YPF SA (YPF) 2014 Q1 法說會逐字稿

Welcome to the YPF Sociedad Anonima first quarter 2014 earnings conference call.

My name is Lorraine, 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, Lorraine.

Good morning, ladies and gentlemen.

My name, as just mentioned, is Alejandro Chernacov, head of Investor Relations at YPF.

I would like to thank you for joining YPF's first quarter 2014 earnings webcast.

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

During the presentation, we will go through the main aspects and events that explain our Q1 results, and finally, we will open this call for questions.

As you can see in this slide, this is our cautionary statements.

It's just there because we will be making various forward-looking statements.

So, please keep an eye on it.

Our agenda today will include the review of the first quarter results.

It will also include an update on our financial situation; a brief discussion of the status of the integration of the assets acquired to Apache in Argentina, which we now call YSUR; and to finalize, we will go through a brief summary.

As you --.

Please remember all our financial figures are stated in Argentine pesos and in accordance with IFRS, International Financial Reporting Standards.

Please, Daniel, go ahead.

Thank you, Alejandro.

Good morning, everybody.

We are very pleased to report again very positive results for the quarter, and this time under much more challenging economic conditions.

We are showing consistent growth across our two business segments, and we have increased revenues by 65%, operating income by 73%, and EBITDA by 76%, also marking a slight increase in margins.

As important, we have also delivered substantial production growth: total production of close to 530,000 BOEs per day, representing an increase of 10.7% versus the same quarter of last year.

And although we will enter into more challenging year-on-year comparisons in the next few quarters, we do believe we can maintain this pace for the remainder of the year, as we also start consolidating the production coming from some of our recent acquisitions.

Operating cash flow also presented an impressive 78% growth, which is key to allow us to continue to fund our growing CapEx.

This quarter, however, was somehow unique in terms of CapEx, as we invested ARS16 billion including acquisition, close to ARS10 billion from an organic origin.

Local demand for fuels was strong in the quarter, in the case of gasoline and fuel oil, mostly; somehow softer in the case of diesel oil.

And although we processed 4.5% less crude in our refineries, we were still able to profitably serve our customer base.

As we are all aware, the local currency depreciated 23% against the US dollar during the quarter, more specifically in January.

However, this accelerated pace of devaluation of the peso had started in the last quarter of last year.

So, when we actually compare the average FX for this quarter with the same period of last year, we see a currency devaluation of 52%.

What I am saying is that the average exchange rate had been ARS5 per dollar in the first quarter of last year and was ARS7.6 per dollar during this quarter.

And during the last couple of months, we obviously faced a lot of questions regarding the effects of this devaluation in the results of operations.

So, we have been trying to provide the market with a conceptual description of how much of our revenues and our costs are dollar- and peso-denominated.

Now, we can also show it with hard numbers.

We had said that approximately two-thirds of our revenues are denominated in pesos, as they are derived from our sales of fuels in the local markets.

We also said that slightly over half of our upstream cash costs are denominated in pesos.

What is more difficult to estimate though is the pace at which each of those values will evolve.

So far, we have been extremely successful in maintaining our average selling prices flat in dollar terms, and we have seen some cost reduction also in dollar terms.

We are proud to report solid revenue and EBITDA growth in dollar terms.

Although one quarter cannot necessarily be used as a proxy for future performance, we are confident in our ability to continue to preserve and to grow our business in dollar terms.

Going back into pesos, operating income for the first quarter of 2014 was ARS4.4 billion, which is 73% higher than the same quarter of last year.

Revenues grew by ARS12 billion, or 65%, mainly driven by a few factors.

The most important of course is a ARS5.9 billion increase in the liquid fuels that we sell locally.

Then, a ARS1.8 billion increase in natural gas, which is also sold locally.

Third, ARS1.4 billion increase in exports, mainly due to higher prices denominated in pesos.

And lastly, ARS839 million increase in sales of fuel oils.

Cost of sales grew by a similar percentage, 65.1% actually, against the same period of last year.

Purchases were up 57%, which is fully explained by higher imported volumes of diesel, gasoline, and jet fuel, and at higher peso-denominated prices.

As a result of higher investments and to the peso devaluation -- remember that our assets are valued in US dollars, as [this is our] functional currency under IFRS -- depreciation increased by ARS1.7 billion in the quarter.

Also, other charges related to the increasing activity and to SG&A were up by 49%, the latter as a consequence of higher export taxes paid due to larger exports.

As a result of the damage suffered by our La Plata refinery in the second quarter of 2013, we started recording insurance compensation.

This quarter was ARS707 million for the lost of profits affecting our business.

