YPF SA (YPF) 2019 Q2 法說會逐字稿

Welcome to the Second Quarter 2019 YPF Sociedad Anónima Earnings Conference Call.

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

(Operator Instructions) I will now turn the call over to Sergio Giorgi.

Mr. Giorgi, you may begin.

Great.

Thank you, Sylvia.

Good morning, ladies and gentlemen.

My name is Sergio Giorgi, Vice President of Strategy, Business Development and Investor Relations of YPF.

I would like to thank you for joining us today.

In this occasion, we will present YPF 2019 second quarter results.

The presentation will be conducted by Ignacio Rostagno, Head of Investor Relations; and myself.

During the presentation, we go through the main aspects and events that explain our second quarter results.

And finally, we will open up the call for questions.

We will be making forward-looking statements.

So I ask you to carefully review the cautionary statement on Slide 2. Also, our financial statement figures are stated in Argentine pesos based on international financial reporting standards.

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

Ignacio will present the financial result for this quarter.

But before, I would like to provide just a few elements of context to put things in perspective and better understand our performance on next slides.

In recent earnings calls, we have explained the overall natural gas market situation and how our focus has shifted to increasing our shale oil production.

We currently have 18 rigs located in the crude oil window.

We continue achieving important results in productivity and development costs and are also focusing in increasing the size of the current shale oil development cluster and de-risking 2 additional new clusters, one in the north and one in the south, in order to prepare the funnel of new developments that will be the backbone of our production growth for the next years to come.

We will be showing later on some of the very encouraging results we are having there.

We continue actively managing our portfolio, including divestment of noncore mature assets by closing the sale of 2 mature conventional blocks in Neuquén province and signing the sale of 2 mature fields in Chubut province.

On the investment side, we have taken advantage of 2 business opportunities.

We acquired Aguada del Chañar block, increasing the size of our main shale oil cluster, adding 14,000 acres of premium shale oil position.

And we also acquired 50% of Ensenada de Barragán thermal power-generation plant in order to secure this plant as offtaker of our natural gas.

We keep on implementing technology to improve the safety and performance of our operations.

During this quarter, we signed a strategic alliance with Microsoft to collaborate in a number of projects and initiatives in order to support YPF digital transformation journey.

Those of you who participated in our recent Vaca Muerta field trip would see the real usage of these technologies in our central control room for drilling, completing and producing wells.

For example, the use of artificial intelligence to geonavigate the Vaca Muerta horizontal rings.

Finally, we launched YPF Ventures, our corporate venture fund to invest in companies that are innovating with breakthrough technologies.

On the macro side, in the second quarter of 2019, the cooling down of Argentina saw a level of activity deepened, while inflation kept on in high figures.

Having said this, by the end of the quarter, we saw some stability on these variables with the peso appreciating and an inflation rate decreasing.

In addition, the average exchange rate in the quarter was 12% higher than in the first quarter.

The gas market continues experiencing an excess of supply due to an increase in production after the incentive price programs.

This effect plus mild weather and weaker demand have affected our natural gas production as we kept on curtailing volumes and also affected the gasoline prices.

On the positive side, this curtailment is lower than the last quarter.

Additionally, we keep on applying all the short, medium and long-time levers to increase gas demand.

I will be mentioning them later on.

It is worth highlighting that an external event affected our production volumes and refining activity during the quarter.

On June 16, almost the entire Argentine electric system grid suffered a massive failure.

In addition, our NGLs production was negatively affected by a post-blackout incident at Dow petrochemical complex in Bahia Blanca.

We will provide further details on the impact of this event when we work through our production figures.

Before moving to our financial results, as on every quarterly call, we would like to share with you our safety and ESG metrics and action plan.

As you can see in the chart of the left side, we track the injury frequency rate, an indicator that measures the number of people injured every million hours worked.

The chart shows that despite a small increase in this number for the first half of the year, we are still achieving numbers that are among the lowest of the last decade.

We therefore remain -- need to remain vigilant in this period of high activity as we are reminded from time to time that we work in an industry with flammables liquids, high pressure and subject to the environment.

ESG is growing in importance globally, and we, in YPF, have always been committed to sustainable practices.

On this subject, we are well aligned to achieve our 2023 objectives concerning low carbon emissions.

Our 2018 Sustainability Report will be available by the end of August, and we'll continue tracking our ESG scoring under the Dow Jones Sustainability Index to benchmark our progress.

Renewable energy represent now 70% of our total energy consumed.

