YPF SA (YPF) 2017 Q1 法說會逐字稿

Welcome to the Q1 2017 YPF Sociedad Anonima Earnings Conference Call. My name is Richard, and I'll be your operator for today's call. At this time, all participants are in a listen-mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I'll now turn the call over to Mr. Diego Celaa. Mr. Celaa, you may begin.

Thank you, Richard. Good morning, ladies and gentlemen. My name is Diego Celaa, Head of Investor Relation of YPF. I would like to thank you for joining the YPF first quarter 2017 earnings webcast. The presentation will be conducted by our CFO, Mr. Daniel Gonzalez. During the presentation, we will go through the main aspects and event that explain our first quarter results. And finally, we'll open up the call for questions.

We will be making forward-looking statements, so we ask you to carefully review the cautionary statement on Slide 2. Our agenda today will include a review of the first quarter results, include an update of our shale anti-development projects with description of our financial situation and a brief summary to conclude.

Also, our financial statements figures are stated in Argentinean Pesos in accordance with the International Financial Reporting Standards (IFRS). In addition, certain financial figures have been adjusted to reflect additional information to better understand our key financial and operating results.

Please, Daniel, go ahead.

Thank you, Diego. Good morning, everybody. Thank you very much for joining us this morning for a review of our first quarter 2017 results. In line with our expectations, this was really a strong quarter. Revenues were up by 21% when compared to the same period of 2016. And our EBITDA reached ARS16.8 billion, which represents 35% increase. Net income of slightly below ARS200 million was affected by an accounting loss resulting from the appreciation of the peso during the quarter as the functional currency of the Company is in dollar.

We also had a strong operating cash flow of ARS24.7 billion, which represents an increase of 127%. Total CapEx was down in this first quarter by 19% in pesos, reaching a total of ARS12 billion, mostly as a result of a reduction in drilling activity that we had budgeted for the year. This reduction activity, which started a year ago derived in our total hydrocarbon production decrease of 1.5% vis-a-vis a year ago, with a 6% decrease in crude oil production and a 2.8% increase in natural gas production. From an operational perspective, we continue to make progress as structural changes in all of our upstream operations, especially in our shale developments as we will see in a few moments.

In this slide, we show our main financial figures, measured in US dollars. Before getting into these figures, it is important to mention that in contrast to what we went through in recent years, in this first quarter of 2017, the local currency actually experienced a nominal appreciation vis-a-vis the FX at the beginning of the period. But when you compare this with the previous year, there is a devaluation of the peso over 8%.

Revenues were up by 12% in dollars as diesel and gasoline prices increased by 18% and 15% respectively, in dollar terms, while export prices in dollars were up 30% in line with the recovery of international prices. Such price increases more than offset the decline in volume of products sold on both the domestic and export markets. Cash costs expressed in US dollars increased by approximately 9%. Lifting cost increased in dollars, but royalties stood below last year figures, or lower crude oil prices at the wellhead.

EBITDA was up by 24.4% in dollars with a margin expansion to 29.5%.

Let's switch back to Argentine pesos to go over the more detailed analysis of the quarter. Operating income increased by 179% as opposed to last year, where the downstream segment had suffered the negative consequences of the devaluation of December 2015 that had not been passed through to prices. This year, the downstream was responsible for the significant improvement in our results as the upstream suffered from local crude oil price decline. This underscores, again, the value of our integrated basis approach.

Local crude oil prices continue to decline and are getting closer to converging with international prices and fuel price increases during 2016 and early 2017 have reconstituted the economics of the downstream sector. The upstream on the other hand, is going through an adjustment of costs that should allow it to be sustainable with $15 per barrel prices.

Finally, our gas and power segment showed better results due to a combination of our better tariff for our subsidiary MetroGAS, which actually improves much further with the tariff review that came in line in April and better results obtained from our power subsidiary YPF Energia Electrica.

In order to better understand the reasons behind the increase of ARS2.9 billion in operating income, we've broken it down in more detail. Revenues grew by ARS10.1 billion or 21% resulting from different factors. First, an increase of ARS3.3 billion in gasoline sales with higher prices in pesos of 29% and an increase in sales volumes of 1.1%. Second, ARS3.1 billion increase in diesel sales due to 25% higher prices in pesos, partially offset by a 3.4% reduction in sales volumes. Third, ARS1.3 billion increase in natural gas sales due to prices which were 6% higher in pesos on a slight increase in sales volume of 0.7%. Then, ARS816 million increase in natural gas sales in the retail segment, which mainly explained by our subsidiary MetroGAS on a 70% increase in prices and 6.4% increase in volumes. And finally, sales of asphalt, which increased by ARS400 million explained by 194% increase in volumes sold.

On the other hand, fuel oil sales decreased by ARS1.4 billion on lower volumes of approximately 38% and 19% lower prices in pesos as the power generation sector had plenty of gas available to displace fuel oil.