This amount was recorded as lower costs of sales, based on the fact that had that damage not occurred at this refinery, lower volumes of refined products would have needed to be imported.

As I previously mentioned, you can see that growth was driven by both the upstream and the downstream business segments, showing a very consistent performance across the entire Company.

We will explain in more detail, but in general terms we can say that the upstream benefited mostly from volume growth and the downstream monetized that growth nicely at the pump, at higher prices in local currencies.

Now, let me try to explain each of these in the following few slides.

In the upstream business, operating income reached ARS3 billion, showing a 61% increase over the first quarter of 2013.

Revenues in that segment were up 69%, and this was primarily due to the 10.7% increase in production, but also to higher prices in pesos both for crude oil and for natural gas.

When we try to break down the revenues by crude and by natural gas, we can see that on the crude oil side, revenues grew by ARS4.3 billion as a consequence of a 46% increase in the price per barrel, in terms of Argentine pesos, and a 6.8% production growth, coupled with exports of 670,000 barrels of crude oil which accounted for slightly over ARS500 million.

The crude oil exports, by the way, are opportunistic and are consequences of quality mix optimization that we do from time to time.

Natural gas revenues increased by 106% as a result of an 18.2% increase in production and a 15.7% increase in the dollar average price, up to $4.4 per million BTU.

In this quarter, approximately 37% of our natural gas production is already benefiting from the new gas plan and therefore receiving a price of $7.5 per million BTU.

That is mostly what is allowing us to reach a weighted average of $4.4 per million BTU.

Now, on the cost side, the total cost increase was ARS4.9 billion and was mainly due to cost of production, which increased by ARS2 billion, driven by increased activity and higher expenses for contracted services, for ARS1.1 billion; heavier depreciation, again, for ARS1.4 billion, which resulted from higher investments and also higher valuations of our assets, in terms of Argentine pesos; and lastly, increased royalties of ARS730 million.

Although lifting cost per barrel came down by approximately 7% in dollar terms, probably most of this effect is related to our significant production growth during the quarter.

We still have not benefited from the decrease in dollar terms that our cash costs should have experienced with a devaluation.

Production-wise, we accomplished an impressive growth, again both in natural gas and in crude oil, this being the fourth consecutive quarter in which we grow total production against the previous quarter.

Regarding crude oil, we were up 10.7% (sic - see slide 9, "6.8%"), as already mentioned, producing 241,600 barrels of oil per day.

In terms of natural gas, the increase in production was an outstanding 18.6% and therefore producing 37.2 million cubic meters per day.

And as a result, in this quarter, total hydrocarbon production reached 529,700 barrels of oil equivalent per day, coming from 478,000 in the same quarter of last year.

Let me dive a little bit deeper into this quarter production figure analysis.

You'll see this quarter we had very solid conventional production increase, which coupled with an inorganic growth and a continued shale and tight gas progress resulted in the figures that I just outlined for you.

Conventional production continues to be above our previous expectations, showing year-over-year increases of 5.9% in crude oil and 11.2% in natural gas, both as a consequence of our drilling activity increase and field optimizations.

Regarding inorganic impacts to production, we have mostly additions in this quarter and some reduction because of the Loma Campana farm-out.

On the acquisition front, as we all know, we acquired the Apache assets in Argentina.

From now on, we are calling them YSUR.

And we saw average daily production for those assets of 49,000 barrels of oil equivalent per day, which is composed of almost 10,000 barrels of crude and 6 million cubic meters of natural gas.

Now, remember that we only consolidated 19 days of YSUR in this quarter.

So, the impact to the quarter's production is actually completely immaterial.

The second acquisition was the 38.5% increase in the Puesto Hernandez joint venture, which we acquired from Petrobras Argentina, where we already held a 61.5% stake.

Now, we became the operators in the field.

And the production, which was consolidated for the entire quarter, resulted in an average crude oil of 4,000 barrels of oil per day.

Now, on the divestiture front, as we mentioned in the full-year 2013 earnings call, since the closing of the deal with Chevron to develop Vaca Muerta last December, we are now accounting for 50% of Loma Campana's production.

That is why in the graph there you can see that the green bar actually shows a decrease in the first quarter of 2014 against the last quarter of 2013, from 9,500 barrels of oil per day to 6,400 barrels of oil per day.

Now, with regards to this project, operations are continuing to run smoothly.

We continue to have 19 drilling rigs and eight work-over rigs in the area, and we're waiting to incorporate the new technology rigs during 2014 and 2015.

We drilled around 50 wells in Loma Campana during the quarter, and we plan to drill another 140 wells before the end of the year, of course all of them targeting the Vaca Muerta formation.

