YPF SA (YPF) 2015 Q2 法說會逐字稿

Welcome to the second quarter 2015 YPF Sociedad Anonima earnings conference call. My name is [Lorraine] and I will be your operator for today's call.

At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session.

Please note that this conference is being recorded. I would now like to turn the call over to Mr. Diego Cela. Mr. Cela, you may begin.

Great. Thank you, Lorraine. Good morning, ladies and gentlemen. My name is Diego Cela, head of investor relations at YPF.

I would like to thank you for joining the YPF second quarter 2015 earnings webcast. The presentation will be conducted by our CFO, Mr. Danny Gonzalez.

During the presentation, we will go through the main aspects and events that explain over second quarter results, and finally, we will open up the call for questions.

We will be making forward-looking statements, so I ask you to carefully review the cautionary statements on slide two.

Our agenda today will include the review of the second quarter results, including an update of our shale and [tight gas pipe] developing projects, a brief description of our financial situation, and a brief summary to conclude. Please Daniel, go ahead.

Thank you, Diego, and thank you, everybody, for joining us this morning. We're very pleased to report our second quarter 2015 results. A quarter, as you all know, in which a global oil and gas industry is still dealing with a very low international pricing environment, with the BRENT crude prices down 45% from a year ago.

In this context, we believe it is remarkable to show our EBITDA in pesos up by 13%, with revenues also up by 12%. However, operating income was down by 6%, affected by higher depreciation expense, and an increase in our costs above our price increases.

Operating cash flow of ARS10 billion represent a 12% decline compared to the ARS11.4 billion figure in the second quarter of 2014, and mainly driven by a larger income tax payment corresponding to the earnings of the fiscal year 2014 that we made during the second quarter of 2015.

In this second quarter, we produced 2.6% more hydrocarbons than a year ago, and processed 4.5% more crude in our refineries. As every quarter, we also show our most relevant income statement figures in US dollars to help explain the evolution of our business in real terms.

This is also how we, the management team, look at the Company long-term as we do all of our planning in dollar terms, and we set our annual objectives also in dollars.

Revenues were essentially flat in dollar terms, as volume increases in the local market were offset by lower prices in dollars, and by lower international prices that negatively affected our exports, and some products which are sold locally at international prices.

EBITDA was up 1.8% in dollars, reflecting a sound business with growing volumes across most products, but with a recent cost pressure that offsets such revenue increase. Clearly this is one of those moments when we benefit from and our proud of our business model, as the downstream is more than offsetting the cost challenges of the upstream.

However, operating income dropped 15% in the quarter, a high depreciation expense more than offset the margin expansion at the EBITDA level.

Going back to the Argentine peso analysis, in this chart we can see that operating income for the second quarter of 2015 was approximately ARS5.6 billion, which is 6.3% lower than the second quarter of 2014.

Revenues grew by ARS4.2 billion, or 12%, resulting from a ARS2.3 billion peso increase in the gasoline and diesel sold to the local market, due to higher volumes and higher prices in pesos for both products. ARS1.4 billion increase in the natural gas sold locally on higher volumes of 1.5%, and higher prices in dollar terms of 9.5% per million BTU.

ARS600 million increase in fuel oil sold to local market, with ARS477 million of decrease in fuel exports. A reduction of ARS350 million in export sales, mostly as a consequence of low international prices, and finally, ARS600 million accrued for the program to promote crude oil production by $3 a barrel, which had been approved by the government at year end.

Moving to the cost side, as in previous quarters, the largest single item contributing to the post increase was again depreciation, which was up by 47%, or ARS2 billion. Purchases on the other hand, increased only by ARS158 million, mainly as a consequence of higher crude oil purchases from third parties in the domestic market of 9.5%, and higher prices in pesos although lower in dollar terms.

This was partially offset by a net reduction on fuel imports of ARS657 million, mainly as a consequence of lower international prices, as well as a net reduction in imported volumes.

Other cost of sales were up with higher activity and cost increases across the local economy.

There was ARS1.7 billion increase in lifting costs, a ARS579 million increase in royalties, and only a ARS68 billion increase in refining costs.

Lifting costs on a per-barrel equivalent basis was up 14.3% in dollar terms, to $15.20, compared with the second quarter of 2014.

