YPF SA (YPF) 2016 Q1 法說會逐字稿

Welcome to the first quarter 2016 YPF Sociedad Anonima earnings conference call. My name is Sylvia 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 turn the call over to Diego Celaa. Mr. Celaa, you may begin.

Thank you, Sylvia. Good morning, ladies and gentlemen. My name is Diego Celaa, Head of Investor Relations at YPF. I would like to thank you for joining the YPF first quarter 2016 earning webcast. The presentation will be conducted by our new Chairman, Mr. Miguel Gutierrez; and our CFO and Interim CEO, Mr. Daniel Gonzalez. During the presentation, we will go through the main aspects and events that explain our first quarter results and finally we will open up the call for questions. We will be making forward-looking statements so we ask you to carefully review the cautionary statements on slide 2. Our agenda today will include the review of the first quarter results including an update of our shale and tight gas development project, a brief description of our financial situation, and a brief summary to conclude. But before getting into details, Miguel Gutierrez will give you some opening remarks. Please, Miguel, go ahead.

Thank you, Diego, and good morning to everybody. I'm very honored and proud of having been appointed as the new Chairman of the Board of YPF. I believe I can bring my expertise, my commitment, and professional expertise to lead the Company to the next level. We are working already very hard with the current management team as the team has been doing over the last few years and we expect to be over that. In Company, there is plenty additional value to recreate it in this new Argentina and in this Company. You can expect the highest standards of corporate governance and transparency.

To that end, I think you have seen the new members of the Board that has been selected based on their professional track record and background that I think allowed to the corporate governance that we want to establish at YPF. As you probably know as well, we have formed two new Board committees, a Risk Committee and a Compliance Committee, to add to the existing Audit and Compensation Committees. In order to further strengthen the corporate governance of the Company, we have split the Chairman and CEO roles in line with global best practices.

And finally, in order to go through this period of time in which we are searching for a new CEO, we have appointed Daniel Gonzalez as Interim CEO of the Company while as I said in the next 60 days hopefully we will have finalized the search of the new CEO. We know that our challenge together with the management team is to execute and also to be very focused on productivity and efficiency and I think this is what we are going to be focusing the next few weeks and months. I have visited the operations recently in order to personally deliver this message to the different teams. I hope to have the opportunity to meet each one of you individually soon and have your support.

And with this, I would like to turn over to Daniel.

Thank you, Miguel. Thank you, Diego. Thank you everybody for joining us this morning. We are again very pleased to report our first quarter 2016 results. A quarter where, as you all know, we had to face an increasingly difficult operating environment with the low international oil prices and a significant devaluation of local currency. However, in this scenario, revenues were up by 35% in pesos when compared with same period of 2015 and adjusted EBTDA reached ARS12.5 billion, which represented a 22% increase. However, operating income was down by almost 64% as such growth in EBITDA was more than offset by the increase in depreciation expense as our fixed assets are valued in dollars and the peso depreciated 67% against the dollar in this last year. Total CapEx increased in the first quarter of 2016 by 19% in pesos reaching a total of ARS14.7 billion, but was 29% lower than last year if we measure it in dollar terms.

In this first quarter, total hydrocarbon production showed a slight growth of 0.3% vis-a-vis a year ago with 1.1% growth in natural gas and 0.8% increase in daily crude oil production. This slide with our most relevant income statement figures in US dollars help us to better understand the impact of the local currency devaluation. Revenues in dollar terms were down by 19% as diesel and gasoline prices dropped by 26% and 25% respectively and the exports in dollars were down 30% on lower international prices. EBITDA was down 27% in dollars affected by the previous explained reduction in revenues coupled with the increase in depreciation expense. However, these results were almost in line with our budget for the quarter as we always expected that the partial recovery of our [pesos] would be gradual as the devaluation was so severe.

Other than depreciation, most other costs were down in dollars as a significant portion of them are denominated in pesos and were therefore diluted with the devaluation. Let's switch back to Argentine pesos to go over the more detailed analysis of the quarter and when we break down the results by business segment, we can see the benefits of an integrated company. Our Downstream sector this time was the one facing a more challenging environment with a combination of lower prices in dollars and higher costs associated with crude oil purchases as crude oil prices are denominated in dollars. The Upstream segment on the other hand has been benefited from the devaluation as revenues are 100% in dollars despite the 10% reduction in crude oil prices that occurred at the beginning of the year. Also, the [value] of stocks was written down as shown by the bar of corporate and others.