We are analyzing new energy solutions through our R&D subsidiary, Y-TEC, and as mentioned before, we launched YPF Ventures, our corporate venture capital to focus in new energy and mobility solutions.

Now Ignacio will walk through -- walk you through our financial results.

Then I will follow with our operational metrics and conclusions, and we will open the Q&A session.

Thank you, Sergio, and good morning, everybody.

Now let me start with our second quarter results highlights.

Revenues were up by 72% in pesos, and our adjusted EBITDA amounted ARS 41.6 billion, reaching a margin of 26%.

Please remember that as of the effective date of January 1, 2019, the group has applied the guidelines of IFRS 16, which FX are not included in our adjusted EBITDA and financial debt.

Total CapEx of ARS 48.8 billion, resulted in an increase of 15% compared to Q2 2018, exceeding our cash flow from operations, which was ARS 40.7 billion in the second quarter of this year.

It is worth mentioning that these CapEx figures include acquisitions of Ensenada de Barragán and Aguada del Chañar assets Sergio mentioned before.

Excluding those one-off transactions, our CapEx before acquisitions was in line with our cash flow from operations.

Total hydrocarbon production was 5.3% below Q2 2018.

Net shale oil production went up by 57.5%, reaching 32,100 barrels of oil per day.

We'll explain all these numbers in detail as we go through the presentation.

Now moving into our main financial figures measured in U.S. dollar.

In the second quarter, the local average exchange rate variation was almost 87% when compared with the same quarter of 2018.

Total revenues show a reduction of 7.3%, mainly driven by lower demand and lower prices in dollars for our main products, gasoline and diesel.

In addition, revenues were also impacted by a 33% decline on our natural gas revenues as a result of lower volumes and a 14% reduction in prices.

On the contrary, total exports showed a slight increase on higher export volumes, partially offsetting these decreases.

Regarding operating costs, lifting and refining costs in dollars increased by 3.4% and 6.5% in absolute terms, respectively, as we had more activity both in conventional and nonconventional.

Royalties which you say only cost component fully denominated in dollars, were down by 23.5%, driven by lower natural gas and crude oil prices in dollars, coupled with the lower production of the period.

In turn, crude purchases were down 6.5% in dollars as we processed in our refineries lower levels of crude than a year ago, while our own crude oil production remained fairly stable.

As a result, adjusted EBITDA was down by 10% in dollars, maintaining EBITDA margins close to the 30% level.

Finally, total CapEx for the company amounted to $1.1 billion when including the M&A activity mentioned before.

Regular investments in our operations were $900 million, 11% higher than compared to the second quarter of 2018, mainly boosted by more activity in Vaca Muerta.

Upstream CapEx in 2019 second quarter amounted $726 million, 5.9% higher than 2018 second quarter.

Drilling and workover represented at 68% of the upstream CapEx, followed by bill up facilities with 24% and exploration and other activities, 8%.

During the quarter, we drilled and put into production a total of 111 new wells, including 39 new shale wells and another 8 wells in 10 formations, out of which 22 are not operated by us.

In Downstream, CapEx amounted to $136 million, 19.7% higher than Q2 2018, of which 66% was in refining, followed by logistics with a 20%, marketing representing 9% and finally, chemicals with a 5%.

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

As we did in previous quarters, we are focusing the analysis in adjusted EBITDA of our business segments to provide a better understanding of how each business segment contributes with the cash generation of the company, putting aside the FX impact on depreciations and amortization, which are, in fact, a noncash effect.

Moving on to adjusted EBITDA, which in fact come up by 68% compared to the second quarter of 2018.

This was mainly driven by the better operating results obtained in our Upstream segment, which showed an increase of ARS 10 billion in adjusted EBITDA, with an increase of 60% in revenues, driven by higher crude oil and natural gas prices in pesos, while cash cost of this segment increased by 66% above revenues increase, resulting in margin erosion.

The Downstream business segment showed an increase of ARS 3 billion compared to a year ago.

Revenues of this segment increased by 78%, driven by higher gasoline and diesel sales on higher prices in pesos, although lower in dollars, partially offset by a slight decrease in demand, higher sales of [jet] fuel, LDC fertilizer, lubricants and petrochemical products and higher exports with both higher volumes and prices in pesos.

In turn, cost of this business segment reported an increase of 75%, mainly explained by crude oil and biofuel purchases, which are denominated in dollars, higher imports of fuel and 99% increase in refining costs.

The Gas & Power segment showed an increase of ARS 1 billion, mainly due to higher average prices in local currency and better commercialized volumes to our LDC Metrogas.

