YPF SA (YPF) 2013 Q2 法說會逐字稿

Welcome to the YPF Sociedad Anonima Q2 2013 earnings conference call.

My name is Richard and I will be your operator for today's call.

(Operator Instructions).

Please note that this conference is being recorded.

I will now turn the call over to Mr. Alejandro Chernacov.

Mr. Chernacov, you may begin.

Great, thank you, Richard.

Good morning ladies and gentlemen, my name is Alejandro Chernacov, Investor Relations at YPF.

I would like to thank you all for joining YPF's earnings webcast presentation where we will discuss second quarter results of 2013.

The presentation will be conducted by our CFO, Mr. Daniel Gonzalez.

During the presentation, we will realize the main aspects and events that explain our results and finally, we will open it up for -- we will open up the call for questions.

I need to let you know that we will be making various forward-looking statements.

So I ask you to carefully review the cautionary statements on slide 2.

Our agenda today will include the review of the second quarter results and financial situation including an update to the situation on the La Plata Refinery, followed by a description of the Chevron agreement and the summary of the results.

All financial figures are stated in Argentine Pesos and in accordance with the international financial reporting standards IFRS.

Please Daniel, go ahead.

Thank you, Alejandro.

And thanks everybody for joining us today.

This was by all means a very unique quarter for YPF.

A quarter that started with a fire in our largest industrial complex that successfully our team not only manage to control and contain but also effectively restore the production ahead of schedule.

A quarter that also suffered a negative ruling from an arbitrage in connection with the gas exports that had been discontinued back in 2009 and now the company decided to reserve although we will continue to defend our position.

Precisely because of this non-cash one time charge related to previous periods is that we decided to show our numbers on a recurring basis.

And this will be the only adjustment to be made to the reported figures.

So despite the negative effect derived from the incident in the refinery, we were still able to produce remarkable results, including revenue increase of 36%, recurring EBITDA growth of 40%, recurring operating income up 19% and recurring net income up 31%.

Upstream production was well above the previous quarter for both crude oil and natural gas, although in the case of gas still below one year ago but at least in an upward trajectory.

These are the direct consequence of the increase investments made during the last year.

And in this specific quarter with CapEx up 90%.

Finally only a few days after the close of the quarter, we signed an agreement with Chevron for the development of Vaca Muerta which was a milestone in our objective to profitably help the country return to oil and gas sub sufficiency.

And this agreement is now subject to the ratification of the Congress of the Province of Neuquen.

Recurring operating income for the second quarter of 2013 was ARS2.2 billion, 18.6% higher than the same quarter of last year.

The adjustment to recurring figures that I just made reference too was ARS855 million and it's reflected in the line other income over income statement.

Revenues increased by almost ARS5.9 billion or 36.4% driven by both stronger volumes as well as higher prices of our core products in the local market.

We sold in the local market 221,000 cubic meters more of gasoline and diesel than what we did in the second quarter of 2012.

This was a 4.4% volume increase in diesel and 14.6% volume increase in gasoline, and with the price increase in average 25% between both products.

Therefore, approximately ARS3.2 billion of additional revenues came from these two products.

Cost of sales were up by a similar percentage than revenues or 13.8%, sorry, mostly explained by an increasing purchases which rose 44% compared to the same quarter of last year and that I will provide you more detail in a second.

However, the negative effect caused by the outage at our La Plata Refinery contributed to operating income only rising 18.6% in the quarter.

When we break up recurring operating income by business segment, we can see that the increase in the quarter was mainly driven by downstream business performance in spite of the hit taken by the La Plata Refinery fire, whereas upstream results were basically flat.

Let me explain both effects in the next couple of slides.

In the upstream business, recurring operating income reached ARS1.44 billion, a very similar figure to what registered in the second quarter of 2012.

An increase of 36% in revenue was offset by increase of ARS1.3 billion in production costs, ARS537 million in depreciation, ARS316 million in royalties and then ARS312 million of crude oil export taxes.

On the revenue side, crude oil sales increased despite volumes and end prices in dollar terms being essentially flat.

This was a consequence of a 19.6% increase in the price per barrel in Argentine Pesos.

