YPF SA (YPF) 2014 Q3 法說會逐字稿

Welcome to the YPF Sociedad Anonima's third-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. You may begin.

Great. 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 for joining YPF's third-quarter 2014 earning webcast. Today's presentation will be conducted by our CFO, Mr. Daniel Gonzalez. During the presentation, we will go through the main aspects and events that explain our Q3 results, and finally, of course, we will open the call up to questions.

On slide 2, we have our cautionary statement. We may be doing some forward-looking statements, so I carefully ask you to review it.

Our agenda today will include the review of the third-quarter results; an update of the status of our shale and tight gas projects, which take place in Loma Campana, Lomo La Lata and Rincon del Mangrullo; a brief description of our financial situation; and a brief summary to conclude.

Please, Daniel, go ahead.

Thank you, Alejandro. Thank you, everybody, for joining us today.

We are extremely pleased to report again another what, we believe, was an outstanding quarter. Significantly higher production in the upstream coupled with higher processing of sales volumes in the downstream, resulted in total revenues of ARS38.2 billion which was a 58% increase against the same quarter of last year.

The higher pace of growth of our revenues compared with all of our costs allowed us to expand margins and approximately double both our EBITDA and our operating cash flow in one year.

Operating income was up by 134% and net income was up by 127%.

As a consequence of these figures, YPF's leverage ratios improved, despite a 72% increase in CapEx.

Without any doubt, the brightest aspect of the quarter was again the substantial production growth, both in the upstream, as well as the downstream.

Total hydrocarbon production reached 573,000 boes per day. Natural gas grew by 26% to approximately 45 million cubic meters a day. Crude oil increased 4.6% to 246,000 barrels per day. We are now producing approximately 19% more oil and gas than when we joined two years ago.

Our downstream business continues to perform very well. This quarter we refined 299,000 barrels of oil per day, which represented a 94% utilization of our refining capacity. And also, represented a 2% (sic - see slide 4, "2.4%") growth versus last year.

This was possible as a consequence of having greater availability of light crude oil, and also resulted in a 36% reduction in the volume of fuels being imported.

Market share was slightly higher, now closer to 60%, as our brand continues to be the leader in the Argentine market. This quarter we experienced growing sales in the world's shrinking market, despite having substantially closed the pricing gap with competition.

Although we formally report in Argentine pesos, and we will make our comments on the quarter's figures in pesos, as we always do, you know that we measure ourselves in US dollars and understand the oil and gas business that way. This is why this slide we also show our most relevant income statement figures in dollars.

Revenues, of $4.6 billion, were up by 6%; EBITDA, of $1.6 billion, grew by 38% in the quarter; and operating income, of $975 million, was up 58% in the quarter.

Now, let's get into the explanation of the evolution of the operating income, as we do every quarter.

Operating income for the third quarter of 2014 was ARS8 billion, which was 134% higher than the third quarter of 2013.

Revenues grew by ARS14 billion approximately, which was 58% higher, and the main drivers were: the ARS8.7 billion increase in the local sales of diesel and gasoline, which is by far our largest contributor.

An ARS2.2 billion increase in the sales of natural gas, which quarter after quarter, is increasing its relevance to YPF.

ARS576 million increase in exports, mainly due to higher prices denominated in pesos.

ARS416 million increase in petrochemicals; and ARS348 million increase in fuel oils. These last two both sold in the local market.

Total costs grew by ARS9.4 billion or 45%. The largest single item contributing to the cost increase was again the depreciation which was up 73% or ARS2.3 billion.

Cash costs including local purchases of crude oil and biofuels, including imports of refined products and, of course, including our operating costs, was only up by 40% or ARS7.1 billion, well below our revenue increase.

You can see in the presentation that purchases were up by ARS2.5 billion, which is mainly explained by the higher prices and greater volumes of biofuels, both biodiesel and bioethanol. That resulted in additional ARS1 billion.

Then the price increase for the crude oil purchased from third parties in the domestic market that went from $71 to $76 per barrel in average and more than offset the lower volumes, given that YPF has higher crude oil production. The net impact was an increase of ARS635 million.

In turn, the imports of diesel decreased by 7% and, although all the average prices in Argentina were obviously higher, the volumes of imports actually declined by 36% in the quarter, and there were no imports of gasoline in this third quarter, as there weren't any imports of gasoline in the second quarter of last year.

