YPF SA (YPF) 2015 Q4 法說會逐字稿

Welcome to the Q4 2015 YPF Sociedad Anonima earnings conference call.

My name is Bianca and I will be your operator for today.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

I will now turn the call over to Diego Celaa.

Diego, you may begin.

Great.

Thank you, Bianca.

Good morning, ladies and gentlemen.

My name is Diego Celaa, Head of Investor Relations at YPF.

I would like to thank you for joining us.

In this occasion we will discuss YPF's 2015 full-year results.

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

During the presentation we will go through the main aspects and events of the year 2015.

Finally, we will open up the call for questions.

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

Our agenda today will include the review of the key issues and achievements of the year and review of our operations, a detailed explanation of the full-year results, an update of our financial situation, and finally, the conclusions.

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

Please, Miguel, go ahead.

Thank you, Diego, and thanks, everybody, for being with us this morning.

We are very pleased to report our full-year 2015 results.

In a very difficult lower environment for the oil and gas companies, YPF was able to deliver solid results both from financial as well as an operating point of view.

The local economy and the political environment did not help either, making our achievements even more relevant.

Revenue for the first -- for the year decreased 3.5% in dollars, mostly driven by lower prices in the domestic market.

However, demand was strong across most of our products.

The decrease in the international oil price also had a negative effect in our revenue race.

Adjusted EBITDA was up almost 1% in dollars, slightly ahead of our guidance delivered in an EBITDA margin of approximately 30%.

We produced 577,000 barrels of oil equivalent per day, which was 3% higher than the previous year, and we increased our proven reserve for the 30 years in [a row], showing a reserve replace ratio of 107%.

We continue to make progress in our shale and tight gas developments, both in terms of production growth as well as cost reduction.

And in line with our commitment on maintaining a conservative balance sheet, our leverage ratio, measured in US dollars, stands at 1.35 times EBITDA, despite having raised more than $2 billion in the international markets in 2015.

Now let's start the section by focusing briefly in our financial results, which were in line with our expectations.

As you are already aware by now, although we formally report in Argentinean pesos, we measure ourselves in US dollars since this is the functional currency for the Company and also help to better understand the evolution of our business in real terms.

So we're including this presentation, our main figures in dollars.

Revenue in dollar terms were down by 3.5% as diesel and gasoline prices dropped by 6% and 2% and more than offset the sales volume increases.

Natural gas, on the other hand, was strong both in volume as well as price, and exports were down 20% on lower international prices.

Cost of sales and G&A were essentially flat, despite inflation in dollar terms in Argentina last year, and also despite seeing an increase in volume of production and sales in both business segments.

With regard to EBITDA, not only we were able to grow by almost 1%, but also span our margin from 29% to 30.5%.

But higher depreciation and the impairment charge to our fixed assets resulted in a drop of 24.5% in operating income.

Daniel will explain these effects in more detail in a few minutes.

Production-wise in 2015 we consolidated the positive trend that we began to experience during the previous two years.

In this way we ended the year with a total hydrocarbon production growth of 3% to [576,700] barrels of oil equivalent per day compared to the 560,000 in 2014.

The breakdown between oil and gas shows crude oil production is up by 2.1% to [249,700] barrels per day.

Natural gas production is also up by 4.1% to 44.2 million cubic meters per day and NGL production up by almost 1% reaching [49,200] barrels per day.

We would like to highlight that the gross production come from those fields in which YPF is the operator, showing an increase of 6.7% in 2015.

On the other hand, the nonoperated production was down by [7.5%].

Let's now move into reserves.

Once again, we think this was probably one of the most important achievements we had during 2015.

We increased total proven reserves by 1.2%, adding 225 million barrels of oil equivalent, of which 114 million corresponds to liquids and 111 million to natural gas.

Total proven reserves reached 1.2 billion Boes.

Consequently, our reserve replacement ratio for 2015 was 107%, 110 from natural gas and 104 from liquids.

We would like to highlight a reserve addition in the following areas.

First Aguada Toledo and Sierra Barrosa with the development of tight gas in the Lajas Formation.

Rincon del Mangrullo also tight gas, Estacion Fernandez Oro, if you remember, is one of the main fields that we acquired with the acquisition of Apache Argentina.

The development of our shared project in Loma Campana and El Orejano; another new one, oil gas developments in the Golfo San Jorge and Neuquen basins as well as the attentions of our secondary recovery project.

Proven reserves should have been up 2.5% (inaudible) of 1.2% if it weren't for the reduction in our share of El Orejano and Rincon del Mangrullo projects.