Our sales of crude oil included the export of 2,000 barrels of crude oil for approximately ARS1 billion in the current quarter considering the additional availability because of the lower processing capacity at our La Plata Refinery, while in the same period of last year, there hadn't been any exports.

As for natural gas, the impact of higher income was of ARS1.24 billion in the quarter.

And this was a consequence of the implementation of a new pricing scheme that increased price of additional gas to $7.5 per million BTU and to the adjustment of the Argentine Peso denominated average price for the CNG which had been implemented in the second half of 2012.

The average natural gas price for the quarter was $3.8 per million BTU.

So revenues or the revenue increase was really healthy during the quarter.

However, production costs grew mainly due to the tariff revisions that started in mid 2012 that we have been making reference to in previous quarters.

Also, the increased activity in construction, repair, maintenance contracting and to a lesser extent material procurement also contributed to the overall cost increase.

However, I would like to note that operating costs have stabilized in the last few months and have actually remained flat in dollar terms when we compare this second quarter with the average of the two immediately previous quarters.

In terms of upstream production figures, we continue to see the reversion of the trend of the last few years.

So you can see in the graphs both crude oil as well as natural gas production was above the previous two quarters.

And we are also showing estimate figures for July that we enforce this concept of reversion of trend.

During the second quarter of 2013, crude oil production was [228,000] barrels of oil per day, which represented a 0.4% increase compared with the same quarter in the previous year, but it was also 0.8% above the previous quarter.

Natural gas production was 33 million cubic meters per day, still 3.2% below that of the same period of 2012, but 5.1% above the previous quarter.

In each week of July, we have been increasing gas output when compared with the previous one.

Reaching an average daily production that you can see in the graph for the month that is above the annual average over the last few years.

As for upstream activity, we had ended the first quarter with 52 active drilling rigs and we ran that figure to 58 by the end of the second quarter, and we are already at 60 by the end of July.

So today, we have 35 more active drilling rigs than those at the beginning of 2012.

Work over rigs followed a similar pattern and today we are running 84 of them.

We are now estimating to have more than 65 drilling rigs running by the end of the year.

Let's move on to downstream.

Operating income increased from ARS862 million in the second quarter of 2012 to ARS1.2 billion in the second quarter of 2013.

That is an increase of 40.4%.

And this increase was despite the incident in the La Plata Refinery.

Revenues last quarter was 30% higher compared to those of last year, such increase was primarily due to a higher average price of gasoline of 29% and of diesel oil 22.9%.

Together with the volume increases mentioned earlier, revenues for these two products accounted for ARS3.2 billion of additional revenues.

Additionally it is important to mention that there were additional revenues achieved due to stronger exported volumes of flour and seed oil which are now a structural part of the strategy of our agri business, and these additional revenues were ARS641 million in the quarter.

On the cost side, the largest impact was in purchases.

A ARS3.5 billion increase mainly due to imported volumes of fuel oil, gasoline, diesel and JP 1 which the company was not able to produce because of the fire at the refinery and that we decided to import in order to maintain our clients fully satisfied.

Also, fuel purchases in the domestic market rose mainly the fuels for the mandatory blend for some of our products.

In turn there have been a higher repair and maintenance rates as well as higher rates relating to crude oil transport and port facility uses.

The volume of crude oil processed during the quarter was 243,000 barrels per day, a 15.9% decrease compared with the second quarter of 2012.

Again, this decrease was almost entirely due to the refining capacity constraints affecting the La Plata Refinery as a consequence of the fire already described.

Special attention should be placed to the fact that refining capacity at our other two complexes operated a 98% and 99% of their capacity during the second quarter of 2013.

The sales mix also changed with the reduced output and both diesel and gasoline represented a higher percentage of our revenues.

Regarding the La Plata Refinery incident, the first thing I'd like to do is congratulate the downstream business team for their impressive efforts to control the fire and successfully restored production ahead of schedule.

As a quick recap on April 2, our facilities were hit by a severe and unprecedented storm which caused the fire and subsequently affected the Coke A and Toping C units in the refinery.

This incident temporarily affected the crude processing capacity of the refinery which had to be stopped entirely.