As we explained in previous quarter, we also accrued the recovery from the insurance on our La Plata refinery, this time for ARS505 million, and this was accounted for as less purchases.

Other cost of sales were up due to higher activity, including maintenance and service contracts of over ARS2 billion and greater royalties of almost ARS1 billion.

In the case of royalties, there is also a price effect as they are calculated based on the price of oil and gas at the wellhead, which, as you know, is denominated in US dollars.

You can see the growth in operating income was evenly generated by both the upstream and downstream business segments, showing a very consistent performance across the entire Company and again proving the value of the integrated model.

We will explain in more detail, but in general terms, we can say that both benefited from both volume growth and slightly higher prices in dollar terms. And, that costs in both segments grew well below revenues.

Entering into our upstream business segment, operating income more than doubled against the third quarter of 2013, reaching ARS4.5 billion. Revenues grew by 77%, primarily due to larger volume of crude oil and natural gas transferred to the downstream at higher dollar prices.

Breaking down the crude oil revenues and the natural gas revenues, you can see that crude oil revenues increased by ARS6.3 billion due to a 7.5% price increase to $76 per barrel in the local market, which actually represented a 55% increase denominated in pesos; and of course, as we will see in the next slide, greater volumes produced.

In terms of natural gas revenues, they were up by 85% in the quarter due to a 26% production growth and a 10% higher average sales price of $4.28 per million btu.

The price of gas -- the average price of gas for YPF is negatively affected by the consolidation with the former Apache operations, which enjoy a slightly lower average gas price, as they were still not under the new gas pricing scheme of $7.50 per million btu for the new gas.

During the third quarter, we registered a gain of ARS359 million for the sale of -- to Sinopec of our 30% stake in the concession extension in La Ventana area in the province of Mendoza, where we already were partners and extended that partnership for an additional 10-year period. This was reported under other expenses in the graph.

Upstream costs were up ARS6.1 billion, a 69% increase compared to the third quarter of 2013, mainly due to cost of production increase of ARS3.5 billion, fueled by increased activity and higher expenses for outsource services for ARS1.6 billion; then higher depreciation of ARS1.9 billion; and finally, the increase in royalties that we already mentioned of ARS976 million.

I would like to point out that during this third quarter of 2014, the unit cash costs in US dollars actually decreased by 2% compared with the third quarter of 2013, and remained pretty much at the same level as the immediately preceding quarter; again, denominated in dollar terms.

Production-wise, we continue to experience a positive trend, with double-digit growth figures vis-a-vis the same period of last year, this being the sixth consecutive quarter in which we grow total production against the immediately preceding quarter.

Regarding crude oil production, third quarter 2014 was up 4.6%, producing 246,000 barrels of oil per day.

In terms of natural gas, the increase in production was 26%, producing 44.9 million cubic meters a day, heavily impacted both by the ramp up in tight gas production and with the incorporation of Apache.

As a result, in this quarter, total hydrocarbon production was up by was up by 15.4% to 573,000 barrels of oil equivalent a day, compared with 496,000 barrels of oil equivalent a day a year ago.

With enough visibility now for the remainder of the year, we think natural gas production should end the year with a growth in the low 20%-s, comfortably above our 18% guidance.

Whereas for crude oil, it is still a challenging goal to reach 5% target, given the incident in Mendoza earlier this year, where we have not yet fully recovered.

Allow me to dive a little bit deeper into this quarter production figures. As conventional production stood pretty much at the same levels, year-on-year growth was delivered both from acquisitions, as well as the increase in natural gas and crude oil produced from shale and tight formations.

On the conventional side, there was a small drop in both crude and gas. Crude oil is still recovering from the Cerro Divisadero incident in Mendoza. We are still missing there around 3,400 barrels of oil per day of production.

While natural gas has a somehow unfair comparison with 2013, when we had extracted less liquid from the gas and, therefore, had shown an unusually high natural gas production figure.

On the former Apache operations, now renamed YSUR, we are producing according to expectations at the time of the acquisition, with daily total production of 49,000 barrels of oil equivalent a day, including 9,500 of crude oil; 2,100 of NGL; and 5.9 million cubic meters a day of natural gas.

On the unconventional production, in the crude oil graph, you can see that we produced 9,500 barrels of oil per day in this third quarter, compared with 7,900 barrels of oil a year ago.

But this is not apples to apples, as in 2013, we consolidated 100% of the production coming from Loma Campana, while today we're consolidating 50% of that production after the Chevron farm-out.

