YPF SA (YPF) 2013 Q4 法說會逐字稿

Welcome to the YPF SOCIEDAD ANONIMA fourth quarter 2013 earnings conference call.

My name is Lorraine, and I'll 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.

Sir, you may begin.

Thank you, Lorraine.

Good morning, ladies and gentlemen.

My name is Alejandro Chernacov, Head of Investor Relations at YPF.

I would like to thank you all for joining us today.

In this occasion, we will be discussing the YPF's 2013 full-year and fourth-quarter results.

The presentation will be conducted by our CEO, Mr. Miguel Galuccio; and our CFO, Mr. Daniel Gonzalez.

During the presentation, we will go through the main aspects and events of the year 2013 and the fourth quarter's results in detail.

Finally, we will, of course, open the call for questions.

Also, I need to let you know that we will be making various forward-looking statements, so I ask you to carefully review the cautionary statement on page 2.

Our agenda today will include the review of the key issues and achievements of the year, a detailed explanation of the fourth-quarter results, an update of our financial situation, and a brief summary and outlook for 2014.

Also, all financial figures are stated in Argentine pesos and in accordance with the International Financial Reporting Standards, IFRS.

Please, Miguel, go ahead.

Thank you, Alejandro.

Good morning and thanks, everybody, for showing us today for the review of the first full year of YPF under the new administration.

And it was indeed a very successful year for YPF, of which we are all, me and my team, very proud of.

The results of the financial operation reflect an organization that's been [driven related] toward growth; growth of production, of course, but also growth in reserves, growth in sales, EBITDA, and net income.

The main highlights of 2013 were revenues were up 34%.

EBITDA was up 63% and operating income was up 52% in pesos.

As a result of the turned around production in our upstream segment, we increased production of both oil and gas, with a total production up by 1.7% in the year, but accelerating during the year, and in the fourth quarter particularly where we were really up 7.5%.

In downstream, we process 278,000 barrels of oil per day, overcoming the impact of the fire in La Plata refinery, maintaining our market share close to 55%, and increasing prices in line with our objective to preserve the margins.

We were able to attract world-class partners to develop Vaca Muerta, Chevron, Dow, Pluspetrol, and we have also taking a bold move by acquiring Apache operation in Argentina.

We play an important role in fostering the settlement between the Republic of Argentina and Repsol where we believe we are all winners, and we put that [distraction] behind us for good.

Let me start reviewing the upstream.

Last year, I have point out that we were establishing the ways to start production growth, and now, after more than 15 years, we were able to increase both crude oil and natural gas production.

During 2013, total hydrocarbon production grew 1.7% to 493,000 barrels of oil equivalent per day.

Crude oil grew 2.2% to 232,000 barrels of oil per day.

And natural gas grew 1.5% to reach 33.9 million standard cubic feet per day.

This is a result of an increase of activity that is start 20 months ago.

And with this activity growth in the country, production from those fields where we operate, as published by the Secretary of Energy, was even higher; up 3.4% crude oil and 2.2% in natural gas.

Let me now move into reserves.

I think this was probably the most important achievement we have during 2013.

If we will want to continue to replicate and accelerate our recent production growth, we need to have the reserves in place.

We increased total crude reserves by almost 10%, adding 284 million barrels of oil equivalent, of which 140,000 corresponds to liquid and 144,000 of natural gas.

Total reserves reached 1.08 billion boe.

Consequently, our reserve replacement ratio for 2013 was 158%; 185% for natural gas, and 137% of replace ratio for liquids, being the highest level since 2001.

And this reserve addition was broad based, not just one-off result or one hit in one particular line or one particular field.

Part of the impressive reserve replacement ratio in natural gas was a consequence of -- in our [work shed] price of $3.94 per million of btu that allow many of the new projects to be economically viable.

I would like to highlight a reserve addition in the area of Lomo La Lata, Aguada Toledo, Sierra Barrosa, the development of tight gas in the Lajas Formation, [Ringonda Mangrucio] where we partner with Petrolera Pampa, and Loma Campana where we continue developing our Vaca Muerta play.

Also, reserves additions are coming from improvements in production of Magallanes [shale-oil] field; and, more importantly, in the basins of Golfo San Jorge and Neuquina basins due to results of the secondary recovery projects.

This year, we also add reserves due to the extension in the concessions in the province of Chubut.

The growth production of reserves we were discussing in the previous slide is directly relating with the work done by our experienced [G&G] team, followed by the drastic increase in our total CapEx spend which was almost ARS3 [billion] in 2013, being 81% higher than 2012.

