YPF SA (YPF) 2018 Q1 法說會逐字稿

Welcome to the Q1 2018 YPF Sociedad Anónima Earnings Conference Call.

My name is Richard and I'll be your operator for today's call.

(Operator Instructions)

I will now turn the call over to Mr. Diego Celaá.

Mr. Celaá, you may begin.

Great.

Thank you, Richard.

Good morning, ladies and gentlemen.

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

I would like to thank you for joining the YPF First Quarter 2018 Earnings Webcast.

The presentation will be conducted by our CEO, Mr. Daniel Gonzalez; our VP of Strategy and Business Development, Mr. Sergio Giorgi; and myself.

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'll be making forward-looking statements, so we ask you to carefully review the cautionary statement on Slide 2. Our agenda today will include the highlights of the quarter, the review of operations, the first quarter financial results, a brief description of our financial situation and a brief summary to conclude.

Also, our financial statement figures are stated in Argentine pesos in accordance with International Financial Reporting Standards, IFRS.

In addition, certain figures have been adjusted to reflect additional information to let you better understand our key financial operating results.

Please, Daniel, go ahead.

Well, thank you, Diego.

Good morning, everybody.

First, let me introduce you all to Sergio Giorgi, who's here with Diego and me today and has taken on the responsibility for Investor Relations in addition to his role of VP for business development.

Sergio reports directly to me, has joined us 1.5 years ago from Total, where he held different positions in different parts of the world.

He has a solid technical and business background that I am sure will be additive to what we have been doing in Investor Relations so far.

Diego will continue with his job as IR Manager, where he is doing a great job, but now reporting to Sergio.

Let me say a few words about this quarter before Sergio and Diego take you through all the details.

This was a strong quarter in almost any aspect.

Revenues were up by 33% in pesos on very strong demand of gasoline and diesel and a recovery of prices.

EBITDA was up by 45%, even before accounting for the nonrecurring gain derived from our dilution in YPF Energía Eléctrica, our power generation subsidiary.

And although operating cash flow was somehow below last year's, again, we had a positive free cash flow, and leverage ratio was, therefore, down to less than 1.9x.

Hydrocarbon production was 4% below last year, but in line with our budget and slightly above the last quarter of 2017.

Sergio will walk you through some of the good things we are doing in the shale to better understand where the Upstream is going to.

So please, Sergio, go ahead and I will resume at the end of the presentation and sit down for questions.

Good morning, everybody.

And thanks, Daniel, for the introduction.

I would just like to point out that I'm very happy to join this team, and I'm sure we'll have several opportunities in the future to meet each other and have fruitful conversations.

I have been working in the oil and gas industry for over 25 years, different responsibilities, operations, exploration, development, offshore, onshore, unconventionals, business development and strategy, and I hope this will help me bring interesting perspective to the messages we'll be sharing with you.

Now we'll continue with the next point in the agenda, the review of our operations.

So let me start sharing with you the slide on safety.

As you can see in the chart, our injury frequency rate in the first quarter 2018 is in the low range of the last 10 years, showing that all the actions that we have been taking over the last years regarding safety measures are paying off.

We will continue updating this information in our future presentations.

Crude oil production in the first quarter decreased 2.7% to 227,600 barrels of oil per day.

As explained in previous quarters, this decline reflects the reduction in activity of the last year and the natural decline of some mature fields.

Natural Gas production show a decrease of 3.5%.

We produced 43.7 million cubic meters per day, while NGL production decreased by 14%, producing 47,000 barrels per day.

As a result, total hydrocarbon production dropped 4.2% vis-à-vis same quarter of 2017 to 549,600 barrels of oil per day.

Putting this into perspective, it is important though to highlight, as Daniel mentioned, that total production has increased 1% to the last quarter 2017, reaffirming that production has stabilized in line with our expectations.

Now let me provide an update on our shale gas and shale oil operations.

Net shale production of the quarter reached 49,600 BOE per day and gross operating shale production was 90,700 BOE per day.

It is worth mentioning that if we add to that the 40 million cubic meters per day of net tight gas production plus the 7,400 barrels of NGL, then we have a total of 145,100 BOE of net unconventional production.

In terms of our activity as operator, during the first quarter of the year, we connected a total of 14 new shale wells taking the total to 621 shale wells in production.

In relation to costs in our shale operations, in this quarter, we are starting to show the development cost and OpEx for both our main development areas, Loma Campana in the oil window and El Orejano in the gas window.

As you can see in the top right part of the slide, the development cost in Loma Campana continued coming down and is now below $12 per BOE.

Similarly, the operating expenses show a significant improvement coming down to less than $7 per BOE from more than $16 in 2015.

In El Orejano, our shale gas development, development cost is below $1 per million BTU and operating expenses are also below $1 per million BTU.

As we mentioned in past quarters, the development of the shale acreage is one of the pillars for growth in production in our next 5-year targets.