Thus, shale oil gross production increased around 140% in one year and 39% against the second quarter 2014.

Of the 5.5 million cubic meters a day of production of unconventional gas, 4.8 million cubic meters came from tight formations. And, therefore, we decided to further discuss the Loma La Lata and Rincon del Mangrullo tight gas projects in this next slide.

In the southwest of Loma La Lata, we have been intensively drilling with the objective of producing tight gas from the Lajas formation, located 2,600 meters below ground, with a gross paid at ranges between 700 meters and 1,000 meters; and a net paid that goes to from 100 meters to 300 meters.

The area we are developing right now is usually referred to as segment 5, is the one that we had farmed-out to Vale and then repurchased from Vale earlier this year. It extends for an area of 30,000 acres and we think with some additional exploration that area could extend for another 95,000 acres.

We have already invested $540 million in that project. We have drilled 69 wells, 45 of them this year and have put in production 56 of those wells. The operation is running with 4 active drilling rigs and has reached a total production of 4.1 million cubic meters a day in September.

The other tight gas project we have in hand is the one that we are jointly doing with Petrolera Pampa. It's in Rincon del Mangrullo and it's targeting the Mulichinco formation, which is located 1,600 meters below ground.

$173 million have already been invested in this project, including a gathering pipeline and 29 wells. 7 of those wells were drilled during this quarter and production reached 1 million cubic meters a day in September.

Production started ramping up in July, when the pipeline was finished. And actually, there is pipeline capacity to at least triple the production coming from that area. Operations are running with 3 active drilling rigs and the wells drills were completed with two stages of frac each.

Tight gas become a vital source of natural gas, both from YPF, as well as for the country in general and represents 11% of YPF's total natural gas production.

Now, let's move on to the shale; operations are running as expected. We have 23 drilling rigs and 8 work-over rigs, devoted to shale development and exploration.

This quarter, we have connected 40 wells, adding to a total of 270. Gross production from shale areas has reached 31,900 boes per days, from which YPF consolidates approximately 50%, as it is mainly coming from Loma Campana, which in only two years has become the second largest oil producing field in Argentina.

We are very glad we continue to experience improvement in the vertical shale oil wells that we drilled in Loma Campana's sweet spot. They are producing at or above the forecasted tight well curve with decreasing drilling costs, and completion costs are now steadily around $7 million of cost per well.

Following what I said in previous quarters, we are becoming more and more bullish in horizontal drilling for some areas of Vaca Muerta. We're having encouraging productivity results in the latest horizontal shale oil wells put in production in Loma Campana; also with promising reduction in the well drilling time through the application of new technologies for us, such as rotary steel bore.

On the shale gas side, there was good progress in the pilot in El Orejano, which is the joint venture with Dow, with continuous drilling activity, including two horizontal wells showing good initial behavior.

Additionally, we deployed two drilling rigs exploring and delineating new blocks during this third quarter. And in October, we actually increased that number of rigs to three.

Finally, we are focusing in technology and have put together an Unconventional Center of Excellence with the upstream organization, to work side by side with our research and development department, which is YTEC. And we are making good progress in accelerating the understanding of the subsurface.

Moving on to the downstream, this quarter operating income was ARS3.9 billion, showing an increase of 152% compared with the third quarter of 2013. Revenues were up ARS12.6 billion or 54%, mainly due to prices in dollar terms, which were up 10% and 3.4% this quarter for gasoline and diesel respectively.

However, we do not expect prices to behave linearly and, therefore, this quarter may have been especially strong in terms of prices.

In addition, volumes of gasoline increased by 3.3% and diesel did so by 5.4% compared with the same quarter 2013.

In the export market, flours and oils increased by ARS203 million and sales of jet fuel increased by ARS282 million.

Sales in the domestic and international markets for petrochemical products reached ARS1.8 billion, and increase of ARS684 million, driven by higher volumes and higher prices in Argentine peso terms.

Costs, by the way, increased by 47.4%, compared with the same period of 2013; again, well below our revenue increase.

And there we highlight the increase in crude oil purchases of ARS7 billion, which is mainly transferred from YPF's upstream business segment, at least representing 80% of the total crude oil purchases. This result is mostly as a consequence of local crude oil prices increased, as explained before.

Then higher prices and greater volumes of biofuels, which I already referenced to, which accounted for approximately ARS1 billion more in this quarter. And finally, higher depreciation of ARS266 million.