The cash generation in the second quarter of the year reached a total of ARS 40.7 billion, a 48% increase over the operating cash flow of a year ago.

This increase of ARS 13.6 billion was mainly due to an increase in EBITDA of ARS 19.4 billion, partially offset by higher working capital needs.

During the quarter, our investment reached ARS 48.5 billion, including ARS 4.3 billion and ARS 4.1 billion in acquisitions of Ensenada de Barragán and Aguada del Chañar, respectively.

Nevertheless, our cash position remains strong, including short and medium-term liquid cash investments at ARS 67.2 billion at the end of June 2019.

In April, we started collecting the installments of the bond issued by the government for the 2017 plan gas accruals.

During the quarter, we have received approximately $150 million out of $760 million, improving our working capital.

We will collect an additional $150 million along the rest of the year 2019.

Additionally, in some we access the international bonds market.

As we can see in the graph on the right, we are funding our CapEx program with our own cash generation, reaching ARS 1 billion of free cash flow during the quarter.

However, if we include the aforementioned acquisitions of the quarter, our free cash flow was negative.

The previous explained cash position is enough to cover our short-term debt maturities of this year.

As said, in late June, we decided to take advantage of the momentum from the recent Argentine rally and announced a new intraday transaction.

This transaction reopened the market for Argentine issuers.

After over a year-long supply drought during a period of market volatility for the country and brought us back to the markets after our last issuance in December of 2017.

We issued $500 million at 10-year bonds with [8 3/4%] yield.

Proceeds will be used to cover 2019 funding needs.

As we mentioned in our previous earning calls, significant amount of 2019 debt maturities are related to trade facilities, which we have been rolling over and expect to continue doing so.

In addition, this year, the relevant maturity in the capital markets are the CHF 300 million coming due in September.

Forward-looking in 2020, we have a relevant portion of debt maturities denominated in pesos.

Our next significant maturity in the capital markets is $1 billion bond due in March 2021, having enough time to work on our liability management, as we have done in the past.

Our leverage ratio stood at 1.9x net debt to adjusted EBITDA, within our 2x target for the year, while the average life of the debt remains in the 6-year area.

The average interest rate in pesos decreased to 44.76%, while the average cost of our debt in dollars remained stable at 7.54%.

With this, I would like to turn the presentation back to Sergio, who will be explaining our operational results.

Thank you.

Thanks, Ignacio.

During the second quarter of the year, total hydrocarbon production dropped 5.3% vis-à-vis a year ago to 515,700 barrels of oil equivalent per day.

However, compared to the first quarter of the year, our total production increased 6%.

Let's look at this with much more detail.

Crude oil production in the quarter show a slight decrease compared to last year's second quarter at 224,000 barrels of oil per day.

It is worth mentioning that due to mature field divestments performed by the end of 2018, we are now considering 2,100 barrels of oil per day.

In addition, crude oil production in the quarter was affected by a massive blackout in Argentina.

So if we correct for that, our oil production had been slightly up.

The good news here is that our shale oil production growth continues to offset the conventional production decline, and we expect this trend to continue along the year and beyond as our unconventional production will continue increasing.

In the gas market, we continue seeing in this quarter, the effect of a significant increase in the local gas supply.

Therefore, curtailments in natural gas production kept on occurring, averaging 3.2 million kilometers per day during the quarter.

This effect, combined with the mild weather, weaker demand and the country's blackout resulted in an 8.8% decrease in our natural gas production compared to the second quarter of 2018, reaching 40 million cubic meters per day.

Now we haven't had to curtail our natural gas production, and excluding the impact of the blackout and the sale of mature assets, gas production will have been 3% below the second quarter of last year figures.

It is worth highlighting that on a quarter-over-quarter basis, our natural gas production increased 15.5%, and we expect production to further increase in the third quarter of the year given the winter period, which increases internal demand.

In July, we were producing 44 million cubic meters per day.

As mentioned in the previous quarter, we are taking a series of measures to mitigate this new reality for the gas market.

These measures are focused on the short, medium and long term.

We continue to limit investment in natural gas just to those molecules that we are confident we will be able to sell in the market.

During the second quarter, we exported an average of 1.2 million cubic meters per day to Chile at an average price of $4.2 per MMBtu.

We have secured one take-or-pay contract with Methanex for the whole year with differential volumes.

The remaining contracts are interruptible, and we expect to resume these exports in the third quarter of the year.

Moreover, we will be exporting LNG in September this year, representing an additional 2.5 million cubic meters per day.

Last month, we reached a preliminary agreement until May 2020 will accelerate energy for the charter of an LNG carrier.

