Pampa Energía S.A. (PAM) Q2 2024 Earnings Report, Transcript and Summary

[Starts Abruptly] that this event is being recorded. All participants will be in listen-only mode during the presentation. After the company's remarks, there will be a Q&A session. Questions can only be submitted in writing through Zoom. [Operator Instructions] Before proceeding, please read the disclaimer in the second page of our presentation. Let me mention that forward-looking statements are based on Pampa Energia's management beliefs and assumptions and information currently available to the company. They involve risks, uncertainties and assumptions, because they are related to future events that may or may not occur. Investors should understand that general economic and 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. Please go ahead.

Hi. Thank you, Raquel. Hello, everyone, and thank you for joining our conference call. I will make a quick summary of the Q2. You may find more details in our earnings release and financial statements. Today, we are having a Q&A with our CFO, Mr. Nicolas Mindlin; Mr. Horacio Turri, our Head of E&P is here; and Adolfo Zuberbuhler, our Head of Finance is also here. Unfortunately, our CEO, Gustavo Mariani can't join us today, because he is in Vaca Muerta hosting our President Milei. The gas production is what definitely stands out the quarter's figures. Again, we’ve beaten all company records, delivering a 37% increase year-on-year in Q2 and recording a new daily record high of 16.8 million cubic meters per day. The output surge is explained by the latest Plan Gas contract we've been awarded, enabled by the new pipeline built last year. It also helped the early winter freeze, driving retail and thermal power generation. The production increase is backed by shale gas, harvesting the campaign we began last year. Shale gas now represents almost half of our total output this quarter, a significant increase compared to last year's 23%. Therefore, this quarter, the adjusted EBITDA amounted to $288 million, an increase of 30% compared to last year's figure, mainly because of the gas outperformance and TGS's contribution, which surged by the 675% tariff hike granted in April. Lower gas exports, sales to industries and thermal dispatch partially offset these effects. The quarter-on-quarter increase is explained by the seasonality and CAMMESA's haircut recorded in Q1 and last year Q4. It is worth noting that almost 80% of the quarter's EBITDA was dollar link and the share now is led by E&P, which is mainly due to the gas production. CapEx in Q2 is 28% lower year-on-year, mainly because in Q3 -- in 2023, we had a strong shale gas drilling and completion campaign and the construction of PEPE 4. This was partially offset by the last diversements of PEPE 6, which is estimated to be fully commissioned by October this year and the beginning of the pilot plan for shale oil in Rincon de Aranda. Moving on to the power generation segment, as seen on Slide 4 -- 5, sorry, we posted an adjusted EBITDA of $106 million in Q2. This is 9% higher year-on-year, mainly explained by lower operating costs, the full commissioning of PEPE 4 in June last year and the strong spot sales in CTGEBA (ph), partially offset by reduced Energia Plus, sales which is in line with the decline in industrial activity, in addition to Mario Cebreiro's divestment last year. Due to dispatch increase 3% year-on-year, this is mainly due to the lower gas availability for thermal dispatch that mainly affected our CCGT’s, partially offset by a better dispatch in the old CCGT at Genelba, which in Q2 last year had more days out of service for maintenance. Higher water levels at Mendoza hydros and PEPE 4's contribution. Take or pay capacity payment, especially from PPAs, explains most of the EBITDA, it is driven by availability and in Q2, we reached 98% availability, this is higher than last year's 95%, mainly due to the previous year's thermal outages that we mentioned. So now turning -- let me give you a quick brief on PEPE 6. The expansion, the project. It's highly advanced, 94% between July and August 10, Vestas wind turbines were commissioned