So we want to share with you the rest of the improvements we have in shale.

First of all, we continue with the reduction of development and lifting cost in growth areas and preparing new developments as we showed in the previous slide.

In Loma Campana, our main development in Vaca Muerta, we have successfully finished the drilling of the first 3,200-meter long lateral well, this is 10,500 feet.

And we are expecting to complete this by the second quarter of this year.

We have put this map in the presentation to show all the different Vaca Muerta activity that we are doing.

In green, the 2 projects under full development, which are Loma Campana and El Orejano, but we're expecting to have 2 to 3 pilots shift into full development this year.

In blue, we show the pilots we operate, including those in which we have partners such as Statoil, Petronas, Schlumberger.

And in light blue, you can see the pilots where our partner operate us such in Aguada Pichana, Lindero Atravesado and La Calera.

In terms of activity, it is important mentioning that this year, we'll be deploying $650 million in our operated and non-operated pilots.

Additionally, we are currently operating 12 drilling rigs and 8 workover rigs in Vaca Muerta.

Finally, all the improvements in cost and work efficiencies mentioned above, together with our knowledge of Vaca Muerta and the high-quality acreage position we hold, continue making YPF a partner of choice for international players.

Going now to Downstream performance.

During the quarter, the volume of crude oil processed in our refineries was almost 291,000 barrels of oil per day, remaining essentially flat compared with the first quarter of 2017.

Regarding domestic market, total volumes decreased by 1%, driven by a combination of lower fuel oil demand, which by the way is one of our products with lower margin, and an increase in 5.9% and 4.4% for gasoline and diesel, respectively.

Now, to provide more detail about fuel demand on this slide, Slide 11, we can see on the left-hand side how gasoline sales evolved every month compared with the previous 2 years, and on the right-hand side, the same for diesel oil.

Gasoline demand, in the first 3 months of the year, is showing the same trend than in 2017 and in 2016, with a total of 5.9% increase as mentioned in previous slides.

Diesel demand also show a good performance, increasing 4.4% in the quarter.

Market share for both products continue to be strong and slightly above 2017, with 56% in gasoline and 57.5% in diesel.

Market share for our premium products, Infinia gasoline and Infinia diesel, were 62% and 60%, respectively.

With regards to our Gas & Power business, clearly, the highlight for this quarter is the closing of the agreement with General Electric to capitalize YPF Energía Eléctrica, our power generation subsidiary, in order to fund the growth of the company.

YPF participation was diluted to 75% and GE acquired a 25% participation in the business for a total gas contribution of $275 million, plus a contingent payment of $35 million.

With this transaction, we have now a market reference with an implied value of our power generation business in the $1.1 billion to $1.2 billion area.

We go to CapEx.

During the first quarter of 2018, the total CapEx for the company amounted ARS 14.9 billion, 24.5% above the level of first quarter 2017, but 1% lower if we measure it in dollars.

Upstream CapEx amounted to ARS 13 billion, an increase of 37.9% compared to first quarter 2017.

This activity was mainly focused in drilling and workover, which represent the 71% of the Upstream CapEx, followed by facilities with an 18% share of the total, and exploration and other activities representing 11% of the Upstream CapEx.

It is worth noting that exploratory investment was 60% higher than in first quarter 2017.

During the quarter, we drilled and put into production a total of 96 new wells, including 14 new shale wells and another 12 wells in tight gas formation.

Most meaningful investments have taken place in the Neuquén Basin, more specifically in unconventionals in all the shale and tight gas blocks where we have activity.

In conventional areas, Chachahuen and Mendoza was the most relevant in the basin.

We continue our drilling activity in all our producing basins, Golfo San Jorge, [Neuquina] and Austral basins.

With regards to exploration in the first quarter, we completed 5 exploration wells, all of them targeting oil formations.

In Downstream, CapEx was ARS 1.3 billion, which is almost 2% lower compared to the previous year.

Activity was focused in refining, which represented 48% of the Downstream CapEx, followed by logistics with a 29% share of the total, then marketing representing 12% and finally, chemicals with 11%.

Bear in mind that due to the deconsolidation of our subsidiary, YPF Energía Eléctrica, the CapEx of that business is no longer showed in the CapEx figures of YPF Sociedad Anónima.

With this, I would like to ask Diego to continue with the first quarter financial results.

Okay.

Thank you, Sergio.

Moving into our financial results.

In this slide, we show our main financial figures, measured in U.S. dollars.

In this first quarter, the local currency depreciated by 25.8% when compared with the same quarter of 2017.

Revenues were up by 5.8%, driven by a strong demand and a higher prices in dollars for our main products, gasoline and diesel.

Exports increased as well as price were up in line with the recovery of international prices, coupled with higher exported volumes.

On the other hand, price for natural gas was down, in average, 3.3%, as the former Plan Gas expired in December 2017.

Cash cost expressed in U.S. dollar increased by approximately 5.2%, lifting cost decreased by 1.9% in dollars in absolute terms.