This quarter we booked ARS505 million in insurance compensation as a result of our business interruption coverage of the damage suffered by La Plata refinery in the second quarter of last year.

During this quarter volumes of crude oil processed were 299,000 barrels per day, which is 2.4% higher than a year ago. And we were able to reach a 94% utilization rate, even without the Coke A unit, as a consequence of having greater availability of light crude oil in the throughput mix due to an increase in shale oil production.

This represents a return to similar processing levels to those before the incident affecting the La Plata refinery.

As a result of the increase in production, we were able to satisfy an overall 2.6% increase in demand, even reducing important volumes of diesel to 191,000 cubic meters, which is a reduction of 36% in volume versus the third quarter of last year.

However, because of the price increase in pesos, the total amount of important diesel reached ARS1.2 billion, which is only 7% less than the third quarter of last year.

We are proud to continue to be the first choice for fuels in Argentina. Even in an overall shrinking fuels market where total gasoline and diesel demand dropped by 2.1%, we were able to sell 2.3% more fuels. Our strong brand resulted in a slight increase in market share, almost 60%. This market share occurred while we maintained the price gap with competition at approximately 5%.

On the chart to the left you can see how YPF's sales volumes in the domestic market grew in 2014 and almost every month of 2014.

In 2013 this was a consequence of a growing market, but in 2014 it was more a result of an increase in market share. Actually, the preliminary numbers for October confirm a similar behavior.

During the third quarter of 2014 total CapEx for the Company amounted to ARS13.8 billion, which represents a 72% increase compared with the third quarter of 2013. Upstream CapEx increased to a total of ARS11.1 billion, 67% higher.

The most meaningful investments in the upstream have taken place in Loma Campana, which is shale; in our Toledo-Sierra Barrosa, which is the secondary recovery; and in Rincon del Mangrullo, which is tight. Today 27 exploratory wells and four work-over wells have been completed this year.

Consequently, we continue to ramp up activity and by the end of September the rig count was at 75; 61 of which are drilling for oil and 14 for natural gas. I think we're going to stabilize in the range of 75 to 80 rigs for the next 12 months; although 15 new rigs will be arriving and some will be replacing older and less-efficient rigs.

In downstream CapEx was ARS2.3 billion where the coke unit replacement is the largest project, and it is in schedule and in budget, and it has already passed its halfway point.

Well, let's speak about our financial situation. The third quarter was a very solid quarter. Cash flow from operations at ARS18 billion was approximately twice of last years and in excess of our CapEx, which allowed us to increase our cash position to ARS15.9 billion by the end of September of 2014.

This quarter we were free cash flow positive by almost ARS4.4 billion as a consequence of an increase of ARS6.9 billion in our EBITDA and a reduction in our working capital, which we may not necessarily experience very often.

Please note that the figures in this slide do not include the consolidated companies. This is YPF standalone.

As I just said, we ended the third quarter of the year with a strong financial situation. Our cash position, which measured in US dollars, was $1.75 billion and covers our debt maturities for the next 18 months.

On top of that, during the quarter we have been very successful in refinancing substantially all our debt maturities through the issuance of notes in the local market. So we continue to be fully funded for at least the next 12 months.

As of the end of the third quarter of 2014, the average cost of debt denominated in Argentine pesos was 25% approximately, but it's coming down as the local interest rates have been decreasing lately. While the average cost of debt denominated in US dollars was 6.6%.

The peso denominated portion of our total debt was 32% and the average life of the total debt is almost four years.

Our net debt to EBITDA ratio went down from 0.9 times in the second quarter of 2014, to 0.75 times in the third quarter.

In summary, another quarter moving in the right direction, delivering ahead of expectations as we continue to increase results and expand margins, despite the currency devaluation.

We increased oil and gas production by 15%, as a result of a balanced mix of conventional and unconventional production, coupled with inorganic growth.

The integration of YSUR continues to advance according to our plan. Shale and tight together already represent 8% of our total hydrocarbon production, which is also in line with our expectations.

All this should result in yearend production above our previous guidance.

Downstream had an outstanding quarter. YPF brand allowed us to increase demand based on market share growth in a challenging market situation (technical difficulty).

A strong operating cash flow allowed us to continue to increase our CapEx without increasing leverage.

We ended the quarter with a solid capital structure with significant cash reserves to provide stability regardless of the sovereign debt situation.

We were cash flow positive, as I just mentioned.

