Pampa Energía S.A. (PAM) Q2 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for waiting. I am Margarita Chun from IR and we will like to welcome everyone to Pampa Energia's Second Quarter 2021 Results Video Conference. [Operator Instructions] We inform that this event is being recorded. Before proceeding, let me please read the disclaimer that is located on the second page of the presentation. Let me mention the forward looking statements are based on Pampa Energia's management's beliefs and assumptions and on information currently available for company. They involve risks, uncertainties and assumptions because they are related to future events that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Pampa Energia and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the video conference over to Lida Wang, our Investor Relations and Sustainability Officer of Pampa Energia. Lida, you may begin the video conference.

Thank you, Margarita. Hello, everyone and thank you for joining our conference call. I hope you all are safe and well. In the interest of time, I will summarize the latest events and financial figures. For more details, you can check our earnings release or feel free to contact us. Our CEO, Mr. Mariani and CFO Mr. Cohen are both here and joining us for the Q&A session. Let's start commenting on the quarters highlights. First, we recorded more than 60% year-over-year sales increase thanks to the Plan Gas winter peak, Pampa new PPA and commodity price hikes. Moreover, our E&P business set another record as our flagship block El Mangrullo achieved full all- time high gas production of 226 million cubic feet per day two weeks ago, contributing to an increase in our overall production. This is a significant milestone for our E&P and the country's big demand during the winter. The record is more than 30% higher than last year's July and three times 2016 production level showing the competitive productivity of high gas formation formation. Also, the quarter's performance is supported by higher prices even higher than pre pandemic levels explained by winter seasonality Plan Gas and commodity prices. Legacy prices are also boosted by the awaited increasing pesos but the result is moderated in dollar terms as a result of devaluation. Our petchem business achieved another outstanding quarter not only benefited by prices but also a recurring demand. The regulator cleared the sale of Edenor’s control and the management change took place by the end of the quarter. Therefore, we ended a chapter and collected proceeds to keep focusing on our power and gas businesses where there is cash generation. The final payment is due one year from closing. But not -- last but not least. We keep strengthening our financial position by reducing our leverage thanks to our free cash flow generation reaching almost $1 billion in net debt. A healthy balance sheet, coupled with a comfortable debt profile makes a great defensive strategy in challenging Argentina. Now, let's move on the quarter's key financial takeaway. Let's only focus on the continuing business. Revenues increased 52% year-over-year to $456 million in the quarter, mainly driven by Plan Gas, winter seasonality and new PPA and high commodity prices boosting petrochemicals and PGA liquids, though partially offset by lower legacy prices in dollar terms, as well as tariff fees and deval effect over utility businesses. In Q2 2021 roughly over 80% of our sales and EBITDA were dollar linked mainly from our core businesses PPA power capacity, followed by E&P. The adjusted EBITDA amounted to $241 million, 79% higher year-over-year mainly driven by the same reason detailed before plus production efficiencies and dilution of peso linked expenses due to the devaluation effect. Quarter-on-quarter EBITDA increased by 18% mainly explained by winter gas prices and the retracted rate in legacy prices offset by outages at close power units and petrochemical scheduled maintenance in the reforming plant. Therefore, oil and gas is regaining exposure by taking a 48% share, as we show on the right below, like while electricity takes 52% of the consolidated adjusted EBITDA. Moreover, in Q2, CapEx was double year-over-year more than double year-over-year and 66% up quarter-on-quarter mainly explained by Plan Gas commitment during the winter, and Barragan's expansion offset by the commissioning of Genelba's new CCGT in July last year. Moving on to the power generation segment, as you see, in slide 5, we posted an EBITDA of $121 million in Q2 2021, 26% higher than last year, mainly contributed by Genelba's CCGT, higher B2B electricity sales, legacy prices update and the devaluation impact on our petchem nominated expenses. These effects were offset primarily by the dilution of in dollars of legacy prices, higher energy purchases to cover the b2b contracts and operation outages in June. Quarter-on-quarter EBITDA increased by 5% mainly due to the spot price this update retroactively to February, offset by the off peak pricing for spot energy and lower dispatched in Q2 '21. Spot energy comprises 59% of our capacity, but represented only 17% of our power generation EBITDA therefore, it will be keep shrinking unless the next inflation adjustment outpaces evaluation. Still it is key to continue with the proper maintenance of this plan underpay considering the contribution to the grid. Moving to the operating figures for generation in 2018 to 2021 was 10% up year-on-year in line with the great recovery like Q1 nationwide demand is back to pre pandemic levels, mainly driven by industry, which is a good news for GDPS credit, we recorded higher dispatching Genelba's new CCGT thermal plants firing alternative fuels and increasing -- increased load factor from wind farms offset by lower gas fire dispatch because there's no gas, limited gas. However, quarter-on-quarter generation was 14% down driven by the full system and outages. Keep in mind that the power generation business model relies on capacity payments. So lower dispatch does not impact the revenue making as long as the availability for scanning especially for PPA based energy, the availability rates in Q2 '21 reached an outstanding 95.8% slightly lower year-on-year mainly due to Genelba partial outages in June, which fully received last month. Regarding our expansion, the closing to CCGT at Ensenada Barragan is almost half away at that we are currently working on the boilers in the cooling tower water system and completing the steam turbines building enclosure, it can seem that around 1,500 people are at the site, working with COVID protocols and reviewing the critical equipment to achieve COV by the second quarter of 2020. One close, but total capacity will be 847 megawatts, become one of the country's most efficient thermal units, and Pampa's four operators CCGT. Moving to E&P results, on slide 7, we posted an adjusted EBITDA of $73 million in Q2 '21, recording that remarkable growth year-on-year, primarily driven by Plan Gas which rebounded the gas prices and volume because