The upstream business was the main recipient of those investments absorbing more than 80% of the total CapEx.

And as it could be seen in the graph at the right side of the slide, those investments led to a remarkable increase of activity, growing drilling rigs from 46 at the end of 2012 to 65 by the end of 2013, a 41% increase.

Today, we are [tailoring] -- we are basically running 68 rigs from which 3 are new [tech] working rigs.

We have secured contracts with both H&P and [Archer] to deploy another 80 of these new tech rigs to our operations in Neuquen.

Also during 2013, we drilled and completed more than 770 wells, 52% more than previous year.

41 of them were exploratory wells, and 12 of those were directly to Vaca Muerta.

Today we are engaged in so many different projects in Argentina that it's very difficult for me to summarize the most important ones.

Without any doubt, both tight gas and shale-oil projects are at the top of the list and we will discuss them in the next slide.

Also, drilling efforts in Manantiales Behr, El Trebol, El [Poltoras] are showing a lot of progress, as well as implementation on the secondary recovery projects in Aguada Toledo and some fields in Chubut and Santa Cruz.

That's an old project, but moving from exploration to development phase is Chachahuen in the province of Neuquen.

Today it's just producing a little over 1,000 barrels of oil per day net to us, and it is refreshing to see our upstream guys continue to turn non-producing areas into producing ones.

Last but not least, we continue moving forward in the construction of the new coke unit which should be finished by late 2015.

Now moving on the slide 7, I would like to get into our unconventional developments of the year.

On the shale projects, we have seen a lot of progress towards the end of the pilot of Loma Campana.

Within the 100,000 acres area compromised by the pilot project, we found different productivity areas, with some well results showing production well above the [typical].

As you can see in the graph to the lower left, gross production in the fourth quarter reached 17,300 boe per day, from which 1,000 barrels are crude oil.

In December, production had reached 18,900 boe per day, and during January, we would have fuel about 20,000 boe per day.

As of December 2013, 50% of the project production is allocated to YPF and the rest to Chevron.

Already, over $1.3 billion were invested in Vaca Muerta.

More than 150 wells are producing.

Another 100 wells were drilled during 2013.

We are entering into factory drilling mode, and we decreased drilling times to 18 days per well.

We successfully pumped more than 500 frac stages, and first-year average cumulative production from the group of wells drilled in 2013 was 10% higher than those from the previous year.

We can now say that we're consistently drilling and completing vertical wells around $7.5 million, and more benefits to efficiency and costs should kick as we incorporate recently secured 15 new tech drilling rigs.

On tight gas from Lajas formation, in the south of West Lomo La Lata, we continue seeing production increase from drilling activities.

In February, we acquired the remaining 50% stake from [Bali], and we are now the full owner of that project.

Lajas is typically tight gas formation with a gross [pay-down] range from 700 meters to 1,000 meters, and [net pay] that goes from 100 meters to 300 meters.

The area we are developing right now extends from an area of 3,000 acres.

We think with some additional provision, that area could extend for another 95,000 acres.

Since May 2013, we accelerated in campaign and developed 4 drilling rigs to the project, drilling 2013 in total of 70 wells totaling 24 wells in the area.

At the year end, we were producing 2.4 million standard cubic [feet] per day.

And as I mentioned a couple of weeks ago, in January, we were already at 2.7 million cubic feet -- cubic meters per day.

Wells in Lajas have a total vertical depth and range from 2,600 meters to 2,800 meters, which has been performing to extend fracs per well at a cost that are a bit little than $8 million.

In Orejano, our first shale gas play, we were involved in the pilot project to develop shale gas with Dow.

We have already drilled and completed four wells, two of them horizontal and two of them vertical; and all of them should be open and connected in the next couple of weeks.

Now let us discuss the highlights of our downstream business.

I am pleased to say that despite the La Plata refinery incident, we have been able to provide higher volumes of refined products in the local market, with an increase of 1.5% compared with 2012.

Domestic demand for gasoline and diesel continued to be strong during 2013, growing by 10% and 1% respectively.

Sale prices for gasoline and diesel increased almost 30% and 25% respectively.

The average utilization rates of our refinery during 2013 was 87%, with an average of 278,000 barrels of crude oil processed, showing a 3.5% decrease compared with 2012.

Fortunately, and thanks to the strong effort made by the downstream team, we have seen a better than expected recovery in the second half of the year, already operating at normal levels by the end of the year.

Let's now focus on the financial results which were in line with our expectations.

In 2013, recurring operating income was ARS12 billion, a 52% increase compared with 2012, primarily a result of substantially higher operating income from both upstream, an increase of 25.3%, and downstream who increased 64.1%.