Although, it was 1.6% up on a BOE basis due to the reduction in total production.

Royalties, which is the only cost component fully denominated in dollars, were up close to 12%, as domestic crude oil prices increased in line with international benchmark.

Crude purchases were up 22% as our own production was down while we process in our refineries similar levels of crude oil than a year ago.

As a result, recurring adjusted EBITDA was up by 15.8% in dollars.

Finally, higher depreciation expense contributed to the 5.4% reduction in recurring operating income.

Let's switch back to Argentine pesos to go over a more detailed analysis of the quarter.

Recurring operating income has come up by 19% compared with the first quarter of 2017.

This was mainly driven by the better operating results obtained in the Upstream business segment, which show an increase of ARS 1.2 billion vis-à-vis a year ago on higher crude oil prices, which offset the lower production of the period.

The Downstream segment results show a decrease of ARS 355 million or 8.1%.

This was mainly driven by 49% increase in crude oil purchases.

Bear in mind that we are comparing with a very strong first quarter of 2017 that show a Downstream EBITDA margin of 13.4%, the highest quarterly margin in this segment for the last 5 years.

The Gas & Power segment also show a reduction of ARS 287 million.

Here, it is worth mentioning that from Q1 2018, YPF Energía Eléctrica is no longer consolidated in the business with segment results.

In Q1 2017, this company has contributed with ARS 167 million of operating income.

In order to better understand the reasons behind the increase of ARS 863 million in recurring operating income, we've broken it down into more detail.

Revenues grew by ARS 18.8 billion or 33%, resulting from ARS 6.5 billion increase in diesel sales due to higher prices in pesos of 30% and an increase in sales volumes of 4.4%.

ARS 5.4 billion increase in gasoline sales, with higher prices in pesos of 30%, an increase in sales volumes of 5.9%.

ARS 1.5 billion increase in natural gas, due to prices which were 25.1% higher in pesos, partially offset by a decrease in sales volumes of 8.7%.

ARS 1.1 billion increase in natural gas sales in the retail segment, mainly explained by the consolidation with our subsidiary, Metrogas, which registered a considerable increase in prices of 91% as a result of the restructuring of tariff and flat volumes.

Other products sold in the domestic market recorded an increase of ARS 2.9 billion, highlighting the strong performance in LPG, asphalts, petrochemical products, jet fuel and lubes, all of them also with higher prices in pesos.

Higher export of ARS 2.9 billion on higher volumes and prices.

And finally, fuel oil decreased by ARS 1.3 billion, due to the reduction in sales volumes of almost 99 -- 97% to the power generation sector, as it has more natural gas available to displace fuel oil.

Cost of sales, other than depreciation, increased ARS 5.2 billion.

The only cost component, which is fully dollarized are the royalties.

The factors explaining the increase in cost were lifting cost, which was up by ARS 2.3 billion or 23%; royalties, which are paid to the provinces on wellhead prices, which are $13, presented an increase of ARS 1.6 billion or 41%, driven by higher crude oil prices in pesos of 54.4%; and the 25.8% devaluation between quarters, partially offset by the lower production of this last period.

Refining cost, which was up by ARS 365 million or 16% higher and transportation expenses, which increased ARS 352 million or 18%.

Depreciation was up by 60% or ARS 6.8 billion, due to an increase in the value of our assets, which are carried in dollars, and the increase in the rate of depreciation, due to the increased net reserve of crude oil and natural gas recorded over the third and fourth quarter of 2017 as a result of a reduction in prices in the domestic market observed last year.

Purchases of crude oil and other products for sale increased by ARS 5.5 billion.

This increase is mainly explained by higher fuel imports of ARS 1.5 billion, especially those of premium gasoline to supply increased demand, and a ARS 1.3 billion increase in crude oil purchases from third parties.

Also, higher purchases of natural gas from other producers for our retail segment increased by ARS 623 million and higher purchases of grains due to the bartering in our agri business that show a ARS 530 million increase.

SG&A was up by 32.7% in line with inflation and with revenue increase as a consequence of higher transportation expenses and salary increases.

Finally, explorations expenses decreased by almost ARS 270 million, all for the 45.5% on lower and productive exploratory wells.

As previously mentioned in Q1 2018, a profit of ARS 12 billion was recorded as a result of the revaluation of YPF S.A. investment in YPF Energía Eléctrica, due to the capitalization agreement of YPF Energía Eléctrica between YPF and the subsidiary of GE Financial Services.

If we exclude this effect, the analysis for the increase of ARS 1.3 billion in other operating results arises from the ARS 1.2 billion gain resulted for -- from the agreement for the changes of the shares in Aguada Pichana and Aguada de Castro blocks.

Entering now to our Upstream business segment, operating income increased by almost 139% against Q1 2017 to reach approximately ARS 2.1 billion.