The total gross production from the unconventional areas, which is mainly Loma Campana plus a few wells in surrounding areas, totaled 19,000 barrels of oil per day.

And remember, again, that net to YPF is approximately 50% of that production.

With regards to natural gas, we are producing 3 million cubic meters per day from both the tight and the shale, with a conventional production that has also been growing, as I said previously, at 11% increase.

And the total conventional production was 34 million cubic meters of gas per day.

Actually, I mentioned tight.

We are extremely excited with the results from the Lajas tight formation.

During the first quarter of 2014, we drilled 10 wells there, and we developed an average production of natural gas of 2.8 million cubic meters a day.

Moving on to the downstream, we continued providing higher volumes to a growing demand, maintaining the necessary pricing discipline which allowed us to keep healthy margins in this segment.

This quarter, operating income was ARS2.5 billion, showing an increase of 102% compared with the first quarter of 2013.

Revenues were up 62%, mainly due to higher revenues from fuels, as average prices in terms of Argentine pesos for gasoline and diesel resulted in higher income of ARS2.2 billion in gasoline and ARS3.5 billion in diesel, and also due to higher volumes of gasoline marketed locally, which showed a 6% increase in volumes, and that provided for an additional ARS377 million of revenues.

This increase in gasoline sales, however, was offset by a 1.4% drop in the volume of diesel oil sold, which had almost no impact on revenues due to the improvement in the mix of products actually sold during the quarter.

Additionally, the sales of fuel oil increased by ARS1 billion, reflecting increases in both the domestic and international markets, while the jet fuel increased by ARS258 million.

I had previously mentioned an increase in fuel sales of slightly over ARS800 million.

That was locally.

Now, I just mentioned ARS1 billion.

That's a combination of the ARS800 million that was sold locally, plus some exports.

Costs increased by 59%, and there we can highlight, first, the increase in the crude oil which was transferred from our upstream business segment to the downstream business segment, and that was for a total of ARS3.5 billion; and then, the increase in the crude oil purchased to third parties, which increased by ARS235 million, which is only due to the increase in prices in local currency terms.

Then, there was a ARS2.8 billion increase in imported products, mainly driven by greater volumes of imported diesel oil, and also, as I mentioned earlier, at higher prices in pesos term.

Third, there was an increase in depreciation of ARS173 million.

And finally, there were higher prices on volumes of biofuels which were purchased locally, and this resulted in an increase in ARS236 million in total costs.

As previously mentioned, this quarter we booked ARS707 million in insurance compensation due to the lost of profits that affected our downstream business after the fire in our refinery last year.

Demand continues to be strong.

Year to date, gasoline market grew 6% while, as I said, diesel market softened 1.4%, Coupled with the additional boost of fuel oil, sales of total refined products increased by almost 3%.

In the gasoline and diesel market share, cumulative to March, we registered a slight increase, to over 59%, coming from 57% last year, and this was mainly as a consequence of the very special market dynamics of early February, right after devaluation, where one could find important price differences between the different competitors.

However, this market share normalized at least one point lower in April.

During the quarter, volumes of crude oil processed were 275,000 barrels of oil per day, which was 4.5% lower than the first quarter of last year, and this was mainly due to, one, the reduced refining capacity affecting the La Plata refinery, which is a structural issue until the new coking unit is back in place.

And, second, we entered into scheduled maintenance stoppage in our Lujan de Cuyo refinery on March 14, and that stoppage was for slightly over a month, and the refinery was up and running fully again by April 15, 2014.

But on the quarter, the processing capacity of Lujan de Cuyo actually was reduced from a capacity of 105,000 barrels of oil per day, to 39,000 barrels of oil per day.

During the first quarter of 2014, total CapEx for the Company amounted to ARS16 billion.

Now, if we strip out the acquisitions, that figure goes down to ARS9.7 billion, which is still 127% above that figure for the first quarter of 2013.

Upstream CapEx increased to a total of ARS8.6 billion.

The most meaningful investments have taken place in Loma la Lata; in Loma Campana, not just the unconventional but also conventional; in Aguada Toledo; Chihuido Sierra Negra; in Manantiales Behr; El Trebol; and los Perales.

Consequently, we continued to ramp up activity and by the end of March, we had 69 operating drilling rigs -- actually, 70 as of today -- and we expect to be about 75 drilling rigs by the end of the year.

The CapEx for downstream was approximately ARS1 billion, and we continue in schedule with the coke unit replacement.

The project is almost halfway now.

Let's speak a little bit about our financial situation.