Cost of sales, other than depreciation, increased by ARS2 billion. The only cost component which fully dollarized are the royalties, which are paid to provinces on wellhead prices, which are set in dollars and they presented a reduction of ARS185 million or 4.5%, or lower crude oil prices, somehow offset by the 8% devaluation between periods. The other factors explaining this ARS2 billion increase were the lifting costs, which was up by ARS1.2 billion or only 16%, which translates into an approximately 10% increase in dollar terms, then the refining cost, which was up by ARS540 million or 31%, and finally, transportation expenses, which increased ARS370 million or 23%.

Depreciation, on the other hand, was up by only 12% or ARS1.2 billion. This low increase in DD&A had to do with a variety of factors. First, the CapEx intensity has been lower than in previous periods. Second, the impairment of last year has reduced the fixed assets subject to depreciation. And finally, the devaluation was also lower than in previous periods, and therefore, the value of the assets which are cut in dollars, did not suffer a significant increase.

Purchases of crude oil and other products for sale increased by ARS2.4 billion, mainly as a consequence of higher purchases of biofuels for ARS1.8 billion, driven by significantly higher prices in pesos and the higher blend in the case of the ethanol. Imports were up for ARS250 million due to higher import prices for diesel of approximately 61% in pesos, and also higher volumes, but partially offset by the absence of gasoline imports during the quarter.

SG&A was up by 25% as a consequence of higher transportation expenses and salary increases. And exploration expenses increased by ARS139 million as a combination of higher number of unproductive exploratory wells and lower expenditures on geological and geophysical studies, mainly in seismic.

Entering now to our upstream business segment. Operating income decreased by 80% against the first quarter of last year to reach approximately ARS900 million. Revenues showed a decrease of 5% to reach ARS27.7 billion, driven by a following combination of factors. On the one hand, lower crude oil sales by ARS2.7 billion or 13%, which was due to 6% lower volumes transferred to our downstream business segment, and 5% lower prices in pesos, and then, volumes sold to third parties, which is not really a meaningful amount, also decreased by 64%.

But on the other hand, there were higher natural gas revenues of ARS1.3 billion, on higher prices in pesos, which were also higher in dollars also, and a slight increase in volumes sold. The average realization price in dollar terms for crude oil decreased to $53 per barrel. As a result of the new agreement reached between local producers and refiners, and which was signed earlier this year, that considers a sliding scale of prices during the year to seek convergence with international prices.

For natural gas, on the other hand, the average price was $4.96 per million BTU, which was 5% higher than a year ago. On the cost side, these were up by ARS2.1 billion, an 8% increase compared with the first quarter of last year due to ARS1.4 billion increase in items related to lifting cost as explained before, then higher depreciation of ARS839 million, and finally, the offset that came from the lower royalties as lower crude oil prices in pesos were as explained before. Exploration expenses increased 30%, also as explained in previous slides.

Now lifting cost on a per-barrel equivalent basis increased 10% in dollars compared to the first quarter of 2016 to $12.20 per BOE. Our total cash cost per BOE reached $20.60, including royalties and other taxes of $6.60 per BOE. It is worth mentioning that these figures, the 2017 figures are totally in line with all seen in previous quarters, and the ones which are different are the first quarter 2016 costs that have been unusually low as they were strongly influenced by the devaluation that had occurred in late 2015.

Crude oil production in the first quarter decreased 6% to 234,000 barrels of oil per day, while natural gas production was up by 2.8% producing 45.3 million cubic meters a day. Natural gas liquids dropped by 2.8%, producing 54,700 of barrels a day. As a result, total hydrocarbon production dropped 1.5% vis-a-vis the same quarter of last year with 573,000 barrels of oil equivalent per day. And this was mainly as a consequence of the reduction in drilling activity started last year, but also somehow affected by several labor conflicts and to a lesser extent, floods in the South that affected the operation in the last days of the quarter. Actually, these last two factors will have a negative effect in the production numbers of the second quarter.

Now, let me provide an update on our shale oil and shale gas activity. First, I would like to highlight that in this quarter, we have decided to start showing in the shale production chart, our net production instead of the gross production as we have been showing in the previous quarters. This will allow us in the future to include new production coming from non-operated areas such as Bajada de Anelo and Aguada Pichana where we recently announced the partnerships. I then said that, the net shale production of the quarter reached 34,300 BOEs a day, which represents a new all-time high.

Now in terms of our activity as operator, during the first quarter of this year we connected a total of 14 wells taking the total to 555 shale wells in production and increasing the total gross operating production to 64,500 barrels of oil equivalent per day. We continue to experience cost reduction per well in Loma Campana, currently slightly below $8 million for 1,500 meter type well. But additionally, we have been able to complete a 2,000 meter lateral length well with 24 frac stages and we are currently testing several other wells with longer laterals of around 2,500 meters. At least five of these longer lateral wells have been drilled after the end of the quarter, but have not yet been completed. And in line with us, we are expecting to test a 3,200 meter lateral long well very soon.

