Q3 2019 Earnings Call
We have a question. Please press Star then one on your Touchtone phone. Please note. This conference is being recorded I will now turn the call refer to Nazi all well Stano you may begin.
Great. Thank you Brett good morning, ladies and gentlemen, if nothing else I have monitor.
Thank you for a second yesterday that they tend to be they said, what yet, but I guess what are we thought it.
It doesn't take always they conducted Baylor yelled at about that it had to get Turkey, we feel but if he can get them and I mean, that's a relayhealth I myself.
During the presentation both through the main aspect I think that's that explain our quarterly side finally, we would've been up because for.
Let me make important good thing so I definitely are viewed the cautionary statement or like too.
Oh, so although our contact clarity you said you I feel that opened that's the thing that you have a policy nothing that they feel they sold internationally by nice highly focused on that you. Okay. So they have you learned this done I would be fine I have I thought I left well explain because when they have the main thing I'd have to U.S.U.S. that either ripe for mid expected they said I'll pick off.
Thank you play nice I would expect next and then pay so you can do everything the way we deal with it I mean, that's not able to start with a presentation.
Well, thank you not John good morning, everybody.
Although I typically do not participating the quarterly calls this is clearly a very particular moment.
And we know there are several questions out there. So we wanted to make sure that we remain SVC roll off we have always been.
If anything here this quarter I say, if you think about right. Yeah first that we are clearly going through a difficult operating environment.
Then that management this reacting rapidly and making tough de shows.
And third that might be everything gravity with union.
With regard to the operating environment. The unexpected result of the primary elections.
All girls and that will that be political volatility that followed.
We felt it among other things be not significant devaluation of the currency and the spike in inflation.
In addition on already slow economy, where we upped the 90% of our product deteriorated further.
To make things worse, the government came out with a broad 90 day price increase for fuels and growing.
I know the free assets Youre will be showing during the presentation fuel prices I pretty much converge with international prices.
We reached out to you about moment on the same day of the announcement by their way to explain the implications on the measures that we would be taking to minimize that he got a negative impact.
Then they got a trajectory of natural gas prices. It's also part of our challenging environment for us.
Although this is not move and we have been preparing for this on several quarters now.
He does affect our revenue base and outgrow growth plans for the near future.
But I want to highlight that we reacted rapidly with the objective of protecting cash.
We explained to the government the negative effects of the measures. They have taken I'm proposed different alternatives to try to reduce these effects.
We pushed out investments, but kept in touch those that have to do with safety reliability and sustainability of our operations.
We passed through to the value chain part of the effects of increased by the way. This entails engaging in negotiations with several thousand constructive and suppliers.
We reached out to you all to all of our partners to review our plans for next year.
Reconfigured the rig count to make it more consistent with a softer 2020.
We paid down to $300 million Swiss franc maturity at the end of September without any difficulty and we will go over the short term debt that can do.
But among anything else, we kept the team focused on execution.
All of this in food and I alignment and with full support of our board of directors from the chairman of the board himself, especially given the fact that we have to make unfriendly and dr. seizures.
Unless I say the company has shown its resilience because under these difficult circumstances, we were still able to lever close to $1 billion of EBITDA.
A positive free cash flow before interest and reduction in lane inline with our original budget.
The government gradually flex utilized the terms on the free with afforded liberalization of wholesale prices and with to bump price adjustments. During the period. We expect the degree that decided the freeze not to be renewed when it expires next week.
John Sasha will go through a detail for the quarter, but I wanted to provide this context under which I believe we obtained extraordinary results.
Now I'd like to share with you or safety metrics.
As you can see the chart of the left the current injury frequency rate an indicator that measures. The number of people injured every million hours worked.
Keeps improving and positioning us at an all time low.
Having said this during the quarter, we had a well control incident in one exploratory gas well under production in the low model at the field.
After deploying a contingency plan and a quick response Tuck task force.
About three weeks of efforts, we managed to control the well unsecured the location with no people enjoy nor any effect on the environment. Besides of course, the gas Douglas burned during that period.
And although I'm very proud of that got Mad men and the response of the white deem to control. The incident I also believe there are lessons to be learned in order to avoid these high potential incidence asked safety of our workers on the integrity of our operations our top priority for us.
On the SG side, we recently published our 2018 sustainability report, which is available in a website both in Spanish and English.
Our vision of sustainability involves multiple internal and external aspects of our operation and everyday business management, such us, making people's safety, a priority ensuring that everyone in our supply chain comply with all safety and environmental rules and aligns with our corporate values.
Working with local communities on an ongoing basis and promoting innovation in both our operations on multiple products or services.
Lastly, we will continue trucking, our SG, scoring under the Dow Jones sustainability index to benchmark of progress internally and against our peers robecosam the firmly hard to assess our sustainability practices and reporting will provide our results by the end of year.
While we're also looking forward to the MST is de ratings update where we expect to keep on improving outperformers. Moreover, we are also being advised by the sustainability team at the bank of New York, Maryland on these issues and please feel free to contact our IR. Our IR team should you have any question.
Most of these aspects.
With this I will let natural Satish will continue with a presentation and it will come back at the end for conclusions and Una.
Moving into our main financial.
Nested in us dollar.
Third quarter, they were negatively impacted by decreasing they look at crude oil on fuel prices under evaluation.
Look at average exchange rate variation with almost 60% when compared with the same growth 28.
Total revenue showed a reduction of 13%, mainly driven by lower demand and lower prices for our main product gasoline and diesel.
Two affected by a 22% decline on our natural gas revenues as a result for 10% reduction in price.