Continuing with our operating income analysis, in this chart we can get in more detail of the changes from last year's quarter to this quarter. Revenues grew by ARS12.2 billion or 35% resulting from different factors. One, ARS4.1 billion increase in natural gas sales due to prices, which were 4% higher in dollars or 74% higher in pesos on approximately similar volumes. Second, an increase of ARS2.5 billion in diesel sales due to 24% higher prices in pesos, which were partially offset with lower volumes. Third, an increase of ARS2.4 billion in gasoline sales with both higher prices in pesos of 25% approximately and higher sales volumes. And finally, ARS1.1 billion increase in fuel oil sales sold on 57% higher prices in pesos as most of our fuel oil is sold on dollar based prices.

Cost of sales grew by ARS14.1 billion or 54%. As in previous quarters, the main driver of cost increases was depreciation which was up by 89% or ARS4.8 billion fueled by the 67% currency devaluation additionally to investments made during 2015. Cost of sales other than depreciation increased by ARS5.8 billion. The only cost component which is fully dollarized are the royalties, which are paid to the provinces on wellhead prices which are set in dollars, and these royalties were up by ARS1.5 billion. The other factors explaining the increase were the lifting cost, which was up by ARS1.9 billion; the refining cost, which was up by ARS388 million; and lastly, transportation expenses, which increased approximately ARS0.5 billion.

Purchases of raw materials and other products for sale increased by ARS3.3 billion mainly as a consequence of 45% higher prices of crude oil purchased from third parties in the domestic market on slightly higher volumes and then higher purchases of biofuels for ARS560 million driven by higher prices in pesos. On the other hand, we experienced a reduction in imports for a net amount of ARS62 million due to lower imported volumes of diesel and higher imported volumes of gasoline, but both at lower prices. SG&A was up by 20% as a consequence of higher transportation expenses and salary increases offset by a reduction in export taxes. Exploration expenses were up by ARS454 million in part as a consequence of higher expenditures on geological and geophysical studies mostly seismic and a slightly higher number of unproductive exploratory wells as the latter is not evenly distributed during the year.

Entering now to our Upstream business segment. Operating income increased by 97% against the first quarter 2015 to reach approximately ARS4.4 billion. Revenues in the Upstream increased by 58% to reach ARS29 billion driven by two factors. Higher crude oil sales by ARS6.4 billion or 48% due to similar volumes transferred to our Downstream business segment, but at higher prices in pesos. In this case, 10% lower prices in dollars. And second, higher natural gas revenues of ARS4.1 billion on higher prices in pesos and in this case also higher prices in dollars and on similar volumes of natural gas sold. The average realization price in dollar terms for crude oil was $61.9 per barrel. Then for natural gas, the average price was $4.70 per million btu, which was 4% higher than the first quarter of 2015.

On the cost side, these were up by ARS2.5 billion or 17.5% compared to the first quarter of 2015 and mainly due to the following. First, the higher depreciation expense mentioned before of ARS4.3 billion in the case of the Upstream; then ARS1.9 billion pesos increase in items relating to the lifting cost; third, the higher royalties because of the higher prices in pesos, also discussed before; and finally, ARS263 million increase in exploration expenses. On the lifting cost on a per barrel equivalent basis, these were down by 27.7% in dollars to $11.1 per barrel compared with the first quarter of 2015. And total cash cost per BOE reached $19.6, including royalties and other taxes of $6 per BOE. This was way below the $24.2 per BOE number of the first quarter of 2015. Evidently in this quarter we experienced the full positive effect of the currency devaluation on our costs, which were diluted in dollar terms.

It is reasonable to expect though that we will give some of this back in the next few quarters as inflation kicks in. Still we expect significantly lower lifting and OpEx for the year, which is the key to keeping our profitability in the future even under scenarios where local prices continue to come down as they have in the last two years. Crude oil production in the first quarter increased 0.8% to 249,000 barrels of oil per day. Natural gas production was up by 1.1% and we produced 44 million cubic meters a day. And then NGL was down by 6% producing 56,000 barrels per day. As a result, in this quarter total hydrocarbon production was slightly up vis-a-vis the same quarter of 2015 with 582,300 barrels of oil equivalent per day. This quarter had one additional day than last year's and therefore the total production increase was slightly higher than the daily production increase I just highlighted.