Our net debt to EBITDA ratio stood at 0.75 times.

On the JV front, on August 28 we announced our third shale pilot project, in this case with Petronas in an area called La Amarga Chica. This is expected to be a three-year pilot looking to invest slightly over $0.5 billion to shoot seismic in the block and drill around 35 wells, many of them horizontals.

However, this deal is still subject to some regulatory conditions and we expect to close it by yearend.

The environment has clearly become more challenging, both locally as well as internationally, but we feel we are well-prepared. We have the natural and financial resources to continue to grow. We believe we have the right business model and we will continue to focus on cost control to make sure that this sustainable and profit long-term growth.

With that, I would like to open it up for questions. Thank you for your attention.

(Operator Instructions). Bruno Montanari, Morgan Stanley.

I have a few questions, starting with refining. You had, as presented, a very high utilization rate. I was wondering if these should be sustainable with the availability of light crude now in the next few quarters; and if it will continue to contribute with diluting costs, which also sounded -- looked very positive in the quarter?

And still on the refining front, how were the discussions or the strategy around new price hikes for gasoline and diesel now, in the end of the year and then perhaps looking at the beginning of 2015?

And perhaps if I could conclude with upstream. What can we expect from the legacy production now into the last quarter of the year with the full recovery of the Cerro Divisadero plant? Should we see an increase year on year, or production around the same levels?

Those are my questions. Thank you very much.

Thank you, Bruno; good morning. In terms of the capacity utilization, we do believe that we can sustain these levels. As you said, there is plenty of -- I don't know if plenty, but enough availability of light crude oil Argentina. And we will continue to grow our shale oil production, which is light crude. So we feel very well about that.

In terms of prices, as I said during the presentation, you should not expect prices to behave completely linearly. Of course, we get what we can take, and we've been extremely successful; probably ahead of our own expectations.

This quarter, we had two price hikes. I believe that it's going to be less so in the last quarter.

We like to look at this in the long run. Thus, we've always been saying we believe that we can preserve our prices in dollar terms in the long run. But it's difficult to provide guidance on a month-to-month basis.

We haven't had any discussions with the government or anyone else regarding prices for the next few months. But we continue to believe that there isn't any structural change to the dynamic that we have seen in the last two years. We feel confident in preserving, in the medium and long term, our pricing power in dollar terms.

In terms of the upstream and the legacy production, the negative effect that you have seen in this quarter and in previous quarter has to do with Cerro Divisadero.

Remember that the initial drop in production was 9,000 barrels of oil a day. Now we are at 3.6 barrels missing, which we -- [3,600] barrels, right, which we believe that we will recover in the next three to six months.

So with this recovery, there is no reason to assume that the legacy production will not be flat, going forward, and that we will continue to experience growth coming from the shale, in the case of oil, and the shale and the tight in the case of gas.

Excellent. Thanks, Daniel.

Ricardo Cavanagh, Itau.

My question is related on the cost side. In a context of rising inflation, how are you perceiving, perhaps going forward, the cost pressure from unions, from outsourced services, and suppliers in general?

At the end of the day, how are you perceiving, if you think that prices could stabilize a little bit, going forward, how are you perceiving margins?

Thank you, Ricardo. We have managed well cost increases, so far. As I repeatedly said during the presentation, we have grown revenues ahead of costs, which is a great thing.

I think that margins, you should not look at margins on a quarter-to-quarter basis. I think you should probably look at year to date, at the nine months. And we believe that those are margins that we should be in a position to maintain.

We have lived in an inflationary environment for the last couple of years already, so we believe that we know our way in order to try to continue to increase prices at the same level or above our inflation of costs.

We have not started meaningful discussions with the unions regarding next year. I think it's a little bit too early. Actually, our bargaining agreement goes until the end of March. But I'm sure that you will start seeing a lot of noise, not just in our industry but generally, in the next few months.

But again, we believe that we will be able to sustain these margins going forward. And always remember that there's a percentage of our cost basis in the upstream, let's say, in the order of 30%, which are dollar denominated.

So the valuation of the currency this year has actually allowed us to have lower lifting cost, lower cash costs by approximately 2% this year vis-a-vis last year. That improvement in margin, again, we hope to continue to maintain in the future.

Okay. Thank you. And just a last one on the -- well, you mentioned that imports fell during the quarter, possibly benefiting margins. How do you perceive that again on the next [Q]?