In terms of operating costs, particularly leasing our refining costs in absolute terms.
Great by 8% and 22% respectively.
The increase in the recent growth was mainly driven by higher workover activity settling to improve the production performance of starts to mature field.
Hi, refining costs were driven by higher maintain us work on conversion units compared to a third quarter of last year that did not affect our processing volume.
However for the first nine months of the refining both only increased by 5% Euro area.
Royalties, which is the only cost components fully denominated in dollars were down by 27% driven by lower natural gas and coal prices.
If you turn positive were down 27% also driven by lower crude oil prices.
I'm, sorry that adjusted EBITDA was down by 15% in dollar maintaining EBITDA margins close to 30% lever.
If I 16 and.
Yes.
29 effects are not included in our adjusted EBITDA and financial debt.
Despite the challenging macro context, our operating cash flow reached $1.2 billion, increasing by 19% year over year.
Cash flow generation looking up the colors, our investments of the quarter totaling a $110 million by parts and lower compared to third world 28 deal.
Turning capex was driven by the evaluation of the currency and Capex reduction initiative across the different business segment.
Besides absolutely. So later, we're also encouraged to contain our production stable at 530000 barrels oil equivalent per day compared to a third growth 2018 and continue increasing our net sales production.
As we did in previous quarters, we're focusing the analysis of the adjusted EBITDA of each of our business segments to provide a better understanding on how the continued with a cash generation of the company, putting aside the impact on depreciation and amortization and impairment, which are in fact gossiping.
Focusing on that tested derrida assets that 15% decreased year over year was mainly driven by that briefing on devaluation effect.
Compared to third World inflating lower operating results were obtained our upstream segment, which showed a decrease of three carrier $45 million in adjusted EBITDA, We have global 23% in revenue driven by lower crude oil and natural gas prices, while gas because of this business segment increased by 12% manager.
And by lower royalty payment.
Because of our segment, so an increase of $60 million, mainly due to lower average practice and costs related to the floating LNG buyers, who would not have last year.
On the are tight deducting business segment showed an increase of one kind of $19 million compared to a year ago.
Moving as of the segment decreased by 8% due to lower sales in the local market, mainly affected by lower gasoline and diesel state on both lower prices and a slight decrease in demand, although we've got higher revenues from export.
The lower revenues were offset by a decrease.
Index spray explained by lower crude oil.
Purchases I lower input of fuel that were partially compensated by an increase in air in the refining book.
This growth this quarter, we area impairment charge net of taxes of 31.1 billion pesos that these $540 million at an exchange rate of the end of the period.
Zipsor and charge is mainly the consequence of the new that market dynamics with lower gas prices.
This price trend is incorporated in that respect so for the coming month, all of which impact on investment activity working day duration in the value of the assets for the recording tax.
I think mansion.
The cash generation in the third world the year reached a total of $1.2 billion a 19%.
Increased over there.
Our cash flow of a year ago. This increase was mainly due to lower working capital only partially offset by a lower EBITDA in dollars.
During the third quarter, our investments effectively paid reached 404 million dollar serpent therapy, no our third quarter 2018 levels.
I think capex in 2019 per square amounted to $691 million, 3% below 28 in third quarter levels Threed NAND Workover represented 67% of the Upton County, followed by the level of activity with 75% an exploration activities a person during the.
Before we drill and put into production a total of 109, new ways of which 33, our non operated by.
Doubting capex amounted to $63 million, 45% lower than Q3, 20, 18% to 20% of this amount was invested in refining considering the shift.
Continuing marketing and the risk in chemicals.
Or financing activities amounted to $796 million into the repayment of the 300 million Swiss franc.
Born in September interest payments of $243 million, almost $50 million dividends and around $90 million of anything payment.
Our cash position remained strong in to ensure a medium term liquid cashing business at $1 billion at the end of September 20 banking Inebriate, we started collecting installment of the bonds issued by the going for the 27 implant thats accruals during the quarter. We have received approximately 70 $35 million improving our working capital.
By year end, we should have collected 300 million out of the 760 million total.
We are committed to align our cash generation with our capital expenditures at financial discipline is one of our key priorities as we can see in the graph on the right. We're funding our topic grown with our own gas generation, reaching more than half a billion dollars. During the nine month period of this year.
I've done in dining explain the current country context on the company from financial situation you have to color to their maturity silent for the next year, which are not begun indeed, despite down for oral and macro scenario, we pay our maturity at the 300 million Swiss franc, one as affixes successfully managed to work on ROI.
In our our short term acuity, which most of them I'd say facility. When further we can't experienced any significant reduction in the banking facilities.
Or looking incentive venue color around six Korea $60 million of the maturity relating to spread financing.
HM we have an international battling bond maturing July Amir minor local coupon.
Our next significant materially in the capital market is that $1 billion month. During March 2021, we are regularly monitoring the market for potential liability management transaction.
Our leverage ratio stood at one point 98 times net debt to adjusted EBITDA within our two cents target for the year, while the average life of the debt remains in the.
Area.
The average interest rate in pesos increased to 55.8% while average cost of our debt in dollars remained fairly stable at 7.6%.
It's also important to highlight that although capital controls have been reinstated by the Central Bank is not prevent the company of accessing the official foreign exchange rate of of exchange rate market to pay any that term with 8% will explain our operation our results. Thank you.
Thank you very much Ignacio.
Total hydrocarbon production reached 430, south and border so for the equivalent per day this quarter.
Remained stable B study, a year ago, and increasing by 2% versus last quarter.