Seven days after the event, the processing capacity was restored to approximately 100,000 barrels per day to the commissioning of two distillation units.

And by the end of May, less than 60 days after the incident, the Toping C unit resumed operations, therefore increasing production to a level of 150,000 barrels per day.

Unfortunately our Coke facility was lost and the new Coke A project which had started construction a couple of months before the incident is expected to start operations in 2015.

This should take the refinery's processing capacity to 208,000 barrels of oil per day or 10% above the capacity of the time of the incident.

As for the economic impact during the quarter, we are estimating an order of magnitude of $150 million impact in operating income.

These are a combination of the lack of middle and heavy products which were not produced, the loss of refining margin on those products that were imported and the write off of the Coke A unit.

The company implemented some mitigation activities in order to optimize total refining conversion within our three refineries taken as a whole.

We started batched operations which by changing the crude quality processed in La Plata and increasing the throughput in Lujan De Cuyo allowed us to redirect Cooking capacity from Lujan De Cuyo to La Plata.

Finally with regards to incident, YPF is in the process of asserting its claim against a contracted insurance companies since the company was appropriately insured both against material damage and business interruption.

So therefore, we expect the full recovery of the impact with the exception of course of the outstanding deductibles.

Total CapEx for the corporation in the second quarter of 2013 was ARS6.5 billion which represented a 90% increase compared with the second quarter of 2012.

This increased investment steams from a boost in upstream development activities mainly in unconventional areas and advances in the set of projects in our downstream segment.

As for the development activities, investments were made in the Neuquina basin, specially in Loma La Lata both conventional and unconventional.

Chihuido Sierra Negra and Catriel.

On the other hand in the Gulf of San Jorge basin, investments have continued in the Manantiales Behr and El Trebol areas in order to increase the recovery factor of such areas.

There were also a meaningful activities carried out in the province of Santa Cruz primarily in Los Perales, Canaadon De La Escondida and Las Eras areas.

And finally progress was also made in the Mendoza Norte Block in the Province of Mendoza.

As for exploration activities in the Neuquina basin, investments have been made mainly in the areas of Chihuido La Sierra Negra, El Manzano, LLancanelo and Puesto Cortadera area.

In turn note-worthy investments were also made in Cerro Piedra and Cerro Guadal Norte belonging to the San Jorge basin.

Investments in the downstream business were ARS925 million standing at similar levels to the period last year with progress of the group of multiannual projects intended to increase both the production capacity as well as the quality of the gasoline and diesel products.

Basically we are referring to the implementation of the new coke unit at the La Plata Refinery, they complete the activities related to the continues Catalityc reformer at our chemical complex in Ensenada and the fuel hydrogenation units at Lujan de Cuyo.

These works at industrial complexes are complimented by improvement in our logistics storage and dispatching facilities corresponding to those products.

The business continues to show a strong cash flow from operations which allows us to finance a couple of expenditures and still maintain our cash cushion and an unlevered and strong balance sheet in our opinion.

After issuing more than ARS16 billion in the local market during the last year, our net debt to LTM EBITDA ratio is still less than one times.

Out of the last seven notes issued during the last quarter and the month of July, three have a seven-year maturity or longer and one has four years of tenure.

So as a result of our financial activity, we continue to reduce our financing costs with average interest rates of 5.2% in dollars and 18.5% in pesos.

We are still having a very strong cash position of almost $1 billion, actually $1.2 billion as we speak cost during the cash cushion that we strategically decided to continue to carry and that provides comfort that capital without a financing activities in process fully funds our 2013 plan.

Also on last Friday, our Board of Directors approved the payment of our ARS0.83 per share dividend which represents our dividend yield of approximately 1%.

Regarding the shale oil development agreement signed with Chevron on July 16, I will go through a brief summary of its main terms and conditions and what the project consists of.

The goal is to jointly develop the concession that unifies the areas Loma Lata Norte and Loma Campana, targeting Vace Muerta formation for the next 35 years.

The agreement comtemplates subject to certain conditions and expenditure of up $1.25 billion by Chevron for a first phase of work what we call a pilot project.