by CAMMESA, totally 45 megawatts. We are testing to commission another four. The 500 kV high voltage grid and transformer station have been fully energized as well as free wind turbine circuits. The estimated full COD will be in October and PEPE 6 energy will be sold under B2B PPAs in the mater. Going on, on Slide 8, our E&P business posted an adjusted EBITDA of $121 million in Q2, this is 24% higher year-on-year. This increase was driven by Plan Gas's latest round unlocked by the commissioning of the new gas pipeline in which we were awarded a long-term contract for 4.8 million cubic meters per day flat during the year. The early freeze also helped lower gas exports and sales to industries offset this. In Q2, our total production averaged almost 91,000 barrels per day. This is 35% higher than last year. When we zoom in crude oil just represented 6% of our E&P output and 50% of the segment's revenue. Total gas just keeps taking the lead, representing 94% of our total production. Higher maintenance and treatment costs due to the increased activity and explain that our total lifting cost grew by 11% year-on-year, still the rising output possibly impact the lifting cost per boe, which decreased 17% year-on-year, recording $5.3 per boe and monetizing the economies of scale. Quickly commenting on gas, our production in Q2 increased by 37% year-on-year and 24% quarter-on-quarter. This is average in almost 50 million cubic meters per day in the quarter. As commented before, shale gas is the main contributor here and 63% of the quarter's production came from El Mangrullo and 23% from Sierra Chata, our flagship shale gas fields. Sierra Chata production grew 50% year-on-year without connecting or drilling a well this quarter. While El Mangrullo experienced 45% surge with only three wells tied-in. The average gas price over the quarter stood at $4 per million BTU, this is 14% down due to the lower exports to Chile, as you can see right below, the higher deliveries of local gas were destined for thermal power generation. This is a quick review on Rincon de Aranda sharing the promising results. Horacio surely will comment more on the Q&A. As you can see here, our wells performance is within the range in our neighboring shale oil blocks and our daily production reached above 1,600 barrels per day once we connected the shutting well in June. We have already placed a drilling rig in the block to start drilling a pad of four wells plus another pad next year. You mean to produce by mid-next year and reaching plateau production between 40,000, 45,000 barrels per day by 2027. The petrochemical business, moving on to another business, posted a $15 million EBITDA in Q2. This is 50% growth year-on-year, mainly because of the higher sales of reforming and improved exports of SBR margins offset by the domestic sales due to the economic downturn. Hence the export share is getting more and more important. Moving on to Slide 12, we show the restricted group figures that reflect the bond perimeter. In Q2, we recorded a free cash flow of $60 million. Our working capital have recovered since CAMMESA's last quarter. As of today, days of sales outstanding is 55 days total. This means a delay of only 13 days. The payment normalization allow us to cancel debt. So the net debt is significantly below last quarter as you can see here. In summary, we increased $69 million of net cash in the quarter, achieving a $914 million cash position by the end of the period. Well, this slide shows our consolidated financial position, including our affiliates of ownership, but let's keep it focusing on restricted group figures. We posted a gross debt of $1.6 billion. This is 3% lower year-on-year and a 5% growth in cash. After settling peso debts and depreciations, the peso 92% of the gross debt is in U.S. dollars. The net debt recorded $691 million. This is 12% year-on-year lower and one-time to last 12 months EBITDA net leverage. The average life was 2.6 years, and until 2027, we just don't face any relevant debt maturity. So this concludes our presentation. Now we'll turn the word to Raquel who will poll for the questions. Thank you very much.