of we took commitments, in addition to higher oil prices and recoveries met. However, more royalties and from higher prices and increased world's drilling and completion activities offset the rise of EBITDA. Quarter-on-quarter the EBITDA more than double due to the winter effects offset by higher royalty. Efficiency wise, we recorded $25 million of listing costs 20% more than last year, due to well drilling and completion reactivation activities offset by higher productivity at competitive gas blocks, such as in El Mangrullo, higher oil production and the devaluation. By BOE produced we kept below $6 of listing costs, 10% higher in year-over-year but very similar quarter-on-quarter. Our global production increased 9% year-on-year and quarter-on-quarter mainly again, driven by the Plan Gas. Oil demand -- locked down but still hasn't reached pre pandemic levels. As a result, we averaged almost 48,000 barrels of oil equivalent per day of which 90% is gas. On the oil side, we represented 22% of the revenues in the quarter, volumes saw increased by 11% year-over-year to 4,500 barrels per day explained by export demand. The 40% quarter-on-quarter increase is primarily due to export concentrated in the Q2. As per crude oil prices which are driven by the rent is almost tripled last year due to the lockdown while quarter-on-quarter remain similar. Our production is still down 1,000 barrels oil per day to the pre pandemic level. We expect to recover them gradually. Regarding gas as shown in the next slide. Our average sales average 264 million cubic feet per day in the quarter, 4% up year-on-year, driven by the Plan Gas PSA. Production could have been higher, but blockade during April 2021 affected the output impacting our employees and equipment daily operation. Therefore our production since May was slightly lower than the GSA commitment. But we still recover this month overproducing actually the target of 320 million cubic feet per day. In addition, Gas producers including Pampa were granted force majeure and so no penalties to pay. Quarter-on-quarter 9% increase is primarily explained by the beginning of the winter peak season and better B2B sales from industrial demand. Like in Q1, nationwide gas production during the quarter was only 1% down year-on-year, evidencing the Plan Gas effect. The demand is rising to pre pandemic level driven by the large users and retail consumption. Going back to our quarter production performance, El Mangrullo led the quarter's production growth contributed close to 70% of our overall gas. This block is wholly owned and operated by us with our standing productivity boosted by the temporary production facility we sold in back in May and reached all time high record by the end of July. During the course second quarter '21, our average price was $3.9 dollar per million BTU double year-on-year and almost 40% up quarter-on-quarter against by the Plan Gas winter peak. The b2b and spot prices out of this GSA also reflected the seasonality but haven't reached the Plan Gas level. As you can see right below the year-to-date sales are more diversified, similar to the country's breakdown. Gas retailers are also part of Plan Gas soared during winter because of their priority. Increasing its share to 30% compared to the last quarter last quarter 18%. Also we are working to grow our B2B sales with positive results increasing our market share as you can see in the site. The only segment shrinking its exports, which will be received for October with a taker pay deliveries to Chile. Regarding our E&P operation subject, we strengthened our investment recording $55 million during the quarter, almost three times higher than last year. This quarter was quite active drill and complete 11 Plan Gas well in line with the winter peak. As I say in the previous call, we are building the second gas treatment plant in El Mangrullo which will more than double the current capacity to reach 290 million cubic feet per day by the first half of next year. In all, we drilled four wells and completed five, all from -- Moving to the petrochemical business, this segment deliver another solid quarter, actually in four times last year EBITDA mainly explained by the significant rise on international prices, higher local virgin naphtha supply and demand growth linked to industry recovery offset by increased raw materials cost influenced by set reference prices and Plan Gas impact. The year-over-year sales volume increase was significant for all the products; sales quarter-on-quarter increased 22% because of our reforming plant seasonal maintenance. In addition, roughly 40% of the quarter sales were exported. Since the international prices are very volatile and seasonal. We do not expect this performance for the second half of the year. Before getting into cash and debt, we must highlight the solid cash flow generation reported during the quarter supported by the outstanding operating performance from all the businesses and improve profitability thanks to higher realized price. During Q2, free cash flow resulted roughly $72 million, $50 million more than last quarter. Notice that it is last year's quarter, notice that the working capital was negative, mainly driven by seasonal, higher seasonal billing and Plan Gas effect and to a lesser extent, the increasing collection days from CAMMESA. In addition, we collected an Edenor’s second sale installment and former Plan Gas receivable for a total of $64 million. We repay $71 million of mostly debt maturities and bought back shares for $11 million. So in total, we generated a net of $54 million achieving $462 million of cash position by the end of the quarter. Moving on to slide 11. This is life. Life shows consolidated figures, including our affiliates at ownership but let's keep focusing on this restricted group for covenant purposes. Things, Edenor was deconsolidated Pampa under IFRS is equivalent to the restricted group. The growth that's continued to decrease amounting to $1.5 billion as of June, 2021, 96% is in dollars up from the 91% last March. As we've been paying down all the shorts in debt most of the shorts and debt in peso. So dollar and. an average interest rate of 7.4% while the peso debt average is less than 37% interest rate. The average life remains at 46 years. As we said before the cash amounted to $452 million. This is 13% higher quarter-on-quarter. So, net debt decreased to $1 billion. In addition, the net leverage ratio improved from 2.3x to 1.7x due to the higher EBITDA. In the next 12 months, the company only faces less than $100 million of maturity, most in local currency. Moreover, our last peso bond matures by the end of this month, roughly $65 million. Therefore, we expect to keep using short term debt, strengthening our balance sheet. As a result, you can see this rating and rated our bonds to be C minus, fee origins and corporate are above the sovereign ceiling. So, this concludes our presentation. Now, I will turn towards to Margarita who will open the floor for questions. Thank you.

