Vista Energy, S.A.B. de C.V. (VIST) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Vista's First Quarter 2021 Earnings Webcast Conference Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Alejandro Cherñacov, Strategic Planning and Investor Relations Officer. Please go ahead. Alejandro Cherñacov: Thanks. Good morning, everyone. We are happy to welcome you to Vista's First Quarter 2021 Results Conference Call. I am here with Miguel Galuccio, Chairman and CEO; and with Pablo Vera Pinto, Vista's CFO.

Thanks, Alejandro. Good morning, everyone, and thank you for joining this earnings call. I am thrilled to share with you our first quarter 2021 results, which shows solid operational progress and profitable growth and put us on track to deliver on our 2021 guidance. Key operation and financial metrics have improved, both year-on-year and quarter-on-quarter. Driving this growth is our flagship project, Bajada del Palo Oeste, which continues to show improvement in terms of well cost and productivity. In Q1 2021, we achieved a quarterly production record, with 34,100 BOEs per day, a 29% increase year-on-year. Oil production was up 56% year-on-year and 15% sequentially, boosted by the early tie in of pad #6 in Bajada del Palo Oeste at the beginning of February and pad #7 in late March. Total revenues were $116 million, up 58% vis-à-vis Q1 2020, mostly driven by the increase in oil production, but also by an improvement in realized oil prices. Lifting cost per BOE was $7.5 for the quarter and 24% reduction year-on-year, reflecting lower incremental costs in Bajada del Palo Oeste, which dilute our fixed cost base. Adjusted EBITDA was $58 million, an expansion of 131% vis-à-vis Q1 2020, driven by the solid increase in revenues amid flat lifting costs. Capital expenditure was $78 million, in line with execution of our 2021 guidance and reflecting the completion of 2 pads in Bajada del Palo Oeste during the quarter.

Our first question comes from Bruno Montanari with Morgan Stanley.

Good to see the continued evolution pad by pad, Miguel, was very impressive. I have a couple of questions here. First, on pricing, what is your view on how oil prices in Argentina can converge to the international benchmark, even with the $53 lock in for Q2, the discount is still a fairly large versus export Brent, right? And then also get your views on whether the company believes that natural gas incentive scheme is going to work properly this time around. My second question is more long term. And taking into consideration the experience you have had now with 7 pads, getting into the pad #8 now. If all the stars align and the reservoir response is positive, how low can lifting cost be? And how low can your drilling and completion cost be? I'm not talking about the next quarter or year, but philosophically, just looking at the potential of the asset, where could cost in drilling and completion cost be?

Thank you very much for your question. A good one, as always. Look, starting with pricing, I think, first of all, we need to keep in mind that price in Argentina have 2 different effects. The fair effect when we talk about export prices is the fact that we are preselling our volumes ahead of time. That we are doing because we are securing revenue, but also because the way that the market in Argentina, the local market works is we believe that every time that we secure volumes in the local market, we free up volumes for exporting. So when the refineries feel that they are -- will supply, okay, they don't cross our exportation. So that effect, we have to keep it in mind. So then it's important to define what is export parity. So you're talking about export Brent. But really, our market is export parity. And export parity in Argentina is -- used to be Brent below 10%. Due to the new regulation today, it's Brent minus 8%. And also, you have to add to that, the discount on commercial volumes that in Q2 2020 used to be below $10, and today is $2. So as an example, if you would take today Brent of $61 and you discuss $2 of commercial discount, you go to $59. And if you dare to take 8%, you are in $54. So that is the export parity that we have, if we take a picture of today. Pump prices are running below export parity today. Pump prices, as you know, evolve during tie in. We have had pump prices that are above export parity in certain moments, and now we have a pump price that is below export parity. I will say, if you take today, probably we are $2, $3 below export parity. As I mentioned before, pricing in Argentina, pump prices have inertia. Inertias to go down. We have never seen going down, and inertias to go up. So that is the name of the game here. In terms of gas prices, I will say, first of all, for Vista, when you look at our top line, our revenues, the revenue coming from gas is less than 10%. So it's not really meaningful for us today. It was 2 years ago. But as we become a company that is more oily, as we develop a more unconventional resources, the gas is having less an impact. I do believe the gas scheme that they put in place makes sense for the government because every time that they don't have local supply, they have to import, and the differential cost is big. And we see companies that are placed over gas resources with this new scheme picking activity. So my view on that is, that is in place, and I think is going to work. In terms of more your philosophical or a long-term question, this is very interesting. And of course, we have a view, even though I cannot give you precise numbers, otherwise, I will be disclosing something I don't have to disclose yet. But do we believe we can really in the lifting cost arena perform below $7? Lifting cost, we have mainly 2 effect as we develop more unconventional as we are going to continue growing production, therefore, diluting our -- part of our fixed costs. And on the other hand, we know that maintenance wise -- operational wise, our unconventional is a lower lifting cost operation compared with our conventional operation. So as we add more volume, we dilute the cost. As we add more unconventional ways, we dilute lifting costs. So I think we can dream of being well below $7 per barrel. In terms of drilling and completion costs, also, I think we can expect at some point of time to be below $7. I think there, you have 2 effects. One effect is clear that we are performing above our type curve today. We've been performing above type curve already for a while. So I don't see that changing. And the other thing that we believe we can do if we could continue reducing more than drilling costs. I mean, I am not sure we can drill faster than we are drilling today. But on the completion side, I think we're still having certain proofs that we can reduce their costs. One example could be a proppant sand. As you know, we have a strategy to source in-base sand, and we are developing that in order to have an impact in a component that is really meaningful to our completion costs. So the answer is yes. I think we can think of being well below the numbers that we are today forecasting to the end of the year. It's going to take time and it's going to take hard work. But I think we have the strategy, and we have the people to do it.