Production was only slightly below our budget so we continue to target flat production for the full year. Now, let me provide an update of our shale gas and shale oil activity. During the first quarter of this year, we connected a total of 34 wells taking the total to 466 (sic - see slide 10, "456") shale wells in production. During this year, we will be migrating our shale projects to pure horizontal drilling as the results of the horizontal wells look much more encouraging than the verticals and much more encouraging than those first horizontal wells that we had drilled back in 2012. Indeed 23 out of the 34 wells connected were horizontals. Total shale production of the quarter was slightly below the previous quarter reaching a total of 50,000 BOEs a day and this decrease is basically explained due to a lower hydraulic stimulation activity in December of 2015.

On the CapEx side, the cost per well in Loma Campana is now consistently below $12 billion a well, in line with the reduction trend that we were expecting for the year and with a target of getting closer to the $10 million mark towards year-end. Another good news is that the initial production rate of those horizontal wells are in line with our well type curve and we expect these wells to accumulate more than 550,000 barrels of liquids plus gas. As we mentioned in our last annual presentation, we were going to start developing shale projects with a new pad of four wells aligned which was going to allow us to reduce the number of drilling days. And in the first quarter, results of this first pilot showed good results reducing the average number of days to 22 days per well. We will see in the next few quarters if we are able to sustain the significant productivity increase.

I would like to mention that we are analyzing initiatives to increase the number of hydraulic stimulation stages per day from four to six per bundle. Wells are now consistently receiving 18 frac stages and there is even one recent well in El Orejano where we have put 27 frac stages. In this quarter, tight gas continues to be one of the drivers of our production growth and represents 20% of YPF's natural gas production. We have put in production 12 wells targeting the Lajas formation in the Loma La Lata block where we own 100% and 16 wells targeting the Mulichinco Formation in Rincon del Mangrullo where we own 50%. As a consequence, our drilling activity gross production continued to show encouraging results reaching 4.3 million cubic meters a day in our Lajas project and 2.9 million cubic meters a day in Rincon del Mangrullo.

It is worth highlighting that during April of 2016, the new compression plant for the area of Rincon del Mangrullo was put in place allowing a significant increase in total production for the area, which actually reached close to 4 million cubic meters a day in the last few weeks. Also from now on and as a result of the operating merger with YSUR, we are showing in our tight gas figures the information of the tight gas production of YSUR's block called Estacion Fernandez Oro or EFO that also targets the Lajas formation. It is important to highlight that the current production capacity of that block is constrained by the current capacity of facilities and during the year we will be carrying out facility debottlenecking initiatives, which will gradually result in an increase of production. However, during this first quarter of 2016, EFO production reached a total of 1.8 million cubic meters a day and we own 100% of the area.

As opposed to what we have observed during the previous quarters, this time the Downstream business segment is the one that faced a difficult quarter as the effect of currency devaluation and its raw material cost eroded margins. Therefore, Downstream reported an operating loss of ARS794 million compared with ARS1.5 billion profit in the same quarter last year. Revenues were up by almost ARS9 billion or 28% because of diesel sales, which were up ARS2.5 billion on 23.5% higher prices in pesos that were partially offset by a reduction of 2.7% in volumes sold. Gasoline sales on the other hand were up also by ARS2.4 billion, but in this case due to a 24.9% increase in average prices and a 3% increase in sales volumes. It is also worth highlighting that we continue improving the mix of products sold increasing sales of premium products by 13% and 6% for diesel and gasoline respectively.

Fuel oil sales in the domestic market totaled ARS2.7 billion, which represented ARS1.1 billion increase which was driven by higher prices in pesos of approximately 67% totally in line with devaluation. In the export market we noticed an increase of 16.3%, which was ARS464 million due to higher prices in pesos driven by devaluation despite lower international prices given that the Brent decreased by 38% vis-a-vis the same quarter last year. Downstream costs increased by 37% compared to the same period of 2015 and here we can highlight. First, the most important factor which was greater crude oil purchases of ARS7.4 billion on higher prices as discussed before. Second, higher purchases of biofuels with higher prices for both biodiesel and bio-ethanol while in terms of volumes, bio-ethanol increased by 9% and biodiesel showed a reduction of 16% due to a lack of availability of the product in January and February.