[Operator Instructions]

Thank you, Lida. Our first question comes from Bruno Montanar from Morgan Stanley. She has two questions. The first one is with the conclusion of Edenor’s disposal. What is the company's mindset for potential future corporate moves? Would Pampa be more likely to buy something or sell something any particular asset type that will be preferred on the purchase side? That is the first question.

Good morning, everyone. Thank you Bruno for your question. Well, while reading your question came to my mind, they joke about the portfolio manager that knows for several years the market will go up and down but not sure in which order. So I think for Pampa is this thing, no, we've been all our life and thinking about our portfolio of assets and rebalancing our portfolio of assets. So the M&A part of our, the M&A activity is part of our DNA. So I'm sure we will continue in the future. And honestly, the only thing that I can tell you that we are actively working today is what has already been disclosed from the interests of gas in our E&P assets, so we continue our discussions with them. Whether that will might materialize in the transaction or not is yet to be seen. And let's not much, although we are all the time analyzing opportunities, and there's nothing more concrete on that front.

Thank you, Gustavo. The second question was of Bruno can you comment on expectations of the new hydrocarbon law and the access to the US dollars?

Regarding the hydrocarbons law, there's not much that I can tell you but it's already in the media. And about a couple of months ago, the government visit around with all the players and explain the basics of the law. And that went into the media show where while after and since then I heard that they continue working on the law, have minor changes have minor additions to what we have seen and what has been published, but not sure about the timing when the executive power will finally present its proposal to Congress. I hope the sooner the better. It seems there are a few things in that law that makes that positive for the sector, several things in the law that are positive for the sector. So the sooner that goes through, the better. Especially before all of us start defining our investment plans for next year. But I have no idea when it will -- when the government will move forward with that.

Our next question comes from Frank McGann. He has three questions but the first one is already answered because it has to do with M&A opportunities. The second one is about the payment chain in power generation from CAMMESA. Can you give us more feedback -- more update on that?