Now let's move on to our downstream business.

In 2015, crude oil processed in our three refineries was 299,000 barrels per day, 3% higher than the 2014.

This way we were able to reach 94% capacity utilization, a remarkable achievement.

Regarding the domestic market, total share of fuel slightly increased by 1% as a result of a strong demand of gasoline growing by 4% and flat diesel sales of fuel oil also up 23%.

The local market remained strong as we will see in the next slide.

On this slide we have plotted YPF monthly sales of gasoline and diesel for the last two full years.

You can note that the green line in the gasoline chart that represent 2015 sales is consistently above that of 2014 sales, showing an increasing demand in the local market despite higher prices and flattish economy.

And our market share remains around 57% levels.

In terms of diesel, which is the graph on the right of the screen, 2015 sales were flat against 2014.

You can note the significant drop in August due to the excessive rainfall, mostly in Buenos Aires Province that disrupted both the transportation and the agricultural business, which was recovered in the last quarter of this year.

Market share of both products was slightly below the last year after a couple years of continued increase.

However, we want to highlight that the market share of our premium products, Infinia and Eurodiesel, were 62% and 60.1%, respectively, comfortable above those of our standard products.

Sales of premium products were up by 33% and 80% for Infinia and Eurodiesel, respectively.

We will now review some of our most relevant projects.

Shale oil and gas is a good part of the future of this company and we have made significant progress in derisking Vaca Muerta and starting to put it in value.

We have 424 wells in production at year-end, 173 of which were drilled last year.

Our three shale joint ventures are working well.

Most of the production is coming from Loma Campana, our JV with Chevron, which was the first and the largest farm out.

We are now migrating to horizontal drilling as a result of the 31 horizontal wells we drilled last year show [a better EUR] and, therefore, more promising economies per well.

Those horizontal wells are costing us around $30 million each and we expect to be closer to $10 million by the end of this year as we continue pushing forward several initiatives to improve efficiency and significantly reduce the well costs.

One, we have extensively discussed the savings expected with our own sand and I will get in more detail later what we are doing in terms of having local proppant.

We are redesigning the pads for four wells in the [road] to better utilize the skidding capacity of our modern rigs.

And we will review and sign contracts and look for room for tariff reductions including labor cost.

With regard to El Orejano, Dow decided to convert to a straight equity as expected and we were in full development mode.

It is already producing close to 1 million cubic meters per day.

The last JV in La Amarga Chica with Petronas only has one well as we started drilling late this year.

So the strategy here is to continue to invest and derisk, but at a slower pace than the last year or the last couple of years.

Tight gas continued to be one of the drivers of our production growth and represents already 12% of YPF's natural gas production.

In the last quarter of 2015 we have drilled six wells targeting Lajas formation in Loma La Lata block, where we own 100%, and 60 wells targeting Mulichinco formation in Rincon del Mangrullo, where we hold 15% share.

As a consequence of our drilling activity, gross production continued to show encouraging results, reaching 4.2 million cubic meters per day in our Lajas project and 2.6 million cubic meters per day in Rincon del Mangrullo.

Another significant project that is strategic for the future of the Company is the contraction to our new coke unit in La Plata refinery.

The new plant should be up and running in the second half of this year and we will have invested close to $1 billion since we started in 2012.

With this, we will be able to produce approximately 10% more diesel and, therefore, reducing the dependency on imports.

This investment is the perfect example of the different things that we are doing within a strategic horizon.

We know that in a way we are affecting the results in the short term because we take on more debt and do not receive any cash flow, but this creates value for the Company in the long term.

Another important project that we would like to mention is the treatment facilities for the proppant used in the hydraulic stimulation.

This month we were starting up our own plant that will satisfy 100% of our natural proppant needs and next year we will be able to upgrade it to also produce the resin-coated proppant that will be also be satisfying almost 100% of our need of such product.

We have invested a total of $160 million and we will save more than 50% on the cost of this proppant.

And initially we will have spare capacity to sell some of the sand in the market to another companies that are developing shale gas projects in Argentina.

Like the case of the coke unit, for now we are only bearing the cost, but we will save costs for the decades to come.

One final slide, I would like to provide some outlook on how we see the upstream sector this year.

2016 is the year to focus on increasing productivity.

We need to create a more efficient industry that is sustainable in a lower crude price environment.

Therefore, we will not see any meaningful production growth this year.

We will be cutting CapEx and that means less activity.

We already have several drilling and working rigs in a standby mode and it is likely that some of them will not come back in operation soon.