This quarter, we saw our cash flow from operations up by 78%, thus generating ARS6.7 billion in the quarter.

This strong cash flow, added to the cash position that we had at year-end, allowed us to complete two acquisitions, to continue with our aggressive CapEx plan, and still hold a sound capital structure, with net debt to EBITDA of approximately 1-time.

We started the year with ARS10.7 billion of cash and after spending the ARS16 billion in CapEx in the quarter, our cash position dropped to ARS3.1 billion by the end of the first quarter.

However, just a few days after the closing of the quarter, we issued $1 billion in our international bond.

And by the end of April, we had already rebuilt the cash position to a similar level than the one that we had by the end of December of 2013.

On the debt front, and updating financial situation actually to the end of April, to put it pro forma also for the long-term debt issuance that I just mentioned, we are showing a cash position which is actually larger than our full-year debt maturities.

And as you can see on the bar chart, we continued improving our debt amortization schedule, with less than 30% of our total debt maturing in the next two years.

And as a result, we continued extending the average life of our debt, to approximately four years.

Our average interest rate is approximately 24% in pesos and 6.7% in dollars.

And the peso-denominated debt accounts for approximately one-third of our total financial debt.

Also, I would like to mention that last week the [annual] shareholders meeting of the Company approved the payment of ARS465 million in dividends -- that's ARS1.18 per share -- which is up 42% against last year and approximately flat in dollar terms.

And the Board of Directors will decide the exact timing for the payment.

With regards to the acquisition of the Apache assets in Argentina, again, now renamed YSUR, we are finishing our strategic plan with a main focus on production increase.

We have put new management in place to substitute for all the Apache ex-patriots that returned home.

Actually, we put our former head of [explotation] here at YPF as the general manager of YSUR.

So far, we have confirmed the upside for the assets.

We are in the process of starting a new drilling rig -- actually, we started it a few days ago -- and have plans for another one or two drilling rigs before year-end.

Remember that Apache was only operating one drilling rig at the time of the acquisition.

YSUR is already producing 49,000 barrels of oil equivalent per day, which is in line with our pre-acquisition expectations.

The core of course is natural gas, where they are producing approximately 6 million cubic meters per day, and actually this natural gas production will be a significant contributor to YPF's growth in gas, going forward.

However, the average price of gas for the YSUR assets was $3 per million BTU, which is significantly below YPF's weighted average of $4.4 per million BTU.

In terms of crude oil, we can definitely use the approximately 10,000 barrels of oil per day of Medanito quality that they are currently producing and that's actually very scarce today in Argentina.

By the way, I should mention that from now on we'll start reporting total YPF production including YSUR.

However, the effect in this first quarter was insignificant, as we only consolidated 19 days of operations.

We believe at this point that YSUR will be invested in the range of $250 million in the year.

So, it is likely that YPF will contribute a portion that cannot be self-financed by the company.

However, whatever this contribution is from YPF, it should occur without affecting the total CapEx plan that YPF has for the year.

We will provide more details on the new business plan as soon as it is ready and approved, for YSUR.

Bear in mind, please, that it has only been less than two months since we took control of the operations.

In summary, another good quarter with good results.

And I'd say those results deriving from the right reasons, which is increasing production, which is solid demand for all of our products, and also increasing prices above our cost increases.

We are confident that we can replicate these results and continue to prove that we have the right business structure in place and that our alignment with the interest of the country is actually a very good thing for all shareholders.

We will continue to focus on growth, but as we said in the last quarter, we will put increased efforts in efficiencies and cost control, and always maintaining a disciplined financial strategy.

We continue to have substantial challenges ahead of us, the macro situation of course, but also the development of the shale, specifically moving our joint venture with Chevron into [faster] drilling mode, plus integration of the former Apache operations to make sure that we make our acquisition dollars yield equal or better returns that our organic growth does.

Total CapEx for the year should be approximately $5.5 billion, and with this we feel comfortable with providing new production guidance of plus 5% in crude oil and plus 18% in natural gas for the year.

This guidance takes into account the YPF stand-alone plan that we had actually announced last quarter and which has not changed, other than for the recent event in the treatment plant in Cerro Divisadero where we lost some production, plus the acquisitions of the additional stakes in Puesto Hernandez and [Ventana], the acquisition of the Apache assets, and the farm-outs of Loma la Lata, Rincon del Mangrullo, and [Orijalo].

With this, I would like open it up for questions, and thank you very much for your attention.

Thank you.

(Operator Instructions) Bruno Montanari, Morgan Stanley.

Thanks for taking the questions; I have a few brief ones.