Our next question comes from Andres Cardona with Citigroup.

I have a couple of questions. My first one, it's following with the previous questions about realization prices. I would like to understand if there is any progress with the hydrocarbon law? And if you can let us know how much of your production was exporting during the first quarter? And if you can give us some color for the second Q? And then the second question is, if you can help us to understand what is the situation between the unions and the oil and gas industry at Vaca Muerta? And if you have seen any impact yet at your operations?

Thank you, Andres, for your question. So I will start first with the export and building up on Bruno's question. So in Q1, the percentage of export was 46%. So we have a mix, again, of local market on volumes that we closed in Q4 2020 for export, and that volume that we presold was 46%. In Q2, of course, we have a very -- a better visibility and better prices on the local market. We apply the same strategy, and we -- the component on the local market was 75% for local and 25% for export. And as you -- as I mentioned in the presentation, it's already on the pocket. Back to what Bruno said, I mean, if you look at -- I'm looking now at a plot where we usually follow the average sale prices in the local market and the Brent export forward curve. If you guys made that curve from January '21 to June '21, you will see how this inertia that I mentioned works, and you see the gap between export and local prices narrowing down. The gap is still there. And part of the gap back again is the export parity and the commercial discount that we have. That also with the -- and the commercial discount has been reduced a lot. I mean we have tenders of $1 today, and we are averaging $2 of a commercial discount. In terms of the impact that we have due to the social demonstration, so first, and what you said that we have no impact on production. Vista have no impact on production. We managed to navigate that issue extremely well. The social demonstration was driven or start by headworkers, did affect drilling and completion activity, yes, because there was -- we were mobilizing a drilling rig from one pad to other, and that was affected because there was many road blockage. And I will say this is today look like is almost resolved. Nothing -- something that we have to watch, something that we are accustomed to, not only for the ones that we have operated in Argentina, but also in another part of the world, it's something that we need and we have to deal with. Hopefully, we see this normalizing in the next few days. The headworkers have achieved and agreed -- have arrived to an agreement with the provincial government. So we see that issue probably resolving now in the next few days. Related to the hydrocarbon law, the initiative is still alive. There's a lot of discussions between the government and the companies. As I have said before, I think the important thing, we have a law that -- oil and gas law that consider unconventional and is working. So I think the main point to address there is if we see any change in the fact that we have a scheme or make a need for cross-border repatriation of dividends for the people who are investing in Argentina. And the other main thing to consider, if we're going to have a low stimulus, Vaca Muerta development is related to export. As we have more volume to export, the better we become the business for Argentina. And somehow a bit more decoupled will be of the local pricing and it's what makes sense for Argentina because it's going to create a new flow of dollar to Argentina economy, that is exactly what the economy needs. So incentive export and anything that they can do in this build to incentive I guess export is really the name of the game. But I cannot say more than that. These are the topics and the discussions are ongoing.

Congratulations for the results.

Thank you, Andres, for the question.

And your next question comes from Alejandro Demichelis with Nau Securities.

A couple of questions. Just as a follow-up to what he was saying, Miguel, on the impact of the social demonstrations. So you were talking about some impact on drilling and completion. So can we see an impact on your next pad? And can that pad kind of move to the next quarter? That's the first question. And then the second question is, I think in previous calls, you were kind of targeting almost 1 pad per quarter. Is that still the plan going forward?

Alejandro, thank you for the question. Yes, I mean, so far, we see no impact. When I said that we have basically lose some time on the demobilization and mobilization of the drilling rig from 1 pad to the other, that is real. Nevertheless, we were ahead drilling wise. So we don't see impact on our plan. So again, everything shows that the situation after the agreement is normalizing. So we are not forecasting any impact on production and we continue with the same plan of tying in 1 pad third quarter. We also are leaving us room to create or to accelerate our 2022 plan. If we have room in Q4, even to pick up 1 more drilling rig, but this is not on our plan, but it's something that we have in mind.