And total cash costs per BOE reached $4.60, including royalties and other taxes. It is worth mentioning also that in second quarter of 2014, we had accrued ARS420 million due to recovery from the insurance on our La Plata refinery fire, which was accounted for at last cost of sales. We are not longer benefiting from this insurance recovery as the business interaction coverage reached its contractual limit in the first quarter of 2015.

Entering now to our upstream business segment, operating income declined by 23% against the second quarter of last year, to reach approximately ARS2.5 billion, as in the previous quarter this business segment's performance was affected by the reduction in local crude oil prices of $7 a barrel.

Just for further clarification let's remember that our upstream business segment transfers substantially all of its crude oil production to the downstream segment, therefore the crude price reduction that affects the upstream does not have a negative effect in the Company as a whole.

The average crude oil price in the domestic market in the quarter was $69, or 8.5% lower than the second quarter last year, as heavy crude was generally sold at $63 a barrel, and light crude at $77 a barrel. On the other hand, gas prices, as I previously mentioned, increased by 9.6%, to $4.50 per million BTU.

Despite that dollar price decline in crude oil, both oil and gas prices were higher in pesos. This effect, together with a higher production of oil and gas delivered a revenue increase for the upstream of 17%. Also, and as it was mentioned before, we accrued ARS600 million in connection with a program to promote crude oil production.

Costs on the other hand were up ARS4.4 billion, which represents a 37% increase compared to the second quarter of 2014, mainly due to higher depreciation of ARS1.9 billion, increases in items related to lifting cost of ARS1.7 billion, and high royalties also as explained before.

Production-wise, crude oil production in the second quarter increased 2.6 -- 3.7%, excuse me, producing almost 250,000 barrels of oil per day, and natural gas was up by 2.3%, producing 44.6 million cubic meters today.

NGL production was negatively affected by a planned stoppage in [Mega], resulting in less production, resulting in 2.8% vis-a-vis the second quarter of 2014.

As a result, in this quarter, all hydrocarbon production was up by 2.6%, to 569,000 barrels of oil equivalent a day, compared to 555,000 for the same period of last year. We highlight that this production figures resulted after considering in this second quarter the effects of the amendment with Pampa that was signed recently, but was effective as of January 1st, resulting in the assignment of some gas production of the first quarter, in the (inaudible) to Pampa two-pump.

Without considering this one-time assignment, total hydrocarbon production growth for the quarter would have been 3.1%.

Now let's move to our shale oil and gas activity. During the second quarter, we have connected a total of 46 wells, including 38 verticals, and 8 horizontal wells, taking the total to 360 shale wells already in production.

In terms of rate count, we are unchanged at an average of 19 drilling rigs, and 8 workover rigs, operating within Loma Campana and El Orejano areas mainly.

Gross production from the shale reached 43,300 BOEs a day, primarily from Loma Campana field, where we have a 50% stake in our joint venture with Chevron. During the quarter, we started the factory model phase for the horizontal wells in the east area of Loma Campana.

And it is worth highlighting that we have extended the length of the horizontal sections from 1,200 meters to 1,500 meters, and now in the process to further extending them up to 2,000 meters. We have also added three fracture stages, so we have taken the frac stages from 15 to 18.

Another important improvement regarding horizontal wells is that the costs have been consistently below $14 million a well, including those with 18 frac stages. In addition, we're still focused in improving our field development cost.

We said earlier this year that we would start drilling slim hole wells, and during the second quarter we have drilled and completed two wells, and we have two more pending completion. This can prove to be a cost efficient way to develop less productive areas of Vaca Muerta.

The sweet spot in the west of Loma Campana continues to be developed with vertical wells, and [interferes] that we have mentioned before between wells have persisted. Our efforts in productivity optimization continued through production engineering and facilities debottlenecking.

We are clearly progressing in a learning curve, but not without missteps. We continue to see this as a long-term project, and issues that we have faced will undoubtedly result in better results and developments to come.

Finally, we started expanding our delineation of the formation with unconventional activity in other areas other than Loma Campana and El Orejano, like La Rivera, where we drilled our first gas well with encouraging results, and of course we also drilled our first well in La Amarga Chica, which is our joint venture with Petronas.

Soon, we will also complete our first horizontal well in Bandurria, which is a concession that we had with several partners, and we recently broke down in smaller pieces, and we now own 100% of a smaller block. We also obtained that 35-year concession for Lindero, where we own slightly below 50%, and we do not operate.