Thank you very much, Lida. So the floor is now open for questions. [Operator Instructions] Thank you very much for waiting. Our first question comes from Alejandra Andrade from JP Morgan. First one says, how are CAMMESA payments? She wants to know how are CAMMESA payments nowadays?

Hello, everybody. Okay, so CAMMESA is paying quite well. As of today, we are not experiencing any delay, which is in line with historical minimums, as Lida showed in the presentation. On the other hand, ENARSA has been paying with a delay of almost a month. But we understand that this should normalize in the coming months. And in any case, we are seeing goodwill and reasonable delays in line with the historical minimums that we have seen.

Thank you, Nico. In line with this, she also asks the $23 million impairments are unrecognized CAMMESA interests.

Yes. So as we communicated at the time, we accepted CAMMESA's proposal to settle transactions for December and January with the a 38 bonds. So this proposal did not recognize accrued interest. So considering the bond market prices at the time of the payment, we recognize a loss of $53 million, of which $23 million were unrecognized interest.

Thank you, Nico. The third question of Alejandra, she asked, how are the infrastructure projects progressing?

Good morning, everybody. Well, we have two main lines of infrastructure, the gas pipelines and the oil pipelines. In terms of -- let's go first to the gas pipelines. We are probably going to see the end of the reversion of the NOA pipeline by September or October of this year. So this will provide gas to the north of Argentina and reduce considerably the imports from Bolivia. On the other hand, TGS has already presented [Foreign Language] to the government in order to expand the transportation capacity of the existing Nestor Kirchner Pipeline with the addition of compression in the first tranche and some works in the TGS infrastructure that would boost the capacity transportation or the transportation capacity to approximately 14 million cubic meters per day of additional gas. This is currently being already presented to the government and it's being analyzed. It's a very important infrastructure project to be take into account. In terms of oil, we will have by March, April of next year. The Duplicar project of old Del Valle already commissioned, that will give additional 300,000 barrels per day of transportation capacity. We will also have the tranche one of the Vaca Muerta Sur project from YPF, going from Loma Campana to Argen (ph). So call this the collector of the main pipeline. That is also in progress now in the engineering phase, which is the connection of Argen to Punta Gorda. That will be commissioned by the first tranche by September of 2026 with approximately 180,000 barrels per day. And an additional 180,000 in September 2026, and an additional 180,000 barrels per day by September of 2027. And currently they're analyzing the possibility of an additional 20,000 cubic meters more or 120,000 barrels more by the end of -- by September 2027. This basically resumes the new infrastructure projects that are currently in progress in Argentina.

Thank you, Horacio. Last question from Alejandra. She asked if we have expectations of returning to international market.

Okay. So this is a good question. So we know there is currently an interesting window in the market for Argentine corporates. And as you know, our financial position is quite solid. And our next significant maturity is in January 2027. This is a $750 million bond with a 7.5% coupon, which is below the yields of Pampa's bonds right now. And comparables and recent issuance from companies, for example, TGS. On the other hand, our cash position of nearly $1 billion (ph) allows us to comfortably meet our debt maturities and growth plans such as Rincon de Aranda in the coming years. So for this reason, we are not in a hurry to undertake a liability management at the moment and to tap the markets. But we will closely monitor market conditions and do not rule out doing something early if the conditions are favorable or for example, if there is an M&A opportunity in the market.

Thank you, Nico. The next question comes from Alejandro Demichelis from Jefferies. He asks, what participation can we expect from Pampa in the recently announced LNG export project?

We definitely will have a very active participation in the LNG export project. We are still in the process of analyzing the project and our participation, but it's definitely the way out to our massive gas resources in Vaca Muerta.

Thank you, Horacio. Next questions come from Marina Mertens from Latin Securities. First one says, Rincon de Aranda has delivered promising results. How do you anticipate crude oil production will develop in 2024 and 2025, given the planned midstream expansions? And what additional evacuation capacity will be needed to meet your 2027 production targets?

Okay. 2024, we don't foresee any increase in our production in Rincon de Aranda, basically two wells that are already being hooked into the production lines. By 2025, as Lida mentioned before, we will be probably drilling and completing two pads, and that will give us the possibility of boosting our production to around 10,000 to 12,000 barrels per day. And that matches as well our transportation capacity from under well and the possibility of acquiring additional capacity from companies that will have idle transportation capacity in the Duplicar project. By 2027, we foresee, as I mentioned before that the Vaca Muerta Sur of YPF will be finished and we have an overall capacity contracted of approximately 48,000 barrels. So hopefully by the end of 2027 at least, our aim is to be in the range of 45,000 to 48,000 barrels per day.

Thank you, Horacio. Next question from Marina says, considering the increase in natural gas production, is it realistic to expect that it could remain stable through the summer when local demand declines?