Third, there were lower fuel imports by a net amount of ARS62 million, higher depreciation of ARS600 million, and finally ARS388 million increase in items related to the refining cost. With respect to prices at the pump, this quarter only was affected by a 6% increase in January and a similar increase in March. In the second quarter, however, we increased prices again by 6% in April and 10% in May. We expect to continue to increase prices if the currency devalues further. During the quarter, volumes of crude oil processed were 294,000 barrels of oil per day, which was 1.9% lower than the first quarter of 2015 mainly due to scheduled maintenance at one of the topping units in our La Plata refinery, which affected activities during approximately 17 days of March. Therefore, the utilization rate of our refining capacity during the quarter was 92%.

Regarding domestic market, total sales slightly decreased by 1.7% mainly driven by the 2.7% decline in diesel and 13% decline in LPG sales. Gasoline demand stood strong with a 3% increase while fuel oil sales also increased another 2%. However, they were not enough to fully offset the decline in diesel and LPG. On this slide, we have plotted YPF's monthly sales for the last two years and the first three months of this year. You can note on the green line in the gasoline chart that represents 2016 sales, they were consistently above 2015 and 2014 showing an increase in demand in local market despite higher prices and our market share remains stable around 57%. In terms of diesel at the right side of the chart, 2016 sales were more linked with economic activity and that line is somehow below that of the previous years. In this case, our market share was approximately 57%, which was slightly below previous years.

Market share for our premium products on the other hand, both Infinia in gasoline and Eurodiesel in diesel, were 62% and 59% respectively. So, premium market share is above ordinary market share for us. April sales, which are not shown in the graph, were very poor as a consequence of record high rainfall in Argentina, which really affected our sales of diesel to the agro sector and also had some negative effect in retail sales. We expect this loss to be recovered in the remainder of the year. During the first quarter of 2016, total CapEx for the Company amounted to ARS14.7 billion, which was 19% higher than last year. Upstream CapEx amounted to ARS12.3 billion, which was only 14.5% higher in pesos than last year.

Our activity was mainly focused in drilling, which represented two-thirds of the total Upstream CapEx, followed by some build-up of facilities with a 15% share of total CapEx, workovers which represented 11%, and exploration and other activities which represented 8% of total Upstream CapEx. Most meaningful investments have taken place in the Neuquina basin most significantly in the blocks Loma Campana, Aguada Toledo - Sierra Barrosa, Rincon del Mangrullo, El Orejano, La Amarga Chica, Chachahuen, and Canadon Amarillo; and then in the Golfo San Jorge basin in Manantiales Behr, El Trebol, Los Perales, and Canadon de la Escondida. With regards to exploration, in this quarter we completed nine exploratory wells, six of them targeting crude oil and three of them targeting natural gas prospects.

The Downstream CapEx on the other hand was ARS2.1 billion where our largest ongoing project is a new coke unit being built in our La Plata refinery and we are scheduling its commencement of operations in the fourth quarter of 2016. Now, let us speak about our financial situation. In the first quarter of 2016, operating cash flow reached ARS10.8 billion, which was 9% below last year's. As in previous quarters, this decrease is primarily due to an increase in working capital driven by the accrual of accounts receivables mostly from the state and as of March 31, 2016 we were owed by the state approximately ARS21 billion. This is derived from the gas plant that provides the $7.5 per million btu and from the oil incentive plan of $3 per barrel that was put in place last year.

This working capital buildup more than offset the ARS2.3 billion increase in adjusted EBITDA and the ARS600 million increase because of the insurance collections. Cash flow from operations and a sound financial performance boosted by the issuance of three new bonds for a total of ARS1.5 billion and $1 billion were directed to finance our investing activities which totaled ARS17 billion. This way this cash flow generation contributed to a ARS26 billion position of cash and cash equivalents as of March 31 of this year. That cash position expressed in dollars and only for YPF SA stood at $1.6 billion, which covered the funding needs for the rest of the year.