Tight gas continues to be one of the drivers of our production growth, and represents 12% of YPF of natural gas production. We have drilled four wells targeting the Lajas formation in Loma La Lata block, where we own 100%, and 12 wells targeting the Mulichinco formation in Rincon del Mangrullo, where we own 60%.

As a consequence of our drilling activity, gross production continued to grow, reaching 4.4 million cubic meters per day in our Lajas project, and 1.8 million cubic meters per day in Mulichinco.

Turning to our downstream segment, this quarter's operating income was ARS3.9 billion, showing an increase of 32% compared with the second quarter of 2014. Revenues were up by ARS2.2 billion, or 6.6%, mainly driven from higher sales of diesel and gasoline.

Diesel sales were up ARS1.4 billion, and gasoline sales were up ARS900 million. Both on higher volumes, despite prices in dollar terms being lower by 6% and 2.3% respectively. It is also worth highlighting that in this quarter, we have improved the mix of products sold, increasing sales of premium products by 36% and 32% respectively for gasoline and diesel.

In the export market, we noticed a decrease in sales of 10%, or ARS350 million, mainly due to a fall in international prices for those products tied to the BRENT oil. However, these export declines were somehow mitigated with lower export taxes, which are accounted for in SG&A.

Fuel oil sales in the domestic and international markets totaled ARS2.3 billion, representing an increase of ARS139 million, mainly due to higher volumes sold in the domestic market, as well as higher prices in pesos, but partially offset by the decrease in exported volumes of fuel oil, and lower international prices for that product in total for ARS477 million.

Costs increased by 4.2% compared with the same period of 2014, and we highlight an increase in the crude oil purchases of ARS912 million, mainly as a consequence of higher prices in pesos, and higher volumes transferred from YPF's upstream business segment, as well as from other producers.

Then depreciation was higher in ARS189 million, and finally lower imports of diesel and gasoline, and higher imports of jet fuel for a net amount of ARS657 million as a result of lower international prices. Imported volumes of gasoline were lower, while those of diesel and jet fuel were slightly higher to support the strong local demand.

As mentioned before, during this quarter we did not move any amounts regarding the insurance compensation for the incident in our La Plata refinery occurred two years ago, as the business interruption coverage reached its contractual limit in this last quarter.

The valuation in operating income explained before includes the consolidation of our stake in MetroGas, which reported an operating profit of ARS196 million in the second quarter of 2015, standing out in the quarter the accrual of ARS355 million, which corresponds to the transitory economic assistance provided by secretary of energy.

During this quarter, volumes of crude oil processed in our refineries were 305,000 barrels of oil a day, which is 4.4% higher than the second quarter of 2014. This way we were able to reach a 95% utilization rate, as a consequence of having greater availability of light crude oil in the throughput mix, due to the increase in shale oil production.

That refinery output allowed us to satisfy an overall 7% increase in demand, with higher volumes sold of 6% for diesel, and 4% for gasoline.

On this slide we have plotted YPF's monthly sales for the last two full years, and the first half of this year. You can note that the green line that represents 2015 sales is consistently above that of 2014, showing an increasing demand in the local market, despite higher fuel prices in pesos.

Demand for our products is strong, and actually much stronger than what we had anticipated. Our market share remains with little changes, close to 57% and 59% for gasoline and diesel respectively.

During the second quarter, the total CapEx for the Company amounted almost to ARS15 billion, which was 34% higher than last year. Upstream CapEx took the lion's share, and amounted to ARS12.4 billion, which is 40% higher than second quarter of 2014.

Most meaningful investments have taken place in the Neuquina basin, more specifically in the Loma Campana block, in Aguada Toledo Sierra Barrosa, in Rincon del Mangrujo, in El Orejano, and in Chachahuen in the province of Mendoza. Then you go to San Jorge basin, Manantiales Behr, in El Trebol, Los Perales, and Canadon La Escondida.

With regards to exploration, in this quarter we completed 7 exploratory wells. We continue to show a flat rig count of approximately 75 drilling rigs, from which 60 are drilling for oil, and 15 for natural gas, maintaining a consistent level of activity and investment.