Recurring EBITDA for 2013 was ARS29.4 billion, a 62.8% increase compared with 2012.

Recurring net income was ARS5.7 billion, a 45% increase compared with 2012.

Now let me turn the call over to Daniel who will focus in the quarter specific and will cover the financial situation.

Thank you, Miguel; and good morning, everybody.

The fourth quarter was again a good one, although somehow below the third quarter for a few one-timers that I will explain further.

In this fourth quarter, revenues increased by 34%, which is the same percentage than the revenue increase for the full year of 2013.

Operating income approximately doubled, and net income was up by 88%, with EBITDA growing 110%.

Activity continues to ramp up with CapEx up 62% to ARS11 billion in the quarter.

Production-wise, I think this quarter confirmed the efforts we are making are on the right track because we are showing again solid and sustainable growth.

Total hydrocarbon production increased by 7.5%, crude oil by 6.3% to reach a total of 239,000 barrels of oil per day, and natural gas, an outstanding 10.2% in the quarter to 35.5 million cubic meters per day.

We'll get into further detail when we discuss the upstream results.

Now on the downstream, crude processed was 287,000 barrels of oil per day, which was only 2% less than when the coke A unit was up and running; and we maintained our market share which was, in the case of gasoline 54%, and the case of diesel 56%, as of December 2013.

Other highlights of the quarter include the final closing of the Chevron joint venture, and consequently the entry of approximately an additional $650 million in December; the extension of concessions in the province of Chubut; and our $500 million five-year bond issued international markets.

Operating income for the fourth quarter of 2013 was ARS3.8 billion, which was 107% higher than the fourth quarter of 2012.

Before moving to the revenues and cost explanation, I would like to focus first on the quarter's one-time events, some of which were negative and others were positive.

The first one would be the recognition of a gain of $300 million, or ARS1.9 billion, for the insurance recovery from the La Plata refinery incident.

Of this amount of ARS1.9 billion, approximately ARS1.4 billion accounts for the physical damage recovery, and ARS550 million for business interruption suffered in the first few months until September 2013.

We are registering this recovery as the reinsurers accepted our claim, and these amounts are being collected in March and April.

We will continue recognizing business interruption recoveries until the end of our [coverage] in 2015, and we will recognize those recoveries as we collect them, or as we receive sufficient comfort that the reinsurance accept our claims.

On the negative side of the one-timers, we have a ARS370 million tax charge that accounted for the full 2013 but was registered only in this quarter, close to ARS340 million in new environmental provisions, and ARS180 million of more expenses in exploration charges which were in connection with three old and unproductive wells.

So moving up to revenues; the revenue increase was mainly driven by the ARS3.7 billion increase in the diesel and gasoline sold to the local market which was higher both in volumes and in prices; ARS1.2 billion increase in the natural gas sold locally mainly due to the positive impact of the new gas plant that established a price of $7.5 per million btu; and ARS800 million in LPG, fuel oil, petrochemicals and fertilizers, all of them also sold in the local market.

Total costs of sales were up 37%, broken down in purchases, which were up by 56% mostly related to higher volumes of imported diesel oil and, to a lower extent, the effect of flood crude purchases at similar dollar prices, but at a much more expensive dollar.

And then other costs of sales were up by 36%, including increase in depreciation by ARS3.1 billion.

Now SG&A was only up 27%.

In the upstream business, operating income reached ARS1.7 billion, which was a 47% increase over the fourth quarter of 2012, as revenues were up on increased volumes and prices, and costs followed a similar trend; both up approximately 20% -- sorry, 50%.

Crude oil sales revenues, which are all inter-segment but is sold to our downstream business, improved by ARS3.2 billion, or 52%, primarily as a result of our 36% increase in the price per barrel in Argentine pesos and a 6% increase in production levels.

The dollar-denominated price for the crude oil in the local market for both the fourth quarter of 2013 and the -- sorry, for the fourth quarter of 2013 vis-a-vis the same quarter of 2012 was up 7.8% in dollar terms.

That is a price of $74.5 per barrel in the fourth quarter of 2013.

And this was primarily as a result of increased demand for light crude of Medanito quality in the local market.

Natural gas revenues increased by 93% as a result of, one, a 10.2% increase in production, as mentioned earlier; and then a 47% increase in the average sale price of $4.16 per million btu.

Currently, approximately 33% of YPF's natural gas production is already getting a price of $7.5 per million btu.

On the cost side, we saw an increase of ARS3.9 billion, which were higher charges in Argentine pesos for contracted services for approximately ARS765 million.