The first $300 million would be dispersed at closing once Neuquen grants the concession exploitation extension until the year 2048.

During the first 90 days, YPF will provide a payment guarantee for those $300 million until the rest of the agreements are signed.

And 90 days after closing, are subject to certain conditions including that those complementary agreements are executed and that YPF contributes 50% of the concession, Chevron will start dispersing the balance up to $1.24 billion.

This figure of $1.24 billion is composed of $240 million to buy in into the investments already made by YPF therefore reimbursing us for 50% of those investment, $500 million to carry YPF, YPF's share of the investments during this first and another $500 million to fund Chevron's share of those investments.

In a second stage after the finalization of the pilot project, both companies expect to continue with the development of the entire area sharing profits and investments on a 50-50 basis.

And conventional drilling in the Neuquina basin targeting Vaca Muerta formation has gone over 100 wells already.

This includes both exploratory as well as development wells.

Therefore reaching a total production of approximately 12,000 barrels of oil equivalent per day of which 7,600 are barrels of oil and the rest is natural gas.

The project is located in the Loma La Lata Norte and Loma Campana with a total area of 395 square kilometers or 97,000 acres targeting the unconventional formations, as I said, Vaca Muerta and also Quintuco.

From the toll area, approximately 290 square kilometers are considered to be developable.

The other 105 kilometers are located under a descending hill until reaching the river.

So this is an area with future upside pending technology and economical conditions as directional wells will be needed in order to reach to formation.

Today, this concession, we have already 15 drillings rigs operating.

The project is divided in two stages, the first one, a pilot project as I said, consist of the drilling 130 wells in an area of 20 square kilometers.

And the second stage if the pilot project is successful implies moving into factory drilling mode in the rest of the acreage.

In that case, we should be running close to 20 rigs in the project and drilling more than 1,500 wells and with a total investment of approximately $15 billion.

By 2017, we are looking for a production plateau well above 50,000 barrels of oil per day and natural gas production of 3 million cubic meters per day and will probably constitute our main producing field.

At this point, the agreement is waiting, the fulfillment of one condition president which is a ratification of the Congress of the province of Neuquen.

To conclude, I would like to make a brief summary of second quarter highlights.

First of all, we are very satisfied of being able to achieve these healthy margins and maintain our market share despite this unprecedented incident in the La Plata refinery.

Also we continue to see very strong demand and price increases of over 25% in a quarter-over-quarter comparison for our main products, gasoline and diesel.

Production trend from previous years keeps being reverted in the upstream business.

We are clearly starting to see the impact of the increased activity of the last year.

On the natural gas side, price has reached $3.8 per million BTU in average and this renewed profitability for natural gas will allow us a monetization of our natural gas resources.

We continue to have a very strong and levered balance sheet with almost $1 billion in cash and so far we've been very successful in achieving financing.

As we presented back in August 2012, a year ago in our strategic plan presentation, we signed the agreement with our strategic partner that we had expected to, this was Chevron, not only adding the expected financing and the plan coming from the form outs, but also adding a world class partner with years of experience both in Argentina and in unconventionals.

So Richard I would like to conclude and open it up for questions.

Thank you.

(Operator Instructions) Our first question online comes from Mr. Ricardo Cavanagh from Itau BBA, please go ahead.

Yes, hi, Daniel and Alejandro, thanks for the call.

I have two questions.

The first one is more like to the ground and it's evident you are -- you are increasing the trend now in terms of production.

How do you foresee that in the coming quarters?

But then I have a more of a structural question that is when you look into 2014, what are the main challenges that you think you will be finding or you will have to overcome in order to reach to that long-term target that you are pursuing?

By this I mean to say what are the challenges in terms of this availability of rigs, in terms of production, in terms of financing?

It's a little bit of a wide question, but I guess you are looking already into 2014, so I'm curious to see that.

Thank you.

Thank you, Ricardo.

Regarding your first question, we had provided estimates of production growth of 1% in natural gas and 4% in crude oil.

Although challenging, we continue to stick to those projections.

As you have seen, we are increasing the number of drilling rigs ahead of our projections.

So that should hopefully offset the soft production of the first quarter.