This will be 1 of the 2 ships that will be used to export LNG.

We have also launched the construction of a new underground gas storage to reduce the peak between winter and summer production.

We will start injecting gas on the fourth quarter of this year, having a first production in 2020 winter and working at full capacity by 2021.

In order to further increase gas demand, we have expanded in the gas value chain, acquiring Ensenada de Barragán thermal power generation plant, located near the center of consumption in Buenos Aires, together with Pampa Energía.

Through this vehicle that was acquired on a project finance basis, we will ensure up to 3 million cubic meters per day of natural gas due to a preferred supplier contract.

We will continue working towards a long-term solution to increase gas demand, which is a sizable LNG terminal.

Last month, we awarded a pre-FEED contract to 2 engineering companies, and we are working with international renowned companies that would like to join forces with us for this project that will be an industry project.

We expect to provide more details by the end of this year.

Finally, we are also working towards reaching FID for the expansion of a Profertil urea plant, a JV we have with Nutrien.

In line with the lower natural gas production, NGL production decreased 5.3% to a total of 39,400 barrels per day.

During the quarter, NGL production was also affected by the June power outage.

In addition, following to the power outage, one of Dow's petrochemical plant, an important offtaker of Mega, our affiliate company, suffered an explosion in an exchanger, decreasing their activity, which in turn affected Mega's production, therefore, affecting our NGL production.

When we break down the sources of our total production, we can observe that shale production contributed with 27,000 additional BOEs per day, while tight production showed a decrease of 19,000 BOEs per day, mainly related to a lower production of natural gas, as explained before.

In the conventionals side, we remain focused on improving secondary recovery and expansion of EUR pilots to improve the recovery factor of our crude oil mature fields.

Our plans include injecting more water than last year and having 10 polymer injection plants working before year-end, and we are well aligned to achieve this target.

Moreover, we continue optimizing our mature field portfolios with sound investment of noncore assets in order to focus on the most profitable sales.

Moving now to unconventionals.

Net shale production in the second quarter of the year reached 82,000 BOE per day, showing an increase of 48% compared to a year ago and 16% quarter-over-quarter.

But more important in the current environment, net shale oil production showed an increase of 57.5% compared to the second quarter of 2019.

Shale oil now represents 14% of our total crude oil production.

During the quarter, we connected a total of 39 new shale horizontal wells, almost doubling the connections of last quarter.

The development cost in our Loma Campana shale oil development continues coming down, being down in the $9 per BOE area, already in line with a target we set previously for this year, while operating expenses are now around $5.50 per BOE.

Additionally, we see a potential to continue this reduction trend, and we're still having a few wells with development cost of $8 per BOE.

We started drilling 2 horizontal wells with 4,000-meter drains, one in Bandurria and one in Loma Campana, and we are bringing along a snubbing unit that will help increasing the speed of wells cleanup.

On the fracking activities, we have already achieved performing 10 fracs per day on few occasions, we are using our own sand boxes for the last-mile logistics, we are currently doing test of nearby sand and our proppant plant will have a capacity to process 1 million tonnes per year before year-end.

Let's go into more detail about what we are doing in Vaca Muerta, which is where our production growth will be coming from.

As mentioned before, our share portfolio contains acres in dry gas, in wet gas and in oil, in different stages of advancing.

We own some of those acres at 100% and some are in JVs, either operator -- operated by us or by our partners.

We own a portfolio of full optionality in terms of redirecting investments when necessary.

We are currently developing 3 shale oil fields in what we call cluster oil #1.

In Loma Campana, production was 40,000 barrels of oil per day during the first half of the year.

We'll be producing 50,000 barrels of oil per day by the end of the year, and we'll achieve a production plateau of 100,000 barrels per day in 2023, being able to sustain this plateau for at least 10 years.

The treatment facilities are being upgraded and will be ready this year and the new 88-kilometer pipeline that connects our operation to the main evacuation route is already in operation.

In June, we had 6 rigs working in Loma Campana.

La Amarga Chica field production was 12,000 barrels of oil per day during the first half of the year.

We'll be producing 20,000 barrels by year-end and would reach a plateau of 65,000 barrels of oil per day in 5 years, being able to sustain that plateau for more than 10 years.

We are currently building a new treatment facility for this field.

And in the meantime, the production has been treated in our Loma Campana facilities.

In June, we had 8 rigs in this field.

Bandurria Sur production was 6,000 barrels of oil per day during the first half of the year.

We'll be producing 10,000 barrels per day by the year-end and will reach a production plateau of around 60,000 barrels per day in 5 years.