No, we continue to see imports coming down. We hardly see any imports of gasoline in the medium term. We will continue to import some diesel until the new coking unit is ready. And that's another year and a few months, in order for that coking unit to be ready.

But I think that we are stabilizing in import levels, which are significantly below the peak that we saw last year.

Okay, Daniel. Thank you very much.

Anish Kapadia, TPH.

I had three questions. Firstly, looking at cash flow generation in 2015. I was wondering if you could give an idea of where you'd expect it to be in different pricing scenarios.

And related to that, what your current CapEx estimation is for 2015. A few years ago, you were up close to $9 billion of CapEx. It's going to be, clearly, lower in this environment. So what kind of level would you see that at?

And then, the second question is relating to farm-outs and financing. What we've seen over the last few weeks is the integrators, most of the majors talking about reducing CapEx into unconventional plays. Just wondering how you see that affecting potential financing and farm-outs for the things that you're looking at?

And then a final one on pricing. What we're seeing now is probably Argentine pricing actually converging with WTI pricing, so if you look at your realizations. Just wondering what impact that price has in terms of the ability to raise prices within Argentina, in dollar terms? Thank you.

Thank you, Anish. Well, on the cash flow generation, it's a little bit -- for 2015, it's a little bit early. We are not providing any guidance. But we certainly do not see our cash flow generation declining next year. We believe that CapEx is going to be flattish vis-a-vis this year.

We feel comfortable in the $5.5 million to $6 million range for total CapEx, and we don't see any reason to [cut on] that.

We still don't have a budget for 2015. We're working on it. We will have it, of course, before yearend. As a consequence of that budget, we will provide some guidance.

But again, I believe that, if anything, we will be generating more cash flow next year, more free cash flow next year than compared with this one, definitely.

We're working towards reaching break-even in terms of free cash flow. This quarter specifically, we had positive free cash flow, but in the previous quarters and the previous year, and probably in the next few quarters, we will have negative free cash flow, as we continue to catch up after so many years of declining production.

But we are certainly reducing that gap between our total CapEx and our operating cash flow, and we are reducing that gap very rapidly.

In terms of the farm-outs and the prices of oil, I agree with you. Clearly, will result in a reduction in CapEx and in marginal products for many of the international companies, both the majors and the independents.

We are not in a situation that we need a new joint venture every quarter or every six months, or anything like that. We have a huge joint venture with Chevron that -- it's only been 1.5 years since we signed that. So we have a huge budget for next year already in place.

Actually, after 270 wells, we can say that project continues to be profitable, even at these international prices.

But again, we have to look at the local prices, which is what we care the most. And in that case, because it's light crude, the local prices are in the low $80-s; it's $84/$85 approximately. There's also some associated gas at $7.50. So that project continues to look good.

If we close on the project with Petronas for La Amarga Chica, we have plenty of food in our plate for several months to go. So let's be cautious in terms of seeing how the international crude oil prices evolve.

If this is a short-term effect, there's absolutely no meaningful effect on us directly, because we don't sell any crude, and indirectly in our ability to attract partners I believe. If this is a longer structural thing, well, we will see how we adapt to that. But we are not concerned in the short term.

In terms of price convergence, yes, you're right, we are converging. We always had a view to watch convergence. This is not the type of convergence that we had expected of course.

It does not have any direct impact on us, as I said, because we don't sell any crude oil. It does have some marginal effect, because we export some refined products with prices linked to the brand. So we might see some reduction there.

But again our total exports are 10% or 15% of revenues. The percentage of those that are linked to the brand and the percentage of decline are really small. So, no, no meaningful effect in our numbers I believe. I hope that answers your question.

Yes. I just had a follow up on the cash-flow generation, because it seems a significant working capital and cash tax versus P&L tax movement through the year. Just wondering: could you just explain some of those in a bit more detail, and how you expect those to move going forwards?

We've always had this deferred income tax under IFRS that has to do with the fact that our functional currency is the US dollar, but we do report in Argentine pesos. That's a non-cash provision.

What you should definitely look at is the -- what we say, the current tax provision. Actually, in the note with the results we break up both. So you can have a good idea of how each has evolved.

But basically, again, the cash provision is behaving very in line with our net income; before income tax, of course, because it's just a percentage of earnings.

But it's difficult to understand. We can have our specific call if you want, because it's not a two-minute explanation how the deferred income tax works. But we, certainly, would like to explain it in more detail to you whenever you feel it appropriate.