Let's look at this we more detail.
Google production amounted to 227000 borrowers before today, which represents a 1% increase on a quarter over quarter basis, and remained flat compared to last year third quarter.
I do have been also higher if you exclude the production associated to the mature fields divestments performed by the end of 2018.
Just production amounted to 44 million cubic meters per day, representing a 9% increase quarter over quarter, mainly driven by higher with the demand.
Remained flat compared to last year third quarter.
Finally, NGL production increased 6% will total of 28.5 thousand Boes per day, when compared with 2018 third quarter.
When we break down the sources of our total production, we can observe that shale production growth contributed with 44.4 thousand additional beuys per day.
The good news is that these growth by itself is offset in both the conventional production decline and the type production decline. These thus one mainly related to a resurrection of investment from gas voice due to the current gulfmark unfold.
Fueled by the shale production growth our unconventional production represents now 55% of our total production I will come back to that in a few moments of first who would like to highlight fewer elements of what we have been doing on the conventional side. The still represents 65% of our production.
Specifically in the conventional side, we remain focused in continuing identifying new fields for primary developments in improving our stick on the recover results by increasing the amount on the quantity of what injected on based on the positive results of polymer injection pilot and expansion of discussion.
Recoveries technique in two other fees.
In order to improve the recovery.
Just to mention a few examples on new primarily developments, we can mention that antenatal heavy oil field human dose of borrowings were after a green royalties reductions came with the broadest we're able to if I read the first ever field development in the country using low cost multilateral wells with five horizontal branch.
We have successfully drilled one of those wells are currently drilling a second one on plan to drill up to 15 of them dramatically, reducing the surface footprint of this development from 75 to just 50 locations.
In addition, these heavy oil will reduce for blend in purposes with a much lighter vaca muerta hole in our 200 crucial refinements.
Also in those up Robbins after a successful exploration on first the nation campaign. We are currently finishing second delineation campaigns in the several modelo list the field with positive results.
Producing around 1300 borders of four per day during this early stage.
We will be testing of what that injection skiing. During the next 12 months then defined the best way forward.
The current understanding the potential field development plan put into more than 200, producing wells are 100 and check from world and increased current production by 10 times or even more if the polymer injection steam is positively.
In the secondary recovery area, we continue identifying opportunities mature fields, which stones not properly sweat by water injection for example, intuitive that you're running at a field located in NUKEM Province, I would use three one of our main producing area by the end of this month with this doubling locos wasn't.
Action was to increase the oil production recovery of these fields.
We have mentioned in the past the positive results achieved with a tertiary recovery pilots into with province, where we're increasing the number of volume injection plant. In addition, we have also achieved positive results in Mendosa Province, I will deploying this thing there too.
Finally, we continue with our exploration efforts aiming to discover new resources, a new play.
We are glad to announce that we have recently reached an agreement with equity reach a major by which they will they will farming into our can 100 deep exploration blocks purchasing a 50% stake with a cash and carry consideration.
We are happy to joining forces with international renal deep offshore operator in order to explore these potentially prolific Atlantic margin block.
Additionally, we have received expression of interest from other top international companies and are therefore joint relaunch in his take on from out within the of retaining each one third of adoption.
Moving now to Unconventionals, our net production in the third quarter of the year for bus for the first time, the 100000 BOE per day milestone, reaching 100 to sell some degree per day, which is a 77% increase compared to a year ago on a 25%.
Increase quarter over quarter.
Net shallow production showed an increase of 55% compared to the third quarter of last year shale oil represent now 60% of our total crude oil production.
During the quarter, we connected a total of 32, new shale horizontal was a news 18 renewals.
Our operation is mainly focused in the three shallow development welcome Panna democratica among progress through but also in continue the risk in our exploration acreage in order to grow a mature the future development portfolio.
In Loma Campana, the 50 50 JV with children, we have decreased six drilling rigs working gross production reached 40 to sell somebody's before per day on for the first nine months of the year, we have added 20 new world.
In America Chica, the 50 50, JV with the thrown US we have seven drilling rigs gross production reached 12000 bothers before today and we added 12, new was in the first nine months of failure.
A minority assortment.
The JV with Schlumberger, we have 4 billion, Rick Ross production, which titles and bolus of whole per day, and we'll update we have connected in Q4 was about.
We also continue with exploration on the risk in activity in our Shane acreage.
On the right hander Thislife, we can see the sustained productivity improvements achieved year on year in all of our main shale development and also few of the very promising results, we are achieving without risking company.
For example in couple of total blocked the JV with it we know where after successfully put in two horizontal wells into production with very good productivity results represent two real.
For more worst in order to have enough information to define new shallow development plan there or for instance, latter festive. It's also from a company with three months of the of turning production results.
We continue searching to improve efficiency and profitability as we can see here the development cost on Opex number component is remarkably low.
As of today, the additional rigs of those under contracts have been upgraded to high spec parallel drilling foster a longer horizontal wells.
We have already drilled 3400 meter horizontal less well inventory as tool and are currently reading at 4000 meter one.
On the completion side, we are switching to high density completion with an average of six to meet the separation between stages.
Improved productivity.
All the worst connected exporter come more from station.
Moreover, we keep on a licensing the use of nearby Stan continue reducing costs.
As a result of these metrics, we continue improving our breakeven Loma Campana that is now in the lower end of the 35 to $40 per bottle.
Our focus is to keep working on the development cost posting drilling and completion, while improving our operating expense message.
Whereas within our control oil and gas prices, we do control our breakeven and therefore, our main focus has remained in the most profitable shale operators innovating on department of choice.