In June, we have 3 rigs working there.

We are also working on increasing the size of this cluster #1.

In June 2019, we were awarded in a bid 100% of Aguada del Chañar block, 14,000 acres located next to La Amarga Chica in the core Vaca Muerta oil window and including some existing facilities.

We will start the pilot on this block early next year.

Our efforts do not stop there as we are also preparing the next wave of shale oil developments.

In our cluster #2, we are working with our partner, Equinor in the Bajo del Toro block.

During the quarter, we put into production 2 horizontal wells that have been producing oil for 4 months by now and are showing top quartile productivity potential when compared with Loma Campana wells.

Indeed, we identified 4 potential Vaca Muerta landing zones in this block and define a tight well with an IP 60 of 1,800 barrels of oil equivalent per day, and EUR of 933,000 BOE.

Based on these good results that are somehow limited, as we are using temporary facilities, we decided with our partner to drill another 6 horizontal wells.

And if we confirm these levels of productivity, then we could launch a new development there.

But that's not all.

In Narambuena block, our joint venture with Chevron, just north of Bajo del Toro, we plan to drill 4 wells this year and in Chihuido block, just north of Narambuena, we have already drilled 4 wells, and we'll put them into production before the end of the year.

We have also started exploration activity in Las Manadas.

So even if it's still early, the production results we have seen in cluster #2 are compelling, and if confirmed, then we're fully converting this cluster into a new development hub.

Finally, we are also performing new exploration in the south, potentially expanding even more the boundaries in what we call cluster #3.

We are performing a shale oil pilot in Loma La Lata west where we drill 3 wells for which we will have production results soon.

In addition, we've put into production a well in Sierra Barrosa, while in Al Norte de la Dorsal, we drill one well and we plan to drill another one.

With all this expected production growth.

And even if we don't foresee any major bottleneck in our oil production on the short term, we are currently performing a meticulous study of the oil midstream sector to ensure that we will be able to evacuate any drop of oil in the years to come, either to our refineries or to export routes.

These studies include reverting some existing pipelines, increasing the pumping capacity of the oil level system, upgrading the existing export terminal in that landing are activating the export route to the Pacific.

Moving now to our Downstream business segment.

During the second quarter of 2019, the utilization rate of our refineries decreased 4.4% versus the second quarter of 2018, reaching a total of 263,000 barrels of crude oil processed per day.

This decrease was mainly driven by Argentina's power outage in June 16, and to a lesser extent, to plant stoppages.

Regarding sales, total volumes were 3.5% below the same period a year ago.

Total volumes in the local market decreased by 4.1%, driven by lower demand for our main products, diesel and gasoline, which both dropped 2% compared to last year's results -- to last year as a result of lower economic activity.

This was partially offset by higher exported volumes of jet fuel that drove total exports up by 3.1%.

Now to provide more detail about fuel demands on this slide.

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.

In the second quarter of 2019, the sales showed some deterioration in response to the contraction of the economy and a slowdown in construction.

In this scenario, gasoline and diesel demand in the overall market declined by 5.3% and 3.2%, respectively, while our fuel sales decreased just 2% compared to the same quarter last year.

Therefore, our aggregate market share during the quarter remained strong at 57%.

In particular, market share for our premium products Infinia Gasoline and Infinia Diesel remained above 60%.

Going deeper in the analysis, gasoline sales reported a decrease of 2.1%, driven by a lower demand for our premium gasoline, with a decline of 24% in volumes, partially offset by higher volumes of regular gasoline.

Diesel sales also decreased 2.1% compared to the second quarter of 2018, driven by lower demand of both regular and premium products, with the later dropping 5.9% compared to last year.

As we have been explaining over the last quarters, and as we will see in the next slide, the evaluation, combined with higher crude oil prices, put an increasing pressure to our Downstream margins as prices for gasoline and diesel were reduced in dollar terms.

This, plus a contraction in the demand and the blackout, affected our Downstream-adjusted EBITDA per refined barrel, which was $7.2 per barrel, similar to the second quarter of last year.

We expect margins to recover in the second half versus normalized refining volumes.

We use import parity as the reference where our local prices should converge.

The dotted line shows the evolution of the import parity and the full line represents the evolution of the blended price of our fuels in pesos since the beginning of the year 2018.

The graph shows that on the second quarter, even if we continuously increase prices, the combined scenario of high crude price devaluation and weaker demand, resulted in our blended price being below import parity.

The graph also shows that these last months, we have been able to reduce the gap with import parity.