This was mainly a consequence of increased activity as the lifting cost per barrel in dollar terms was down 5% than a year ago.

Amortization increased by ARS1.1 billion as a result of increased investments, increased value of our peso-denominated assets, and increased production.

Royalties increased by ARS540 million, mainly due to the higher Argentine peso-denominated prices at the wellhead, and also because of increased production, of course.

There was a one-time charge related to taxes and contributions of ARS370 million, which I have already mentioned.

Then there was ARS185 million increase in exploration expenses; and finally, ARS75 million increase in new environmental provisions.

Miguel already talked a lot about production for the full year, but let me add that the quarter was especially strong on production growth.

We experienced consistent growth, both in natural gas and crude oil.

With regards to crude oil production Q4 2013 against the same quarter of 2012, we were up 6.3%, producing 239,000 barrels of oil per day; and comparing against the immediately preceding quarter, that is the third quarter of 2013, we were also up in this case 1.8%.

Again, production growth is higher when YPF is the operator.

In this case, of the fourth quarter of 2013, we were up in YPF-operated production by 8.6% versus the previous year.

In terms of natural gas, the increase in production is even more telling; even the steep declines where we were coming from.

This is important for us, as natural gas become a very profitable business with a new pricing scheme.

So production in the fourth quarter of 2013 was up 10% against the same quarter of 2012, producing 35.5 million cubic meters per day.

As a consequence of the growth in crude oil and natural gas, total hydrocarbon production was up 7.5% to 517,000 boe, which is a net increase of 36,000 boe, but returning us to production figures above 0.5 million boe per day.

As we mentioned last quarter, growth is not just about unconventionals.

We are sustaining our view that there is plenty to do on the conventional side as we continue to develop the unconventionals also.

Conventional crude oil production was 229,900 barrels of oil per day, showing a 3.7% increase against a year ago, and a 1% increase against the third quarter of 2013.

We saw a similar result in conventional natural gas production, as it reached 33.2 million cubic meters per day, which represents a 4.5% increase against the fourth quarter of 2012.

Moving on to the downstream, we continued providing higher volume to a growing gasoline market and a somehow flattish diesel market, and maintaining again the necessary pricing discipline.

This quarter, operating income was ARS2.8 billion, showing an increase of 131% compared with the fourth quarter of 2012.

But, as previously mentioned, we recorded the advanced payment from the insurance company related to the La Plata refinery incident.

Revenues were up 35%, or ARS5.7 billion, as shown in the graph, primarily as a result of a 34.7% increase in the average price of gasoline, and 30.6% increase in the average price of diesel.

This pricing differential resulted in increased income of ARS1.2 billion in the quarter for gasoline, and ARS2.2 billion in the quarter for diesel.

In addition to pricing, there is also a ARS345 million increase, or approximately 7.1%, due to higher volumes of gasoline sold in the local market.

Also, we had additional revenues coming from a ARS350 million increase in exports of agro products, mainly soya mill and oil; and ARS450 million increase in local international fuel oil sales.

Operating costs were up 40% compared with the fourth quarter of 2012.

The largest impacts were the increase in price of crude oil purchases, both from our own upstream and from third parties; ARS3.3 billion was from our upstream segment, and ARS820 million from third parties.

Then there was a ARS673 million (sic - see press release, "ARS763 million") increase in the amount of imports of diesel, mainly [euro-diesel], due to higher volumes, and at a higher peso-denominated price, although essentially flat those prices in dollar terms quarter versus quarter.

There was a ARS291 million increase in the price and also in the volumes of the bio fuels, which are purchased locally, and ARS181 million increase in the amortization.

And finally, as was also previously mentioned, during the fourth quarter of 2013, we registered an exceptional environmental provision of ARS287 million, and that is the one-timer in the downstream operation.

Processing levels at our refineries decreased by 2% in the fourth quarter of 2013.

The level of crude oil processed in this quarter was 287,000 barrels of oil per day.

And as previously mentioned, demand continues to be strong.

The fourth quarter 2013 figures versus the fourth quarter of 2012, in the case of gasoline, demand grew by 10.6%.

In the case of diesel, it decreased by 1.5%.

In the fourth quarter, total CapEx for the Company amounted to approximately ARS11 billion, which represents a 62% increase compared with the fourth quarter of 2012.

Upstream CapEx increased to a total amount of ARS8.7 billion.

And to mention, the most meaningful investments have taken place in Loma La Lata, Aguada Toleda-Sierra Barrosa, both in the conventional and unconventional projects; and in Chihuido and Catriel areas.