In the downstream, CapEx was ARS2 billion, where our largest ongoing projects is a new coke unit being built in our La Plata refinery. We are scheduling its completion for the first quarter of next year, and commencement of operations for mid-next year.

In the second quarter of 2015, operating cash flow was ARS10 billion, which is 12% lower than the ARS11.4 billion figure of the second quarter of 2014. This reduction was mainly driven by a larger income tax payment of ARS1.2 billion, which corresponds to income tax of fiscal year 2014, but paid in the second quarter 2015, and the higher increase in working capital, resulting from the accrual of some revenues, which are pending collection, including the new incentive for crude oil production mentioned before.

Our net debt to EBITDA ratio now stands at 1.2 times. As we have been doing in the past, we use this next slide to show how we have been lengthening the average life of our debt, now to almost 5 years. Of course this maturity extension comes with an increase in the average cost of our debt, which now stands at 7.6% for the dollar-denominated debt, and 23.5% for our peso-denominated debt.

A cash position of around $1.4 billion, should allow us to fund all of the needs of next year, without any need to access US debt markets for the remainder of this year. We have increased our trade finals, and still have opportunities to continue to grow that niche. Additionally, we are planning a couple of local couple of market trades, which should complete all of the needs for the year.

In summary, the second quarter of 2015 was another very solid quarter despite what we are still going through, the very challenging global oil price environment. We have been able to deliver solid results comparing favorably with almost any other company in our space.

And as I said before, our integrated business model is proving to be a huge competitive advantage. Cost control is still one of our key priorities, especially at a time where the strong peso is resulting in higher costs in dollar terms than most of the industry internationally is seeing a significant cost reduction.

We believe that the efficiency initiatives that we have taken and will continue to take should prove to be structural, and not just help us to weather this particularly difficult time. We recently closed the collective agreement with our main unions, and the average wage increase for the year compared with the previous year is around 27%.

Demand of fuels in the local market remains strong, and above our earlier expectations, helping in the growth of our revenue base, and we have maintained good prices. On the financing side, we continue to build our cash cushion, by new [debt] issuance to prevent us from having to access markets at times of increased volatility.

Just as we did in the first 3 months of the year, in the second quarter, we are keeping activity flat, as we believe price visibility for the short term coupled with our medium term and long term price expectations, support our ongoing projects.

We have continued our exploration and delineation activities in shale, in order to increase the number of potential projects, and eventually new potential partnerships. Of course the more challenging projects, especially those of shale oil and shale gas, we will continue to be disciplined in prioritizing those projects, and engaging in those cost projects only with attractive economics.

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

Thank you. (Operator Instructions).

And our first question comes from Bruno Montanari from Morgan Stanley. Please go ahead

Good morning everyone, thanks for taking the questions. I have a couple of questions.

Starting with the union agreement, Daniel can you share with us some of the details behind the agreement, so when does this kick in already now this quarter, and how does it compare with the fixed wage hike you were granting to the workers since the beginning of the year?

Then the second question is how should we think about the unit costs in the second half of the year, both for upstream and downstream? Would the negotiation with the suppliers and service providers offset the prevailing inflation, so trying to get a sense of where margins could go to?

And if I could add a final one, when should YPF receive the cash from the incentive price? And is the government also paying the higher gas price view under the same schedule, or there have been delays recently? Thank you very much.

Good morning, Bruno. Thank you for your questions.

The first question regarding the bargaining agreement, what we have agreed with our main unions was to extend the fixed amount until November, and approximately 20% increase in December, and another increase of 6% in January, and that should take us until the end of March, Okay?

So because this increases the timing of the increases differ from those of last year, I'd like to point to the average wage increase for the year as a whole compared to the previous year, and as I said, that results in approximately 27% higher wage increase this year vis-a-vis 2014.

In terms of the unit costs for the second half, clearly we are in a challenging cost environment, because as you know, our costs in dollars tend to go up. However, because we continue to increase production, and remember a good part of our cost base is fixed, we definitely count with deluding that fixed cost basis on a per barrel basis. That plus some initiatives makes us believe that we can keep our lifting costs flat in dollar terms for the remainder of the year, Okay?

And in terms of for the other business, because I believe your question was regarding both, I think the same reasoning would apply. I don't see any reasons why the refining cost would increase further in dollar terms in this second half of the year.