First, on the gas price, I understand that the new contract with the government provides an annual reset, but we have actually seen a consistent increase in the last few quarters.

So, how should we think about the evolution of realized prices in the next few quarters, assuming of course there's no changes on the subsidies front?

Second, on the cost front, are there any news on the negotiation of the new labor contract?

And then, finally, if I could explore the guidance a bit further, would you be able to break down the growth of conventional and unconventional production?

First, let me make a clarification, because I made a mistake in my last statement when I said we had acquired Ventana.

Actually, what acquired was the 50% stake in Lajas, from Vale.

Going to your questions, Bruno, on the gas price, there's no reset.

Actually, the 15% increase in dollar terms, it's just a consequence of a higher percentage of our total production which is deemed to be the new gas, at $7.5 per million BTU, and a lower percentage being the old gas that continues to decline, at a 7% contractual rate, as agreed with the government.

So, what you --.

Although I'm not going to be providing an estimate of what the gas price will be at year-end, you will see that this will continue to grow above this $4.5 figure that I just outlined.

In terms of costs, you actually brought up a very good point.

I should have mentioned that we did finalize our labor discussions and ended up with a 30% increase in labor cost, in salaries, which is actually 17% in April and another 13% in August of this year.

So, it will be a total of 30% on the year.

And on the guidance, at this point, Bruno, we are not breaking down the projections for conventional and non-conventional.

Perfect.

Frank McGann, Bank of America.

I was wondering, just following up on the gas question, if you could comment on the Apache and YSUR gas, how long you think it would be before that gas becomes eligible to move to the higher prices that are being granted now for new gas?

And secondly, in terms of the timing of the refinery, the La Plata refinery, coming back fully, what is the status of that?

And how quickly can it ramp up once the new unit is finished?

On the Apache gas production, which is actually very meaningful to us, because we have not finalized our business plan for the future, we can still not sit down with the regulator to show what kind of growth we're actually projecting and, as a consequence of that growth, when we will start receiving $7.5 price for all that additional growth.

So, it is definitely one of our priorities for Apache going forward.

As we said when we performed the acquisition, we do see significant production upside there, but we also see an important pricing upside.

So, we will definitely focus on that.

We'll keep you updated as we make progress, but you should assume that nothing will happen in the next quarter, at least not in terms of already benefiting the higher prices.

In terms of the question regarding the works at the La Plata refinery, as you all know, we are investing in the order of $800 million in a new coking unit.

We continue to estimate that it should be up and running in the last quarter of 2015.

Okay.

Gustavo Gattass, BTG.

I had two questions, here.

So, I wanted to (inaudible).

The first one, as a follow-up on the question that Frank just made, is it [certain] that you guys won't get a retroactive curve on new production, as far as Apache goes?

So, is it certain that from the moment you sit down with the regulator, that's the best case scenario for when the 7% is going to draw down?

That's point one.

And if I could just do one quick follow-up on YSUR, as well?

You guys reported EBITDA for YSUR.

I just wanted to have an idea -- the EBITDA contribution for YPF was, I would say, fairly linear with regards to what you reported for the quarter for YSUR?

Or, if there was any kind of disparity there on what made it to your numbers?

And on the other side, just following up on Bruno's question, really, even if you can't talk about oil plus gas, is it possible for you guys to give us at least an idea of how the shale oil part of things is growing right now or end-of-quarter or what you guys were seeing in April, so that we can have a sense of how things has been evolving from the figures you reported?

On the Apache gas, I think the most realistic scenario is to think that we will not get any retroactive price increases.

We do believe that we have a very good case in order to get a better price from the regulator, given that Apache was coming from -- I think it was, if I don't remember wrong, a 13% declination when we started looking at the numbers in the second quarter of last year.

So, as long as we can provide for growth vis-a-vis that declining expectations, I think we should be fine in terms of getting $7.5 for all that additional gas that we are bringing in.

Regarding the EBITDA for YSUR, we only consolidated 19 days of EBITDA.

So, again, I think it was [ARS200 million] was total EBITDA for the quarter; 19 days of that is actually negligible.

So, it didn't have any effect in the numbers of YPF for the second quarter.

And can you repeat the last question?

You were -- I was hearing you a little bit low.

Yes, the question was whether or not you could give us any idea of how the shale oil production is doing, other than just the average figure for the quarter?

I think that's what Bruno also was trying to understand, whether or not, let's say, that production is growing, if in April it was a little bit better, in March if you just want to talk about the closed quarter?

How did it look, let's say, sequentially, so that we can have an idea of how it's progressing?

No, unfortunately Gustavo, we have not yet released numbers for April.