In Neuquen, we start a preventive procedure to adapt the workforce to this new activity level.

With the collaboration of the unions, the service companies, and the province, we are all trying to mitigate the impact on the workers.

We need to put in place similar procedures in another locations in Argentina.

With this I would like to turn the presentation to Daniel for the financials.

Thank you, Miguel, and good morning, everybody.

I will go through the analysis of the annual results denominated in pesos, as we do every quarter.

Revenues in Argentine pesos increased by 10%, EBITDA was up by 14.8%, and operating income decreased by 16%, heavily impacted by higher depreciation and impairment charges of around ARS2.5 billion.

Net income, not shown in the slide, was down by 50%.

Operating income and net income would have been down 3% and 31%, respectively, if it were not for the impairment charge.

Let us break down the changes in operating income from last year to this year.

Revenues grew by ARS14.2 billion, or 10%, and the main drivers were: first, an increase of ARS4.8 billion in local sales of gasoline, due to 3.5% higher volumes and higher prices in pesos of only 14%.

Second, an increase of ARS3.5 billion in diesel sales on higher prices in pesos of 11% and slightly lower volumes.

Third, ARS4.6 billion increased in natural gas sales due to a 22% higher price in pesos and higher volumes of 3.5%.

Then ARS2 billion increase in fuel oil sold to a local market, both on price and volume.

And then, on the other hand, lower exports of ARS3.1 billion, mainly due to lower international prices.

Finally, during 2015 we accrued almost ARS2 billion of the oil production incentive program of $3 per barrel that had been put in place at the beginning of 2015 and was not present in 2014.

On the cost side, cost of sales for the year 2015 increased by 14%, so above the 10% increase in revenues, compared to same period of 2014.

Within the cost basis, depreciation was the driver of the increase with a 34% jump, or ARS6.5 billion.

Other cost of sales were up with higher activity, ARS6 billion increase in lifting cost, ARS900 million increase in refining costs, ARS1.5 billion increase in royalties, but per barrel lifting cost was up by 23% and per barrel refining costs was up by 18% in pesos.

Purchases of raw material and other products for sale were down by ARS2.1 billion, mainly as a consequence of a significant decrease in fuel imports of ARS 4.4 billion due to lower volumes purchased and at significantly lower international prices.

This was partially offset by higher crude oil purchased locally from third parties for ARS1.2 billion on higher volumes and higher prices in pesos, not in dollars.

And, finally, higher purchases of biofuels for ARS800 million in the year.

SG&A was up by 14% as a consequence of higher transportation expenses and salary increases, which were partially offset by lower export duties due to a mix of lower exported volumes, lower international prices, and lower export taxes.

Exploration expenses were up by ARS439 million, or 22%, as a consequence of the more active exploration activities during the year.

Also, the Company reflected in 2015 a charge of impairment of fixed and intangible assets for a total value of ARS2.5 billion, which has been registered in other operating results.

This impairment was our crude oil cash-generating unit as the lower price environment was not fully offset by the lower cost structure as a consequence of the devaluation.

On the other hand, in 2014 we had made a reserve of ARS1.2 billion as a consequence of a claim at our subsidiary, Maxus, and we did not have such charge in this year.

The upstream business segment was one with a difficult year as crude oil prices were lower in dollar terms, while costs were escalating only as a consequence of the artificially strong peso in 2015.

We expect to see exactly the opposite this year, so operating income in 2015 declined by 39% in the upstream to reach ARS7.5 billion.

Revenues increased by 13.5% to reach ARS80.3 billion, mainly driven by higher natural gas revenues of 26%, or ARS4.6 billion, as higher volumes were sold at higher prices in pesos and higher prices also in dollars.

Crude oil sales increased by ARS2.5 billion, or 4.4%, due to higher volumes transferred to our downstream segment and at higher prices in pesos, but in this case lower prices in dollars.

The average realization price in dollar terms for crude oil reported a decline of 8% to $67.60 per barrel due to the crude oil pricing a scheme set and agreed at the beginning of last year.

This price was further reduced this year and the average price is currently around $61 per barrel.

Then for natural gas, the annual average price was $4.60 per Mmbtu, which was 6.6% higher than last year and this price will continue to increase this year with the gas pricing program still in place.

Additionally, during 2015 we accrued three consecutive quarters of crude production incentive of $3 a barrel for a total of ARS2 billion and the less positive impact in upstream is a ARS1.2 billion recovery of the business interruption insurance coverage from the Cerro Divisadero fire back in 2014.