And another important piece of news is our main shale gas project in El Orejano has reached a peak in gross production of 3 million cubic meters a day. We have also deployed two drilling rigs in order to derisk Vaca Muerta in less explored areas as we have mentioned in our annual call, to carry a total of 10 pilot projects this year. In addition to the shale announcement, we made in our previous webcast presentation, we have announced $390 million JV with Schlumberger in Bandurria Sur and those the reshuffling of an existing conventional JV in Aguada Pichana block that will shift into two new unconventional JVs, where total CapEx is planned for the first stage of $0.5 billion. We will operate the Schlumberger JV and we will let others operate the Aguada Pichana JV.

With regards to our tight gas projects, as we did with our shale production, we're also showing in this chart, our net tight gas production, which continued to show encouraging results, reaching 13.1 million cubic meters a day. This way, tight gas production represents now 29% of our total natural gas production. In terms of activity, we've put in production nine wells starting in the Lajas Formation in Loma La Lata where we own 100%, two wells targeting the Mulichinco formation in Rincon del Mangrullo where we own 50%, and another two wells in EFO, where we also own 100%.

The downstream segment reported an operating income of ARS4.4 billion compared with ARS800 million operating loss of the first quarter of 2016. Revenues were up by ARS8.2 billion or 41%. As explained before, gasoline sales were up by ARS3.3 billion on better prices and higher volumes, and sales of Infinia which is our premium gasoline, increased by almost 10%. Diesel sales were up by ARS3.1 billion on higher prices, but were partially offset by a reduction in volume. However, here it is also worth highlighting again, the increase of 15% in sales volumes of our premium product Infinia diesel.

Sales of asphalt increased by ARS400 million explained by 194% increase in volumes sold, marking an encouraging sign of pick up in the construction activity. Fuel oil sales dropped by ARS1.4 billion on lower volumes and lower prices. Finally, the export market was strong with an increase in sales of 41% due to higher prices and good volumes of jet fuel LPG, virgin naphtha and petrochemical products.

Costs increased by 8% vis-a-vis the same period of 2016 and let me highlight the causes. First, lower crude oil purchases of ARS2.3 billion, or lower prices and lower volumes as discussed before. Remember that most of these purchases come from our own upstream segment. Then, higher purchases of biofuels with higher prices for both the biodiesel and the bioethanol of 40% and 44%, respectively. Bioethanol volumes increased by 20% due to the increase in a blend rate for gasoline from 10% to 12%, while biodiesel volumes increased by 22% as there had been a lack of biodiesel in the first quarter of last year. There are also higher fuel imports of ARS250 million, an increase of ARS540 million in items related to the refining costs and higher depreciation of the downstream assets of ARS388 million.

During this quarter, the volume of crude oil processed in our refineries was 291,000 barrels of oil per day, which was 1% below last year, mainly due to lower fuel oil production of 31%. Therefore, the utilization rate of our refining capacity during the quarter was 91%. Regarding the domestic market, total sales decreased by 2% mainly driven by 3.4% decline in diesel and the 37% decline in fuel oil, partially offset by the previously explained increase in gasoline and asphalts.

As we can observe in the graphs plotted in this next slide, January and February were weak months in terms of demand for both gasoline and diesel. A good March drove diesel sales to similar levels of those in the previous year, but was not enough to offset the cumulative decline of the first two months. Therefore, diesel sales declined by 3.4% in the quarter.

With respect to gasoline, the path was similar, but the consumption of this product on March was strong enough to drive sales for the quarter 1.1% higher. In April, sales of gasoline were sharply up, mainly due to an increase in market share and also because of strong demand, and diesel sales were flat. So this number for April would confirm this positive trend that started in March.

During the quarter, we also experienced a nice increase in market share for both products with 55.5% in gasoline and 57.5% in diesel. The market share of our premium products was 61% and 59%, respectively. As you all know, in 2016, we started to report our business segment gas and power, which includes the results coming from our subsidiaries MetroGAS and YPF Energia Electrica.

With regards to power, currently we have a total capacity of approximately 1,300 megawatts from our power generation plants in Tucuman and Dock Sud, and we will be adding 575 megawatts more from the four newly fully-funded projects that we've already announced last year.

All these projects are progressing according to schedule with the exception of a wind farm, which is slightly delayed due to the recent floodings that affected the [power]. We like power, we believe the demand for new power generation is there, the economics are compelling, and additionally, has synergies with our main businesses, as we are the largest purchasers of power in the country.

We have already identified 2,000 megawatts of additional projects that we can sponsor. They include a combined cycle co-gen projects in our existing refineries. and additional wind farm, and other renewable energy projects. However, we have decided not to allocate additional capital into this sector and we have, therefore, started a process of identifying potential partners to capitalize YPF Energia Electrica, the areas to create a standalone non-consolidated subsidiary where all of our power assets will reside.