Now, let's look into more detail biggest market and production.
On the left hand side of the slide we concede that we have managed keeping it flat production during the third quarter of this year compared with third quarter last year.
And that we have managed coming back again to historical production levels.
However, we can also see that fueled by the excellent results obtained with Vaca Muerta shale gas development, we have now a new reality in the gas market, which can be summarized as having more gas offer than demand outside of the with them system.
Which has already led to customer payments on pensions in price.
We're going to be mentioning in previous communications for the levers that we have activated to cope with this new reality I would like now to provide some updates.
First as we already mentioned on supported by the Optionality of our shade acreage, we redirected investments originally planned to gas bill was or is it.
We will also start exporting GSC from Chile. This year and are actively looking to increase our share of dust expert in the future as they are still availability into existing infrastructure.
We started the construction of a new on the ground gas storage projects that will be functioning in 2020 and will allow us to better cope with the summer on winter swing, therefore, reducing content I.
I will will exporting our first LNG cargo ever before in the next base.
Our tangoe floating LNG unit, while we also continue working towards finding a long term solution to further increase gas demand, which is disciple and in Japan.
Finally, we have requested offers for the expansion of the preferred urea plant capacity JV, we have the Newton and we will be evaluating dose offers on the market conditions during first half of next year.
The dynamic in the natural gas market together with an increase supply has put pressure on prices recovering station price for this quarter was $4 per million view from failed is 4.51 year ago.
Nonetheless by the end of the quarter the price was closer to 3.5 dollars premium.
Moving down to our downstream business segment during the third quarter of 2019, the utilization rate of our refineries increased 2.6 versus the third quarter of 2018, reaching a total of 287000 barrels of crude oil process per day 90.
A 90% refinery processing levels.
Regarding sales total volumes remained fairly stable compared to the same period, a year ago as lower volumes in the local market were partially offset by higher exports.
Indeed total volumes in the local market decreased by 2% driven by lower demand for our main products diesel and gasoline.
But with deeper in the analysis.
Gasoline sales reported a 2% decrease compared to last year, driven by a lower demand for our premium gasoline will decline of 9% in volumes.
Partially offset by higher volumes of regular gasoline.
Diesel sales decreased 6% compared to the third quarter of 2018, driven by lower demand of both regular and premium product with a later dropping 5% compared to last year.
I would aggregate market share during the quarter.
Dropped by remained strong at 56% in line with historic lows.
In particular market share for our premium product infinera gasoline and senior diesel remained above 60%.
Downstream adjusted EBITDA verifying barrel for the first nine of the year reached $11 per bottle slightly above last year levels, but still below previous years figure.
For us for gasoline and diesel will reduce in dollar terms due to the fruits in prices and deliberation of that business.
This was in part offset by higher volumes processed and lower costs, mainly driven by lower crude oil purchases.
Would you simple policy of the reference where local prices should converge. The dotted line showed the evolution of import parity on the full line represents evolution of the blended price of our fuels in pesos in the beginning of the years themselves than anything.
The graph shows at the beginning of the quarter, we're able to close the gap willing portfolio.
However, as the primary elect presidential elections, with the devaluation of the peso and weaker demand our blended price when below in for clarity on Inova 16, 3566 gross fuel prices for the 90 day period.
Since then dangerously engaged with the government to smooth the cost to the maturity of the friction period.
Firstly, we obtained liberalisation as a wholesale prices, which allow us to global adjust prices from that segment. Afterwards in September in November . The government allowed to include the prices are the bump by four and 5%, respectively. So pricing and 9% increased his initial was put in place, but still our prices have remained below it.
Propriety with a 15% to 20% gap.
Was the 90 day period expire we expect to continue performing price adjustments to gathering close the gap with input costs.
Complementing what we have shown concerning the gap of our fuel prices when compared with input quality. The following the following chart shows that the local fuel prices at the pump in US dollars are currently a low historical levels.
With these I would ask on year to continue with some closing remarks.
Well, thank you very much out of here.
In summary, despite the macro situation, we performed well and managed to generate a considerable amount of free cash flow from operations necessary to maintain our financial discipline and keep on investing to develop vaca muerta.
We are seeing good resulting in a shade production and our effort will be on improving productivity, while continue to reduce cost in the play.
We remain focused on accelerating our Sheila developments and will concentrate our investments in the three core shale oil areas Loma Campana laminate Attica Amadou vessel.
On the gas side, we will continue to limit our investments until we see we can I located every molecule of gas we can produce at competitive prices in the meantime, the objective is to protect our share in the local market, meaning MISO curtailment and continue to increase exports.
As I said, we view the free seen prices as a temporary measure the government had bacon.
Fuel prices are currently at historic lows and we believe in a gradual recovery that allows the continued investment divest techniques.
With recent developments, we are providing new guidance for the rest of the year.
We expect EBITDA in the 3.7 billion dollar area.
Capex of approximately $3.2 billion.
Actual decline in the 3% area and net leverage in that two point 15 times area.
We believe long term growth, it's not being affected by the events over the last few months as luck on what that continues to be a priority not only for us and the rest of the industry, but also for the recently elected government.
We may see little growth in 2020, as we are putting together our plan for next year with our priority in maintaining our sound balance sheet.
Is the only way to assure that long term vision growth.
With that we'd like to address your questions. Thank you very much.
Thank you.
We will now begin the question and answer session. If you have a question. Please press Star then one on your tax town, Tom If you wish to be removed from the Q. Please.
Hash key it will certainly for the first question is are now.