On the cost side, these were up ARS12.3 billion, a 22% increase compared with full-year 2014 due to first ARS6 billion increase in items relating to lifting costs, 23% increase in the unit lifting costs, and the rest as a consequence of the increase in production.

Second, higher depreciation expense of ARS5.9 billion as our fixed assets are valued in dollars.

Then a ARS1.5 billion increase in royalties on higher both production and prices in pesos.

And, finally, ARS439 million increase in exploration expenses as discussed before.

The full effect of the ARS2.5 billion impairment charge discussed earlier was borne by the upstream sector and actually impacted the fourth quarter and on.

The total cash cost, including taxes, measured in dollars was up by 3.5% from $23.50 per Boe to $24.30 per Boe and lifting costs went up $1, or 8%, to reach $15 per Boe.

The downstream segment, on the other hand, had a much better performance and would have seen its operating income almost flat if it weren't for the write down of their stocks at year-end as a consequence of the devaluation and the immediate reduction of prices in dollar terms.

This ARS1.5 billion effect is then eliminated for consolidation purposes and, therefore, does not affect total company results.

Also making the comparison versus last year more difficult, it is important to note that the 2014 cost figures included the positive effect of the ARS2 billion accrual for insurance compensation due to the business interaction derived from the fire at our La Plata refinery that had occurred in 2013.

Having said this, prices for our products increased below inflation and below evaluation but costs behaved similarly; therefore, not hurting the margins for the segment in any meaningful way.

Operating income reached almost ARS8.4 billion, showing a decline of 23% compared with same period in 2014.

Revenues were up by ARS6.8 billion, or 5%, mainly due to gasoline sales as discussed before; diesel sales, which were also up as discussed before; and fuel oil sales in the domestic market, which totaled ARS5 billion, representing an increase of ARS2 billion, mainly due to higher volumes sold as well as higher prices in pesos.

It is also worth highlighting that in this year we have improved the mix of products sold, increasing the volume of sales of premium products by 25.6% and 24.6% for gasoline and diesel, respectively.

On the other hand, petrochemical product sales in the local market reported a reduction of ARS625 million driven by lower prices and an 8.6% decline in volumes.

And in the export market, as expected, we noticed a decrease in sales of 20%, or ARS3.1 billion, mainly due to the fall in international prices for those products tied to the Brent.

For the year 2015, costs increased by 7.5% compared with last year and there we highlight first the increases in crude oil purchases of ARS 4.4 billion on higher volumes transferred from our upstream business segment and also higher purchases from third parties in the local market, both at higher prices in pesos.

Then higher volumes of purchase of biofuels accounting for an increase of ARS800 million because of the increase in the blend, partially offset by lower prices for these products.

Then an increase of ARS900 million on items relating to refining costs.

Then heavier depreciation expense of ARS723 million.

Offsetting all these negative effects were lower imports of diesel, gasoline, and jet fuel for ARS4.4 billion as a consequence of the decreasing international prices and lower imported volumes as we increased our own throughput.

Also, in the fourth quarter we made a reserve of ARS500 million for a 20-year-old lawsuit that we had a negative ruling and we are in the process of appealing.

Let us use the next two slides to go through our financial situation.

During 2015, operating cash flow reached ARS41.4 billion, which was 10% down compared with the previous year.

This reduction was mainly driven by the increase in working capital, mostly due to higher revenues coming from natural gas and crude oil subsidies that have not been collected yet.

We have an account receivable for these two items of close to ARS12 billion as of December 31, 2015, as March 2015 was the last month in which we collected the gas subsidy and we did not collect any of the three quarters of crude oil subsidies.

We did not make any bad debt allowance for this as we have been in contact with (inaudible) administration and believe that they will be providing a solution soon.

Capital expenditures of ARS64 billion, in line with our expectations, created a funding gap net of the increasing cash of ARS23 billion that we covered without any difficulty in the local and international capital markets.

By the way, the funding needs for this year are considerably lower as we are reducing CapEx and also have lower refinancing needs.

Our cash position by the end of 2015 stood at close to $1.2 billion, in line with an average of the last few years.

Additionally, we have those account receivables that I mentioned before with the public sector and that we expect to reduce soon and that, combined with our cash position, cover the refinancing needs of the next two years.

However, we feel confident in our ability to roll over most of the 2016 debt maturities as they are mostly in the local capital markets, where we have proven as late as yesterday that we have wide access.

Although we have recently started to see the international banking market open up for us for the first time in several years, we will consider one debt new issue in international markets and are currently monitoring market performance to decide the appropriate timing for this.