During the first quarter, total CapEx of the Company amounted to ARS12 billion, which was 19% lower than last year or 46% down, if we measure it in dollar terms. Upstream CapEx amounted to ARS9.4 billion, which was a decrease of 23%. Our activity was mainly focused in drilling and workover, which represented 62% of the upstream CapEx followed by a buildup of facilities with 24% participation, and exploration and other activities, which represented 14% of the upstream CapEx.

During the quarter, we drilled and put in production a total of 96 new wells, including 14 new wells in shale areas and 13 new wells in tight gas formations. Most meaningful investments have taken place in the Neuquina Basin, most specifically in unconventionals in the blocks Loma Campana, Aguada Toledo, Rincon del Mangrullo, El Orejano, La Amarga Chica, EFO and only Chachahuen in the conventional side. And then, in Golfo San Jorge basin in Manantiales Behr, Los Perales, Canadon Yatel, Canadon de -- Seco Leon and Barranca Baya. In Neuquina basin, we continued the development of Barrancas, La Ventana, Mesa Verde and Ugarteche. With regards to exploration, in this quarter, we completed 11 exploratory wells, six of them for natural gas and five of them with crude oil targets.

In downstream, CapEx was ARS1.3 billion, which is 21% lower compared to the same period of 2016, and we can highlight the advance of the revamping of the top three units in our Lujan de Cuyo refinery and then some logistics on safety improvements.

Now, let's speak about our financial situation. The strong operating cash flow of ARS24.7 billion, which represents 127% increase vis-a-vis last year, was mainly driven by ARS4.3 billion increase in EBITDA, but also an improvement in working capital, which is mainly due to collections of receivables, including some are rising from the gas plant program, but also lower income tax payments.

For the first time in quite some time, we are showing positive free cash flow. We can see in the graph at the left, our operating cash flow exceeded CapEx in close to ARS10 billion in the period. We expect to give back some of this, as we are still planning to be free cash flow neutral for this year. This cash position of ARS26.2 billion, including the dollar denominated sovereign bonds held in Treasury, is enough asset cover our debt maturities for almost the next two years as our next important debt maturity is only in December 2018. This cash position was strengthened further with the recent $300 million equivalent of peso denominated bonds with a five-year tenure and a 16.5% fixed rate as was placed last week.

Our leverage ratio has come down to 1.87 times net debt to EBITDA, which is inside our two times target for the year. Please note that in this quarter, we have included consolidated figures in the financial amortization debt schedule chart as opposed to what we have been showing in previous quarters, which were not consolidated with subsidiaries. The average interest rate in pesos were 24%, while the average cost of our debt in dollars was 7.8%.

In summary, we are adapting to this new macro environment and sticking to our objective of having an upstream segment which is viable with oil prices up to $50. The agreement with the unions to implement productivity measures for the development of the unconventionals in Neuquen, but also for the development of conventional production in Chubut shows that we are committed with this objective. We know there will be tension around these changes, but we believe these changes are structural modifications that the industry needs, and we are therefore, willing to pay the cost of these tensions. Part of this cost will come in the form of lower production. At this point, the production for the year should be approximately 3% below last year.

There were several positive developments with regards to the price of natural gas. The normalization of wellhead prices started last year is now complemented with our new tariff for transportation and distribution. And additionally, the new gas pricing program for unconventional developments that goes until 2021 provides the clarity needed to continue to accelerate our new natural gas project sanctioning. The economy is looking better. Volumes sold in local market in the last two months have shown an improvement, and we are optimistic that the rest of the year will improve further.

Another highlight of the quarter is the substantial improvement in the development of Vaca Muerta. The economics in Loma Campana are really compelling and provide with plenty of optimism regarding this and elsewhere in Vaca Muerta. Evidently, we are not the only ones seeing this, as the number of joint venture deals in this quarter is clearly a testament of this.

In summary, this was a solid quarter, in line with our expectations, and we are reaffirming our guidance with respect to EBITDA, CapEx and cash flow for the year.

With that, I would like to stop here and answer your questions. Thank you.

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

Hello, good morning. Two questions, if I might. One, just in terms of volume expectations in upstream, with the decline you had this quarter and you indicated that the next quarter might be fairly soft, how are you thinking both this year and as you look out over the next two years, three years, four years with the increased JV activity, which clearly will take some time to have results, but how are you thinking now about the ability to expand volumes over the next several years?

And then, secondly, just in terms of the downstream environment from a competitive and pricing standpoint, Shell is reportedly trying to sell their assets and there is some thoughts certainly expressed by different market participants of that, potentially could change the competitive dynamics. I was wondering how you're seeing that, and how you think prices will trend going forward relative to international prices as you move into this more open environment?

Thank you, Frank. In terms of volumes as I said and posted in your question, clearly 2017 is not going to be a strong year in terms of hydrocarbon production. We are envisioning with some of the conflicts that we went through with the unions that had to do with these structural changes, which again, I think this is a great thing for long term, but also with the negative weather that affected the process of Chubut recently, at this point, we're targeting a 3% decline in hydrocarbon production for the year.