We will continue doing periodic price adjustment when necessary as we have been doing.

In summary, sustainability and safety are core values for the company.

This quarter, we continue achieving good safety track record, and we invite you to read the 2018 sustainability report that will be issued by end of August.

In terms of production, we remain focused on accelerating our shale oil developments, while at the same time, we keep on reducing the development and operation costs.

Shale oil production is now offsetting conventional oil decline, and we are confident that we can achieve the oil production target we set for our 3 main shale oil developments located in cluster 1 for this year.

Furthermore, we increased the size of our core Vaca Muerta shale oil position in this cluster by acquiring 14,000 acres that we'll start derisking early next year.

We're also having very compelling results in the shale oil cluster #2 with proclivities in the top quartile, and we will keep preparing this cluster for future developments.

We also keep on expanding Vaca Muerta boundaries, and we are continuously analyzing the midstream capacities to ensure we can keep on with the potential production growth.

On the gas side, we will continue to limit our investments until we can increase the demand using all the short, medium and long-term levels we already mentioned.

Our EBITDA figure in USD for this quarter was impacted by the lower natural gas production and prices and also by lower downstream revenues.

Despite the challenging local and global environment, we were able to tap the global bond market in June, reopening the market for Argentine issuers.

We will continue monitoring the market to be able to respond as soon as necessary.

Considering all the elements that we have already shared with you, we're reaffirming our 2019 guidance, which is CapEx being in the lower end of the $3.5 billion to $4 billion, to remain in a minus 2%, minus 3% production range we set for this year, an EBITDA target close to $4 billion.

With that, we'd like to address your question.

Thank you.

(Operator Instructions) Our first question comes from Bruno Montanari from Morgan Stanley.

First, on the longer shale wells, I know you touched this on the presentation, but any insight you could give us on how those wells are performing?

How they can perhaps improve the currency awards the company has been using on the type curve?

Second question would be on the LNG projects.

I understand you alluded to the 2 initial ships that the company is going to work with to export LNG.

But how should we think about the larger scale projects that could be done in Argentina?

And what would be YPF's financial commitment to it?

And a third quick question, if I may.

We saw a relevant pressure in working capital in the second quarter.

So I was wondering what should be the working capital trend for the second half of the year now, perhaps linking it to the receivables from the government.

Bruno, thanks for your question.

So today, our average well in our development is around 2,500 meters, horizontal drain with 36 fracs, right?

This is what we are using in a majority of wells.

Now having said that, we already drilled 3,200 meters horizontal well with good results, with EURs that are higher, of course, than the previously mentioned was around 1.5 million BOE.

And of course, we want to extend this.

So this is why we are now in the process of drilling 2 wells, one in Loma Campana, one in Bandurria Sur of 4,000 meters.

So this well could have up to 60 fracs, right?

So it is early days to put EURs affected to those wells, but we are always trying new ways to improve our development costs.

So this is the way to do it.

And in the end, we will continue drilling what is the most economic or profitable was.

So that's for the longer wells.

In LNG, as we have been saying, this is part of one of the levers that we are activating to increase gas demand and as you mentioned, the sizable LNG terminal would be the one that will be unlocking more production for Argentina.

So we have been studying this for some time now.

We hired 2 engineering companies to perform pre-FEED studies that we will have some fair results by the end of the year.

We are also having conversations with different companies that would like to join forces with us because this is not going to be a YPF project.

It's going to be an industry project.

So coming to your question, it is very early now to talk about what will be the financial commitment.

So having said that, we don't want to dodge that question and we will be giving more updates as we have been saying, by the end of the year.

And when we do our webcast by the end of the year.

So this is what I can say about that.

Let me interrupt you, sorry.

But is the idea to have more or less than 50% ideally?

No, it's not yet decided, Bruno.

So we are having conversations with several potential partners.

We need to integrate what we will be doing in the upstream, what we will do in the midstream, what we're doing in the LNG.

So it is early days to say what will be the percentage that YPF will be taken along the chain.

And it's early days to say that we'll be taking the same percentage all along the chain.

So we will be giving more information about that by the end of the year.

Bruno, this is Ignacio.

Concerning working capital, we will see an improvement.

It's important to mention here the seasonality now.

We are in the period of winter due to distribution company payments and increases in those sales.

There has been some difference in the working capital compared to the previous quarters.

Having said this, this will improve.

And also something to mention that it is important in terms of -- and we have mentioned it, is that we are collecting the plan gas debt of 2017, and that is being paid in terms, so that will help our working capital also.