Of course all of this is subject to how the exchange rate behaves, but assuming that the exchange rate devalues in nominal terms in line with the devaluation that we have been seeing in this first half, which is approximately I would say 1% per month, I think that we can keep our costs pretty much flat in dollar terms in the second half.

In terms of when we're going to be getting the cash from the incentive of the second quarter, we are presenting, or have presented in July, the numbers for the second quarter, and I think it's going to take the government probably another 3 months in order to pay, so we should get that payment either late in the third quarter, or early in the fourth quarter of this year.

And in terms of gas plan, we have not seen any deterioration in the pace of the payments, so we keep collecting four, five months after the end of the month.

Great, very clear. Thanks a lot.

Thank you. And our next question comes from Frank McGann from Bank of America Merrill Lynch. Please go ahead.

Hi, good morning, just year, two questions if I could.

One is in the other operating results, there was a swing from a cost in the first quarter of ARS176 million to a gain in the second quarter of ARS662 million. I was wondering if there were any details that you had on what drove that change?

And then looking at downstream demand, it's, as you pointed out just at the end of the presentation, it's been holding up very well. I was just wondering how you see that over the next 6 to 12 months. The economy is weak and I was just wondering if that could again have some impact on the overall level of demand for products?

Sure Frank, good morning

The most important element in other operating income stream is the consolidation of approximately ARS350 million of MetroGas. Remember that they are getting this temporary assistance from the secretary of energy, and they have accrued that because that's not a recurring income, or a recurring revenue. They have accrued that as other operating income, and of course we consolidate MetroGas figures on a line per line basis, so that is what is driving most of the swing.

In terms of downstream demand, actually numbers in July were as strong as those that we have been seeing in the last few months, and frankly we don't see any reasons why this should differ from the first half. I'm not saying that it necessarily will be 4% and 6% as it was in the first half, but clearly we are in a strong demand environment.

If you look at prices, which as I said, are lower in dollar terms, 2% and 6%, in pesos they were up well below many price increases across the economy, Okay. So clearly we had not felt any push back from the consumers in terms of the demand, and that is clearly what, among other reasons, what's driving volume increase. So we continue to be positive about the second half in terms of demand.

Okay, great. Just following up on the MetroGas comment, is this something that we should expect as long as the current care structure and all is in place? Is this a quarterly thing, is this once a year, is this whenever they need the additional funds to keep the business solvent? How is that amount determined?

What MetroGas has accounted for in this quarter is approximately half of what they are going to be getting this year, Okay. As I said, it's a one-time I think they call it temporary assistance. It's basically to keep their numbers above waters this year, and I think that you will see a similar accrual as I said in the third and fourth quarters.

Okay, thank you very much.

Thank you. And our next question comes from Felipe Santos from JP Morgan. Please go ahead.

Hey, guys, good morning. Just some questions here. First, this -- how you see, in all that has been the evolution of the drilling costs for the shale this Q, on the vertical wells is still hovering around the [$7.5 million] or have we had any advancement on this?

And is it possible to speak about a little bit about the pricing environment for the next year for the fuels, if you have heard anything or have - received any contact from the government so far?

This were my questions. Thank you.

Thank you, Felipe. The drilling costs for the shale have remained pretty much flat in dollar terms for the verticals. We are consistently drilling at $7 million per well. On the horizontals, we were pleasantly surprised with the costs, which as I said, has been consistently below $14 million a well. That's twice the cost of a vertical, but with cumulative production, or cumulative expected production, which is well above two times. So the economics of the horizontals look very promising.

In terms of the pricing environment, all I can tell you is that we have been increasing prices on a monthly basis, pretty much in line with the nominal devaluation of the currency, and that is in line with what I've been telling everybody for the last 6 to 9 months, which is we expect to keep prices pretty much flat in dollar terms.

Specifically in this quarter we see a reduction in dollar terms. I think that when you look at year 2015 vis-a-vis 2014, it's going to be pretty much flat in dollar terms. So I think I don't see any reasons why this will change this year.

I think we are still very far for next year, and a lot will happen between elections and whatever transpires out of those elections, so it's a little bit too early to comment on. Hopefully the next few months we'll have a more visibility, but generally speaking, we do expect to keep this discipline in terms of pricing, in order not to hurt our operating cash flow, otherwise it would be very difficult for us to keep the level of activity that we have been maintaining so far.

That's great. Thanks so much.