Additionally, we have plotted in green in the graph the account receivables credit with the public sector coming from the gas plan and the crude oil incentive only for 2015 as we were informed that we will be soon collecting these amounts in the form of government bonds denominated in US dollars. As we have repeatedly said, we are maintaining our target net debt-to-EBITDA ratio measured in US dollars at 1.5 times. We are currently at 1.53 times and we will go even higher this year as we gradually make our way back to positive free cash flow. However, if we consider the accounts receivables previously mentioned, the pro forma ratio would stay at 1.39 times today. The average interest rate in pesos was 28.6% while the average interest rate in dollars stood at 7.75%.

In summary, results were negatively affected in the quarter by the currency depreciation. While we have not been able to pass through the full effect into prices yet, but we expect to continue to catch up in the following quarters. We continue to put focus in reducing our cost base, which in this opportunity was partially helped by the devaluation; but also achieving structural efficiencies that would allow the Company to overcome the difficulties of the current and future pricing scenarios. Our target continues to be to at least maintain our EBITDA margin although we acknowledge that in absolute terms, EBITDA in dollar terms should be somehow lower than last year's. Economic activity has slowed down in Argentina and sales of our products mainly the diesel oil have suffered because of that, but we believe YPF's strong market position will allow us to make up for these lower sales once the economy picks up in the last part of the year.

We have proven to continue to have wide access to international markets raising $1 billion early in the year to almost fully cover our financial needs for the year. We have new sources of financing now that were not available last year and that put us in a better position to decide how to continue to fund our business going forward. We are still seeing some progress in our unconventional activities. The results of the quarter show that we are in the right track to put these resources in value even in a scenario of lower international prices. So, overall this was a transition quarter of a challenging year. We have set actually very challenging internal goals for all of us as a management team, but we believe we are very well prepared to take the Company to the next level as Miguel said earlier on the call.

So with this, I would like to thank you all and open it up for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Frank McGann, Bank of America Merrill Lynch.

I'd like to follow-up if I could just on costs. You had some benefit from the devaluation in the quarter, I was wondering what you expect as you go through the rest of this year in terms of cost trends given inflation and a possible labor settlement. And then thinking a little bit more strategically longer term, what opportunities do you see for taking potentially significant costs out of the cost structure via oil services costs especially in light of the improved situation in Argentina, which I would assume would reduce the risk profile for contracts and potentially enable you to get better pricing from service companies?

This is Miguel Gutierrez. Just taking your last question, I think we have plenty of opportunities going forward as the macro situation continues to stabilize here, risk premium continues to reduce, and I think we should re-engage with all of our suppliers and have a discussion under the new macro conditions and things. So right from there, there must be a significant opportunity to reduce costs.

I would say, Frank, in addition to that that you have seen that most of our cost types, say all of our costs which are peso denominated were up in the 25% to 30% range from one year ago. So clearly not only below the devaluation, which you made a good point that has helped us, but also below inflation. So, we do expect to continue to see our cost increase below inflation, below our price increases going forward. It is clear though that this first quarter didn't have the impact of salary increases, which we might see in the second quarter, but we will surely see in the third and fourth quarters. However, our budget for the year assumes a significant reduction both in lifting cost as well as in total OpEx in the Upstream and little bit of a milder reduction, but a reduction at the end in our refining costs for the year. All of them measured in US dollars.

So, we do believe that as you said our cost bases will continue to come down. We were very encouraged with the last results of the well productivity in terms of drilling days, which has been a record for us. We have been able to increase the frac stages per day. So, I'd say everything is looking in the right direction. However, with respect to the contracts that I agree with Miguel, they will come down as the cost of doing business in Argentina continues to come down. It will be gradual though because most of them are medium and long-term contracts that can only be renegotiated once they come due, right. So, you should not expect a significant drop from one day to the next.

Okay. If I could follow-up maybe just with a second question. Just in terms of demand trends, obviously you mentioned the economic effects near term. With prices having risen pretty sharply, I was wondering if you expect any effect of price increases on either gasoline or diesel demand. And in terms of natural gas, the potential increases for residential consumers, I was wondering if you have seen or are there any indications yet if that's having any effect on the mix of gas sales from residential perhaps to industrial?

On demand, what I can tell you is that diesel oil sales have a high correlation with economic activity and are less elastic to prices, first. Gasoline on the other hand has some more elasticity to prices. However, even with these last price increases, you have to bear in mind that prices for gasoline and diesel were up 23% and 25% vis-a-vis last year. In an inflationary environment in Argentina with levels which I cannot guess, but they are clearly above those levels. So it is not that the prices of our products have grown beyond inflation, quite the opposite. Having said that, the 10% increase that we just put in effect on May 1, it's a little bit too soon to see any effects out of that. I think that May should be a good month in terms of our total sales basically because we would be making up for all the sales lost in April because of rainfall.