Our next question comes from Frank McGann from Bank of America Merrill Lynch.

Okay.

If I could just ask 2 questions.

Natural gas, when you list the number of projects that you have that could provide with additional demand going forward with the storage and with potential exports to Chile, with the new thermal plants that you have a stake in, you get to some pretty high potential increases in demand.

I was just wondering as you look forward, do you expect to see pretty sharp increases over the next 12 months in terms of your gas demand, even though we're in, of course, still a very difficult supply-demand situation within Argentina?

And then secondly, just quickly, if you could remind us what the current decline rates are you having in your base production and what you think that might trend over the next several years with efforts that you may have to contain those decline rates?

Okay.

Thanks, Frank.

So in terms of gas production, as we said, we expect first to recover our historical production level over the next 12 months.

As we said in the presentation, we already producing 44 now.

And we'll be adding all these chunks of, I would say, of gas that you have mentioned, as we have been presenting.

Not all of them are at the same time, so we believe that once we reach our historical production level, this production will be flat for some time, and we'll be increasing later, along with all the new projects that we have been mentioning and will be increasing demand, right?

Your second question was related to decline.

So they say that we have an overall decline around 10%.

Our next question comes from Vicente Falanga from Bradesco.

I had a couple of questions.

You mentioned in your press release a very detailed, all the projects that you're working on secondary and tertiary recovery.

I was just wondering for Loma La Lata, Sierra Barrosa, which is probably one of your largest fields, we have seen some intense decline there.

Are you working in secondary, tertiary there also?

And what could the company do to slow down the decline in this field?

Also, my second question, we heard that the government of Rio Grande do Sul in Brazil is potentially talking to Argentina to import gas after this new pipeline is built.

I'm just wondering if YPF can make any comment about this.

And do you fear the potential development of gas markets in Brazil?

The Brazilian government has launched a big program.

Could this get in the way of exporting plans for Argentina?

And then one last question, if I may.

Do you still think that YPF, with the acquisition of Barragán, will generate free cash flow to equity in 2019?

Vicente, thanks.

So concerning our secondary and tertiary recovery, our focus has been over the last 6 months to increase focus in secondary and tertiary recovery.

So in secondary, by injecting more water, better quality and with better selectivity than before.

So we are seeing good results.

For instance, in [Bella Vista] field in Chubut, we managed to revert the production decline and to increase the production just by optimizing water injection.

Based on this, we are looking to extend this to other fields.

In particular, for the field you mentioned, Aguada Toledo, Sierra Barrosa, we do have a secondary recovery project there with some water injection in the excess of 10,000 cubic meters per day.

And it's producing around 2,300 barrels of oil per day.

And we don't have tertiary recovery plans there.

Concerning the Brazil gas policy.

Of course, I mean, every country will try to do the best they can to explore more gas.

So we do have the capacity to export to Brazil as we have the capacity to export to Uruguay and to export to Chile.

So we will take any possibilities that will be available.

And in terms of competing for exporting gas, well, we are doing our gas LNG project, and we believe we can be competitive in a global market.

So we will need to be competitive, not only in Brazil, but in an international market.

Concerning your question about free cash flow to equity, Vicente, what we have been saying is that CapEx is being funded by the free cash flow from operations.

So far this quarter, with these 2 acquisitions.

The ones we mentioned before, they were unique opportunities.

So when we see in our long-term strategy.

They weren't contemplated in our annual budget, but free cash flow after all the financial expenses will be negative.

We are aiming to maintain our leverage ratio between our target.

Our next question comes from Luiz Carvalho from UBS.

Just 2 quick questions from my end.

I mean we saw the production drop in this quarter, right?

And currently, the average might be impacted for the second quarter as well.

So -- and there's no much visibility of natural gas demand improvement.

So I just would like to understand, I get a bit more color on how this might change your forecast in terms of production growth looking forward?

And the second question, it's more on the downstream margins.

You mentioned that you expect margins recovery on the second half of the year.

I understand that third quarter might be a bit better because the oil pressure dropped.

But I just would like to understand if it's just a commodity impact?

Or there's something internal that you're doing to try to follow up on -- follow up closely the international prices.

Luiz, thanks for your question.

So yes, we expect a recovery in the production on the second half of the year compared with the first half of the year, mainly by recovering the gas production that we already mentioned.

And also increasing the overall oil production, which is mainly coming from our shale oil operations.

That's in terms of production for the second half of the year.

Concerning...

Just one question, yes, sorry.

I mean you kept the guidance, but the point is that, I mean, at least in our forecast, I mean, the prediction for the first half was a bit lower than expected.