So, I cannot give you any guidance.

We do have significant growth expectations for the remainder of the year, for this project.

Bear in mind that in March Chevron contributed $287 million for the next stage.

They will have to contribute another $500 million for the remainder of the year.

And so, YPF will have to contribute a similar percentage, because from now on the investments will be carried on a 50/50 basis.

But unfortunately, the kind of guidance, short-term guidance, that you're looking for, I cannot provide at this stage.

Okay.

Walter Chiarvesio, Santander Bank.

Congratulations for the results.

I have a few questions.

The first one is specific related to the price of crude oil that you report in the press release.

This has declined to $66.

You can give some explanation on why that happened and what is your forecast looking forward?

That is my first question.

Second, if any update or if you could give us something compared to the presentation that you made in March regarding the development in unconventional in terms of productivity, costs, drilling days, et cetera.

For example, this new technology and the number of rigs that you expect for the longer term, meaning next year, probably?

Two more questions.

The first one is, given the recent increase in prices in natural gas that the government allows to the resident [transportation] sector and the gasoline price at the pump, what is your expectation about the impacts on demand on both products, especially in the retail sector?

And finally, if you expect or do you think that you could make an update in the near future on the strategic plan that the Company presented in 2012?

That's it, all the questions I have.

Well, the price of crude actually came down right after devaluation.

There was a general agreement between all producers and refiners to pass through the effects of the devaluation over time.

And actually, what I can tell you is that at least the prices for the light crude oil, the Medanito crude oil, are already at $80 and growing.

So, I think it was a very specific drop that had to do with devaluation.

In terms of the unconventional, as I told Gustavo and Bruno, we do not have any additional updates to what we have been telling people in terms of our cost per well.

In terms of the number of drilling rigs, we are at 19.

Actually, we have 21 drilling rigs in the area, but we are actively operating 19.

We have another three which should be coming soon, with new technology.

So, our idea here is to, especially in terms of what we communicate to the market and to the general public, go step by step.

So, hopefully you will hear from us soon when we have news in terms of anything changing.

For now, you should assume that things are progressing exactly as we were expecting.

In terms of the effect of price increases and demand, I don't know for natural gas residential, because actually that's more a question for Metrogas than for us.

I hope that it does have some effect in containing demand.

What I can tell you in terms of fuels is that we've seen gasoline being extremely resilient to prices, the gasoline demand being extremely resilient to price increases.

So, although of course we had seen gasoline demand go up 10% last year and only 6% during this quarter and somehow softening, that probably has more to do with the reduction in the sales of new cars and maybe with some softening in the economy, and not that much with the price increases in our views.

And with diesel oil, it's a similar situation.

We believe that in second quarter, we'll start seeing some increase in demand, as the agro business starts its peak season.

And we have not sensed any important demand stoppage or any reduction in demand because of price increases.

Your last question actually is a very good one, regarding a new strategic plan.

We are starting to work on one.

Actually, we have hired consultants to help us produce a new strategic plan for the future.

I cannot provide you at this point an estimate of when we will come up with a new business plan, but we are starting the process.

Okay.

Just one more question.

No, that's it.

Sorry.

It's okay.

Thank you.

Anish Kapadia, TPH.

I have three questions.

The first one is to do with the growth in the Vaca Muerta production that you've reported.

In the [third] quarter of 2014, the gross production growth that I calculated was around 12% versus fourth quarter 2013.

When I look back into 2013, the average quarterly growth for each of the four quarters was over 30%.

So, I just wanted to know why you've seen a significant slowdown in the growth, and maybe you can relate that to your expectations for this year?

The second question was just going back to the presentation you gave back in March on the Vaca Muerta.

When we look at the type curve for the Vaca Muerta, only it seems 10 of the wells which were drilled into the sweet spot, out of around 125 wells that you talked about being drilled, were actually performed in line or above the type curve.

I was just wondering, given that, what's the risk that outside of the sweet spot area that the type curve will have to come down, and maybe quite significantly?

And then, my final question was to do with crude pricing again.

I was wondering if there's been any more recent discussions with the government about changing the export cap for crude exports, given you're starting to see some increase in production in-country now?

And also, if you can just update where the current spot price is for crude?

Let me address the last question, and I'll have Alejandro tackle the first two.

No, as far as we know, there haven't been any discussions regarding changing the tax regime for crude exports.

And as I said earlier, the spot price for crude oil productions, especially for the light crude oil, which is actually what we produce in Vaca Muerta, it's at low-$80s as we speak, coming from the high-$60s or low-$70s right after devaluation.