So, I think we need to wait a couple of months to see what, if any, is the effect of prices in demand; but I don't expect it to be significant to be frank with you. In terms of natural gas, it is very soon because I haven't seen the last numbers from our subsidy MetroGAS, but the bills with the increases in prices have very recently reached the residential customers. So only after the customers see the increase, they start eventually cutting the use. The mere increase of tariffs without actually anyone suffering them in the bill that comes at the end of a two-month period is not enough to make any adjustments. So again similar to the answer regarding gasoline and diesel sales, I think that we need to wait a couple of more months to see what kind of effect there will be. However, I do expect some reduction in residential gas consumption to be experienced in the next few months.

Okay. Thank you very much.

Juan Vazquez, Puente.

The first question is about the gas subsidy. We've seen again an impact in operating cash flow from this account receivable and if it hadn't been for this, free cash flow may have been positive. So if you receive bonds in order to collect the gas subsidy, do you think you're going to be able to sell those bonds in the market if you wanted to? The second question is a follow-up to a previous question. We've seen volumes sold in premium gasoline and diesel actually go up so what is the main reason behind that when our volumes were flat? And the last question, if I may, is given the increases in gas prices at the wellhead, do you think that in the next quarter the average realization price for gas would be closer to let's say $5.20 per million btu? Thanks.

With regards to the bonds, we still have not seen details. There will be some kind of a restriction to monetize those bonds obviously. On the other hand, we would not like to go out to the market and try to monetize right away because it will probably have a negative effect on prices. And given the cash situation that we have today which is very comfortable, I can anticipate that we will do a gradual sell down of those bonds. On the other hand, they are dollar denominated so it helps us in covering if you want our dollar based liabilities, which are dollar based debt. When do we expect? We understand that this is kind of imminent. Frankly we were expecting this to occur before this call, it has not. We would be very surprised if it doesn't happen in the next couple of weeks. We're having conversations at both the Ministry of Energy as well as at the Ministry of Finance regarding this and I think that we will see some kind of solution one way or the other very soon.

In terms of the premium products, it was a great question that I should have addressed when Frank asked this question regarding demand and the effect on price increases because evidently when there is a significant increase in prices which has a significant impact in demand, the first product that usually suffers is the premium product and that was not the case. So, that again underscores what we have just said that we don't see a meaningful negative effect from price increases. The reason I believe for the continued increase in volumes of premium products I'd say it's twofold. On the one hand, the car market in Argentina continues to grow with more modern cars, which tend to use premium products on the one hand. And second, just for YPF, we believe our products are extremely strong from a marketing perspective.

Our Infinia product that was launched a year-and-a-half ago has consistently been eating market share from others. So, again I believe it's just the result of a very strong commercial position. In terms of wellhead prices of gas, we are not expecting any significant change in the short term. The mere application of the gas plan results in an increase in wellhead price of gas in dollar terms in average for us every quarter. But as you have seen in this quarter, the increase vis-a-vis last year was only 4% in dollars. So, I think that you will continue to see that kind of increase. However, there are conversations with the Minister of Energy regarding a potential increase in prices of gas at the wellhead. They are preliminary at this stage, but I think what we will probably see towards next year or the end of next year is that prices will stabilize in the $5.5 to $6 range per million btu.

Perfect. Thanks, everybody.

Anish Kapadia, TPH.

First one, just a clarification on the accounts receivable from the government. I think you mentioned ARS21 billion. I just wanted to check what's the conversion rate that that's going to be converted at? Is that the rate of the time of those receivables or is it at the current exchange rate? And second question around your unconventional portfolio and some of the growth. From the Vaca Muerta in Q1, it seemed like production fell slightly despite adding 32 wells. I was wondering if you could explain the reason for this and then I suppose on the tight gas side you've seen the opposite, you've seen very strong growth in gas. So if you can give somewhat of an outlook for your tight gas production and is the real constraint some of the processing capacity? And then just finally with regards to both those areas given the situation you're seeing at the moment, are you seeing a significant increase in interest in farm-outs? Thank you.