Well, Argentina is a seasonal market with a strong component of domestic demand, so I don't think it's realistic to think that the demand will be constant during the off peak or the non-winter season.

Thank you, Horacio. Next questions come from Bruno Montanari from Morgan Stanley. First one says, how is natural gas demand performing into third quarter 2024? Can we expect higher volumes versus this quarter?

Okay. Well, so far we only have one month of the third quarter, which is July. In July last year, we delivered around 10.8 million cubic meters per day compared to 15.3 million this year, so we are 42% up. July '24, '23 and August is just starting, so it's hard to say, what's going to happen because it's very much variable depending on, particularly on the weather.

Thank you, Horacio. Next question from Bruno says, what is the potential maximum volume of natural gas production once Nestor Kirchner, the second tranche is delivered and how much would Pampa Energia choose to achieve that production?

Okay. We were awarded in the last round of the Plan Gas with the 4.8 million cubic meters per day on a flat basis. So the commissioning of the compression plants do not change our participation in Plan Gas. So we already reached our demand on Plan Gas basis. So we don't see an additional production due to the -- and I understand that you are asking about the commissioning of the two compression plants. So we don't see an additional capacity affecting the Pampa's demand on Plan Gas. So that was the first question. And the other one, in order to keep the production levels that we have, both Plan Gas and plus exports, plus industries, we foresee approximately four to six wells being drilled per year in order to just keep the constant production rates. So that would amount to approximately $100 million per year with no increase in our production curve. Just keeping our curve as it is.

The last question from Bruno says, can you talk about the evolution of the project to develop the company's shale oil acreage? Is the company on track to deliver the plan for 40,000 barrels per day plateau by 2027? What are the infrastructure bottlenecks and investments required to reach the production plateau?

Okay. Well, I already mentioned that we are currently drilling our second pad in Rincon de Aranda and we will be drilling two pads, additional pads in 2025. The bottlenecks basically have to do with treatment and transportation. In terms of treatment, we are already starting the construction of all the necessary evacuation pipelines and -- pipelines, in terms of oil pipelines and gas pipelines and temporary production facilities both owned by Pampa and eventually being negotiated with neighbors in order to be able to deliver those 10,000 to 12,000 barrels per day I mentioned before by 2025. And also we are currently finishing the engineering of our central processing facility that will have four blocks, basically the oil plant, the gas treatment plant, the water disposal plant and the generation plant that will be ready by May 2026 for the first tranche of 3,500 cubic meters per day. And by September, October '26, the second tranche of an additional 3,500, totaling 7,000 cubic meters per day or 42,000 barrels per day. So in parallel with our evacuation and treatment from the Rincon de Aranda itself, we are currently negotiating with YPF our participation in the Vaca Muerta Sur connecting Argen to Punta Gorda for, again, I mentioned before, 48,000 barrels per day. We already have contracted with YPF. The transportation from Loma Campana to Argen through the contract of the Vaca Muerta Sur.

Thank you, Horacio. Next questions come from Anne Milne from Bank of America. First one she says, can you give us an update on the construction of various infrastructure needed to grow Argentina and Pampa's oil and gas business in Argentina? If there are any delays, how do you think they will be?

I think we already covered this.

Okay. And next one says, is Pampa looking at any other non-conventional oil areas at the moment?

We are always looking at new opportunities.

Okay. And the last one says, where do you see Pampa's hydrocarbon production five years from now in terms of volumes and breakdown between natural gas and crude oil?

Okay. In terms of oil, we already mentioned that our aim is to reach a plateau of around 45 barrels to 50,000 barrels per day. And that's what we probably going to be keeping as our goal. Eventually, we are looking at new opportunities. But what we have today in the pipeline is that. And in terms of natural gas, until 2028, we have the plant gas, which are current, basically the current volumes that we are delivering into the market. We still have to see what happens with the expansion of the gas pipelines. As I mentioned before, that represents around 14 million cubic meters per day. I guess that probably we will keep around 20% to 30% out of that market share. So we are talking three to four additional million cubic meters per day of natural gas during the winter season. That's approximately 100 days to 120 days. So basically, those are the main drivers of our future production, not to mention the possibility of the development of the LNG projects that we mentioned before.