Now, the reason why we have signed these JVs and we might sign new ones, is precisely that we want to accelerate our total production going forward. You have heard me many times saying that I believe that 3% to 5% per year should be our run rate of growth of hydrocarbon production. The only way to do that is to accelerate the development of the shale and the tight, and we're going to be doing that with partners. So we're not there yet to provide any kind of guidance for 2018. I think for the medium term, again, 3% to 5% per year, and a good part of the growth will come from these JVs that we've been announcing clearly.

In terms of the question regarding downstream, the downstream sector in Argentina, although we come under a pretty high market share of north of 55%, continues to be a competitive market. Shell could be going through changes. The same thing regarding what used to be Petrobras. It has been to be rumored that something similar could happen with the oil network. The reality is that we haven't experienced any changes in the competitive dynamics so far. We're prepared to continue to compete. We do not think that any changes here will make things easier to us.

So nothing has changed. We are really happy that in the last few years, we've really closed the pricing gap with the competition and preserved market share, and in this specific quarter actually, increased market share. So I think we're looking really good in terms of competitive position there. And I'm not envisioning any change in the competitive landscape in the short term, regardless of potential changes in the shareholdings of some of our competitors.

Okay, thank you very much.

Bruno Montanari, Morgan Stanley. Please go ahead.

Good morning, everyone. Just two quick questions. First, how has been the acceptance of the new fuel pricing policy across the chain? And as inflation seems not to be included, what happens if there is a spike in inflation, so is there a provision for price hikes outside this quarterly schedule?

And then, Daniel, following up on the question about the JVs in Vice Murat, while we've seen in terms of announcements so far, have those been in line with management expectations, have may exceeded expectations and should we see the same level of intensity in new JVs for the remainder of the year? Thank you very much.

Thank you Bruno. Well, in terms of the price formula or the price agreement. I think there is a general acceptance among all parties to go forward with it. Prices continue to be free from a formal perspective, but I think all participants in the industry have decided to adhere to the pricing mechanism negotiated earlier in the year. And it is true what you're saying that the formula does not include any effects of inflation and this year, this could be headwind to all of the refiners given that it looks like inflation is outpacing the devaluation and probably will continue to for the remainder of the year.

Long term, we think ourselves in dollar terms. So the fact that we have prices that we are keeping them essentially flat with a slight increase in dollar terms for the year, the quarter you should not take into account. The quarter was really strong in terms of pricing in dollars, but because we are comparing this earlier quarter which had been affected by a deval, but the fact that we are keeping prices essentially flat and with a small increase in dollar terms for the year, I think should be a good sign for the medium term although I acknowledge the fact that it could be somehow our challenge this year where we do have inflation in dollar terms.

In terms of the second question regarding JVs. As I told Frank earlier, we've always seen this is an important vector of growth because we don't have the necessary capital to develop all of shale by ourselves. Now at the same time, we have been disciplined in not forming out areas that are not ready to conduct a meaningful pilot project or to start development really soon. So we have been trying to protect our asset base and not to elude early on, that has not changed. What we have seen is a significant increase in the interest of different third parties regarding Vaca Muerta. So if the question is do you have more aligned parties willing to team up with us for Vaca Muerta, the answer is definitely yes. If the question is, are you going to be announcing a few JVs per quarter as we did this quarter, the answer is probably no. We are going to be careful in terms of teaming up with the right partner at the right valuation and only when we are really needing to develop an area. Should you expect more JVs to come this year, probably yes, but not at the same pace.

That makes sense. Thanks a lot Daniel.

Luiz Carvalho, UBS.

Thank you. Hi Daniel, how are you? Just three questions. The first one is regarding the [LCD] production drop that you mentioned about here today, around 3% this year. But at the same time you can't beat the guidance, (inaudible). So I just want to have a little bit more of color, how this will be possible? So that's the first one.

The second, it's mainly when we see the shale prediction, you basically added 14 wells on a quarter-over-quarter basis and when I see your prediction, it basically increased on the gross, we don't have the math, but only by 23,000 barrels a day. So I just want to see how do you (inaudible) productivity of these new wells versus the decline rates from I'll say the more legacy wells, if I can put this way?

And the third question, it's about [old Tibet fracking ban], I talked with Diego yesterday and there was some news on the press talking about Entre Rios which is not a relevant province than the frac and we tried actually to find some data about those, and there are on, I don't know 50, 60 cities which already went to the same direction. And there was one process in (inaudible) at the Supreme Court and we haven't -- I mean we didn't have the final decision yet. So I just want have more color, what are the risks and if this business is, I'm not going to say is a political one, and just to have your view on that. Thank you.