Depending on how fast we are able to monetize those account receivables, we may have a smaller negative free cash flow this year as expected, or best case, we might even be breakeven.

However, we are maintaining our target net debt to EBITDA ratio measured in dollars at 1.5 times.

We are currently at 1.35 times and might go slightly beyond our target ratio during the course of this year as we gradually make our return to positive free cash flow.

With this, I will turn it back to Miguel for final remarks.

Thank you.

Thank you, Daniel.

We are not satisfied with the price performance of our shares.

We know how YPF is fully correlated with the price of the Brent and the performance of our international peer group, as you can see in the chart at the left side of the screen.

But our financial performance has been very different than that of the peer group as we have been able to grow our EBITDA in the last two years, while the rest of the companies in the same space have seen their own cut by half.

Obviously, we have not done a great job in communicating properly the uniqueness of our story and we will make sure that our message comes across loud and clear.

We are experiencing the same situation with regards to the performance of our bonds.

Look how we are trading at yields substantially above most of our peer group, while our credit ratio points toward a completely different credit story.

Moreover, our volume did not even catch the rally of the Argentinean sovereign after the more favorable expectation of the [holdout] resolution under the new administration.

We are committed to maintain a solid capital structure and believe that soon enough the market should recognize the discipline and our yields should come down.

In summary, 2015 was completely in line with our expectations and with the guidance we provide to you all.

We are very pleased with the results, but also well aware of the challenges going forward.

The name of the game of 2016 is sustainability.

We need to adapt our company and our industry to a different environment.

This implies a reduction in activity this year and it also implies having difficult discussions with unions and contractors, but this is what we need to do.

We will continue derisking Vaca Muerta as there is plenty of long-term value that we want to unlock.

However, given the reality of the industry, we will do it at a slower pace.

We also plan to put our new coke unit in operation in the second half of the year.

We will improve our cash flow generation as the government normalizes the payments of those subsidies that have been accrued and unpaid.

We will have to cut the CapEx this year.

We expect this reduction to be in the 20% to 25% range.

This will mean that production will not have a meaningful growth this year, so we are projecting flat production with a focus on natural gas.

But it also means that we take it very seriously to keep a healthy balance sheet and we believe this is in the best interests of our shareholders, creditors, fellow employees, and ultimately, also for the country in which they operate.

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

Thank you very much, everybody.

(Operator Instructions) Bruno Montanari, Morgan Stanley.

Good morning, everyone.

Thanks for taking the question.

I have two questions.

First one, we're heading into the third month of the new administration in Argentina, so wanted to get your views on what changed in practice in the oil and gas sector.

Do you feel that the new government is more aligned with the sector or is it more of a continuation of rather similar policies?

And second question, I wanted to explore a little bit more the question of the wage negotiations.

So have the discussions already started and when can we expect it should be concluded?

And if you can share with us what is your base case for wage hikes this year that would be great.

Thank you very much.

Thank you for your questions.

I think basically we are probably three months with the new administration and we have seen probably few changes that I believe are meaningful for our business environment.

I will say the first one and the more important one is the focus on trying to resolve the holdout issues that for sure will create a new business environment in Argentina and also probably will allow us to improve the relationship with our investors or to capture more investors that are focused in projects like [Chebida] we have in Vaca Muerta that one, as you know, the main issue that they have were the repatriation of dividends or repatriation of profits.

The second thing I would like to mention is the push in order to improve the prices of different services, electricity, gas, that clearly is showing a trend to reduced subsidies, what I believe in the long term it will be very important for our business.

You -- the second question was related to wages and negotiations with unions.

As I mentioned in my presentation, this will be an important step in order to reduce the activity.

The reality is we have moved several rigs, probably more than 20, into a standby already in December.

Therefore, our main step in order to reduce activity was already taken.

We are discussing with the unions the way that we can handle this without having a measured impact on the workers.

We have created a legal instrument called prevention of crisis that is a legal instrument that exists in Argentina in order to create a transition for those workers and in order for them not to have a major impact on their social life.

So we are already implementing this.

Most of the rigs are already in standby, so reduction on CapEx and OpEx is already underway.

Great, thank you very much.

Frank McGann, Bank of America Merrill Lynch.

Good morning.

Just to focus perhaps maybe a little bit more on the long-term outlook.

You mentioned the potential for bringing well costs down for nonconventional.

I was just wondering if you could maybe give us a little bit of your view as to the potential anyways -- I know it's hard to be overly specific here.

But the potential for getting substantial cost reductions, either from efforts like you are doing with proppants or additional technology advancements, better understanding.