If you are you snakes speaker phone you may need to pick up the handset first question. The numbers. Once again, if you have a question. Please press Star then one and you touched on top.
And our first question comes from Bruno non Cat Mattera from Morgan Stanley . Please go ahead.
Good morning, Thanks for taking my questions.
And thanks for the presentation then ill.
I have a few questions.
First one is what would be the company's wish lease to or each were seen any signals of upcoming energy policy into the new Oren. So what would you like to see.
To make sure did the investment climate.
Remain supportive into the coming years.
Second question related to that piece.
Since the price decrease were announced and Anda.
The government R&D election outcome, what has been the reaction of the Io sees you work with and how do you read their appetite to continue investing in vaca muerta in coming years.
And finally.
Talking about the gas situation, how would the company frame.
Thanks for increasing LNG investments with the with the bulkier sized facility you guys were planning.
If I may ask just a quick follow up on the on the subsidies receivables that Ignacio mention just to make sure I have the right numbers that'd be great. Thank you very much.
Good morning, Bruno Thank you for your questions.
Well.
Let's start from.
The third question with Geos Leashes, one regarding LNG investments next tier their negligible.
Okay, we have our floating barge already in operation that doesn't require any additional investments I would only doing engineering regarding.
Large scale LNG project.
Which with everything going on I think in a way gets pushed out.
Let's see a year, but we will continue look you have they are the projects continue doing some engineering, but it would not require any significant capex next year.
In terms of the reaction from our partners. Obviously, we are still defining the plans for next year with each of our partners one of the first thing we did.
Is reaching out to each of them share our views and unconscious rate plan for next year and what I can tell you without getting into any details because actually the detailed investment plan or were planned budget for next year has not been fully approved is that in all cases.
Of the large.
Shale oil developments that I mentioned, we increasing Capex next dnbi Chevy this year, okay. So I think collectively our partners on us.
Our in agreement that the.
Very successful results that we are seeing more than offset the negative implications of this short term price freeze unless you know we make decisions thinking of the next 20 to 35 years of each block right. So that's definitely good news.
In terms of the wish list again, we're not going to be getting into any details now because we don't have any visibility on who are the.
People within the new administration that will be key and I think.
From that end because I'm sure there are questions regarding that we only to be patient as we know.
The president elect as not yet.
And now stays cabinet.
So.
Thank you have out to who is going to be key in energy and the what kind of agenda. They have in mind S&P at we will have clarity on in the next few weeks.
But again I think that we need to my next manage our anxiety here.
What we want is a very gradual.
Cooporation of our prices. Okay, we are and have always been extremely sensitive to the importance of.
Fuel prices in any given country and we will continue to act very responsibly as we have done in the past.
But clearly without the right pricing incentives, it's going to be difficult to see the investments needed to develop vaca muerta as a whole and and I think the new government if anything they agree with the outgoing element on the with the government I believe.
Four years ago of the importance of the development of the shale for Argentina. So.
Reasonable prices I think it.
Hi, Good summary of what's on our wish list in terms of receivables stature in terms of receivers concerning day. They planned as Cindy 17 that today, Dave Finance have dead.
They don't answer has.
We have collective have.
So far to Fannie and $35 million.
Yes.
Remarries have more or less a defined million dollars a coupon per month.
And the total exposure you mentioned that was around $700 million what was that sorry.
Although the original plan of which has not just said a good part of that close to half of it it's going to be connected by the end of next year, if they continue to.
To work with a monthly payments as they have done very diligently this last year.
Got it perfect. Thanks, so much.
Our next question comes from Frank Mcgann from Bank of America. Please go ahead.
Okay. Good morning, just one question are there is talk to new government is preparing a new law.
That would help to provide.
Security for Investor in the Bakken workers and other factors related to actually new investments.
Non conventional I'm just wondering if you are working with.
Within the.
New government to try to define now and what your expectation is as to what that potentially could include or should include.
Hi, Frank well.
I said.
Still not.
Our clear first on within the Fernandes administration that.
We can.
Have a detailed discussion regarding this potential new law, we believe it's a great idea if they do that I'm sure that if they have that in mind, we and the rest of the industry will have the opportunity of providing.
And advice or less that list of things that we believe are helpful.
Definitely we have very high expectations.
For that and as I said previously.
If anything the pressing the leg as I mentioned in many occasions, how important the relevant Duncan work that will be for his government and if.
That.
Comes together with a low or not we don't know yet.
Hopefully we will have some clarity in next few weeks, but if I said.
Let's let's be patient and and optimistic.
Okay. Thank you very much.
Our next question comes from Louis Cavallo from U.P.S. Please go ahead.
Hi, Good morning, everyone on a billion to make sure you just theres looking at the core we appreciate it.
Truckload what appear to be.
Some questions during one of the recent political change to maybe how the company can react to some of these new scenario.
Looking to Europe last slide you mentioned for basically hard interesting points, rather Manny first talking about a bit more focus on the unconventional Chuck and you also metric as again.
With an extent.
No, but more of this offline, even though you have some.
More higher subsidies you mentioned about the challenging price scenario, which is nothing really new you mentioned about do you see something the Cardinal thinking that there has been you kind of recurring question from my side in terms of the portfolio management and also you gave the guidance right. So you may help was to try to give a bit more details.
Each of these topics and how big match with the.
The net neutral to negative free cash flow. This year next year, but that will be very very good to each of the topics.
Second question.
About the streets.
And the oil fuel prices that should again next week as you probably recall.
As the industry be talking to you today, you you'd like to Gulf matter, we got to be cheap price obviously the country.