Okay, thank you. That would be helpful.

Frank McGann, BofA Merrill Lynch.

Thank you, my questions have been answered.

Gustavo Gattass, BTG Pactual.

I had a couple of questions here; just some, I just wanted to double check some of the things that you've said. I'll start with the easiest one.

Did I understand it correctly that you talked about bringing the cost of the wells, I assume it's the vertical wells, on Loma Campana down to about $7 million on the sweet spots? So just to check if that number I wrote down correctly.

Yes, Gustavo. Good morning. But you wrote that down correctly. It's $7 million per well.

Right, perfect. With regards to the other two questions, just -- I wasn't able to find anything on the filings, or around the press release that we have, about the potential for extending the gas incentive deal to YSUR.

I know we've probably asked that question over the last quarter. I just wanted to see is there any evolution on that? Is there any possibility that that might come in the near term?

And the second question that I just wanted to touch base with you is I think you mentioned this quarter we may have had exceptional pricing with regards to the downstream part of the business.

I just wanted to understand should we think of this as market forces are potentially going to lower that? Or should we just think about we have a high bar that may be eroded by the currency? How's the thought process for us as far as thinking about the next quarters and the next year with regards to the downstream? Thank you.

Okay. In terms of the extension of the gas pricing incentive deal that we have at YPF to YSUR, yes, we are very advanced with that. It'll be a different scheme, what's called [Gas Plan 2]. It's about to be signed and actually when it is signed it will be retracted a couple of months, because the agreement has already been reached between YSUR and the government a couple of months ago.

But again, it still has not closed. I think it's just an administrative step missing. We certainly assume that it will happen in the very near term.

In terms of the exceptional pricing, as you said, what I try to explain here is that you should not expect our prices to continue to grow in dollar terms the way that they have been growing, especially if international prices, at least, are flat and, therefore, import parity has been reduced a little bit.

We feel comfortable with the prices that we have in dollars. We believe that we can maintain those prices in the long run.

Now we may not necessarily be able to maintain it in the fourth quarter, and maybe in the first quarter they are higher. That's what I'm trying to explain by saying that they are not linear.

Remember, when we had discussions right after devaluation of January when people were skeptical that we would be able to keep the prices in dollar terms. We said: listen, don't expect us to increase prices over night.

But we certainly feel comfortable in that we will be able to increase prices to at least keep them where they were before the devaluation. Actually, we are somehow higher today.

So look at this as in longer periods of time, as opposed to just three months. But I continue to feel positive, as I said, that we will be able to maintain these levels in dollars.

Perfect. If I could ask just one last follow-up. On the shale investments and, basically, the message that you are more positive now on the horizontals, do you feel that you have already come to a technology and productivity set up that is what you plan to roll out for the future?

And, if that's the case, can we think about a more aggressive pace of growth for crude in 2015? Or is that something that's still being looked at?

Well that's a great question, Gustavo. No, we don't feel that we are there yet, in terms of understanding exactly how we will be developing the horizontals going forward. We are extremely happy with the trend that we're getting there, as I said, with a reduction in drilling costs.

We still are not in a position to tell you what an average drilling cost is, as we do tell you in the case of verticals, just because we have 11 wells, and the verticals we have 260 wells. So we are at completely different stages of our learning curve in the horizontals vis-a-vis the verticals.

But, yes, you should assume that we will be drilling more horizontals in the next year. As I said, I don't have a full budget yet, but that's something that, when the budget is approved, we may even be able to provide some guidance to the market in terms of how many horizontals we see going forward; but definitely, much higher than what we've done so far.

Okay, thank you.

(Operator Instructions). Andre Sobreira, Credit Suisse.

I have four questions, please; two on upstream, and two on downstream.

On upstream, Daniel, you've mentioned you want to keep conventional production flat after you recover production from Cerro Divisadero. Is that valid for YSUR as well? Or just for your legacy production? That will be question number one.

Number two, I would just like to understand a little bit more the trends for your lifting costs? And, if possible, could split it by conventional/unconventional oil and gas, just for me to understand how the dynamics is playing out.

And the two questions on downstream, I'd just like an update on the timeline of the La Plata refinery. If the ARS505 million, if that was insurance related for this quarter and if you expect to continue to receive that going forward.

Thank you.

Hi, Andre; thank you for your questions. Yes, the guidance of a flat production for conventional also applies to YSUR. We don't have a budget for next year yet, but at least we expect it to be flat.