And then in the Golfo San Jorge basin, investments continued in Manantiales Behr and El Trebol, both in order to increase the recovery factors from those areas.

And finally, we need to highlight development activities in the province of Santa Cruz; primarily, Los Perales, Canadon Seco, and Canadon de la Escondida.

In downstream, the CapEx was ARS2.1 billion.

And in this quarter, we continued in schedule with a new coke unit construction; and then additional works at our industrial complexes to improve logistics, storage, and dispatching facilities.

Now let's speak about our financial situation.

The business continues to show a strong cash flow from operations, which continues to allow us to finance a large extent our capital expenditures.

We also continued with our strategy of maintaining a sizeable cash cushion, which at the year-end was about $1.5 billion.

And although we are increasing our leverage in line with the plan, our leverage ratio expressed as a net debt to EBITDA stood at 0.74 times.

As of the end of 2013, the average cost of the Argentine peso-denominated debt was 21.5%, while the average cost of our dollar-denominated debt was 6.1%.

And the peso-denominated debt portion of our total debt is approximately 40%.

The average life of our indebtedness remains approximately at 3.5 years.

Although we continued to efficiently raise finance in the local market, where, by the way, last week we raised approximately ARS900 million, in December last year, we priced the first YPF senior secured obligation international markets since 1999, which was the $0.5 billion 9% note due 2018.

Looking forward, we will continue to monitor the international debt markets in order to be prepared if a window of opportunity opens again, as it did late last year.

We will continue to be pragmatic regarding opportunity of entry into the markets.

Going back to cash generation from operations, we generated ARS4.5 billion, which was approximately the same amount as in the fourth quarter of 2012, but mainly expressed by one accounting factor, and that has to do with a $300 million entry from Chevron, which was booked as an advance in the third quarter, and was actually reversed in the fourth quarter as we closed the transaction.

And that liability actually went away, having a negative impact in the operating cash flow of the fourth quarter; a negative accounting impact, I have to say, because it didn't have any real cash impact.

One clarification that I'd like to make for the future, and given the increased size of the exchange-related gains recorded as a result of the increased [devaluation], we will start reporting our EBITDA as operating income plus depreciation of fixed assets, plus amortization of intangibles, thus, not considering the FX differences for the financial income line.

Under this methodology, recurring EBITDA in 2013 would have been ARS23.4 billion, which is still 45% higher than 2012; and it would have been ARS7.3 billion in the fourth quarter, which would still be 80% higher than the fourth quarter of 2012.

Regarding to many questions we get asked on the effects of the currency fluctuations in our business, I'd like to make this -- or present this slide with some clarifications.

First, out of our revenues, approximately two-thirds of our revenues are peso-denominated, which is basically the fuels sold in the local market.

And the other one-third is dollar-denominated as a consequence of our exports and natural gas sales, which again, the price of $7.5 is a dollar price.

And then there's some other downstream products which are sold locally by that prices, which are established in US dollars.

Now on the cash cost side, approximately 55% of our costs are peso-denominated, and 45% are dollar-denominated.

Of those 55% of peso-denominated, 30% comes from the upstream operating costs and 25% comes from the downstream operating costs.

Now on the portion of our cost base that is dollar-denominated, approximately 20% is related with purchases, purchases of crude oil and purchases of refined products that we import; and 17% is related to the upstream operating costs which are tied to the dollars, or paid in US dollars.

And finally, 8% of our total cash costs has to do with royalties.

And because of royalties are paid on the prices of both crude and gas at the wellhead, they are also denominated in dollars.

So all in all, I'd say on this slide I think we have very limited long-term cash impact coming from currency fluctuations.

And with this, I would like to pass the presentation back to Miguel for some closing remarks.

Thank you, Daniel.

So, gentlemen, to wrap up, I would like to make a brief summary of 2013 and give some outlook of what I expect for 2014.

We have set the bar pretty high for ourselves when come out with our business plan back in August 2012, and I believe in 2013 we delivered in line with such a progressive plan.

We turned around the downward trend in production through increasing drilling activity and basically a lot of work and world-class work of our G&G people in the company.

We increased pricing across all products in line with our need to preserve and increase profitability.

We were, therefore, able to maintain our healthy margins, providing the value of fully integrated business.

We kept as priority maintaining a solid financial situation, and regained access to international capital markets.

We execute a strategic initiative to increase production through partnership, farming out to Chevron, Dow, Pluspetrol and Pampa, but also adding production assets from Apache, Puesto Hernandez and Bali.

We [exchanged] our concession [into goods] in line what we have done already in Santa Cruz and Tierra del Fuego recently; and we continue gaining operational efficiency in unconventional drilling and completion and prepare the organization for further growth in the years to come.