Not at this moment you haven't seen equipment comment that you guys that.
And your advisors stated that it doesn't make sense for acute targets for national price. So just just try to actually get to be more details on how you're seeing this Charles Lynch.
And then.
Now this could also match could you talk about Capex locked sure. Thank you.
Well I was wondering which unfortunately.
It's been very hard.
To to here.
Very noisy your line.
I see regarding the last question regarding pricing going forward and what kind of interaction we've had with the and new government taking office I think the answer is saying to at least two questions which is.
We don't know exactly we will be talking with I think that the message from us on the rest of the industry as clear and we will continue to make it clear those have.
Commitment from all of us to continue to invest all we need as prices.
That gradually adjust towards international prices as we had been seeing and we were getting there and converging there by mid this year before the price fleece.
Food as playing catch up again.
Regarding all the previous a point the only thing that that we heard clearly from new was something regarding negative free cash flow and that we can tell you that not the way that we are planning next year.
Planning next year, whereas.
Flat.
Free cash flow breakeven from a fee cash flow perspective, considering interest okay. So.
We are basically assuming that our debt well remain essentially flat now. This is just ambition for now and it's not yet our plan because that's going to be.
Embedded in our budget for next year that will only be approved by the board and December as we do every year and once we have their approval, we'll make sure to reach out to you all to provide you guidance with regards to next year. So how does aflac free cash flow.
Interact with all the previous as well it's possible that some of the growth that we were previously envisioning for 2020, except pushed out a year. So okay.
And that we will continue focusing on vaca muerta tough I said wed.
Hi.
Probably more focus on before because the the core areas of the shale oil window are the ones are going to be getting.
Most of our investments within back I'm worried about.
Can you shed significant increase in Capex and in production of course from those areas when we come out with reserves.
And that we do at once a year for Ivy Bye.
I'd say in late February early March you will be able to see how relevant the shale oil developments have become our toll.
We serve.
Total proved reserves, okay. So again.
Proving that case that we're going into right direction on the way to go for US, especially next year as a concentration on vaca muerta oil without neglecting the rest sat here.
Spend.
Quite some time during the presentation blowing through the different things that we're doing and in conventionals, not only trauma drilling perspective, but also from a secondary recovery and tertiary recovery exit. So we have a nice portfolio, we intend to.
Develop it.
Maybe add somehow slower pace next year than we had previously intended and that has to do with macro situation more than anything else you mentioned metro gas also who.
Still very unclear how the situation with the utilities generally will evolve.
It's not a key driver for us it has never been it's very nice asset to have and we will do what we have to do in order to optimize it.
Operational side its margins, but again.
I understand the questions, but unfortunately, we don't have yet a lot of answers hopefully in the next few weeks as the agenda for next garment.
It's clear we will be able to start providing some of these announcements.
Okay. Thank you and sorry about the background there was a fire during the period. Thank you very much.
Our next question. Our next question comes from richest Cardoso from Credit Suisse. Please go ahead.
Good.
Good morning, everyone.
Thanks for taking my question.
Congratulations for the results it was put into mid to maintain solid results through the first.
And then I think at this point in time I mean, following the results would be a version in the trust that has caused to the KEPCO more to the increase in your Peter Peter.
The market perception of your risk.
Which translates into higher unit material into world I mean, the for an initial review has really has paid off.
Because it appears you could otherwise be very tough position right now if you needed liquidity in the short term.
So my business for me the biggest concern, though I want to true to review how do you think about <unk>.
The extra liquidity going forward what are your liquidity sources and how what are those the levers you have to maintaining leverage under control and guaranteed are worth one point itself Im maybe sort of a liquidity shortages picture.
Well, thank you bridges for that I completely.
Share the concern.
Luckily, it's not a new concern to us it's something that the last 80 years has always been our priority to keep a sound balance sheet and.
At times had rainy days like the ones that we've.
Just a scene it's definitely been are differentiating factor the way we are dealing with this going forward I think has.
Several Lex first is as I said planning a year in which we are not going to be increasing that okay. Now from a ratio perspective is that add racial increases slightly or not will depend on our ability.
To keep PVA flat next year or if we see a small decline you might see a small increase in the ratio but still.
Starting from the fear from a two times very reasonable.
Racial going forward. So it's not just about short term liquidity. It's also about long term balance sheet. The way we're looking at it in terms of a short term liquidity, we have been able to raise some money in the local markets. I recently as natural has said we have not had any difficulties at all in rolling over.
All of our trade finance, we have not seen any of our short term bank facilities go away. So we believe that we're in a very good situation to face, which by the way are very low maturities next year.
Okay. So.
It is reasonable to assume that we will be absent from the international capital markets for quite some time and we're not looking or doing anything there we have been accident. The absent from the local capital markets for last few years, maybe that's something that we might like to revisit again.
And.
But but it's not something that we are.
We see as a problem again, because we are starting from a very very good situation and remember with a billion dollar cash position.
That we are not intending to use because as I said, we expect to roll over all of our short term.
Debt coming due.
Thanks to know if I may just a follow up on that one.
Because I mean for one third it's very important in Turkey delivered stable, but we we would also like to see production.
People or growing rental.
You don't really find yourself in a vicious cycle, where your cash flows would be compromise, but declining production so barrel oil going I guess true.
Dishes.
And what it if you could maybe comment and would you think is roughly the level of capex required to maintain production flat and if you could maybe you know what does this is 34.
Each 1% production grew four or something that's where there might have an entrepreneur Mike. Thank you.