In terms of the trends for lifting, we do not provide the break-downs, I'm sorry, in terms of conventional and unconventional, and in terms of oil and gas. Actually, in terms of oil and gas, it's tricky; it's difficult, because a good part of the gas that we produce is associated with oil, so it's arbitrary.

What we can tell you is that we have seen last few quarters lifting costs consistently between $13 and $14. We feel comfortable with those levels going forward. Hope that answers your question.

In terms of question regarding insurance, yes, this is a quarterly provision. It's in line with the previous quarters. This is a coverage that extends until some point in the first quarter of next year. So you should continue to -- you should expect to continue to see this, at least in next two quarters.

Two follow-ups on downstream, when do you expect La Plata to be fully running?

I would just like to understand as well the dynamics in the downstream market. Why do you think you have been able to capture market share? And how do you think the overall market will behave going forward? Will we still see flat to lower volumes in the Argentine market overall for gasoline and diesel?

Well, regarding the La Plata refinery, the new coking area should be finished by the end of next year. So, hopefully, in 2016 you will see it fully up and running.

In terms of the dynamic in the local market, I think that we are very proud of those few points of market share that we have gained, because clearly the local market has been challenging in line with the evolution of the overall economy, and we were able to sell more fuels in that challenging market.

I doubt that we will take our market share, well, beyond where we are today. I think it had -- it had fluctuated between 50% and 55%; lately it has fluctuated more between 55% and 60%. I think around those levels is a sustainable level going forward.

We are seeing flattish volumes in the Argentine market generally. I think it is a reasonable assumption for the next few months. Then it will depend of course on how the economy evolves.

We are preparing ourselves for that market. Actually, the day before yesterday, we launched a new premium gasoline called Infinia, which again, is in line with what we expect in terms of being the leaders in the market and having the best products in the market.

Two years ago, although we were the leaders in the market, we had a 15% pricing gap with competition. Now, we look at ourselves and we have a 5% pricing gap and we have higher market share.

So I believe that the dynamic has to do, of course, with the local economy, which is not growing, but also with our own performance, which is better than average. We are very happy with that.

Okay. Thank you very much.

[George Muller], [SBX].

My question is regarding the crude prices. I understand they are fixed in Argentina at around $80 adjusted by quality and diesel (inaudible), [WTI] was up $95/$100. Is there any mechanism by the government in order to adjust prices going forward or should we expect prices to be kept at $80? Thank you.

Well, [George], no, there is no mechanism. The prices of the local crude oils are established basically by supply and demand. There is, of course, a limit in terms of the withholding taxes on exports and that has put a top, in a way, to the -- especially for the heavier crude oils that are exported in the $70-s.

The price of the lighter crude oil that I mentioned this in approximately $84 is a scarce type of oil in Argentina and, therefore, I am not assuming that that will come down significantly. But there's no specified mechanism to adjust prices by the government or anyone else in the way that you describe it.

Okay. Thank you.

[Sonny Kushwaha], Everest Capital.

I have a few quick ones. One I think -- you've addressed this, but have you guys had any issues in terms of accessing dollars for any aspect of your investment program, whether it's buying equipment or anything else?

Second, could you may be shed a bit more light on your -- on the program with Chevron in terms of what are the different milestones for committing to new investing, how that works?

Then three, I'm not sure if you've shown this in previous presentations, but if you've shown some of the production decline graphs for your different wells. You didn't show that this time. I'm wondering if you can share that, or if you shared it in the past just [a graph] that shows the decline in production over time. Thank you.

Thank you, Sonny. No, we haven't had any issues in accessing dollars for imports and to service our debt.

The second question regarding Chevron, the way it works is that every year the two partners have to agree on a budget for the next year. Of course, that is within a framework or what we both put together in a consensus model when we set out the rules for the initial -- for the farm-out.

But the specifics of each year have to be determined by both partners. We are in that process as we speak and, hopefully, we will have that resolved soon. I don't expect any meaningful change to what we had originally anticipated.

In terms of your last question regarding breakdown of production on a per well basis, we've never given that. I don't know if you have any specific question, maybe we can address it offline. But, no, we have never provided that kind of breakdown.

Okay, no worries. Thank you.

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

Well, this is Daniel again. Thank you, everybody, for joining. Thank you for the sharp questions, and of course, Alejandro and myself are available if you have any follow-up questions. Have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.