Revenues increased by 39.3%, reaching ARS 38.7 billion driven by the following combination of factors: Crude oil revenues reached ARS 25.9 billion, representing an increase of ARS 9 billion or 53.1%.

The average realization price denominated in dollars increased 22.8% to $65.1 per barrel.

Volumes transferred to our Downstream business segment remain essentially flat, while those sold to third parties increased by 21.6%.

And natural gas revenues were ARS 13.1 billion, an increase of ARS 2.1 billion or 19.3%.

The average realization price in the quarter was $4.84 per million BTU, and 3.3% lower than a year ago mainly due to the finalization of the former gas plan incentive in December 2017.

However, volumes decreased by 8.7%, as mentioned before.

This decrease is explained by a 2.3% reduction in volumes delivered and the balance due to an accounting record in Q1 2017 to invoice 242 million cubic meters of natural gas that was injected in previous quarters but was pending nomination.

On the cost side, these were up ARS 10.8 billion, a 41% increase compared to Q1 2017, mainly due to a ARS 6.4 billion increase in depreciations, ARS 2.3 billion increase in items related to lifting cost, ARS 1.6 billion increase in royalties and ARS 0.5 billion increase in purchases.

Lifting cost on a per-barrel-equivalent basis increased by 1.6% compared with the first quarter of 2017 to $12.5 given the production decline.

(inaudible) resulted in a reduction in the lifting cost per barrel.

Total cash cost per BOE reached $21.2, including royalties and other taxes of $6.5 per BOE.

Exploration expenses decreased by 45.5% or ARS 270 million, as we also described in the previous slide.

Finally, and as previously mentioned, the results of this segment also include an income of ARS 1.2 billion related to the agreement for the changes in the share of Aguada Pichana and Aguada de Castro blocks.

The Downstream business reported an operating income of ARS 4 billion and 8% lower than ARS 4.4 billion operating income reported in the same quarter of 2017.

Revenues were up by ARS 16.2 billion or 36.6%.

As explained before, diesel sales were up by ARS 6.5 billion on 30% higher prices in pesos and 4.4% increase in volumes.

Again, it is worth highlighting that the increase of 26% sales volumes of our premium product, Infinia diesel.

Gasoline sales were up by ARS 5.4 billion on 30.4% in higher prices in pesos and a 6% increase in volumes.

Sales volumes of Infinia, which is our main premium gasoline, increased by 10%.

Fuel oil sales dropped by ARS 1.3 billion on lower volumes and lower prices, as we explained before.

In addition, the domestic sales of the rest of the refined products increased by ARS 2.8 billion with higher sales of LPG, asphalt, petrochemicals, and other refined products.

Finally, sales in the export market increased by 62.5% or ARS 2.9 billion, due to good volumes and higher prices of jet fuel, LPG, and petrochemical products.

Cost increased by 42.5% or ARS 15.3 billion compared to the same period in 2017, as a result of higher crude oil purchases of ARS 10 billion or 51.3% higher prices in pesos, partially offset by 6.8% lower volumes purchased to third parties.

Higher imports of ARS 1.5 billion, of which ARS 1.1 billion are related to premium gasoline imports, as explained before, while higher import prices of diesel and jet fuel also contributed in the said increase.

Higher purchases of grains in our agricultural business of ARS 530 million, higher depreciation of ARS 430 million and finally, ARS 365 million increase in items related to refining costs.

Now let's move to our financial situation.

Operating cash flow remains strong in the quarter, reaching ARS 21.4 billion.

However, and despite the ARS 7.7 billion increase in recurring adjusted EBITDA, this cash generation represent a 13% year-over-year decrease, due to an increase in working capital in the quarter on higher receivables and lower collection of the gas plant subsidies among others.

Nevertheless, these operating cash flow more than exceeded the ARS 16 billion CapEx of the period, continuing with the diesel deleverage process that is part of our 5-year plan.

This cash generation, including the dollar-denominated sovereign bonds still held in treasury, results in a strong cash position of ARS 42.3 billion at the end of the first quarter of 2018.

The previously explained cash position is enough to cover our debt maturities of this year, since our next important debt maturity of December 2018 has been reduced by the end of 2017 by the repurchase of $409 million of the bonds, Series 26.

Our leverage ratio came down to 1.89x, net debt to recurring adjusted EBITDA within our 2x target for the year and the average life of the debt has been extended to 6.3 years.

The average interest rate in pesos was 24.8%, while the average cost of our debt in dollars was 7.4%.

With this, I would like to ask Daniel to make our final remarks before opening it up the questions -- for questions.

Thank you, Diego.

Well, first let me tell you that the results of the quarter slightly exceeded our plan for this quarter and actually give us confidence to reaffirm our guidance to increase EBITDA by 10% this year in dollar terms and to experience a production decline in the 2% area.

Demand is still strong.

Actually, April figures reaffirmed the good performance of the quarter.

And our market share remains pretty much unchanged.