Okay. Thank you for this. As you can see on this presentation, collection date from CAMMESA have deteriorated a little bit in the last few months reaching a high of 90 days? Just to clarify this 90 days doesn't mean -- it's 90 days of delays, 90 days since invoicing actually CAMMESA pays at 40 days 45 days after invoicing. So the delay from CAMMESA is an average of 45 days not 90 as you can see here in this picture. Anyway if you see the pattern last year, around this time of the year was the worst moment and then CAMMESA improve their collection days a little bit. That is basically because during the winter those are the toughest months for CAMMESA. They have to pay for the purchase of a gas oil, fuel oil and LNG. So those are the toughest month for them and we hope that as it happened last year, the collections days will go down again as we approach during the third and fourth quarter. It just a clarification CAMMESA doesn't only affect power generation in our cases. It also affects the E&P business as well as the significant part of what we sell through CAMMESA.

There is one more question from Frank McGann. What is the Q3 gas price expectation do you see this year?

We expect the price on the third quarter to go slightly up of the second quarter. Because we continue in the winter in the fourth quarter, it will go down basically following the pattern of the Plan Gas pricing scheme. In the third quarter not only price will go -- average price will go up, but also volume will go up vis-à-vis the second quarter.

Our next question comes from Constantino Satalia. He has three questions that the first two questions are related. It has to do with the view on the local gas market evolution in the mid term. What is the expectation in prices and volume? And the second question is regarding CAMMESA tender. They have been raising more than 70 million cubic per day for August at Plan Gas prices amid a dry season that will perhaps affect next year as well. Do you see any additional Plan Gas or something similar or perhaps more frequent short term tenders of the sort?

The last part of the question wasn't heard.

So the last part was -- the second part was regarding, they have been bracing more than 17 million cubic meters per day in for August, Plan Gas reference prices, and if we see any additional tenders or something similar in a more frequent basis in the short term.

Okay, thank you Constantino for the question. As you know because of the Plan Gas, there's been a significant change in the market. Last year, we had, if you want more spot market with a prices regulated by basically CAMMESA the Secretary security of Energy. Today, we have a contracted market. So most of us during the winter 100% of our sales go through the contracts of the Plan Gas either with CAMMESA, with the industry with the distribution companies. So those 17 million cubic meters of tenders that CAMMESA has done or CAMMESA -- every month is almost irrelevant in terms that tender is not binding neither for, it doesn't have any take or pay or deliver base. So you offer your guide there. So in case you have an excess of supply that is not sold through the Plan Gas or to the industry and you really have that access. You can sell it to CAMMESA but only if you don't have a better time. And they work the same way for CAMMESA, so those options, those monthly options and they reflect the spot price as long as there are transactions during the winter that no transaction so it's not a good reflection of the market. And in the short or medium term, what do we expect? This winter there's been as you know, thanks to the Plan Gas the industry recovered, production recovered from last year. And but still, that was excess capacity in the pipelines going from the Neuquina basin to going out of the Neuquina basin of around 6 million cubic meter of gas per day. So what we expect to happen is that the government will call for the third round in order to fulfill the transportation capacity out of the Neuquina basin that is a win-win situation, because we continue increasing the local production of natural gas, this displacing even more expensive imports of liquids or LNG, or eventually Bolivia. So we expect that's around have to happen. Sooner, the better so, the industry can prepare and be ready to deliver that gas next winter. What else do we do expect in our volumes in the third quarter of the year and in the first quarter of next year? The expectation was, we are currently producing or delivering 9 million cubic meters that would have been contract in the Plan Gas, in the fourth quarter of the year and the first quarter of next year, what we have committed is 7 million to the Plan Gas. So volume should -- our sales should go down during that period. That might be a somehow moderated by the fact of the extreme draw a failure by extreme weather in the south of Brazil, especially the drought, the drought in the south of Brazil. So we might be able to export about two to three watt electricity from Argentina to Brazil. That is the big consumption of gas that is around 10 million cubic meters of natural gas per day. So if Brazil needs this energy from Argentina will be significant improvement of consumption of gas internally and that could improve our volumes in the fourth quarter and in the first quarter of next year.

Yes, there is one more question from Constantinos, on top of that there is the state budgeting adjusting the budget that includes gas main pipeline expansion, do you see that positively affecting the business in the near term?

That good question also within great news to hear that the government is working and moving going forward in expanding the capacity and transportation capacity is not going to impact our business in the near term because building this pipe will take about two years. But as we always said, Argentina imports a lot of gas from Bolivia throughout the year, all year long. That makes a lot of sense that the local industry replaces those imports. And we also import heavily and very extensively during the winter. And it also makes sense. We have the reserve; we have the capabilities to replace those imports will with local production that we need infrastructure. Infrastructure that will be -- that makes a lot of sense and will be quickly replayed with savings in imports of energy. So the sooner the better. So, to answer shortly your question isn't going to impact, it won't have an impact in the short term and but will it may have a significant impact in the medium or no long term on our business.