Thank you. And our next question comes from Santiago Wesenack from Raymond James. Please go ahead.

Hello, Daniel and thanks for taking the question.

Just a follow-on on the margin side, this quarter we saw actually amazing margins on the downstream side, close to 11%. So I was wondering if you could comment what should we expect for the rest of the year?

And the second one, on the CapEx side, you mentioned that the Company spends close to ARS12.4 billion on E&P. I was wondering if you could break that down between gas and oil, and what should we expect in terms of gas, investing in gas and oil for the rest of the year? Thank you.

Hello Santiago. On the margins, as I said previously, I don't see any significant cost pressures on the downstream, so ability to keep margins as they are is directly tied with our ability of continue to increase prices the way that we have, Okay, at least in pesos, as I said.

We look at the Company always on an integrated basis, so I agree that the margins for the refining part of the business look good, but the margins for the EMP part of the business are suffered, right. So we look at the EBITDA margin on an integrated basis, and that is what we intend to protect, Okay.

But going specifically to downstream, I don't see any reasons why those margins should decline, as long as we continue to be successful in keeping prices pretty much flat in dollar terms.

Regarding the CapEx, we don't usually break it down between oil and gas, because there is a lot of CapEx is directed to oil development, but there is plenty of gas associated with that oil, so if we just break down the number of rigs for instance, it will look much more oil-driven than it really is.

What I can tell you from a trend perspective is that the increase in CapEx in natural gas is much more aggressive than in crude oil. We have seen that consistently in the last few quarters, and I think the economics of gas are very promising, and I don't see any reason why that trend will change in the near future.

Great. Thank you very much.

Thank you. And our next question comes from [Andreas Sauria] from Credit Suisse. Please go ahead.

Yes, good morning everyone and congratulations on the results. Two questions, Daniel, if I may. The first one is have you ever done a planning on a bear case scenario that oil prices stay where they are into 2016, and the FX rate depreciates gradually towards let's say 14? On that scenario, what can you do when you're running the business, to protect cash flows, or not to leverage too much?

That would be the first question, and the second question is if you could comment a little bit on the working capital performance in the quarter, please? Thank you.

Hi, Andreas. Well yes, we obviously run bare cases, which we will not share with you necessarily. We are optimistic about the medium-term effects of a real devaluation of the currency in our business. I think that we expect to be more successful in passing through the potential effects of that potential devaluation that you are commenting on, to prices much more rapidly than that effect going into costs, specifically labor.

In terms of local pricing and its link with the international prices, although I accept that I'm a little bit less optimistic about international prices today than what I was a few months ago, and I think that we are in a low pricing environment that will probably stay for a couple of years, not necessarily in this range, but let's say in the $50 to $70 range, eventually I'm completely convinced that Argentina needs oil EMP companies to continue to invest in order to grow production, and reduce, and eventually eliminate the energy deficit.

And I'm sure as this government has done, I think any government will try to support that. What I cannot tell you, because I don't know it, is if the next government will support that with higher prices, with tax rebates, or with any other mechanisms, in order to try to protect the local industry.

Of course we're doing our fair share of the deal here, by trying to put in place efficiency initiatives as I made reference to, but still our cost base in dollar terms, as I said, hopefully will stay flat in the remainder of the year, but has increased in the first half of the year, where the rest of the industry globally has seen those costs decline.

So I think it's a combination of both things, but in bare case scenarios, of course the way to adjust is by reducing CapEx. There's no secrets there, and obviously as we start our planning season towards 2016, we will incorporate a bare case scenario in our planning.

But we are really optimistic that the higher local prices will remain, and that we have enough visibility in terms of local prices in order to support our ongoing projects, and hopefully keep activity pretty much as it is.

But still too early to comment on 2016, clearly when we have the next conference call regarding third quarter results, I'm sure that I will start providing guidance on how we believe at that moment that 2016 is going to look like.

In terms of our working capital, as I said, this was somehow a difficult quarter because we had a much larger payment of income taxes, basically because the net income of 2014 was much higher than that of 2013, therefore we had to pay the balance in the second quarter, 2015.

And also because our EBITDA, which was up in dollar terms like 2%, incorporates certain aspects like the ARS600 million plus incentive from the old production of $3 per barrel, which are part of the EBITDA, but have not yet been collected, so that makes the working capital work against us in this quarter. We have seen an increase in our working capital. This is not a trend, i.e. we are not envisioning a worsening working capital at all.