How you think the economics for Vaca Muerta and [Chia] will be two, three, four, five years from now.

What type of oil price do you think perhaps those areas could become profitable in?

Then secondly, perhaps also just on the conventional sides, what are the opportunities over the next several years?

Particularly on the oil side; gas seems to be less of an issue.

But on the oil side to be able to maintain production, to be able to perhaps increase production from conventional resources.

Thank you, Frank, the question.

So let's start with Vaca Muerta development.

First of all, I would like to say that today we have more than 400 wells so an important part, even though is an important part of the beginning of the learning curve, have allowed us to better understand the [subsurface] of Vaca Muerta.

Vaca Muerta, as I mentioned in the past, it clearly is a [road] that has a lot of potential but also is probably more complex that we have seen in US.

That level of complexity today, we understand it better.

Our project in the east, where we are placing this pad of four wells is doing pretty well and the first results that we have are very encouraging.

We are drilling those wells in pads.

That means we drill the surface casing first for all wells, the intermediate casing for all wells, and then we complete all wells together.

That clearly will bring a level of efficiency that we have not seen before.

And also now with the technology have in the country, we have managed to play more [stations] in those horizontal wells.

That area (inaudible) is also in geomechanically [more calm] area than we saw before.

What I mean complexity of Vaca Muerta, I mean that the from the subsurface point of view we had a tectonic geomechanic play that is more complex than the one that we have seen in US.

The projects that we are drilling today are profitable.

I would say marginally profitable, and I believe with the decrease of costs that we are going to see from the pads, plus the improvement that we have because we are investing in infrastructure.

And the local proppant of sand is just one example of that, because in transportation we are planning to move things by train.

The water now we don't just handle it, just moving trucks.

We have water reservoirs.

All this infrastructure also it will play an important role in our cost reduction.

So summarizing, I believe we will continue seeing improvements in cost reduction and that clearly will have an effect on our economics.

On the other hand, we have seen a decrease on price of crude oil and, therefore, probably our forecast that we had before is not in line with what we have today and we will have to make more effort on the cost side.

The other thing I would like to mention to you is that we have two different plays.

One is the oil, but the other thing is the gases.

The results of the El Orejano are very encouraging.

This is the first shale gas project that we have put into production and we have done much better than we thought.

Gas seems to be less complex from the production point of view and we are using, of course, all the learning that we have done where we have had in oil on the gas play.

So that is something also to keep in mind.

The second part of your question was related to the marginal -- to the conventional field.

As you know, most of these fields are brown.

We continue looking for new conventional oil.

We have certain play concepts that look like very encouraging in the Golfo San Jorge basin and will continue increasing the water injections on those projects, so I believe in this new transition to look for more efficiencies.

Also, we will see more production coming from those fields.

Anish Kapadia, TPH.

Good morning.

I had a few questions, please.

Firstly, I wanted to get a bit more guidance, if you could, on the cash flow side of things.

Just wondering if you could give some kind of guidance on what your cash flow should look like in 2016 on a pre-working capital basis.

And then on the CapEx side of things just wondering how much further flexibility there is around your CapEx for this year.

You said 20% to 25% reduction.

Could you go down further than this if you require?

Secondly, on the Vaca Muerta, I just wanted to get some more specifics on that.

I was wondering if you could say how many rigs you are running now in the Vaca Muerta versus last year.

And then your expectation in terms of how many horizontal and how many vertical wells that you're expecting to drill this year and what does that mean in terms of production growth from the Vaca Muerta?

Then my final question is I suppose just carrying on the theme of the Vaca Muerta, wondering what's the limiting factor for you at the moment in terms of accelerating drilling in the Vaca Muerta.

Is it that you're waiting for returns to improve, for costs to come down further, or is it really just the availability of capital in the current environment, and if you can access more capital you would accelerate production?

Thank you.

Thank you, Anish.

Starting for the guidance in terms of cash flow for 2016, unfortunately, I couldn't give you guidance on that.

Now coming to the rest of the question that I think was related to CapEx flexibility.

So CapEx flexibility; I believe we do have CapEx flexibility.

The 20% is a starting point and, of course, we watch our cash flow and pro forma very closely, and if we need to go farther down, we will go farther down in terms of reduction of activity.

We don't expect that to be needed at the moment, but of course, if we need to take that step we will take that step.

In terms of number of rigs that we have in Vaca Muerta, I believe we have 11 today versus 17 that we had last year, so that implied a six rig reduction and we are talking about drilling rigs then the workover rigs and the [holdings].

In terms of horizontal wells, what was the question exactly?