Going back to the first question, tackling what happened with -- the evolution of, let's say, shale oil growth during Q1, Q4, Q3, and Q1.

What you've seen at the beginning, it's of course you came from a lower base, with less wells producing.

So, the amount of wells against the ones you had on the base, which you were adding each quarter, was of course higher.

That is one of the reasons that you see, for example, again, a growth of 45% from Q3 to Q2, for example.

I'm talking about gross figures, of course.

What you see in Q1 against Q4, it's anywhere between 22% to 25% growth in the last quarter, which is actually similar to what you've seen in Q4.

And that is mainly because we connected actually a similar amount of wells in Q1 that we did in Q4, and with very similar results.

And of course, the results coming from the decline of the first wells -- and this is linking to the second question -- of course, those had higher declines, as they were not as good as wells that we drilled by the end of 2013 and beginning of 2014.

So, that is why you are starting to see that decline for a bigger -- a deep part of the base that we have there.

So, it's two things, really.

It's a similar amount of wells drilled in Q4 and in Q1, and the decline from the older wells which are, let's say, not as the ones that we are drilling today.

And that linking to a second question, which was the results that we've seen in the sweet spots compared to the ones that we've seen in the other part.

Going back to that presentation, there's a slide where we break down Loma Campana in four kinds of -- different stages of advance or the risking or understanding how the [roll-out] really works.

We found that in the northwest, which is where we find the sweet spot, it's where we are seeing good productivity.

It's where we are seeing that we are producing as or a little bit above the type well curve.

That is where today we are focusing, with about 14 drilling rigs.

The other, we are still working and we are still testing different kinds of completion modes in order to get similar results to the one we are seeing in the sweet spot.

That is what we are doing today.

And on the eastern part, which is actually -- was at the beginning called Loma Campana, that then merged with [Loma La Lata Norte] -- is where we are seeing the good results or the possibility of developing with horizontal.

So, that is a little bit on how we are seeing the project today.

The risk, I cannot put a number or a percentage of what's the risk of not getting the sweet spot, but we are very confident that in the sweet spot we're going to get better and even above the average, and we're probably going to reach those numbers in the whole project.

Great.

(Operator Instructions) Christopher Buck, Barclays.

First, I'm wondering if you can give us a little bit more color about what you expect for margins in the downstream, and maybe for the rest of the year it would be helpful, but also more over the long term, if you see room for expansion in downstream margins?

And I guess it would be helpful to understand, if you would quantify a little bit -- you talked about FX and the impacts on the quarter.

And if you could quantify some of those numbers for us, that would be great.

Second, there were some pretty big investments in working capital on the quarter in terms of inventories, receivables, payables.

Can you just help us understand what we should expect there for the rest of the year?

And additionally, third question from me would just be around your refinancing (technical difficulty).

You have quite a few amortizations coming for the rest of the year, and you did release a note indicating you could issue up to $500 million additional bonds.

So, if you could give us some more color about what's happening there?

Well, let me start with the last one.

We feel extremely comfortable the refinancing needs for the year.

As we've shown in the presentation, we have cash in hand for more than the full refinancing for the year.

What I should clarify is that yesterday our Board approved us to issue up to another $500 million in bonds.

That doesn't mean that we have a plan to issue, [and less so] that that plan provides for us issuing in international markets.

The way that we have been functioning is that we ask our Board to give us, let's say, an umbrella approval in order to provide us with enough flexibility to tap the markets, especially the local markets, when we see an opportunity.

So, it is likely that you will see us in the local markets in the next, let's say, four to six weeks, which actually makes a lot of sense because we do have some refinancing to make in the local markets at that moment.

And our working assumption is that we are going to be refinancing everything that comes due locally during the remainder of the year.

In terms of the working capital question, I think the evolution has basically to do with two things.

One is the increase in the size of our business generally.

If I'm not mistaken, we have grown our working capital by 24% this year and we have grown sales by 21%.

So, that provides for a good part of the answer.

And the other part of the answer has to do with inventories, which are actually valued in US dollars.

And as you know, in this specific quarter, those are 23% decrease in the value of the peso, a 23% devaluation.

So, that provides for higher inventories in peso terms.

Let me try to address the question on refining margins.

In the short term, what you are going to see is -- not in Q2, but probably in Q3 and Q4, as you're going to have the full quarter with the Lujan de Cuyo refinery working at 100%.

You're probably going to be seeing a little bit -- a small increase in margins there, as you reduce imports linked to higher refined products that you're going to have in our own refineries.

And going to the long term, and as we usually discuss, the way to think of it is you're probably going to have a jump in the refining margin when we put up the coke unit running by the end of 2015.

