDA margin was 43%.

We closed the period with a robust financial position with a cash balance of $74.5 million and net debt of $291.8 million resulting in a net debt leverage ratio of 1.6x LTM adjusted EBITDA.

July marked a turning point in funding of our growth plan.

We successfully closed the Aleph Midstream transaction, the dual listing of Vista on the New York Stock Exchange and issuance of 2 series of bonds in Argentina, representing a capital raise of up to [$360 million].

I will go into more details in the following slides.

Our production metrics for the quarter are already reflecting the impact of our Vaca Muerta development.

Our total quarterly production was 13% above our previous quarter and 19% above the second quarter of 2018 when we started our operation in Argentina.

Our production posted an impressive growth of 29% year-on-year showing the acceleration potential of our Bajada del Palo Oeste block and the shift we're undertaking to a more oil production mix.

The impact of unconventional production is highlighted in light blue in this chart.

Natural gas production in the quarter was 5% above Q2 2018, growth driven by associated gas.

Moving on to Slide 5. Our second quarter revenues totaled $120.4 million, 9% above Q2 2018 and 28% above the previous quarter mainly driven by the increase in oil sales.

I would like to highlight that this strong revenue performance was achieved despite a soft realization price environment.

Compared to the second quarter of 2018, our crude oil prices for the quarter were down 12% mainly driven by lower Brent prices and the effect on domestic pricing following the introduction of export duties by the Argentinean government in September 2018, which impacted the local oil market dynamics.

Natural gas prices are down 21% vis-a-vis the second of 2018 mainly due to the current gas oversupplied in the domestic market.

Moving on to Slide 6. The total operating expenses for the quarter were $32.5 million, only 4% above Q2 2018 despite increased activity in Bajada del Palo Oeste.

OpEx was $12.3 per barrel of oil equivalent, 13% below Q2 2018 and in line with the previous quarter.

This year-on-year reduction is a result of 2 factors: the cost control effort we started last year and continue to pursue it; and our strategy of ramping up shale oil production with minimal incremental operating cost, therefore diluting our fixed cost base.

Moving on to Slide 7. Our adjusted EBITDA for the quarter was $51.5 million, 39% above the previous quarter and 5% above Q2 2018.

We achieved this year-on-year increase despite the lower oil and gas realization prices, thanks to the ramp-up of shale oil production while maintaining conventional production essentially flat and continually lifting cost.

Our adjusted EBITDA margin in Q2 2019 was 43%, increasing 3% point with respect to our previous quarter and recovering to a similar margin level of Q2 2018.

As shown in Slide 8, we maintained solid cash position and ended the second quarter of 2019 on $74.5 million, coming from $87.5 million at the end of Q1 2019.

Cash flow from operating activities in the second quarter was $40.2 million, excluding the annual corporate income tax paid in May, which amounts to $13.1 million and including working capital from both OpEx and CapEx.

Cash flow from investment activity reached $63 million including $40.7 million of [CapEx invest] and $22.3 million of accrued and unpaid CapEx.

CapEx was mainly spent in drilling and completion activities in our Bajada del Palo Oeste development.

Finally, cash from financing activities was $22.8 million including $25 million in short term borrowings.

As of June 30, 2019, our net leverage ratio was 1.6x LTM adjusted EBITDA.

Pro forma net leverage ratio after addition of net proceeds from the New York Stock Exchange listing is 1.1x LTM adjusted EBITDA.

Moving into Slide 9. As a key element of our funding strategy, in July, Vista, Riverstone and Southern Cross created Aleph, the first midstream player fully dedicated to hydrocarbon gathering, processing and evacuation in the Neuquina basin, focused on Vaca Muerta shale oil window.

This concept, under which our stream play of low midstream CapEx to dedicated midstream services provider, has proven to be successful in allowing E&P companies to focus its capital on higher returns, drilling and completion activities.

We have brought this investment thesis to Argentina, where need for incremental infrastructure player with Vaca Muerta's strong growth potential, create a unique commercial opportunity for a first mover like Aleph.

Riverstone and Southern Cross are expected to contribute up to $160 million to Aleph for 78.4% of total equity, whereas Vista will contribute the majority of its existing midstream asset for an equity interest of at least 21.6%.

The closing of this JV is a cornerstone of our funding strategy as it will significantly decrease our CapEx needs for 2020 through 2023.

We now move to Slide 10 to reap our further insight in Q1 of the key milestone of the year.

With the focus of creating liquidity for our stock and attracting a larger investor base, on July 25, we completed a global offering of 10.9 million shares on the New York Stock Exchange.

This marks the first U.S. listing of a producer mainly focused on Vaca Muerta, confirming both Vista uniqueness as a shale-focused play and investor confidence in our ability to execute on our profitable growth plan.

Gross proceeds from our dual listing were $100 million.

On July 26 and August 2, we issued 2 series of U.S. dollar denominated bond in Argentina Capital Market for a total of $100 million with a lower rate achieved for these kind of issuance during 2019.

For the 24-month bullet bond, the rate was 7.88% and for the 36-month bullet bond, the rate was 8.5%.