So I just would like to understand in the long term, if there's something that you might review in terms of production growth for the next, let's say, 5 years or so, considering a lower base?

Yes.

I mean our plans for the next 5 years, we are drilling them by the end of the year, so where we do.

Now we need to consider that last year, we also had some curtailments, so we expect for the second half of the year with all the levers that we have activated that weren't there last year.

We will be able to do the catch-up.

Okay.

And can you just talk about the refining margin, sorry?

Yes.

Concerning the refining margins?

Yes, we expect those margins to have a better situation.

We must say that in the first part of the year, we had some storage that we weren't considering.

So this should help.

Also in addition, concerning the import party, this -- the international prices have been going down.

So in that sense, it will help our margins over there.

And mainly, it's our ability at the end to keep on with this pass-through that we have been doing with more stable or with a more stable scenario that we have been seeing in the last month in Argentina, that will also help.

Our next question comes from Pavel Molchanov from Raymond James.

Over the last several years, every quarter, you provide an update on Loma Campana development cost and operating cost metrics, which is very useful.

I'm curious how long will it take before you are ready to provide the similar data for La Amarga Chica and Bandurria Sur.

Okay.

Thanks for your question.

So yes, I mean, you are right, when we are always showing the Loma Campana development costs.

When we performed the field trip to Vaca Muerta, we showed some of the development costs we were having on the first phases of the development in La Amarga Chica, which we are just very near to those of Loma Campana because, of course, we are using all the synergies and all the lesson learnt that we have lived from there, and we are passing them to the same field.

So the figures that we showed when we did that, when we were having approximately $10 per BOE in Loma Campana, we were having around $11 to $12 in La Amarga Chica.

But that was because we were counting some wells that were coming from the piloting phase.

So we are very confident that now that we are in the full development mode.

I mean the well cost and the well productivities are very similar in all these fields, and this includes as well Bandurria.

Okay.

But let me also ask about the YPF Ventures, which I remember you announced about a month ago.

Realistically, what percentage or proportion of your total capital spending over the next 5 years, do you think will be allocated to renewables and low-carbon technology?

Well, I would say, we have to separate YPF Ventures with renewables and low-carbon technology because, as you know, we also have our branch of thermal power, YPF Luz, which is also investing in renewables.

For instance, we have a wind farm.

We are building in a new one.

We have projects of solar coming in the future.

So we need to separate in terms of how much of our percentage of CapEx will go to renewables when we consider the aggregate.

Now your question coming to YPF Ventures.

YPF Ventures was established a couple of months ago.

It's our new corporate venture funds, focused on accelerating innovation.

And the CapEx we're allocating to that initiatives are, let's say, below that 0.1% of the company CapEx, right?

So this is, let's say, around $30 million per year, globally, if we find good opportunities.

So but this is, I would say, this investment is much less of the global investment that YPF is doing in renewables.

As I mentioned before, we have already a wind farm working, a wind farm being constructed.

And also we are looking to increase that size of projects.

Our next question comes from Daniel Guardiola from BTG.

I have a couple of questions here.

My first question is on reserves.

And I was wondering if you could please share with us your thoughts on how likely it is you may have to book a potential negative revision or impairment on reserves, considering lower realized gas prices in 2019?

So that's my first question.

And my second question, I was just wondering, if you could give us an update on the strategy on Vaca Muerta, and specifically, if you are considering to divest additional acreage.

Daniel, thank you for your questions.

Concerning the question about reserves, we do not expect them to be material, if they happen, these changes that you are mentioning.

It's not only prices, but also cost and performance that you have to take into account.

So -- and also it's important, please remember that we use domestic prices and not international prices.

So therefore, changes are not that relevant in prices.

But yet, we cannot anticipate anything so far.

We are not going -- or we're not seeing that reversion.

Yes, considering our strategy in Vaca Muerta, your question was specifically in terms of divestments.

So as you see that we mentioned, we just bought a new acreage in Aguada del Chañar, which is just beside La Amarga Chica and is giving a lot of synergies to us.

And we could divest part of this block because there are some companies that are interested in joining forces with us to derisk and develop that block.

We are not actively looking to divest any of our oil acreage at this time.

Once we are confirming that we have, for instance, a new development hub, where will we look at that time if we need to do some divestments or not?

But it's not now in -- we are not actively pursuing that at this time.

We have no further questions at this time.

Okay.

So thank you very much.

And as always, if you have follow-up questions, you can contact Ignacio and the team, and thank you for participating.

Goodbye.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.