I was just wondering in terms of how many wells you were expecting to drill in the Vaca Muerta this year or approximately what percentage horizontal, what percentage are vertical.

And then as a follow-up to that, what's the growth with that kind of current rig count this year?

In the area that we are now in the east, most likely we have most have been horizontal wells.

I would say it's over 90%.

We are planning to drill around 54 wells, from which 40-plus will come from Loma Campana.

And in terms of -- the rest of your question in terms of a limiting factor to continue growing in Vaca Muerta, I believe the strategy that we put in place is the right strategy.

We need to derisk Vaca Muerta and the way of derisking Vaca Muerta is taking step-by-step in the different areas.

And for the different areas we have different joint ventures with different companies, so I believe that's the right strategy.

I will not accelerate today the pace with the current local oil price to go faster.

Nevertheless, if we find a new partner for a new block, that will be a way to accelerating derisking in a more expanded geographical area.

For example, taking advantage of the results that we are having in gas.

So I don't plan that we are going to accelerate the pace unless we have new partners ready to invest dollars here in Vaca Muerta with us.

Thank you.

Felipe Santos, JPMorgan.

Good morning.

Just three questions.

First, have you received and have you been receiving visits or inquiries from big companies outside Argentina, E&P companies trying to join you with -- after the market selection?

It is the first question.

Second, could you just give a more -- is it possible to give any kind of breakdown of the CapEx decrease and changes on CapEx that you are forecasting, this 20%?

And the third and last question is what is -- I understand that you are moving to more horizontal than verticals wells.

How does this pay off in terms of productivity compensates you?

If you could summarize and say, hey, for X amount of wells horizontals we are going to be producing this amount of more and just to give a brief overview of that.

Thank you.

Thanks, Felipe, for your question.

The first part of your question is, yes, we continue receiving companies that are very interested in the Vaca Muerta play.

That is an ongoing -- we have ongoing discussions with several companies.

Some of them have been interested for many years; some of them have renewed interest during the last few months.

As you know, we signed a memorandum of agreement with American Energy Partners not far ago and we deeply regret the loss of Aubrey McClendon that happened during the last two years.

So as an example, we are continue receiving companies that are interested to team up with us in order to develop Vaca Muerta.

In terms of CapEx, I will leave later on Daniel to give you a bit of a breakdown on where this 20% to 30% reduction comes from.

On your question of horizontal versus vertical, as I mentioned before, geomechanically what we're facing in Vaca Muerta is more complex than the current geomechanical environment that you facing US.

Therefore, the area of that we are now horizontal basically present a better solution.

And the fact that we are able to place more (inaudible) than we did at the beginning also is helping us to increase the EUR of the horizontal wells.

We mentioned the EUR of the horizontal wells is around 560 million barrels without including the gas, so with that number we look for a positive economic.

And if you will manage the well to perform at these levels and even to reduce farther the cost of those horizontal wells, because we managed to create efficiency charts through the proppant, through infrastructure, or through the way that we are developing (inaudible), I think we have a good -- a very promising project ahead of us.

I will let Daniel to answer the question related to the breakdown of CapEx.

Felipe, we are guiding CapEx reduction in the 20% to 25% range.

The bulk of that will come from the upstream.

The downstream will have a minor decline, I'd say more in the 10% area, and that has to do with the final investments that need to be made in the coking unit that will be finalized soon.

I think more significant CapEx reductions in the downstream could be expected for the following years, not 2016.

Okay, thank you so much.

Frank McGann.

I was wondering perhaps if you could discuss what your expectations are for gas pricing under a potential new policy that the government could implement over the next one to two years once you get beyond the current agreement with the $7.50 price for new gas.

How you think -- what, one, the timing of that is and, two, what range of prices you think might be targeted?

Yes, Frank, we don't foresee any major change in the medium term in terms of gas pricing.

And I will say the fact that it's a consensus to reduce subsidy and they are moving to adjust the tariff of gas, that means that the gap between what the government is subsidizing and what the consumer is paying it will reduce in the future.

So I feel that in terms of gas, the economics today are very good and I believe the fundamentals of gas from Argentina are still very strong.

I understand from the government that it's consensus in terms of prices of gas around $6 per barrel -- $6 per Mmbtu.

So I feel very comfortable with the outlook of gas pricing and also with the fundamental of the economic of the gas projects.

Okay, thank you very much.

(inaudible), UBS.

Can you give us more information on discussions with the government to implement additional price hikes in the downstream business?

In January, you informed that we should have additional floor price hikes in 2016 with the next one, if I'm not mistaken, for March.