During the quarter, we have been catching up with fuel price increases to reflect the increase in international crude oil prices and also to reflect the devaluation of the peso, which was especially steep this quarter.

However, the recent spike in the FX would have caused a 10% increase that the industry, in agreement with the government, has decided to postpone in order to avoid a negative effect in our client base and the overall economic activity.

We agreed to make up for these lower prices during the next 2 months.

During the second half of the year, that's where we're going to be making the recovery, and if this were insufficient, the government has agreed to compensate the oil refining industry for such shortfall.

Our financial situation is strong, and we have a -- had raised substantially all of our refinancing needs of the year in December, so we continue to enjoy a solid cash position, and additionally, we have positive free cash flow.

Production of oil and gas that had been weaker than expected last year stabilized and was in line with our budget.

Actually, April was above budget.

Production growth in the next few years will come from the shale, as we have repeatedly said, and the results that we shared with you today proved that this development can be profitable if we replicate in the rest of Vaca Muerta, what we have done in Loma Campana and El Orejano.

We expect to accelerate the shale development, and that is why we are engaged in so many pilot projects, as we showed you today.

And finally, in line with our vision to make YPF a modern energy company, we have strengthened the pipeline of projects in our power generation vehicle and continue to see plenty of additional growth ahead there.

So with this, I would like to finalize our presentation and open it up for questions for the 3 of us.

Thank you.

(Operator Instructions) Our first question on the line comes from Mr. Frank McGann from Bank of America.

Just -- I was wondering, in terms of the Vaca Muerta developments and tight gas developments, as you look forward for the rest of this year and into next year, any specific areas that you think that you will be able to -- that will be the key drivers of the growth that you're talking about?

And secondly, just in terms of cost, I was wondering what types of additional cost improvements you think you might be able to achieve via perhaps, a little bit more expanded union agreements or new service -- competition or service supplies that -- and infrastructure that could be helping to reduce costs, both over the near term and longer term?

Okay.

I will try to answer to that question.

So first of all, all our growth in the Vaca Muerta in the tight is located in the Neuquina Basin, as you know.

And what we are focusing now is to accelerate the pilots that we have, so we can, this year, arrive to FID of 2 to 3 new developments.

In terms of -- this is shale.

And in shale, we like to have optionality, so we are focused in both in gas and oil, and we have this optionality and we like it.

So we will be able to focus on the most profitable parts.

As I say before, in terms of tight gas, we continue our developments in Estación Fernández Oro and Rio Neuquén.

We're also in Sierra Barrosa, which is our Loma La Lata legacy asset.

And see this as our growth area in terms of unconventional shale and tight.

In terms of cost, as we said, we are continuously reducing our development cost, and this comes from different, I would say, ways.

One of them is in terms of efficiency, in terms of operations.

We are drilling longer laterals, and this is reducing our costs.

Productivity is increasing, so this is a good combination.

And this is on the technical part.

And then, on the, I would say, contractually efficiency part, we are seeing reductions in our new contracts, and we'll continue working with unions in order to have smooth operations in Vaca Muerta.

So all in all, we have achieved so far cost reductions.

We believe we will continue this path.

Let me add one thing to Sergio's comments and that is the positive effect in cost of the devaluation of the peso, right?

Remember that the OpEx is at least 2/3 or more peso-denominated.

So in dollar terms, that should -- the devaluation that we just experienced should help continue drive down the cost in addition to the real cost reductions and efficiency improvements that Sergio laid out.

(Operator Instructions) Our next question on the line comes from Mr. Luiz Carvalho from UBS.

First, Daniel, congrats on the appointment.

And, Sergio, also, good luck in the new position.

I have basically 2 questions here.

Daniel, starting from a very top-down strategic level, I'd like to know now as the CEO of the company, what are your main goals, if I can (inaudible), let's say, 3 to 5 years?

And is there any strategy, I wouldn't say change, but adjustment that you would like to make?

And what are the main challenges you see in this new role?

Second question, I mean, as you've just mentioned in the formal remarks, talking about here to the recent Argentina development and the government inflationary concerns.

Minister Aranguren just mentioned about the agreement and the postponement of the price increase.

How can we see the -- say, really the, how can I say, the price adjustments looking forward?

My question is, really, okay, that you postpone for additional 2 months, but let's say that Argentina situation do not get better -- I mean, will YPF be able to actually to pass through the, I'd say, the price policy to the funnel -- to the domestic consumer and on a monthly basis?

And so, one.

And second, if I may ask, I'd really appreciate if we have more visibility about the price adjustments in the website or official communication from the company or something like this.

Okay.

Good morning, Luiz.

Thank you for the comments and the questions.

Let me say that there is no change in strategy at all coming from my appointment.

I've been with the company for 6 years, and I was clearly part of the team that had put together the strategy.

So that will not change.

What we are doing, of course, and we actually committed to you all is update our strategic plan every year.