The first question regarding the ARS21 billion, they should be converted into dollars at the time that those bonds are issued to us. At this time, the dollar is kind of flat. It has been flat and actually coming down for the last couple of months I have to say so we are not really concerned with that given that it is supposed to be sold just in a matter of weeks basically. In terms of Vaca Muerta production, you are right, the first quarter experienced a slight decrease. That is because we reduced CapEx by the end of last year preparing for the budget for this year, which would have lower CapEx. So, we reduced some of the stimulation activity in the last month of last year. Having said that, we continue to budget an important increase in production coming from shale this year.

While we talk, we are making some calculations here in terms of total shale production both oil and gas for the year vis-a-vis last year. It's not going to be below 10%. So, I'd say between 10% and 15% growth in production this year of course with the first quarter without significant growth vis-a-vis the fourth quarter, but with significant growth vis-a-vis the first quarter of 2015. In terms of tight, you are right also that we have some facility restrictions. As I mentioned during the presentation, we have three main areas of tight gas production and the facility restriction today is in one of those areas, which is EFO, and that is in the process of being [solved] during the course of the year. The other area that had a facility restriction was Rincon del Mangrullo.

And actually in this second quarter, you should see production out of that area increase significantly because we are now producing close to 4 million cubic meters a day without any restrictions while we were below 3 million cubic meters a day a month or two ago. And in the other area, we have not faced any facility restrictions at all. The other area actually it's the Lajas formation in the Loma La Lata block, actually to be more precise in Sierra Barrosa - Aguada Toledo, and there is plenty of idle capacity there because Loma La Lata is precisely where most of the gas came from in Argentina in the last 20 years. That production out of Loma La Lata, the conventional production, has been coming down; but most of the facilities continue to be in place of course. So, we shouldn't have any restrictions there.

Thank you very much.

Alex Burgansky, Deutsche Bank.

I just have a question on the profitability of the Downstream division. Your presentation mentioned and you said during the call that there was some product stocks that were written down during the quarter. Can you please quantify that amount? And also if you could provide a little bit more detail maybe on the actual per barrel costs in the Downstream business, refining or transportation logistics, so we can better understand the profitability of the refining unit? Thank you.

Let me start with the second question. The refining cost again other than the crude oil purchases was up 28% in pesos, the total refining cost so it was significantly down in dollar terms and remember that the crude oil represents 80% of our total refining cost approximately. The problem with this business segment is that 80% is denominated in dollars and the revenues that we get out of the segment are initially at least denominated in pesos because they are actually derived from sales of diesel and gasoline in the pump down here in Argentina. So until we are able to catch up with the price increases, you see some reduction in price in dollar terms while our main cost stays flat in dollar terms, but goes up significantly in pesos.

In terms of the first question regarding the writedown in stocks was approximately ARS1.5 billion in the quarter and we had seen a gain of stocks of ARS1.3 billion a year ago. That's why the difference is so huge. It was a positive effect last year, it was a negative effect this year. However, that result between segments what that means is that the numbers of the Downstream had the positive effect of a revaluation and then we put the provision in an opposite sign out of corporate and other. So it's not a result that goes out of the Company, it's an intersegment result. I'm sorry I was not very clear with the explanation.

Okay. Thank you very much.

Alejandra Aranda, Itau.

This is Ricardo Cavanagh. I wanted to ask on your expectations regarding negotiations with the unions and salary increases overall and related to that if this is what exaggerating keeps you awake at night as main risk to the Company this year? Thank you.

Yes, you know that this is the main challenge for us. It's a combination of reduction in activity that we said that we would have this year that we're in the process of putting in place and the salary discussion. We are only starting that salary discussion as we speak so we don't expect to have any news in the next couple of weeks. We do expect the unions to behave rationally because if we are not able to reduce the costs at the Upstream in dollar terms on a sustainable level, it will be very difficult in the long term for all of us producers here in the industry to keep the level of activity that we have today. But we know what we need to execute, we have a very good relationship with the unions. They have always been very constructive in these last few years working hand on hand with us so we expect a positive outcome. But I have to say yes, this is the most important thing that that keeps us up at night.

Okay. Thank you very much.

We have no further questions at this time.

Thank you very much for your attention today and see you next quarter.

Thank you. Bye, bye.

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