Thank you, Luiz. Good morning. Regarding your first question on production decline and how that's consistent with us sticking to our guidance for cash flow CapEx and EBITDA, the answer is, we will have to make further adjustments to those that were already contemplated in the budget in order to keep our cash flows in line with what we had estimated and what we have guided the market, although the production will come lower. Of course, there always was the easy way out, which is to lower guidance for EBITDA, in line with the guidance for production decline. We're not doing that. We know the challenge is much bigger than it was before, but we're sticking with our guidance. And we think we have the elements try to come up with that level of cash flow that we have expected. And again, being free cash flow neutral for the year, that is the main driver for us for the year.

In terms of our shale production, you're absolutely right. The first quarter was somehow slow in terms of our completed and connected wells and that is why the production growth vis-a-vis the fourth quarter of 2016 was not really relevant. I think we're going to see a nice improvement in the second quarter, because there were a lot of wells that had been drilled, but were not completed or were not connected, okay. And that actually happened during April, and it's actually happening as we speak. So I would not look at that as a red flag or as an early sign of production growth flattening in the shale at all, okay.

And regarding your last question, regarding the fracking ban in Entre Rios, well it's always easy for a province that doesn't have a single barrel of oil production to ban fracking, right. It's probably a nice populist measure, but it doesn't mean anything, okay. What we've seen is a very high degree of consensus regarding the development of shale in Argentina. And you've seen how the government has come up with this price incentive program for natural gas, coming from the unconventional, which is mainly shale. So tight, that goes for next five years.

And you've probably seen in the papers how the governors of the provinces in which there is especially in province of Neuquen where there is an unconventional production, are really committed with having this production continue to grow and continue to develop. As we speak today, the Minister of Production is actually visiting Vaca Muerta today. We've a delegation of Congressmen visiting Vaca Muerta in next few days also. So, I think there is an overwhelming consensus in Argentina that the development of a shale, is a way to grow in order to develop or to grow oil and gas production in Argentina. Of course, it is on us and the rest of the producers to prove every single day that we do this on a safe manner that we care for the environment and we have been doing this and I don't see any reasons why this will change. So it is always something that we keep an eye on of course, but I'm not concerned at all regarding what has just happened in Entre Rios, and I don't think that will be replicated, at least not in provinces that really count for our shale development.

(Operator Instructions) Ricardo Cavanagh, Itau.

My question is, in this -- well, first of all congratulations on the cash flow, because I know that this is a priority and it shows and it has already started to show on the last quarter. So I want to say that.

Secondly, in a context where CapEx is falling and where drilling activity is falling, how do you foresee or how are you able to manage the tension that involves particularly in the South of the country with the unions? And then also, how are you perceiving the agreement that you have signed in by Vaca Muerta in Neuquen with the unions, what are the benefits or how do you see foregoing? Thank you.

Thank you, Ricardo. Let me say first that on the cash flow, this was not just a one-off quarter. Actually April was really strong in terms of operating cash flow as well. So, we really have been pleased with how operating cash flow is evolving. And I think this is will only improve during the course of the year.

Regarding tensions with the unions, every time of course, structural changes like those that are part of the annual collective agreements signed for the unconventionals and also the changes to the collective agreement also signed in for the Province of Chubut last week, we always come with tensions, right. So these are things that we need to deal with on a daily basis. It's probably the most important focus of a good part of our management team and I think at the end of the day, these agreements, what they reflect is that the society, in general, the workers, the union leaders and the politicians understand that over the long term, the only way to have more investment and more production is if we're really sustainable with reality, okay. And reality is that the price of oil is not $100 per barrel, it is $50 per barrel, and that we need to be competitive at those levels.

So I think this really as a very good sign of maturity, okay, of understanding, all of us that we want to grow, and the good news is, we can grow, we've plenty of resources. Now, in order to grow, we need to make sure that we're competitive. And this is a step in the right direction in terms of our competitiveness.

So as I said during the presentation, we're not assuming that this year is going to be free of tension, quite the opposite, but we're willing to deal with it, and I think it's for a good cause, it's for the long-term survival of the industry.

Okay, Daniel. Thank you. Thank you very much.

Anish Kapadia, TPH.

Hi, Daniel. I had a question on your Vaca Muerta acreage, previously YPF had talked about 3 million acres that's prospective for Vaca Muerta, about two-thirds in a liquids window, about a third in the gas window. I was wondering, just given some changes in your acreage and some of the deals that you've done, can you give an update at net acreage position, and then, maybe split that into how much of the acreage you see is core for the Vaca Muerta liquids, how much for the Vaca Muerta gas, and how much for the tight gas?

And then, kind of related to that, I was wondering how much more acreage do you see there being available for you to form down. And one of the other things, given the number of transactions you've announced and potential further transactions, the CapEx guidance, I think you talked about for this year was about [$4 billion] originally. Is that likely to be lower and given that you're also seeing kind of higher efficiencies on the drilling costs? Thank you.

Well, thank you, Anish. The question of the acreage does not have an easy straightforward answer, because it all depends on what is the core acreage that we are really targeting, right. What has not changed is that the liquids window is over 60% and the gas window is more like 40%. What we are envisioning today as the core areas of Vaca Muerta that where we hold acreage and that we are willing to develop with what we know today it's probably more around 2 million acre number than the 3 million acre number. But again, a good part of this is things that we are going to be developing in the real long term, right.