Well, yes I fully.
I agree with your views regarding production going forward and try not to affect the reduction in capex not affecting.
Production growth capacity, if you want and ER, although we cannot talk about specific plans for next year, because we have not yet presented them to aboard and therefore, they have not had been approved.
We're not foresee situation our production decline at all for next year, Okay, maybe essi natural gas for a decision that we.
Twoq earlier this year of slowing down those investments in order to.
Then the additional cuts but for crude oil with that additional Capex. Larry mentioned, we will be putting into lamarca Chica Loma Campana unbundled here soon I think that we will start Oh thats not start but continue to see the significant production growth coming from Unconventionals that we have.
Being seen in the last few quarters I think is very impressive.
Hopefully you found at the same to see a 77% production increase Eva year over year. So.
You know what I'm, saying is with a level of Capex, that's definitely going to be below this year and that they said I cannot tell you how much below this year not yet.
We should be in opposition to keep production at least flat but.
Like the seeing growth in crude oil production.
Thank you Daniel.
Our next question comes from Santiago went anywhere from eight our partners. Please go ahead.
Hello, everyone and thanks for taking my question.
Just a follow up on the regulation, but on the short term specifically on resolution side. She picks up taking into consideration that oil prices are going down 25% year over year.
While gasoline so only down 9% I'm actually be shop of course is because of the wholesale market.
It seems like the upstream segment. This thing most of the costs for the regulation. So if we assume that next week the resolution types. It takes.
Extend that what would be wipe your strategy to be to.
The increase price of oil to take it back to explore policy and how do you see the market engine the pump prices adjusted to thank you.
So thanks, Sandy will decrease 566 will expire next week and as we said we don't believe that there's going to be any extension I do not necessarily as agreed that the impact.
A more on one segment than the other it depends a lot on how you calculate that you can calculate that aside what kind of catch up thus the.
Segment need in order to.
Reach import parity in the case of fuels expertize indication of our crude oil and there you will see that the they catch up it's not that different you can measure that in terms of what kind of.
Return on investment invested capital each other segments Hassani that and I can tell you that.
The invested capital that we haven't downstream is very very significant and the maintenance capex that you need to put into the.
Downstream segment. This also significant Moreover, we need to make significant investments to reduce or sell for sulfur content of our fuels and we will be making those investments. The next few years, which by the way there was an extension in the time.
By which we need to comply which could lose because it will allow us to push out some some investments there so I think that.
Breakdown between upstream and downstream and who gets affected the most as one that we do not necessarily share now as I said.
Once the decrease is.
Over we will be very responsible in how we increased prices we are.
Very aware of the social and economic situation in Argentina, we care about our clients not just for the short term, but for the long term. So we will do what needs to be down, but always being sensitive.
To the needs of our clients as I said, what will happen in the.
Crude oil sector in the upstream part of the equation. We don't know yet we are not price centers. There we do by some crude oil locally and we buy that starts at the same price at the rest of our competitors too.
So.
That will depend upon the logical thing is to assume.
Also a gradual recovery in crude oil prices pretty much in line with a recovery in there and in downstream prices, if what we want a SAR.
Healthy integrated industry and not just a one sector.
90, another sectors.
Being broke and the other thing anyone wants that.
Okay perfect. Thank you for the time.
Our next question comes from has now all channels from Raymond James. Please go ahead.
Thanks for taking the question.
So you highlighted three.
Areas of welcome last where youre already producing commercially.
Correctly, you will have only disclosed cost and well data.
For the long Compania and I'm curious if in 2020 you plan to begin reporting the same kind of information for our market cheap and Bunbury assortment.
Hi, Pavel absolutely S.
For lack of work or.
General for different areas within back I want and including in some cases for those areas that are only in pilot mode and it's something that we did not do in the past I think that.
Hopefully what you're seeing from a presentation says that we are gradually providing more detail actually in this presentation sat here provided the IP for one well is which is only three months old that's something that weve never done, but it's to try to show that we are seeing positive results.
In other areas of luck on what that which are again I promise at west of the.
Delineation efforts that we have been doing these last couple of years and that hopefully it's got to be paying off in the next year. So.
The answer to your question is definitely yes, and the of course.
You can talk to the IR team.
With what kind of information you can help us out in terms of letting us know what kind of information with a would be helpful.
For you I cannot guarantee that we will be providing have et cetera, but we'll definitely the guidance I will take into account.
Understood. Let me also asks about the low carbon you highlighted this as a priority you clearly want a higher SG score as as a company.
Ooh low carbon be a greater portion of the capital program in 2020 as compared to previous years I know you cannot say what the capital program will be by at least as a percentage should this be a larger portion.
Well a good part of that will come from white the evolution from our.
Our yeah.
Generation vehicles. That's you know we can control with GE. Fortunately none of that Capex comes out of idea because our company finance. It says, but just to give you a clue that accompany that today has the like 100 megawatts of.
Wind power and it's going to 450.
And may have a wind power and then we have a transformational or what we got a transformation initiative you know that we have a transformation office and this is a.
He said that.
Involves not only our three business segments, but a good part of the corporation that has to do with energy efficiency throughout our operations.
And that we are tracking very very closely thats, probably a subject of of on falling itself.
Improving the efficiency of our operations and obviously also focusing on reaction of admissions generally feel to generally and me saying.
Basically now in addition to that what I can say that we will be investing you take 100 million Dollarss next year the have to do what we do see yourself for content of our refinery. That's not go directly to the carbon question, but has to do with our sustainability efforts.
Overall.
Okay. That's helpful. Thank you very much.