In sum, in the last 30 days, we raised $200 million in the capital market, which combined with the closing of Aleph JV represent a total funding of up to $360 million which we intend to use to ramp-up our shale oil activity.

Now on Slide 11, let's go back to the operational front.

I am thrilled to share with you the latest data regarding our performance in Bajada del Palo Oeste.

In July, we completed our second 4-well pad, landing 2 wells in La Cocina and 2 in lower [Orgánico] with an average lateral length of 2,170 meters.

Our completion strategy was more aggressive than in the first part, reducing frac spacing from 75 to 60 meters, therefore totaling 36 average stages per well.

More importantly, our second part has shown a material performance improvement vis-a-vis our first part in drilling with a 52% increase in feet drilled per day and in completion with an increase from 5 to 7.6 frac stages per day, establishing a new high mark in the basin as did the 11 frac stages reached in a single day.

This efficiency improvement translate into a 9% reduction in total drilling and completion cost per well, an average of $12.6 million in the second part, representing an decrease of $1.2 million per well.

Now on Slide 12, we focus on well productivity where we continue to see very strong performance.

The chart on this left show the cumulative production of the 4 wells of the first part in Bajada del Palo Este [tying] during Q1 2019, which after 150 days of production show cumulative production that is on average 22% above our current type curve.

In our next quarter earning call, we will report production results on our second part, which albeit in very early stage with less than 20 days of production today, is shown in coalition result.

To close our earnings call, let me highlight that we continue executing our plan in line with our guidance by: first, ramping up production in our shale oil development in Bajada del Palo Este, where our first 4 wells pad is performing among the best wells in Vaca Muerta history; second, achieving further drilling and completion cost improvements across key indicators; and third, increase in adjusted EBITDA with higher volumes and OpEx efficiency; and finally, by having managed to secure funding for our growth plan that will allow us to now fully focus on operation execution.

To conclude the first part of this call and before opening the line for questions, I want to thank you, the entire team at Vista, for their hard work and commitment, and the investors that support us in our capital market activities.

Thank you all for allowing me to share Vista's second quarter 2019 result with you.

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

(Operator Instructions)

And our first question comes from Bruno Montanari with Morgan Stanley.

First one, I know you'll give more details on second pad on the next earning cycle, but if you could comment on the initial production performance there versus your expectations and perhaps comment on what was different with the beginning of production in the second pad versus what you observed in the first pad would be really helpful.

My second question is about technology.

There has been plenty of discussion about new efforts to use the digitization in the U.S. shale industry, especially in hydraulic fracturing, to achieve better pump performance.

Is this something that the company is looking into?

And how can it help both drilling efficiency and costs?

Bruno, thank you very much for the questions.

Look at -- starting from the first one -- I'm trying to reserve the news where we have more production from the second pad.

I can initially tell you that first of all, these are shorter wells and with more intense frac activity.

So we'll reduce, as I said in the call, from 75 meters stage to 60 meters stage.

So we went for even a more high density approach in the second part.

It's looking pretty good, okay?

It's looking very good.

We are holding ourselves to give you the news until we have more production data.

But it's looking pretty good.

It's basically showing us that in terms of completion strategy, we are in the right path.

And also showing us that from the resource base, we are clearly -- we are over the right place of the rock.

So I will hold on myself and will give you the news when we have the full data in order to show where exactly we are.

But we are very happy and encouraged with the result that we see in terms of pressure and [PI] so far.

In terms of digitalization, there're a lot of things that we are doing, and I think it's probably very long to cover.

But initial digitalization, we have from the operational, 2 approach.

One is to the (inaudible) [workflow] or the development overflow where we are doing a lot of things, okay, in term of remote operation and in term of real-time operation.

And the other thing that we are doing is on the operation itself, more toward O&M.

So one decision that we made a few months ago, it was to --basically to have a fiber optic backbone in the full feet.

This is going to be unique for Argentina.

That will allow us to do a lot of things that normally nobody can do.

And that basically is going to enable us to have what we call a digital oil field.

So we are moving forward for that.

In term of fracking, there're a lot of things that we are looking at.

We are in this journey of reducing CapEx.

And for that, we are looking at many aspect of the operation.

One particular one is in term of rotary steerable and how we land and how we drill the horizontal well.

As you see today, we have managed to reduce -- we have managed to increase the speed in almost 50%.

And also similar improvement we have seen on the completion side.

So there's a lot of -- there's more things coming up on that front.

Clearly, this is the path we need to go through because I think there in the CapEx -- we have done a fantastic job in OpEx.

But in the CapEx, I believe long term with certain things that we have in plan, we will see further improvement.

Thank you.

And I am currently showing no further questions in queue.

I'd like to turn the call back over to Miguel Galuccio for closing remarks.

(inaudible) there're no more questions.

I will say, to close, thank you very much for supporting us all the way.

This has been an extremely intense and successful quarter for us, both the transaction on Aleph and the fact that we managed to dual list the company and the fact that we finished the second part with those operational super performance.

This has been for us a very rewarding quarter.

So thank you very much for following us.

And I hope so we can come up with certain update on the second pad soon.

Thank you.

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

This concludes the program.

You may now disconnect.

Everyone, have a great day.