We are not really fixated in here in terms of number of acres. You know very well that what we are more focused is in the quality on determining what is the right acreage that we want to develop over the short-term. And that is why as opposed to the previous years in which we were basically focusing on a couple of very large pilot projects this year, we have significantly increased the number of pilots, but with a limited number of wells per pilot, right. So I said that we are going to be running around 10 pilot projects this year. But these are pilot projects most of them with two, three wells per pilot. This will give us a much better understanding of what is the acreage that we really want to develop going forward.

I think that there's still plenty of acreage for us to farm out. As I said earlier, we do not intend to farm out all of our acreage right now, because the strategy behind the farm outs is to find someone that can provide the necessary capital for the development. So we'd rather do the derisking ourselves and the only farm out when there is some value because there more knowledge of a specific area, right. So, I think we have plenty of things to farm out.

What we don't have this year is a big need farming out in order to reduce our commitments. And that goes to the second part of your question regarding CapEx. The JVs with Shell and with Schlumberger took care of the two areas where we have the largest CapEx commitments for the next couple of years. So we have unloaded this weight on others, and that of course, frees capital either for accelerating growth further or for reducing CapEx.

Most of these commitments were not so much in 2017, were more 2018 and 2019. So they should not have a meaningful impact in CapEx for the year to your question. So we still are targeting $4 billion in total. Given that we were a little bit slow in terms of CapEx in the first quarter, we might be a little bit below the $4 billion mark. But it is still early to say if we are not going to be catching up.

Just to follow up and judging by those comments, if you have a similar activity level next year, you'd probably expect lower CapEx given that you've got a significant amount funded by your partners?

Yes, I think what this is telling us is that for next year, we'll have more capital available to go after other areas because some of the areas that are already in our plants are now being funded by our partners. Yes.

Andre Natal, Credit Suisse.

Thanks for taking the questions. First one would be in regards to the production from unconventional fields. This production increased materially in the quarter if you compare to the previous one at least. So with the addition of these 14 wells, we want to understand a little bit of the highlights behind these production numbers, mainly where it came from? Was it mainly tight gas, are the main fields contributing, if there was an increase in productivity of particular wells? And if you could also comment on what we should expect of the base of the addition of new wells in those unconventional fields going forward, that would be great.

Second question would be in regards to the lifting cost, if you look to the numbers on a quarter-over-quarter basis, we can see that they were they were kind of under control at least, even slightly better than the previous quarter even in an environment of lower devaluation of the business. So we wanted to understand from you how we should interpret this and in regards to -- is there any results already we can see of the actions you're doing to reduce costs to gain efficiency? Is that already a reflection of any positive impact from the negotiations in Neuquen, with the unions? And if you could also comment on the remaining negotiations in other regions, how they're going and what we should expect from there, it would be also great.

In the end, if I still have one more question, I would ask in regards to the working capital reduction we could see this quarter, a good portion of your cash flow generation came from a reduction there, but there was no clear item responsible for this reduction. So we wanted to understand from you, if possible, what are the main causes there and to what extent these numbers are recurring or not? Thank you very much.

Okay, Andre. Well, first, let me make a clarification, I should have made it during the presentation. Regarding the production from unconventional, specifically on the tight, the graph on the presentation includes areas that we're not operating, and therefore, had not been included in similar charts in previous presentations. I'm talking about two areas, (inaudible) two tight gas areas at where we hold a significant stake, but we do not operate. Also they include the acquisition that we made from Petrobras and Pampa of Rio Neuquen and Aguada de la Arena, okay. So what I'm trying to say is, if you're comparing the tight gas production of the graph with previous graphs, I think that there is this change.

Now where is the unconventional production growth coming from? There is no single source that explains all of it. I've to say that the most relevant one in terms of shale is actually El Orejano shale gas. And in tight, it's basically, Rincon del Mangrullo and the Lajas formation in Loma La Lata, okay. So the good thing I believe about production growth in unconventional is that it's not coming from one single source. Now, Diego and Pablo can follow up with you offline with a little bit more detail, if needed.

In terms of the lifting cost, yes, it is under control. It is a challenge for the year, clearly. I've to say that the first quarter is -- the lifting cost is probably going to be below the next few quarters because we still do not have the impact of the wage increases in the first quarter, those actually comes in the second quarter, and continues to be outstanding for the remainder of the year. So depending on how the other macro variables behave very well and the inflation, that will give you the exact number, but you should assume that lifting cost will be somehow above those numbers of the first quarter.

In terms of working capital improvements, the most important contributor to that improvement is the collection of the gas plant subsidies. Remember that last year, in the first half of last year we had not collected a single month of subsidy. In this first quarter, we collected two months, months of May and June of the previous year. And now in April, we should not include the first quarter of course, we collect another two months. So that collection phase is improving and that is in itself the main contributor to the improvement in working capital, but there are others, including also our lower payment of income taxes more than anything else.