Perfect. Thank you very much.

Thank you. And our next question comes from Anish Kapadia from TPH. Please go ahead.

Hi, yes, thanks very much. I had three questions please. Firstly, you mentioned the La Plata crackers -- coker sorry, is going to come on-stream next year. Just wondering if you could give some guidance in terms of either the earnings contribution or the cash flow contribution you'd expect from that unit on a full year basis.

Second question is just looking at the Vaca Muerta, what we've seen is you had some pretty rapid growth on a quarterly basis through 2014. That growth seems to have slowed right down in 2015, but it seems like you're running kind of same number of rigs. Just wondering if you can explain that growth trend, and how you see that going forward.

And then the final question is on CapEx, just wondering if you can update your CapEx guidance for 2015, if there's any change over there, and I'm guessing 2016's going to be biased a bit lower. Thank you.

Hi, Anish. Thank you. With regards to the coking unit, basically what that will allow us is to significantly increase the production of medium distillates, mostly diesel oil, Okay. It will depend a lot of course on international prices, because that diesel oil that we will be producing locally, today we are importing, and with low international prices, we have a decent margin on the imports also.

But generally speaking, we think that the coking unit should have a positive effect of around $300 million of EBITDA on a full year basis, Okay. We will be updating eventually that figure as we move forward, but that, as a rule of thumb, will give you a sense of how important this is. For a $5 billion EBITDA company, it's really relevant.

In terms of Vaca Muerta, the slow down that you are mentioning, it is true that in the second quarter, the pace of growth was lower than what we had seen in previous quarters. I do not necessarily assume that this is a trend.

We changed -- this was the first quarter in which we started drilling more aggressively horizontals, so we clearly moved drilling rigs to the east part of Loma Campana to start drilling horizontals, and it's also a quarter in which we started drilling slim holes, so that's basically testing, right.

So I think it's just a result of a normal learning curve in which we've drilled and completed 45 wells give or take in the quarter. We have 360 still. This Company operates more than 15,000 well. So I think that looking this on a quarterly basis is somewhat trying to split hairs here. I think that we should try to focus more on the medium term trend.

But rest assured that we obviously look at it on a daily basis, and we had expected a slightly higher production coming out of the unconventional this quarter, but not significantly different to what we have announced.

And in terms of our CapEx for 2015, it remains unchanged. We still believe that we will be investing in the order of $6 billion in the full year, and yes, it is a little bit early to talk about CapEx of next year, but if anything I'd be biased to lower capital investments in 2016 vis-a-vis this year.

Thank you, that's very clear. Just one quick follow up, in terms of the Vaca Muerta production from the JV with Chevron, where you would expect that to go, maybe in 2016? Where would you expect to be able to get to next year? Thank you.

Up. No, we won't provide any guidance broken down on a field per field basis, so I am very sorry, Anish, but we are not prepared to provide an answer there.

Okay, no problem. Thank you.

Thank you. And our next question comes from Walter Chiarvesio from Santander Bank. Please go ahead.

Yes, hi good morning. Congrats for the results and thank you for taking the call. I have three questions, the first one is partially already answered, but if you could develop further on the horizontal drilling, in terms of if you are facing challenges, is this going that you have been expecting or some guidance looking forward in terms of productivity, or is this could change the profitability of investment in shales in the coming years? If you could provide some developments or impressions on that, would be helpful.

The second question is regarding on also on shale investment, what do you think is the most important factor to attract more joint ventures in the field? Is this related to the country risk, or I should say specifics, or is more related by the international oil prices? What do you think is more important for the further development of shale in Argentina?

And the final question is on downstream refineries are mutually working at full capacity, even with an economy that is not growing. So is there any plan -- I know that you mentioned in other calls that there is no one, but if you can say or figure out how this will be paid in the future, if the Company is going to [and just] plans of new refineries in order to face an increasing demand with the potential economy in the coming years? So those are my three questions.

Thank you, Walter.

Well your first question regarding horizontal drilling, if we have faced challenges, not anything different to what we have faced with verticals and with the development of the shale generally. What we have mentioned during the call is we have lengthened the laterals, which is very important, because it allows us to increase a number of our frac stages, right.