Okay. And just to kind of close that, I think in your 2021 guidance, you were saying the plan was to tie in 16 wells. You already tied in 8. You have 4 ready to be completed and tied in. So it seems that you have the whole of the second half to tie in only 4 wells. So can we see more wells being tied into the second half of the year then?

Yes. So we have tied in 8, we are going to take another 4 in Q2. And yes, as you said, in this second half, we have 4 more to tie in. Can we drill 4 more in Q4? Yes, we could. Can we tie in those in Q4? Yes, we could. Can have impact in 2021, a minimal.

Okay. Yes. No, that's clear. But it seems that you are well ahead of the guidance, at least on the drilling and completion.

Yes, we are.

Our next question comes from Ezekiel Fernandez with Valance.

Congratulations on the progress in Bajada del Palo. Most of my questions have been already answered. I have only one that I would like to stress on maybe related to what Miguel was commenting on the new hydrocarbons law. In early April, the government issued the FX regulations, which are not new, but they reinforce the notion that exporting companies will have greater flexibility in accessing the official FX market for debt repayment and even dividends. I'm talking about . I was wondering if this particular legislation impacts your financial strategy and if you're thinking about potential dividends?

Thank you, Ezekiel, for the question. And the answer is no. I mean we are not planning to use the to repatriating funds and the dollars that we need, we already brought it before that regulation was in place, and we have no visibility that we are going to bring any more dollars in this year. As you know, you see and you follow us and you see our cash flow generation and balance sheet, we are starting to generate cash and that now is going to be, as we continue with our plan, something we will do. So we have no plans to use the more and to repatriating and to use that.

Our next question comes from Frank McGann with Bank of America.

Most of the questions have been already asked, but just maybe to follow-up a little bit on some of the other comments that you've made. Towards your activity this year, it's fairly clear. As you look into 2022, what are your thoughts in terms of where you'll be focused?

Frank, thank you for the question. So 2022, we will basically have -- we will continue. So far, our view is we'll continue with this strategy of drill to fill mode. We're still having spare capacity in our facilities with minimal CapEx investment to go all the way to 45,000, 50,000 barrel per day. So the strategy will be continue to be the same. That strategy what it does is create a company that in 2022 generate a lot of cash. When you look at $45, that is the plan that we have today with lifting cost of $7 and development cost of $7, let's put. So we have become a low-cost producer that clearly have margin of 50% at low oil prices. So 2022 will be a year where we are going to be above the cash flow curve and we will have to decide what we do with that cash that we generate. Of course, the option to accelerate the development of the resources that we have that are huge is an option but of course, we have another option. Something that we have added to that the strategy is that now we don't want to be only low cost. We want to be a lower carbon operator. And I'm not saying that in a mode of fashion. We are really putting this plan on sustainability. And we believe that we have the agility, the team and the power to become a low-carbon producer. Of course, our unconventional development is helping in the lifting cost, is helping in the low cargo as well because our operation today of unconventional is probably in kilogram per CO2, half of the -- that's half the CO2 emission that our conventional operation does. So that is another objective that we have. And I think that objective we have to realize between now and 2022. But 2022, with today oil prices, looks very bright for Vista.

Our next question comes from Marcelo Gumiero with Crédit Suisse.

Congratulations on the results and also on the achievements on the ESG front. My questions were mostly answered before. I have just a follow-up question on the production and the CapEx part. I mean we saw production at 34,000 BOE in the first quarter with Bajada del Palo Oeste all the way up to 21,000 per day in March. But the 2021 guidance is 37,000, 38,000 with exit rate at 40,000 I mean could you provide us some color on when do you expect to tie in the other wells? You already said that you could tie in more wells than the plan. And how should we see production evolving through the year, could position grow even further than the guidance?

Thank you, Marcelo, for the question. So yes, I mean the fact is that we are performing above guidance today. When you look on production and also forward, we are seeing of the performance of Q2, production today of Vista is about 40,000 barrels per day. When you take the picture of today, I think it's 43,000. So we are performing above guidance. Nevertheless, we have half of the year to go. The activity that we plan is still the same. So we are talking about a potential additional pad in Q4, but the reality is that pad is not in the plan. And if we have that pad in the plan, it's going to have minimal impact on production, it will more be important for 2022 because it's going to create -- it's going to help us to have a much better starting point, something that we did this year, and I think it's important. Nevertheless, for the guidance of 2021, it will make no difference. So if we are above guidance, how we finish the year, we pretty much depend that the quality and the timing of the pad that are coming in Q2 and the one that we are going to start in Q3 come in place with the quality that we've got. But the short answer is yes, we are performing production-wise above guidance so far.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Miguel Galuccio for any further remarks.

Gentlemen, thank you very much for your question and continued support, and I wish you are all healthy, and wish you a good day. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.