So again we continue to see growth in both oil and natural gas there.

I mean in terms of challenges for 2014, I'd say that the challenges are mostly the same than those that we were facing in 2013.

Maybe with the one difference which is it was definitely easier and more efficient for us to find ourselves in the local market and I believe we've done that successfully.

We still have room to go there, but I think in 2014, we'll have to -- hopefully we'll have to have access to international markets in order to raise the same kind of money that we have raised this year.

Other than that, from a production perspective, I think the challenges are the same that we face this year and that I believe that we have overcome that mostly.

Okay, Daniel.

Thank you very much.

Our next question on line comes from Mr. Marcus Sequeira from Deutsche Bank, please go ahead.

Hi, good afternoon, everyone.

One is on the imports of refinery products, if you could tell us or give us a sense of the difference between imported prices and the prices that you sell to domestic market?

And then the second question, do you have an update on when and how much the insurance payment will be -- will be done, the insurance on the refinery?

Thank you.

Thank you, Marcus.

On the second question, on the insurance, unfortunately, we do not have any clarity as of now.

As I said, we believe that we were appropriately insured and therefore we definitely expect full recovery.

But this was an important incident and these recoveries take very long, so very difficult for us to provide any kind of indication.

What we will definitely do is once we have some clarity, we will get back to you and to the market generally with that information.

Marcus, this is Alejandro.

Good morning, actually or good afternoon.

Regarding prices in the pump or actually what we see from imports, it's a kind of a different situation where we are seeing between diesel and gasoline due to the way they get -- they get paid.

Today the import price is close to 75% to 80% of what you sell the previous year.

The only difference between gasoline and diesel is that with diesel, what you see there is that you recover some part of that, in fact this in order not to have any losses.

What you see there and the imports that we had to do due to the La Plata Refinery incident were mainly diesel.

So I say it's not mainly the imports, what is the biggest part of the problem it's the reduction in some of the products that we had which are not only gasoline and diesel.

All right, thank you.

Thank you very much.

Our next question on line comes from Mr. Frank McGann from Bank of America, please go ahead.

Hi, good afternoon.

Just a follow up on the La Plata incident and you mentioned that the cost I think were ARS810 million -- ARS750 million.

Is it fair to say that if that had not happened, the operating income in the quarter would have been about ARS1.9 billion?

An then going forward, is any of that recoverable or should we view this ARS1.2 billion in the quarter as kind of a normal number from which you could grow with price increases or potential improvements and mix coming out of the refineries, but I was just curious as to was that a one-time number or should there be some recurring effects as we go forward?

Hi, Frank.

Thank you for your question.

First the effect that we are estimating and these are rough figures but it's approximately $150 million during the quarter.

And yes, it is true that in the absence of the incident you would have seen operating income $150 million higher than what we reported.

Now, not the full effect of this will be seen in the next few quarters because A, you will not have another ride off of the assets and B, during the quarter, you have the refinery completely out of order for a week.

You have that working at approximately 50% capacity for another 45 to 60 days.

And only then the refinery started to work at the capacity that we have today and that we will have until a new coking unit is working.

So definitely you should not expect $150 million or anything close to that to be an ongoing effect quarter after quarter.

Okay, thanks.

And if I could just follow up, in terms of just overall cost trends, what you're seeing, I mean in the third quarter say, relative to the -- to the kind of cost pressures you are seeing in the second quarter in both upstream and downstream if you would.

Now mostly in upstream which is where most of our costs are concentrated, what we have seen in the second quarter is that our average costs in dollar terms was essentially flat with the first quarter of this year and last quarter of the previous years.

So still the comparison Q-to-Q to the previous year is a negative one because many of the adjustments that were made or most of the adjustments were made after mid 2012.

Therefore the second quarter of 2012 was not suffering for this increase cost.

I'd say that we don't expect any meaningful upward adjustments in the third quarter when we compare it with third quarter of last year, again, because the third quarter of last year already had some of these effects.

Okay, thank you.

Our next question on line comes from Mr. Santiago Wesenack from Raymond James, please go ahead.

Hello, everyone and thank you for taking my question.