So we have not encountered any issues, actually the initial production is in line with what we had in mind, and well tight curve for the horizontals is proving to be reasonable and in line with the results of the first wells.

But still, we have only drilled and completed 8 horizontal wells this quarter, and we probably have less than 20, or around 20 horizontal wells in total, so still a little bit too early to say. When we do our math, when we run our spreadsheets for the projects going forward, of course we have some assumptions.

In terms of continuing reduction in costs and of course our own assumptions regarding activity, and if those assumptions prove to be realistic, the returns for those wells are very encouraging, are very promising, and that's why especially in certain parts of Loma Campana, like the east side, we will continue to develop through horizontals.

In terms of the shale in generally, and what are the factors for attracting partners, frankly we are not in a JV mode at this point. It's clearly a time for oil and gas companies globally where it's probably not a good idea to go out looking for partners, or trying to farm out properties, especially if what you want, as we clearly do, is to maximize the value that we eventually monetize out of our property base.

But clearly international oil price environment is an important factor, and of course the local macro here or elsewhere is also important in this, specific timing Argentina, so close to presidential election, I think politics also play a role.

So in summary I would not expect any significant joint venture to be announced soon, but obviously what we are doing of expanding our horizons within Vaca Muerta by investing in La Rivera, by investing in Bandurria, and so on, provides us with more projects to be able to eventually team up with someone when conditions both globally and locally allow us to do so.

But for time being, we have a lot of food in our plates with Loma Campana, with El Orejano, which the pilot has been completed, and our partner now has a couple of months in order to decide if they continue with the full-blown project, and we are very optimistic about that, because the results of the pilot were positive. And as I said, we'll continue exploring and delineating other places of Vaca Muerta.

In terms of our downstream, yes, you're absolutely right, we are working close to full capacity, and demand is strong, so we are importing product. Our strategic plan here has been to increase conversion, de-bottleneck, and grow production in our existing refineries as opposed to engaging in a huge, multi-year project that would mean a build up of our full refinery, of our greenfield.

So we don't have a plan for a greenfield refinery for now, and it's not in the plans for next few years. It's a multi-billion dollar investment, so obviously we will let people know when we engage in something like that, but that I believe it's very far away, and clearly not in our radar screen for now.

Okay, thank you very much.

Thank you. And our next question comes from Bruno Montanari from Morgan Stanley. Please go ahead.

We've seen a lot of assets being sold in the industry in general across all regions, so I was wondering if YPF would be interested in any opportunities that might arise in Argentina, and in that case, if there's any specific part of the industry that you would be more interested, if upstream, downstream, conventional, unconventional, so I just wanted to get your thoughts. Thanks a lot.

Well Bruno, we always look at opportunities. We have done a few acquisitions in the past. We've been very, very disciplined in valuation of those acquisitions, and that will not change, especially with the levels at which our stock is trading today. So we know what the assets are worth in Argentina, and we would never pay up for something which is worth more than what we are worth.

We will probably be announcing a small acquisition in the downstream, not really significant from a total investment perspective, and it's completely integrated with our existing downstream operation, and that should happen soon, but it should not be something that changes things dramatically. It's a good long-term strategic move in my opinion.

With regards to EMT, we would very rarely have interest in unconventional, because we own plenty of unconventional acreage already, so we'd rather develop what we have, and find eventually partners to help us develop what we have, as opposed to going after other unconventional acreage in Argentina. Actually there have been a few sell-side processors, and a couple of acquisitions are actually close, and we did not participate in any of those, because we will not be interested in that.

With regards to conventional production, those areas that have production, that have research, and have upside to increase both production and research, yes we will definitely look into that. We represent 40% of the EMP production in Argentina. We wouldn't mind increasing that a little bit. But always, again, going back to the beginning of the answer, being extremely disciplined in valuations, Okay.

I think we believe that assets in Argentina are going to be worth much more in the future, but if we go along with acquisition today, assets are worth what you guys, what the market says it's worth today, and we know where our stock is trading, and we would try not to dilute our multiples, or the multiples that we are trading at.

Perfect. Thanks for that, Daniel.

Thank you. And I am showing no further questions at this time.

Well thank you very much, Lorraine. Thank you, everybody, for participating. Diego, Pablo, myself will be available if there are any follow up questions, and have a great day. Good bye.

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