Our next question comes from Pedro materials from Citigroup. Please go ahead.
Good morning team congratulations on the results. Thank you so much as well for like an Echo my French words or on the proof disclosure and opening up for these remarks I have a couple of follow up so the first one is that we have read in the local news.
Reports show me the fracking fracking activity has been materially reduced in the last few much. So I just wanted to here a little bit more color on that right.
Just as a.
Some guidance on short term initial production for the fourth quarter.
My second question is also Amy for to understand environment in the short term for gas prices in dollar terms.
Four of the freezing the volatility in the currency.
I wanted to understand how has gas prices being behaving the last few months and whether that brings any risk of impairment to gas reserves by the end of the year.
Those are my two questions. Thank you.
Thank you Pedro.
Regarding the fracking activity generally generally for the industry, Yes, we have also seen.
Deceleration or a reduction in activity in the last few months there are few.
Other players at our food, there and drilling rigs on standby mode. It has not been our case not thus far at least not in the.
Shale oil areas, what we have been reducing if anything has to do with our shale gas operations on that as part of a different decision that was taken.
Quite sometime ago, and there's nothing to do is the with the price increase.
It is likely though that we will see some reaction activity next year, the sorry, what we experienced.
This year definitely a reaction regarding what we were all expecting would be 2020, because the things that we are hearing so far is that activity generally will come down in terms of our own activity as I said as still early to say exactly how or what is going to be our.
<unk> rig count for on commissions for next year. It will be below this year no question about that.
But as I said with a focus on those three shale areas in which in each of them, we're gonna be seeing significant capex investments.
Or increase in a in Capex, we savvy last year okay.
Now with regards to gas prices and how they have behaved well they have clearly come down quarter after quarter.
Yes, you mentioned, although the average for the quarter as a $4. The average for September was more like 350, and the average in the fourth quarter is going to below the below $3 for me to be deal.
Okay, we're not yet providing guidance for next year, but we'll clearly we will clearly see prices next year below.
This year and that's coming from each of the.
Segments within the natural gas market, a Argentina and you know are slowing us there is excess supply of natural gas a good part of a year.
This.
Behavior of natural gas prices logical.
I think that we will see that that the oversupply of natural gas outside of the winter well.
Slowly go away as many or most ortega and each one of the.
Upstream players has been reducing its a investments in natural gas and because of the high decline rate that Unconventionals have you will see a reduction a gradual reduction in natural gas production, Argentina were lower production is going to be less excess supply and that we believe that prices will.
Gradually go back to normality Gordon goals.
Okay. Thank you so much that no.
Our next question comes from Daniel Guardiola from P.T. cheap.
BTG Pactual. Please go ahead.
Hi, good morning.
Very good.
And he is related to the announced focused on financial discipline and now I'd like to now if you could share with us some color on the company's dividend policy under the current uncertain environment.
Okay.
Well that is.
As much as that as a a great question to ask Unfortunately, I cannot give you a precise answer because that will be part of the discussions that they're going to be hiring at the board by the end of all of this year and ER and I'd say maybe than where the shareholders.
Early next year so.
We have always intended to eat and they are predictable dividend policy, we were expecting.
In our last ambitious plan from a growth Indians that maybe get pushed out with a new reality and it will depend a lot of course in the cash situation as we have said.
Many times during this presentation on the Q on a session protecting preserving a cash and keeping a sound balance sheet is a priority to us on these that requires.
Not increasing IDN for now we will make that recommendation to the awards.
[noise].
Our next question comes from Mimi Anna Yang from HSBC. Please go ahead.
Hi.
Yeah.
Could you even then indication of the Capex plant down that tends to happen. Thank you. Thank you minor combined for the tree crude development areas or shale I of course understand they might change so but as of now what.
We have heading budget.
Oh for the other question is.
Maybe regarding the underlying gas plant assumption that you used for the gas asset impairment.
Thanks.
Thank you Lily.
Unfortunately, I cannot give you any figures regarding capex for next year, because if I said that plan needs to go through the board first and that will happen in December all I can say again as that for those three crude oil areas in the shale.
Shale oil areas that are under full development, that's going to be any increase in capex in each one of them. Okay. How much I'm not the level she can too to disclose.
With regards to your second question and ER and regarding the natural gas prices news.
For the.
Urban test.
All I can say is that we have used prices for next year, which are below this year.
Totally in line with our expectations today and that we have kept long term prices pretty much unchanged in the $4 per medium BBU area, because as I said in the previous question. We do believe that eventually weight reduction in natural gas prices.
Oh, sorry, natural gas production natural gas prices, where.
We'll go back again to the four.
Dollar area.
Thanks, that's it follow up on the first question and increasing Capex on the acceleration Capex should actually in a high number of wells are.
No.
Yes, you should assume a higher number rigs and therefore, a higher number of wells.
But again, a good far out of the answer has do with.
The wells I'm not exactly the same was said we drill this year and definitely very different to those had we were drilling in the previous years in terms of the length of collateral in terms of amber.
Pages per well and.
Well high density complete.
If we have a broker people each of those frac stages. So in a way what we are saying is we we are finding a recipe for lower development cost for unconventional for a generally and that has to do with a significant controlled coming from Ah things just.
Outlined so it's not linear that's what I'm trying to say the increasing capex with increasing awareness.
Yes.
Okay, great. Thank you.
And we are showing no further questions.
Okay. Thank you very much to all of you for participating on the call and thus we always say please feel free to follow up with sat here on that you're on the rest of the team at your convenience celebrating.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.