Our next question comes from Alejandra Andrade from JP Morgan. Do you still expect CapEx of $200 million $250 million for the year for the restricted group before answering keep in mind that we don't give guidance.

Hello, the significant amount of CapEx this year is essentially related by some infrastructure CapEx on the business plus additional wealth in order to achieve higher levels of production. So, assuming no changes for next year, the amount of CapEx should be decreased from the current year based on the infrastructure that we want this year and the level of the production that we already reached. So any differential from this expected equation would be if we enter into new E&P business that as of today, it's not budgeted.

Our next question comes from Anne Miller, Bank of America. Now that Plan Gas is implemented and your thermal plants are almost near completion, what are the next strategic steps for Pampa Energia? What is the CapEx for the remainder of the year and preliminary budget for next year? Before answering keep in mind we don't give guidance.

Thanks for the reminder. The strategic steps for Pampa within the sector that we work and room for growth. Today, we clearly see it on the E&P business to continue developing our assets there and as explain before it depends on basically on two things. One is a new round new bidding round for on the Plan Gas and we expect that to happen rather soon and medium term the expansion in transportation capacity. Otherwise the industry itself won't have much room to grow. We may be able to gain market share because we have very competitive assets, very competitive portfolio of assets in our E&P sector. And in power generation, we might be able to expand on our portfolio of renewables we are analyzing whether to build a fourth wind farm and that could be through the model so that b2b to the industry, and those are basically what we are foreseeing in the short term.

Our next question comes from Florencia Mayorga from MetLife. She has three questions. The first one is do you have any update on the refinancing of the 2023 bonds?

Yes, hello. As we mentioned in previous calls, that's something that we want to do constantly. It's also related to Central Bank regulations. And at some point, we expect to do something that it may be either paying the bond or refinancing if the central bankers allow.

And the second question is about the legacy energy after the 29% hike announced in May, any update on potential adjustments for next year?

No, we have no clue about next year adjustments. There are currently minor requests from the industry to adjust not the price itself, but the industry's claiming for a few changes in the regulation 440 they are being especially with those equipment that are less dispatched, so like steam turbines -- mainly for steam turbine. But those discussions that are going on with the Secretary of Energy. But so far, nothing has been decided that we know.

The last question from Florencia is regarding any update about the hydro concessions that are maturing in the next three years?

Unfortunately, three years is like eternity Argentina will always be starting next quarter. No, not the next three years. Now unfortunately, we have no clarity of what the government is thinking. I don't think that at this point the government is having this issue on their mind.

Our next question comes from Ezequiel Fernandez from Balanz. He has two questions. The first one is about the export to Chile of that. In case you have not commented on this earlier, do you have any update on the possible gas export deals to Chile you mentioned during the first quarter call?

Yes. Maybe we forgot to mention that on release we did yes. But Lida mentioned during the presentation we have been awarded the contract to export firm to Chile 1.5 million cubic meters of gas per day since the 1st of October until 1st of April of next year. So that export will go through beginning in October. What else is in the question?

The next question from Ezequiel that was the last one is regarding any sign of demand from corporate in the matter the renewable private market that could help unlock new Greenfield investment in renewables.

The demand from corporate obviously is there the issue is about the pricing. So, we are evaluating, unfortunately the cost of building wind farm has gone up because of the prices of commodities, especially because of prices of commodity going up in the world. So that's why we reevaluate this, we have requested prices from the suppliers and we are evaluating that, but the demand obviously from the corporate sector is there to acquire renewable energy.

We have one more question from Ezequiel from Balanz on Edenor just confirming that the June 30 balance already reflects the cash collected from $50 million payment.

Yes, hello. In that respect, we already collected $50 million and there is a remaining $40 million payment for next year.

Our last question comes from Raphael assuming no modifications to your PPA; do you have any intention starting the international capital market in order to extend maturities but mainly to reduce your cost effect in US dollars?

Yes, hello. With today's debt profile and cash position we will be comfortable in that respect. Although we are actively managing our debt profile in the event we see any changes in our business projections.

Thank you. Gabby. This concludes the question-and-answer section. We will turn to Lida for final remarks.

Thank you, everybody for joining us. I don't know Gabby would you like to make some comments that we not covered well, petrochemicals or whatever you feel that we didn't cover? This is one hour call. If you have more questions, we will be very happy to follow up with you. You can see this replay afterwards. Any questions? Just contact us Margarita. We are always available for you. Thank you so much. Have a good day. Bye-bye.

Thank you very much. This concludes today's presentation. Thank you for joining. You may disconnect at this time. Goodbye.