But then, you should probably see stable refining margins in the long term, while of course you should see increases in upstream margins as you grow production.

Chris, the way we look at this is that, of course it's very dependent on our ability to continue to increase prices locally.

So, we try not to give any projections for the short term.

Of course, this is always a sensitive issue, price increases at the pump.

We do believe that in the medium to long term -- and actually, if you can use the past as a proxy, that actually confirms this -- that we can actually maintain our prices in dollar terms, our local prices in dollar terms.

It may not be the case in one specific quarter, especially the currency devalues, but in the long term we continue to be optimistic with our chances of at least maintaining if not growing our prices in dollar terms.

And therefore, as Alejandro says, depending also of course on the evolution of the crude oil prices locally, which is by far the main cost component of the downstream business, we should be able to maintain margins at least flat.

Great.

That's helpful.

One follow-up on the working capital.

So, should we [expect to see] continued working capital investment in the sense that your peso-denominated revenues should continue increasing?

So, we shouldn't expect to get any of that working capital back this year?

Well, the evolution that I just explained was actually end of March versus end of December.

I think that what you are going to see is, depending on the fluctuation of the currency and depending on how we continue to grow our business, you will continue to see an expansion in working capital, but with percentage terms which will not be above our business growth numbers.

So, if we grow sales by 25%, there's no reason to think that we should be growing working capital beyond those levels, unless, again, there's any significant devaluation which results in a larger book value of our inventories, which of course we are not seeing.

Great.

And then, just one final clarification, which is, on the cash flow statement you had a pretty significant item called "Net Charge of Income Tax Payment." Can you help clarify what was happening there?

I think what you're looking at is the adjustment for the deferred tax, which is a non-cash item and it's actually huge.

There was a huge increase in the deferred income tax, and therefore we are adjusting that in the cash flow statement.

Okay.

And that increase in deferred taxes is due to the depreciation, right?

Right.

And again, it's a non-cash.

The depreciation of the currency actually results in a higher valuation of our fixed assets, which are denominated in dollars because our functional currency under IFRS is dollars.

And then, the other side of the coin is the increase in the deferred income tax.

Again, non-cash.

Thank you.

Santiago Wesenack, Raymond James.

Just one question related to E&P cost growth rates.

Despite increasing operating profit, 60% year over year this quarter in peso terms, actually cost growth accelerated in first quarter over the fourth quarter of last year.

So, I was wondering if you could comment on the operating expenses trend for the rest of the year, in terms of E&P?

As I said, or tried to make a statement, during the presentation, we believe that we should have an improvement in the level of dollar-denominated costs, or dollar costs, cash costs, especially in the upstream business, going forward, because of the effects of the devaluation, of course.

Bear in mind that for most of our contracts in the upstream, approximately only one-third of the tariff is actually linked to the US dollar.

So, the other two-thirds, which are linked to the peso, should end up representing less dollars, going forward.

Now, we haven't seen this positive effect in the first quarter, and we do expect to start seeing some of this positive effect going forward.

Great.

At this time, I am showing no further questions.

Christopher Buck, Barclays.

You guys were pretty clear that diesel and gasoline imported volumes went up on the quarter.

Historically, you said that about 10% of your sales are imported.

Can you give us a magnitude, in terms of either percent or absolute volumes, that were imported during the first quarter?

Actually that's a good question, because we incorporated from now on in the tables in our press release the size of our imports.

So, you will be able to track this going forward.

That's a new number that we didn't use to show.

But just to give you a sense, last year our diesel imports represented approximately 15% of our total diesel sales.

It used to be more like 10% before our refinery lost part of its capacity.

The first quarter was kind of unique, as I mentioned, because not only had that structural issue with the La Plata refinery, but also you had the programmed maintenance stoppage at our second largest refinery, in Mendoza.

Therefore, we had to import more product than before.

In that case, in the case of the first quarter, the total imports represented approximately a quarter of the total additional oil sold locally.

That number should go down again going forward.

So, I think 15% in diesel continues to be a reasonable estimate.

In terms of gasoline, it's significantly lower.

There are a few quarters where we actually do not need to import any gasoline at all.

It was approximately 5% last year, and I think that was in a way related to the couple of months in which refinery was actually almost out of business.

I think less than 5% for the year, it's a realistic estimate.

Thank you.

(Operator Instructions)

At this time, I am showing no further questions.

Mr. Chernacov, do you have any final remarks?

Thank you very much, Lorraine, and thank you, everybody, for being on the call.

If you have any follow-up questions, please do not hesitate to call Alejandro or myself.

Thank you very much.

Thank you.

And thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.