We're in the process of doing that.

And around the beginning of the last quarter of the year or the end of the third quarter of this year, we are going to be laying out the changes, which should be on a course-of-business kind of changes, not more than that.

Main goals, of course, is to grow what we have seen from a production perspective in the last 1.5 years and from a reserves perspective is that the Upstream business has been stagnant.

And what we have shown in the 5-year plan is that we believe that we have the resources in order to change that and to see meaningful growth going forward.

I am very optimistic regarding this.

Everything that we have said today and what we are doing is aligned with this.

Because as we said, all of that growth will come from unconventional, especially from the shale, and the results keep getting better.

Quarter after quarter, both from a productivity as well as from a cost perspective, they keep getting better and better.

So growing, and growing in Upstream specifically is part of the goal.

Downstream, as you know, it's very aligned or dependent on the local economy.

Fortunately, the local economy has been doing good.

And specifically, our volumes have been doing excellent, and we believe that we have the platform in order to replicate this year after year.

So very confident about that also.

So that has to do with growth.

And then of course, what we need is to improve efficiency or reduce costs, okay?

What we are seeing is that our costs are increasing below our revenue increase.

That's a good thing, but starting from a high base, okay?

And it's a big challenge because a good part of our operations are result from very old, mature, legacy assets that are more difficult to reduce costs, especially, when you see that production decline.

So because of the fixed component of the costs, it's usually difficult to dilute that cost basis with -- when your volumes are coming down.

That is different with the shale, okay?

Because we don't have any of those legacy issues to deal with, okay?

And we have been building everything from scratch, and I think the numbers are actually showing that we are extremely efficient and we are comparable to many of the shale plays in the U.S. Actually, we do benchmarking with our partners and what we are seeing, specifically in Loma Campana, has very little to look up for in other parts of the world.

So I think we are doing well.

And as our production and reserves are more shale related and less legacy related, I think that those -- the combined numbers are going to be looking much better.

It doesn't mean that we are not putting a lot of effort in fighting decline, in increasing, especially productivity of all our secondary recovery efforts.

And, which we haven't said, but we will be saying more about this year, launching massively our tertiary recovery, enhanced oil recovery, which we have been piloting for a couple of years now, a few years, I would say.

And now, we are actually moving to a new phase of full development there also.

So that has to do with the production growth and the sales growth and as I said, efficiency.

We will continue to be active in terms of our portfolio management, meaning getting out of those fields or assets where we do not think that we are competitive.

And hopefully, you're going to be hearing some news soon about that.

It's nothing huge, but step-by-step, we are going in that direction.

And also, opportunistically, if we find the right value, more acreage to acquire, or more assets for us to operate, we are absolutely willing to do that.

I think that we have a very good track record in terms of our acquisition discipline.

Where we have found assets to be expensive, we have not bought in.

And we have acquired assets at a very good valuation in the last 5 years.

So I do expect that to continue.

Financial discipline, we have talked about, and I think, numbers speak for themselves.

That will continue to be a key aspect of managing this company going forward, a key aspect of our strategy, I should say.

And lastly, not because it's less important, but it has to do with safety and environmental issues.

The safety of our people and our assets is key to us.

Sergio has shown that in 2017, actually, we had the lowest or the best registered index of accidents since we have record, okay?

So that's amazing.

But we're still below our objective.

So that is also an integral part of our strategy going forward, making sure that what we do, we do it safely and we do it on a sustainable way.

So that's on strategy.

On the agreement, specifically, and how we'll continue, basically what the agreement says is that we are postponing the price increases for a couple of months and that we intend to catch up with that postponement in the second half of the year.

How are we going to be doing that?

I think it is likely that we are going to be doing price increases on a monthly basis as we have been doing the first part of this year, and hopefully, catching up on what we are not doing today.

The good news, however, the agreement is that the government is reaffirming their decision to have a free market, which was actually put in place in the last quarter of last year.

And so much they are reaffirming that, that they are actually committing to finding ways to compensate or to make up for any price increases that, for market reasons, we might not be able to do this year.

So at the end of the day, this seems to be just a postponement of increases.

And why we are doing this?

Because we all need the country to do well, the government to do well, okay?

And we're in a good financial situation, so we can actually help in that respect.

And when I say, we, it's not YPF.

I'm talking about the refining industry as a whole in Argentina.

This is a competitive market.

We do command more than 50% of the share of that market, but we are not the only one.

We have 3 or 4 other refiners.

New people have entered the market.

So it's an active market, and it seems that we are all aligned in terms of helping out in this -- the government in this moment and in a way, helping out ourselves and our client base because, frankly, if we have decided just to increase prices by 10% or 12% overnight, I think that it would have a very negative effect on demand.

And one thing we are very happy about is how strong demand has been during the last 12 months and we expect that to continue to be strong in the future.

Lastly, regarding more visibility on prices.

We will take your suggestion.