Filipe Gouveia, Bradesco.

So, I'll just follow-up into forward-looking question. So first, we saw the 34,000 barrels of daily production in Vaca Muerta reported in the first quarter. If you could possibly give us some sort of guidance for next two year or four years. So I think one of the difficulty we have in forecasting production growth is, with the CapEx you have in mind for the next four years, where do you see the production from Vaca Muerta for the next two years to four years?

And second question is with liability cost of Vaca Muerta as well. We saw first quarter reporting an impressive $8 million per well for [comparison]. So where or how do we model going forward, where should we see this number because it seems to be already a pretty low number, but should we expect any further decrease for this number going forward? Thank you.

Unfortunately, we do not provide guidance in terms of the production for Vaca Muerta going forward. Of course, as you know, a significant deal of our production growth comes from Vaca Muerta and also from tight gas. So if you assume that we are expecting 3% to 5% production growth over the long term every year and that we are doing big efforts to keep our conventional production essentially flat fighting the natural decline rate, you can try to build a number with those. I'm sorry, not to be more precise, but frankly, we've never provided that kind of projection going forward.

In terms of the CapEx per well on Vaca Muerta and the $8 million number, yes we are expecting additional savings. But more importantly, I think what we're doing is, we're moving away from the 1,500 meter lateral wells, which is the one that is actually costing us $8 billion or less, and we're actually trying to drill longer laterals with more frac stages.

So evidently, what we're trying is to improve the economics here, the costs of longer lateral wells with more frac stages, obviously are going to be higher, but the cumulative production should also be higher, and hopefully, that should result in a reduction of the breakeven prices for those wells and improvement of the IRRs.

So what I'm trying to say is, we're not done yet. In terms of efficiencies of CapEx, the steepness of the curve is not the same, okay. It's easier to go from $50 million to $8 billion than it is going from $8 billion to $6 billion, but we're still not satisfied and we continue to identify ways to lower the cost per well.

Okay, thanks very much.

Pavel Molchanov, Raymond James.

Thanks for taking the question. Can I just ask you to clarify a simple point? If, the labor disagreements that you described did not exist hypothetically, would you be reaffirming 0% to 2% production decline for the year?

Thank you, Pavel. First, let me make a clarification. I've actually set minus 3% production for the year, okay so that it is a change in terms of guidance. And the answer to your question is, no, we would clearly have a better production if we didn't have these disagreements, as you said, with the workers and with the unions. We've not broken down exactly what percentage of production is affected by these tensions. And sometimes, it's not easy to come up with a precise number. But clearly, production is being affected and in the absence of those tensions of those disagreements, production for the year would clearly be higher than the one that we're forecasting today.

Okay. So all of the change in production guidance from the original level 0% to 2%, to the new level of 3% decline, all of that change is attributable to labor. Is that right?

No, that is not right. Part of the change also has to with some severe floorings that we had in the Province of Chubut during the month of April and zero to minus 2% also was accounting for some labor disruptions during the year. We already knew when we put together a budget that this would be a difficult year in terms of changes that we want to affect have to do with the labor conditions. But I'd say the most important factor contributing to the additional decline has to do with these tensions, but it's not the only one weather, it's also a factor.

Juan Vazquez, Puente.

I wonder if you could give us some color on whether we should expect significant CapEx on the refineries in order to be in compliance with the sulfur levels on refined products that are required for the next year? And second question is, whether you're foreseeing in the short-term a higher volume of bioethanol and biodiesel in the gasoline and diesel mix from the 12%, 10% currently in place? Thank you.

Yes, with the medium term, we will have to adapt part of our refineries to new rules of lesser sulfur content in gasoline and diesel. That will clearly require CapEx, that is CapEx that will be invested during four-year, five-year period. We don't have an estimate yet, but should have a slight increase in terms of the annual maintenance CapEx if you want that the downstream actually needs. In terms of your second question. We are not expecting any increase in the blend of our buyers at all.

And one last question if I may, regarding the energy business, I mean it's a quite interesting business for us and the question is whether you are playing to be an active player in both thermal and wind energy signed in PPA's contract with Gamesa in addition to supplying your own energy?

Yes, we have participated in the auctions last year and we've been awarded few PPAs. We might decide to participate in new auctions this year. But again, remember what I've said, the areas have YPF Power, will be a standalone subsidiary, hopefully, capitalized with funds coming from our new partners coming in. And that company with its own management will make its own decisions regarding in which auctions to participate or not. But in theory, in general, we do like the idea of having a significant part of the capacity bringing in, being supported with PPAs from Gamesa.

Okay, perfect. Thank you so much.

Okay. At this time, I see we've no further questions. I'd like to turn the call over to Diego for closing comments.

Well, this is Daniel. Thank you very much everybody for participating. As usual, myself, Diego, Pablo, we're all available for follow-up questions. Have a great day.

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