Thank you, Horacio. Next question comes from Gustavo Faria from Bank of America. First one, he says, how do you see the demand for gas export in the second half of this year? And could you give a little disclosure on the export prices in the second half of 2024?

Okay. For the second half of 2024, we have committed 600,000 cubic meters per day to Chile through Gas Andes, the minimum price and the price at the same time. That was approved by the secretary of energy, 7% of Brent, which turns out to be around $5.5 per million BTU well head.

Thank you, Horacio. Next question from Gustavo. He says, we saw an important drop in the lifting cost in the second quarter of 2024. Do you see any room for additional lifting gas improvement in the gas upstream segment or do you consider the current level as the plateau?

No, we consider that what we reached is probably the plateau. We won't be seeing any substantial decrease in the future.

Thank you, Horacio. Next question comes from Ignacio Sniechowski from Invertir en Bolsa. First one he says, regarding future increases in regulated prices, do you have any estimation of when these hikes will finally translate into effectively higher income for the company rather than merely substituting subsidies?

Good question. So less subsidies means less dependence on CAMMESA delays and it's more reliance on the demand. Basically, the higher hikes on the electricity, the famous electricity, raw price in the final bills, that means lesser subsidies. That means lesser subsidies for CAMMESA and then CAMMESA faster, for example. It's not going to be materially we getting more money, we as a company getting more money, but that meaning, we getting a better quality on the collections on the payment side, on the receivables. This is mainly the biggest importance here behind the lowering of subsidies. Another thing that is very important is that the other regulated prices, the gas price and the final bills. The higher the gas prices for retail, the lower the subsidies it is. So we collect the less Plan Gas compensation, but again we collected for the distribution. So I mean, it's getting a better credit profile and lesser dependence on the government's diversements. Just to notice, the government just passed a few, actually they passed last June, the regulated prices until the end of this year for electricity and for gas. They already put the outlook for what's going to be the subsidies until the end of the year. As well for what's, if -- what kind of subsidies will be for those that are under retail, social tariff or middle income, as well as the government just passed just a few days ago, the monthly increment -- monthly increase for inflation, 6% for Transmission -- for Transener, 4% for TGS and 3% for legacy prices -- legacy energy.

Next question from Ignacio is about gas production volumes going forward. Do you see these levels of production being sustained in the forthcoming quarters or was this peak due to an exceptionally cooler quarter?

I think we covered that.

Okay. So the final question is, are there any M&A opportunities being considered or all the cash will be devoted to CapEx in order to accelerate and ramp up Rincon de Aranda.

Okay. So we know that our financial position and level of indebtedness allow us to grow inorganically. And we have been analyzing all the opportunities that have been in the market recently. Particularly in our core segments, including unconventional areas. But unfortunately, no attractive opportunities in terms of price have appeared yet. So currently developing our best gas fields such as El Mangrullo and Sierra Chata, and now Rincon de Aranda in oil, along with all the necessary infrastructure is much more profitable for Pampa than paying a high entry price for new assets. So as always, we remain open to potential opportunities that may appear in the market and are always evaluating what is best for the company. But we haven't found anything interesting so far.

Thank you, Nico. Next question comes from Fernando Pueyrredon (ph). He asked, have you discussed alternatives with the government regarding the cancelled Genelba three greenfield and Barragan expansion projects?

So, as Nico, if you don't hear. We have presented two projects. The big one, the 300 megawatts, of course, it's not going to pursue because this can sell. But the other one actually we did presented we wanted. Well, the TerraCom (ph) auction is canceled, but we're doing it anyways. This is a way to improve efficiency even further. The efficiency of the plan. And we are doing this very small CapEx is $50 million for increasing 111 megawatts. So we are doing it.