2014 will be another challenging year for all of us.

We still have an aggressive growth plan, so we need to especially renew our focus on efficiency, both on the operational metrics and on cost control.

As I said last year, we are looking for a profitable growth, production and revenue increase with cost control; and we intend to preserve the profitability of this Company and I will have all the determination to delay or eliminate projects if needed.

The CapEx plan is aggressive and we believe we can execute and still maintain a sound capital structure as we manage the macro swings.

We will continue focusing on the development of Vaca Muerta.

We are advising Lomo Campana and analyzing possibilities to move to the north of La Amarga Chica, and also to start a project, a pilot project, in La Calera with Pluspetrol, which may even [may be] an operator.

We will continue to execute our strategic initiative, and including the recently acquired assets from Apache to the same strategic model.

The focus in Apache will be increasing reserves and increasing production the same way that we have done with YPF.

With regard to our financing strategy, we plan to continue running the Company with a healthy cash cushion and continue to have an opportunistic approach to new issuance.

For the 2014, we expect to grow crude oil production in the area of 3%, natural gas by 6%, and we have a CapEx in the order of $5.5 billion range net to YPF.

Around $1 billion of this $5.5 billion will go to downstream, and $4.5 billion will go to the upstream side.

We expect financial results to follow a similar trend.

Despite the recent devaluation, we will work to maintain EBITDA levels in dollar terms.

With this, I would like to conclude the presentation and open for questions.

Thank you very much for your participation.

Thank you.

We will now begin the question and answer session.

(Operator Instructions).

Marcus Sequeira, Deutsche Bank.

I have two questions.

One, we've seen a cost increase in the quarter, and I was just wondering what's your message for the coming quarters; if you expect margins to stay at the same levels beginning of the year and then improve later on.

And also, if you could give an update on labor negotiations.

And then a quick question on debt ratios; if you have any ceiling target for debt ratios.

Thank you very much.

I will start with the labor part of the question and then I will pass to Daniel for him to give you more details on the numbers.

We are entering, as I said, a very challenging 2014, and that also is regards the level of discussion that we are going to have.

If you remember, we have last year -- two years ago, a [paritalia] -- that is what we call the negotiations here -- with the leader of unions of 18 months.

That put us towards January with the end of the discussions, and we managed to extend the discussion for three months.

So basically, beginning of April/end of March, we will have new negotiations with the labor unions, but I believe we'll be basically a bit higher on the range of what we have discussed before (technical difficulty).

Please stand by.

So as I said before, I believe it's going to be at the same level that we discussed before or a bit above.

And also, the main discussion that we are going to have with the labor unions today is going to be more around productivity, not only of cost of labor.

So even though for the year are going to be a difficult discussion, I believe we will move ahead in part of the discussion without major business discontinuity.

Regarding the question on the cost increases in the fourth quarter, first on the upstream side, I believe all the cost increases have basically more to do activity increase than anything else, because actually, the unit costs, which I measure as the lifting cost per barrel, was actually down in dollar terms.

And you may remember that in the past, we started saying that we had seen a stabilization of the lifting costs.

Now we're starting to see a small reduction, and hopefully, especially with the effects of the devaluation, I would assume that we will continue to see reductions in that matter.

Now regarding the downstream costs, I think the quarter was very much affected with one-timers that I made reference to, especially the ARS287 million environmental provision.

We are not necessarily seeing the duration of our refining margins in the long term.

The first quarter will not be a proxy for the rest of the year because the first quarter was very much affected with the devaluation, or 20% devaluation of the currency in January, but we have all the intention in recuperating margins in the medium and long term.

Regarding your question on the ceiling of debt, the way we look at it, it's not so much on an absolute figure.

We look at it as a net debt to EBITDA ratio.

We have said that -- or self-imposed a limit of 1.5 times.

We are not seeing our projections reaching that level, but just to be on the safe side.

So we will continue to be prudent in terms of not over-levering the Company.

Thank you very much.

Thank you.

Bruno Montanari, Morgan Stanley.

I just wanted to understand two things on the guidance for 2014.

If I look at the crude production, 3% growth, this implies almost flat production from Q4 2013.

And on the gas, if I look at 6% growth, it implies about 1.2% growth from 4Q as well.

Is this the correct way of looking at it; so net production for YPF flattish around the levels of the fourth quarter now?

And then connected to this question on the CapEx, is the $5.5 billion figure limited by your view of the amount of funding obtainable in the year?

In other words, if there are any surprises on the funding side, can CapEx and production be higher or lower in the year?