We will work with Sergio, Diego and the team to see how we can come up with more visibility in terms of how we have defined prices.

Always keeping some of that information close to our chest because, as I said, this is a competitive market.

We always have threat of new entrants and threat of imports, and we don't intend to make the lives of those people easier.

Pretty clear.

If I may, just one follow-up regarding the cost.

And I know that's probably for Sergio, but from the initial labor agreement signed with the unions, I mean so far, what are these 2 improvements that we can see from a cost perspective?

I mean, are all of them being implemented?

Or can we have further, how can I say, achievements in terms of cost reduction from that end?

I think if you are referring to the cost reduction coming from some of the productivity provisions that we included in last year's agreement, I think those are coming slowly, okay?

We have some of that, which are reflected in the reduction of costs that we have been showing.

But as we have been saying, this agreement was not so much about the short-term gains of labor cost reduction, but about a change in trend and having all of our labor force focused on productivity, okay, which is going to be positive to us and to them as well, right?

Because that is the only way that we can assure sustainable growth for the industry.

So, I'd say, labor relations are in a very good moment.

Labor -- or union leaders are being constructive.

You know that we have an agreement for labor -- for salary increases that was put in place in the last month that provides for a 15% increase in salaries in 2 installments, April and October, and of course, with a revision at the end of the year based in inflation.

So if inflation is higher than this 15%, we might have to chip in with some additional increase.

But the good news here, again, is that we're always talking about salaries moving in line with inflation.

So if we can really be more efficient, more productive, that means that labor cost in real terms will come down, okay?

Our next question on the line comes from Regis Cardoso from Crédit Suisse.

I really would like to take this opportunity to understand better the downstream dynamics, especially now that the new agreement is in place.

So can you comment whether there will be any sort of impact should the upstream side of the value chain, as well?

And if there is not, how will refiners cope with an eventual increase in crude prices and a devaluation of FX, let's say, in case that happens?

Because I know it's only 2 months, but things can get ugly pretty fast, right?

It's a margins business.

So if you can comment on that, I'd very much appreciate.

Thank you, Regis.

That's a very good question.

First, the agreement is just between the refiners.

So initially, it doesn't involve the upstream operators, which doesn't mean that at some point, individually, we, the refiners, might try to get better prices for the crude that we buy locally, okay?

But that's normal supply and demand dynamics.

So that, I'm not concerned with.

The other thing, which is relevant to have in mind is that, as Diego said during the presentation, this quarter was one of the best quarters in terms of margin of our Downstream segment.

Actually, the best in the last 5 years, if I don't recall that wrong.

So we are starting from a good base.

At the end of the day, you are absolutely right, okay?

It's not sustainable over the long term.

That's why the agreement was put together as a short-term agreement, okay, by which any shortfalls that we have during the course of this 2-month period will be recovered, okay?

So I think, everybody understands that what you're saying is absolutely right.

At some point, we need to make sure that we have the appropriate margins in the Downstream segment, otherwise, we would not be able to make the investments that the segment needs.

So give us the benefit of the doubt.

I think in the last few years, especially last few months, we have shown pretty clearly, how we have been adjusting our prices to what was going on with crude oil prices and with the FX, generally, and the fact that we are putting this in sort of a parenthesis for a couple of months, doesn't mean that we are changing the strategy.

So, as I said, give us the benefit of the doubt.

We are very focused on profitability at a company level and at a Downstream segment level also.

Very clear.

If I can just make a follow-up.

Can you comment a little on what is the position right now in terms of your positioning relative to import parity prices in Argentina?

And if you could also compare or describe to us how has the competition been in these few months so far that you have had free prices.

I mean, have trading companies organized themselves and in spite of bringing in products, has that pressured market share?

Has it not?

Logistic barriers were actually higher than you thought?

I mean, how are you seeing the downstream pricing dynamics?

Well, the second part of your question, yes, we have seen more activity from traders, clearly.

That's why I was referring to a competitive market, the one that we are in.

Having said that, our market share was actually up.

If you look at -- there is one slide in the presentation that shows the market share of the quarter, vis-à-vis previous 2 years, and we are almost 1% up, vis-a-vis 2017, both in diesel and in gasoline.

A little bit below 1%.

But again, very, very strong.

So we have a platform that we believe puts us in a very competitive position to fight traders or fight the rest of our competitors locally.

Our objective is not market share, our objective is profitability and that's why we have always been very careful in not gaining market share at the expense of prices.

We've never done that, not at least in the last 5, 6 years since I'm around.

And we don't expect that to change in the future.

But we acknowledge that it is a more competitive market than before.

Regarding your first part of the question on import parity and where we stand, we are approximately 10% to 12% below import parity, okay?

Our next question on the line comes from Muhammed Ghulam from Raymond James.

My first question is around currency.

Can you tell us what effect the falling peso is having on your business and how management is dealing with it?

Hi, Muhammed.

Sure.