Thank you. Next question comes from Walter Chiarvesio from Santander. First one says, can you please update on Rincon de Aranda total drilling and production curve, evacuation capacity, etc.

I think we already covered it.

Next one. Any update on potential energy price regimes to be introduced by the regulator?

No, we covered that.

Next question comes from Florencia Machardo (ph) from Medlife. She says the deterioration.

She told me that it's okay.

Next question comes from [indiscernible] she wants to know, do you have some color related to export in terms of restrictions, can you sell that you want abroad -- all that you want abroad, sorry.

We are talking about oil, gas or electricity, but I'm not sure about it. If it is oil, there's no restriction whatsoever. And in terms of gas, it's the same thing, we are restricted by the transportation capacity. There's no regulatory restriction under the new lay the buses in order to export. It's a free market.

Thank you, Horacio. Now Yes, from Florencia Machardo (ph) from Medlife. Regarding hydros, we are recognizing a provision of termination of Mendoza hydros, which was the value. Any update on next steps?

Yes. We've been making provisions, if you can see, quarter-on-quarter, in light of this -- this is very close expiration. The only update we have is that we be granted a 12-month extension. So this is complicated because there's two concessions in this hydro. That is -- one is the provincial or one is the national one. The provincial one has been granted for 12 months. But the state -- the national one, it's only for six months, extendable for another six months. So in light of this, it looks like -- it's going to HINISA -- will be expiring if there's no extension provided, granted on November of this year, we'll see. That's how it is.

Thank you, Lida. Next question comes from [indiscernible] First one says, according to the press, some companies have signed export contracts of natural gas to Brazil with the regression of north gas pipeline, would Pampa export gas to Brazil too?

Yes. We could export gas to Brazil. Absolutely. And we can also export gas to the north of Chile, which is a market that will compete with Brazil. Definitely, we can do that.

Thank you. Next question from Jorge Luis Mauro. After the recent increase in gas prices and electricity prices, how much of the cost is paid by end users for gas and electricity?

For electricity, the other day I got the number, the cost was $91, the average cost of the grid. And the coverage was 61%. So it's pretty much -- the coverage was 61%. It's pretty high. Last year, the coverage was 20%. So it's increasing. Still the government has to diverse the other 40%, right. For example, for users -- retail users that are non-subsidized, such as me, I'm not subsidized at all. I am paying in my bill $72 per megawatt hour. Of course, against the real cost $91 still subsidized. But I didn't hike from $20 last year. So it's been increasing hike. Then in gas, gas, I don't remember the coverage, because in winter the prices go up very much because of the liquids. It's difficult to assess. But for example, full non-subsidized people like to, such as me, I'm paying $3.3 per million BTU. Last year, I was paying $1.5 per million BTU. So it's been increased. And low income people are paying instead of $0.30, $0.20 now they're paying 1.8, but just for a block, if they're more than that. If they excess on consumption, they have to pay the full fare. That's 3.3. So the idea is to lift it up, the prices little by little. In the case of the people that can afford it, such as myself, it's the full fare, but still a little bit lower that real cost, but very close, as you can see.

Thank you, Li.

Do we have more questions?

So next question comes from Ludovica (ph), too. You have just announced a share buyback program. Would you consider to return more cash to shareholders?

So we just announced the program and you're already asking for more. Now, in the last five years, less than five years, we have repurchased almost $600 million of shares at an average price of $22 per ADR. And now we are announcing a new program. So that's all for now. We are not considering anything more.

We don't have any more questions.

I think. I don't see more questions. If you have any questions about the financial statements or anything, you can just delete it. We just uploaded in our website the earnings, we have all the backup information there. I think we had hit the top of the hour. We appreciate very much you joining us in this call. Appreciate you, Horacio, Adolfo and Nico for joining us for the Q&A. Any questions you may have, please send us an email, we will be more than happy to help you. I hope I beat you a good day.

Thank you very much.