Thank you very much.

Regarding CapEx, the figure of $5.5 billion area is not constrained by capital by any means.

We have found out so far that we've gone ahead with all the projects that we thought were the right projects for YPF at this stage, and capital has been widely available to us, so it's not a capital restriction.

If anything, I think that this number may come down a little bit, as again with the effects of devaluation, but we believe that the $5.5 billion is a reasonable area.

Regarding production, your question is a very good one, but you need to bear in mind that 2013 started really low on production and the numbers that you've seen in December we believe that we can maintain or even increase in next couple of quarters.

Also, bear in mind that the Loma Campana, that's the unconventional production, from now on, we will only register 50% of that.

And by the way, the guidance was without Apache.

So actually, we believe that consolidated production will be actually higher than what we are guiding at this point.

But again, the third quarter and December is a good base.

We plan to continue to grow ahead of that.

I would not assume that December production figures are going to be flat going on.

Bruno, this is Miguel here.

I will add through the perception of CapEx constraint in terms of capability of growing.

One thing we should not forget is that we have managed to double the level of investment, and almost with that money we have tripled the level of activity; and tripled the level of activity basically bringing in place some kind of velocity where we can really get operational efficiency without destroying value.

Our ability to continue growing number of rigs in the country at a pace where we feel comfortable that we keep adding value is something that we monitor constantly, and something where we have to be aggressive but prudent at the same time in order to capture the value of what we're doing.

Great.

Thank you very much.

If I may make a follow-up on the rig issue that you mentioned.

Now that you're getting the new rigs to Argentina, is the strategy still to drill primarily vertical wells, or to move more to horizontals, so with the new equipment?

It's a good question, Bruno.

Look, those rigs are working rigs.

They can move in the two directions.

Therefore, we are able to move from one part -- to one location to another location within the part without rigging down.

So that brings additional efficiency no matter we are drilling horizontal or vertical wells, and that is basically where the drillings are coming from.

Also on the vertical and horizontal, we believe that we can speed up the drilling we are -- when we are building those wells.

Nevertheless, on the shale oil, we have drilled a few horizontal wells, some of them very encouraging ones.

The last one that we have drilled, it's still for us a bit early to say that we are going to move from vertical to horizontal.

Vertical is still being today the preferred way of develop Vaca Muerta.

Nevertheless, we continue looking at what are the development of the horizontal wells.

Perfect.

Thank you very much.

Ricardo Cavanagh, Itau.

I have a question regarding the oil agreement with Repsol [unclear] So basically, what is window of opportunity that opens up to you in Vaca Muerta?

Do you expect that this will accelerate a little bit the speed-up of potential partnerships in the region?

How do you see?

Look, as I mentioned before, and as you know better than me, this is besides YPF, a very positive outcome for the country.

And therefore, even though today we were not -- we have not been constrained in terms of the number of partners that we have brought to Vaca Muerta, because closing Chevron and Dow was exactly what we have in the plan, we cannot basically lack of recognizing that our work is going to be much more this year attracting partners to Vaca Muerta today because some of them were uneasy with the Repsol situation that they're still open.

So therefore, yes, we are positive that first of all that is going give to the management team more time in both -- in the right things because that took time of everybody here, and therefore also, it will leave a better feeling for people that they're really looking at Vaca Muerta.

And then YPF as a partner of choice, the road's more open for -- to partner with us.

Well, thank you for that.

And then just a follow-up on more specific on the price for new gas.

How are economics with the increase in overall cost in the country, those $7.5, how do you see working out today and if there is a chance that that price could eventually be revised higher?

Well, I don't think that price is going to be revised higher in the medium term.

We feel comfortable with that price.

We do believe today we have the right margins for the portfolio well that we are drilling.

And also, we believe we still have yet to gain operational efficiency as we bring the new rigs on, as will the operation become more -- a little more about the place that we are drilling.

These are horizontal -- these are vertical wells to Lajas.

We [started to build] those wells 10 months ago, so I'm sure we also have room to improve the operational efficiency.

and regards the devaluation, as Daniel explained, we believe the devaluation in those particular cases of (inaudible) have basically a [seal on] net effect.

I'd say even a positive effect because the cost increases in the upstream have been below the devaluation of the currency.

And approximately the costs of the upstream, let's say it's approximately two-thirds pesos and one-third dollars, just the lifting costs.

So if we keep our contract of $7.5 per million btu, we're actually in a better situation in terms of the margins for that specific segment.

You have to remember, Ricardo, that we have a fixed baseline, so any improvement that we bring with new wells, and also basically improving the efficiency of the conventional wells we have already drilled and the conventional plays that also have a positive effect in our balance sheet.