In January there was a 6% price hike, but the devaluation of the currency has been much higher since then.

Should we expect this effect to be offset by the end of the year or should we expect YPF's margin to be under pressure until the end of the year?

Thank you very much.

Thank you for your question.

First of all, I would like to clarify that we have not given any guidance in terms of price hike and timing during the year.

Nevertheless, we have a 40% devaluation at the beginning of the year.

We have a fair price increase of 5% and we will continue upgrading our price in line with our policy and in line with what the Company is expecting for our plan this year.

I believe a new price increase on the BAM is imminent and then I cannot give you any guidance or how many others we will have during the year or what will be the range.

Okay, thank you.

Alejandra Aranda, Itau.

This is Ricardo Cavanagh.

We work together with Alejandra Aranda.

I see a lot of concern about investors in general regarding the sustainability of the price premium to international.

You just, Miguel, said that -- well, you just mentioned about the prospects for price increases, but conceptually do you think that this premium is going to be sustained for the foreseeable future?

Second, and perhaps more important, is do you expect perhaps next year the development of certain incentives to attract investments towards Argentina beyond what we have in terms of prices and also in terms of resources?

Basically, when listening to the Minister of Energy in the past, he says that Argentina has a phenomenal asset with Vaca Muerta; the problem is that you have many other Vaca Muertas in the world.

So I would imagine that in order for Argentina to attract money, some changes might be due.

I want to ask if you think there is any reason or not at all.

That's all, thank you.

Thank you, Ricardo, for your questions.

First of all, I will say the newest scheme that we have in terms of crude oil local prices have put in place very recently, so I have no reason to think that we will have a change in the near future.

I will not be able to comment what will happen in the long term.

I hope so the international price go up, so we are less decoupled than we are today with international price.

Nevertheless, we don't foresee any change in the near future.

Also, you have to take in account that we are fully integrated.

So at the end of the day what will happen on the price of the [pound] for us is even more important on the price of the crude oil.

Of course that will have effects in some of our shipping partners that are not fully integrated and are investing because we have a $60 per barrel in Vaca Muerta.

The last part of your question was --?

Yes, how -- if there's anything to [attract investors toward] --.

I do believe today we continue to see an interest in Vaca Muerta.

I do not believe there are many other Vaca Muertas worldwide.

I believe there are other places to invest and other types of projects to invest, but clearly from an unconventional point of view --.

I've been drilling in India; I've been drilling in Eastern Europe.

I participate in some of the projects of China and clearly I think we have an advantage in Argentina for many reasons: access to water, footprint of Patagonia, and probably the more important thing is that we have a fantastic rock.

And also, I believe nowhere else besides US were far ahead of us.

You have derisked an unconventional project or you are at a stage of derisking unconventional project as we are in Argentina.

So clearly for me, after US this is the place to be.

You have to also take in account, related to your other question, that the demand of gasoline and diesel continue increasing in Argentina.

Therefore, we have a market that continue increasing regardless of our price update or price increases.

We see our market looking forward, as we saw in the past, in a very solid trend.

Thanks for that and just one additional.

You think that while the geological qualities and the price premium are enough to attract the desired investment for YPF and I would say for the sector, or you think that some additional incentives might be required to make the large investment expectation materialize in the country?

I think, Ricardo, we have a fantastic rock and you know how oil business men think; they come here because of the potential.

Clearly, we have even more potential today than we have two or three years ago because we know more and we're improving our EUR and reducing the cost.

This slowdown in prices, of course, is probably hurting us, but people that look Vaca Muerta look with a long-term view.

So I do believe the fundamentals for the development of unconventional in Argentina with the market that we have in Argentina and the need that we have in Argentina, remember we are still net importers of LNG at a level of 100 [cargos] per year.

And Argentina far away from the different places where that gas is coming from.

I think the long-term fundamentals is still very strong.

We feel that and we see that because we have not seen a slowdown in activity in terms of discussions or potential projects in Vaca Muerta.

I (inaudible) a week.

I was there a few weeks ago.

There were 5,000 people from around the globe involved in the oil industry and clearly Vaca Muerta continued creating advice on the industry where people believe this is something that long term they have a bright future.

So I am convinced of that.

Okay.

Thank you, thank you, thank you all.

We have no further questions at this time.

Ricardo, any further incentive will be welcome.

Okay, we will see.

We have no further questions at this time.

Thank you, ladies and gentlemen.

Thank you very much, everybody, for joining the call and for continuing supporting what we are doing.

Thanks.

Bye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.