I was just wondering if you could give more of an update, just a follow up on the production side, I know you talked about what we should expect for next year, but we've seen that production trend already increased in July.

So should we expect this kind of quarter-on-quarter increase going forward just to try to figure out what should we expect for 3Q, thank you.

Thank you, Santiago.

No, you should not expect one month to be a proxy for the year.

We, as I said, the only estimate that we are providing as overall annual figures for 2013 to be 1% above 2012 in the case of natural gas and 4% above 2012 in the case of crude oil.

Okay, great.

Thank you.

Our next question comes from Shola Labinjo.

Hello, good morning.

I just had a couple of questions on the Vaca Muerta actually, just looking at the recent wells that you've drilled in the Vaca Muerta it appears that the production significantly underperformed the Ryder Scott type of curve.

I'm just wondering if you could talk about that.

And the other question is would you continue to develop that play, say, you have less then 10% IRR on some of these wells and bought a few prices in Argentina might indicate that you might have less than 10% IRR.

Thank you, Shola.

Well we are not seeing those IRRs.

We are IRRs went above those figures.

We are not seeing production below our expectations.

I don't know exactly what you referred to the Ryder Scott curve, but we measure ourselves with our -- with our own plan and our own expectations and not necessarily with what previous management could have expected.

And we believe and evidently because of the signature of the agreement, so thus Chevron, that we are according to plan.

Right, right.

Thank you.

(Operator Instructions) We have a follow-up question Mr. Ricardo Cavanagh from Itau BBA, please go ahead.

Hi, Daniel, regarding the compensation to Repsol, I know it's not something of YPF business exceeds YPF, but how is -- are you seeing that in the context of a challenge that you might see into 2014?

And do you see a solution for additional as well?

Well, as you said, Ricardo, it's completely beyond our reach.

We have repeatedly said that we would definitely like to see a negotiated transaction.

I think it would benefit all parties.

What has been made public by Repsol actually is that they had received an offer, that's what they said, and they rejected it.

If that is the case evidently there is a good will for both parties and if there is, I think that we would all benefit from that.

There is absolutely nothing that we know of, otherwise, we would definitely make it public.

And we are not a direct party to those discussions.

Okay thanks again.

Our next question on line comes from [Karanjit Aurora] from Columbus Hill, please go ahead.

Hi.

How are you doing?

Can you guys hear me?

Yes, go ahead.

Given you guys just signed the Chevron transaction on what seems to be pretty accretive terms, I was wondering if you can provide us an update on any other discussions you maybe having in terms of raising outside financing and how we should think about sort of the evaluation that you guys signed the deal with Chevron in terms of an acreage basis?

Thank you, KJ.

There's nothing that we can disclose of in terms of potential additional discussions other than those that are public of what we announced with [Dow], okay?

Not in terms of the evaluation, first from transaction to transaction you will see significant differences.

So I would not just extrapolate evaluation from one deal and assume that we will do many others at the same price, it maybe at higher prices or if it's in the case of gas, it maybe different prices.

Now we really do not focus on value per acre because the quality of the acre varies significantly within Veca Muerta, but mostly for what I'm sure you would like to do which is compare with acreage in other places of the world, it actually is comparing apples to oranges in our -- in our opinion.

So we focus on discounted cash flows.

We focus on IRRs.

We focus on MPV per BOE of production.

And unfortunately KJ, those are all confidential measures that we are not sharing with anyone especially if we might negotiate new transactions in the future.

Can you give us a sense of what types of IRRs you are seeing on the wells you have drilled in the unconventional area?

Well we will not provide individual IRRs on any given well, on any given project.

What we have repeatedly said and we continue to stick to that is that overall we are looking for cut-off rates above 15% in dollar terms.

So you should assume that this first large transaction we are making reference to is above those levels.

Okay, thank you.

We have no further questions at this time.

I will now turn the floor over to Mr. Daniel Gonzalez for any final remarks.

Well thank you very much, Richard.

Thank you everybody for participating.

If there are any follow-up questions, we'll be glad to take them.

So have a good day.

Bye-bye.

Thank you, ladies and gentlemen, this conclude today's conference.

Thank you for participating.

You may now disconnect.