Okay, perfect, and thank you so much.

Frank McGann, BofA Merrill Lynch.

Two things.

One, in terms of your costs for Vaca Muerta and the shale developments and tight gas developments, you mentioned a well cost of $7.5 million, and I was just wondering, given that you're still in the beginning stages of what looks like a massive development, how you see that cost developing over time?

And perhaps you could say what the difference would be between a vertical well cost currently and a horizontal well and then what you think each of those could do over time.

And then secondly, just in terms of the refined product demand, gasoline demand was very strong.

Diesel demand seems to be somewhat weaker.

And I was wondering what you're seeing in the first quarter and what your expectations are for the full year in terms of demand for products.

I would say that by product -- Frank, thank you for the question.

So starting with the ability for us to continue improving well costs, so the answer is, yes, we will continue improving those costs.

As you rightly pointed out, it's very early stage for us and we continue being in a learning curve, and this is a matter that I am very focused on.

So we'll continue to see basically costs improving in the well cost construction as we move forward and as we can more -- our costs mature and the way that we develop those plays.

I do have a target.

Unfortunately, I cannot give you the number in this call, but we do have a target, and the target is much more aggressive that $7.5 million.

Related to horizontal and vertical, as I said before, vertical from the economical point of view, is still being the way that we will continue develop those old shale oil plays.

And as I said, we are doing some tests with horizontals and we have some encouraging results that also I cannot share with you at the moment.

Now tight gas, Lajas, is still also vertical with a bit more of [stage shift].

We move from 7 to 10 stages there in Lajas, and we are happy with that, and that we believe is the way to develop those plays from the moment.

xxx Now in shale gas, you have to remember that we are very early stage.

We drilled four wells in Orejano; two vertical, two horizontal and we have not opened those wells.

Even though we have some tests, we have not put those wells through the facilities yet.

That is going to happen in the following weeks.

So it's very early to say if vertical or horizontal is the way to go in shale gas.

I'm more positive on horizontal on the shale gas, but that is just a feeling.

Regarding your other question on demand on refined products, we did see in January slowdown of demand.

Still gasoline demand was much higher than last year, I think in the order of 6% higher, but at least 1% below the last month of 2013.

So sequentially, month after month demand came down a little bit.

On diesel, it was again flattish; as I said on the presentation, plus 1% January versus January where it had been minus 1% in the fourth quarter.

But again, minus 1%, plus 1%, I tend to categorize both of them as flattish demand.

But generally, we have seen a little bit of a slowdown in demand.

Okay.

Thank you very much.

[Candid Earl], [Columbus Hill].

This is actually Chris Brunk from Columbus Hill.

I'm just following up on Bruno's question on production guidance for 2014.

You guys said 3% growth in crude but that that was affected by the sell-down of the Loma Campana field.

How would the crude production fare if that was not sold, that 50% Loma Campana stake?

Does that make sense?

That makes sense, Chris.

I don't have the figures, but let me -- let us calculate the figures and if we have that by the end of the call, we'll give it to you.

Otherwise, we'll shoot it by email.

Definitely, it will be a higher production level.

Got it.

(Operator Instructions).

Frank McGann, BofA Merrill Lynch.

Just in terms of depreciation charges going forward, given the substantial increase that you've had in CapEx over the last two years and the strong levels that you expect going forward, and as you move the portfolio more towards new developments versus the historical lower-cost developments, I was just wondering how should we think of -- what do you expect the trends to be for depreciation over time?

Well, that's a very -- it's a complex question, Frank.

It has a lot of different components.

One component that you need to bear in mind that has barely been mentioned so far is the effect of increasing reserves, because increasing reserves will basically mean that you are depreciating the assets in a longer period.

So that will be a positive effect.

Now the negative effects continue to be the same, which is increased CapEx, as you have said; increased value of the assets, as you have also said; and also increase in production as we have been increasing production.

So the total effect will depend a lot on the development of the currency, but conceptually, those are the most important elements that you need to look into.

The base for depreciation, is in pesos, or is it in dollars converted into pesos?

It's in dollars.

Our functional currency is dollars, so our assets are basically denominated in dollars.

Okay.

Great.

And I am showing no further questions at this time.

I will now turn the call over to Miguel for closing remarks.

So, gentlemen, thank you very much for participation and for your support.

As I mentioned before, we've been very proud of the result that we have achieved during the first year of our management of YPF; and, therefore, once again, thank you for participation and thank you for your support so far.

We're looking forward for a good 2014.

Thank you.

And thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.