Well, as long as we can over the medium term continue to pass-through the effects of the FX to prices, the FX has a -- the FX devaluation has a positive effect on our numbers because we have a good part of our cost structure, which is denominated in pesos, okay?

And that's actually part of what you have seen with the numbers of the first quarter of the year.

There's a portion of our prices which are fully dollar-denominated, like gas -- natural gas sales, like exports, like sales of petrochemical products or jet fuel and others.

And there are other parts of the business, like gasoline or diesel, which are very highly correlated with the dollar over the medium and long term.

But as we have just discussed, over the short term, we might have some lag in terms of that pass-through, okay?

But in general terms, the devaluation is a good thing for the company.

From a pure financial perspective, what I can tell you is that we have more debt denominated in pesos than cash denominated in pesos.

That means that, also, we benefit from a devaluation of the currency.

One other one on labor issues.

In the past, you've had labor issues.

Anything going on right now?

Or are those -- have those mostly been addressed at this point?

Well, that is a dynamic situation.

It's very difficult to say that those are behind us.

Clearly, we are not having any meaningful issues today, but that doesn't mean that we might not have those in the future.

It's something that we manage on a daily basis.

It does take a portion of my time and my priorities.

And we have a great team of people dealing with that.

And as I said in one of the previous questions, we have found that the union leaders have been very constructive.

So from time to time, we will have issues.

We don't expect anything extraordinary or anything significant that can derail our plans.

Our next question on the line comes from [Florencia Torres] from [TPCS].

Just a quick question regarding the Upstream business, regarding production.

I remember that in the earnings call of 2017, you mentioned that production is expected to decline around 2% or 3%.

After the positive trend quarter-over-quarter basis shown in this quarter, what is your target or guidance regarding production?

[Florencia], thank you.

Well, production actually as you mentioned, quarter-over-quarter, important this time is that in the first quarter, we've seen production just 1% above the production of last quarter of last year.

So that is actually positive because that is reaffirming that production has stabilized and we continue having this outlook of production for the rest of the year seeing that in the second half of the year, we will see production again coming up.

Guidance for this year, now we're in the minus 2x area.

So it's in line with what we have already said in the past.

Our next question on the line comes from Andrés Cardona from Citi.

Just one quick question.

Is there any impact to the Plan Gas receivable agreement announced earlier this year because of the revaluation?

Or is it fully dollarized?

Just want to confirm that.

Thank you, Andrés.

No.

No effect at all.

That agreement is fully dollarized.

So we are going to be collecting that in 30 installments starting next year.

And all of those installments are fully dollar-based.

Our final question comes from [Camila Ramirez] from (inaudible).

Regarding the agreement, you're going to wait 2 months for -- to do price hikes.

I'd like to understand how you plan to schedule the hikes and how much is going to be each month during the second half of 2018?

Well, thank you, Camila.

The reality is that we don't have a number to give you.

What we want is to make sure that we make up for the price increases that we haven't done or that we will not have done in the next couple of months during the second half of the year.

If we are going to be doing it on equal installments or not, has not been defined.

It will depend on many factors, including competitive factors and also including how the -- how international crude oil prices behave, right?

So if crude oil prices come down, we have less of a pressure to increase prices, initially.

If crude oil prices go up, we might have more pressure to increase fuel oil prices, initially.

So all we can say at this point, not because it's confidential, just because we have not defined anything further than to what I'm telling you now, is that we expect to fully recover those effects during the second half.

And again, the agreement also says that the government will determine mechanisms before the end of the year for us to recover whatever we have not been able to recover in the second half of the year.

So clearly, acknowledging that the objective here is that the refiners do not suffer any damage based on this postponement of price increases.

Okay.

Perfect.

And just a follow-up question.

During these 2 months, you're going to have some increases in cost that are dollar-denominated or caused by inflation.

I'd like to understand how much are margins going to contract due to this agreement?

Well, yes, there are some costs that are dollar-denominated, but also remember that we have plenty of revenues which are dollar-denominated, okay?

This agreement is regarding gasoline and diesel.

We export our products.

We sell natural gas locally.

So there are a lot of other products which prices are dollar-denominated and will probably offset, I don't have a precise number, but in general terms, I would say that pretty much offset the increase in dollar-denominated costs.

So you might see some short-term pressure on margins.

But as an integrated company, I think that margins should not have any meaningful decline.

Okay.

Perfect.

And finally, how much of your revenues are dollar-denominated?

Do you have a percentage?

40% of revenues are dollar-denominated.

But again, the other 60% has a very high correlation with the dollar over the medium term, okay?

So when we look at the company for the next few years, we believe that close to 100% of our revenues are dollar-denominated over the long term.

And at this time, I'm seeing we have no further questions.

Okay.

Thank you, everybody, for the call.

And as usually, Sergio, Diego or Pablo, myself, we're all available if there are any follow-up questions.

Have a great day.

Thank you.

Bye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.