Welcome to the First Quarter 2016 YPF Sociedad Anonima Earnings Conference Call. My name is Sylvia and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Diego Celaa. Mr. Celaa, you may begin.

Great. Thank you, Sylvia. Good morning, ladies and gentlemen. My name is Diego Celaa, Head of Investor Relations at YPF. I would like to thank you for joining the YPF First Quarter 2016 Earnings Webcast. The presentation will be conducted by our new Chairman, Mr. Miguel Gutierrez, and our CFO and Interim CEO, Mr. Daniel Gonzalez. During the presentation, we will go through the main aspects and events that explain our first quarter results, and finally, we will open up the call for questions. We will be making forward-looking statements, so I ask you to carefully review the cautionary statement on Slide 2. Our agenda today will include the review of the first quarter results and give you an update of our shale and [pipeline] [ph] development projects, a brief description of our financial situation and a brief summary to conclude. But before we get into details, Miguel Gutierrez will make some opening remarks. Please, Miguel, go ahead.

Thank you, Diego, and good morning to everybody. I'm very honored and proud of having been appointed as the new Chairman of the Board of YPF. I believe I can bring my expertise, my commitment and professional expertise to take the Company to the next level. We are working already very hard with our current management team, as the team has been doing over the last few years, and we expect to build over that. [Indiscernible] is plenty and of additional value to recreate it in this new Argentina and in this Company. You can expect the high standards of corporate governance and transparency. To that end, I think you have seen the new members of the Board have been selected based on their professional track record and background, that I think are [aligned] [ph] to the corporate governance that we want to establish at YPF. As you probably know as well, we have formed two new Board committees, a Risk Committee and a Compliance Committee, to the existing [indiscernible] Compensation Committee. In order to further strengthen the corporate governance of the Company, we have split the Chairman and CEO roles, in line with global best practices. And finally, in order to go through this period of time in which we are searching for a new CEO, we have appointed Daniel Gonzalez as Interim CEO of the Company, while as I said in the next 60 days hopefully we will have finalized the search of the new CEO. We know that our challenge together with the management team is to execute and also to be very focused on productivity and efficiency, and I think this is what we are going to be focusing in the next few weeks or months. I have visited the operations recently in order to personally deliver this message to the different [indiscernible]. I hope to have the opportunity to meet each one of you individually soon and have your support. And with this, I would like to turn over to Daniel.

Thank you, Miguel. Thank you, Diego. Thank you everybody for joining us this morning. We are again very pleased to report our first quarter 2016 results. Our quarter, as you all know, we had to face an increasingly difficult operating environment with low international oil prices and a significant devaluation of local currency. However, in this scenario, revenues were up by 35% in pesos when compared with the same period of 2015 and adjusted EBITDA reached 12.5 billion pesos which represented a 22% increase. However, operating income was down by almost 64% as such growth in EBITDA was more than offset by the increase in the depreciation expense as our fixed assets are valued in dollars and the peso depreciated 67% against the dollar in this last year. Total CapEx increased in the first quarter of 2016 by 19% in pesos reaching a total of 14.7 billion pesos, but was 29% lower than last year if we measure it in dollar terms. In this first quarter, total hydrocarbon production showed a slight growth of 0.3% vis-a-vis a year ago, with 1.1% growth in natural gas and 0.8% increase in daily crude oil production. This slide with our most relevant income statement figures in U.S. dollars helps us to better understand the impact of the local currency devaluation. Revenues in dollar terms were down by 19% as diesel and gasoline prices dropped by 26% and 25% respectively, and the exports in dollars were down 30% on lower international prices. EBITDA was down 27% in dollars, affected by the previously explained reduction in revenues coupled with the increase in depreciation expense. However, these results were almost in line with our budget for the quarter as we all was expected that the partial recovery of our [pieces] [ph] would be gradual as the…

[Operator Instructions] Our first question comes from Frank McGann from Bank of America Merrill Lynch.

Just I'd like to follow up if I could just on cost, you had some benefit from the devaluation in the quarter. I was wondering what you expect as you go through the rest of this year in terms of cost trends given inflation and a possible labor settlement? And then thinking a little bit more strategically longer term, what opportunities do you see for taking potentially significant cost out of the cost structure via oil services costs, especially in light of the improved situation in Argentina which I would assume would reduce the risk profile for contracts and potentially enable you to get better pricing from service companies?

This is Miguel Gutierrez. Just taking your last question, I think there are plenty of opportunities going forward as the macro situation continues to stabilize here. Risk premium continues to reduce and I think we should reengage with all of our suppliers and have a discussion under the new macro conditions I think. So right from there, there must be significant opportunities to reduce costs.

I would say, Frank, in addition to that that we have seen that most of our cost, I'd say all of our costs which are peso denominated, were up in the 25% to 30% range from a year ago. So clearly not only below the devaluation, which you made a good point, that has helped us, but also below inflation. So we do expect to continue to see our costs increase below inflation, below our price increases going forward. It is clear though that this first quarter didn't have the impact of salary increases, which we might see in the second quarter, but we will surely see in the third and fourth quarters. However, our budget for the year assumes a significant reduction both in lifting cost as well as in total OpEx in the Upstream and a little bit of a milder reduction but a reduction at the end in our refining costs for the year, all of them measured in U.S. dollars. So we do believe that, as you said, our cost basis will continue to come down. We were very encouraged with the last results of the wells' productivity in terms of drilling days, which has been a record for us. We have been able to increase the frac stages per day. So I'd say everything is looking in the right direction. However, with respect to the contracts, I agree with Miguel, that they will come down as the cost of doing a business in Argentina continues to come down. It will be gradual though because most of them are medium and long-term contracts that can only be renegotiated once they come due. So you should not expect a significant drop from one day to the next.

Okay. If I could follow up maybe just with a second question, just in terms of demand trends, obviously you mentioned the economic effects near term. With prices having risen pretty sharply, I was wondering if you expect any price or effect of price increases on either gasoline or diesel demand? And in terms of natural gas, the potential increases for residential consumers, I was wondering if you have seen or been able to, is there any indications yet if that's having any effect on the mix of gas sales from residential perhaps to industrial?

Okay, on demand, what I can tell you is that diesel oil sales have a high correlation with economic activity and are less elastic to prices, first. Gasoline on the other hand has some more elasticity to prices. However, even with these last price increases, you have to bear in mind that prices for gasoline and diesel were up 23% and 25% vis-a-vis last year, in an inflationary environment in Argentina with levels which I cannot guess but they are clearly above those levels. So it is not that prices of our products have grown beyond inflation, okay. Quite the opposite. Having said that, the 10% increase that we just put in effect on May 1, it's a little bit too soon to see any effect out of that. I think that May should be a good month in terms of total sales, but basically because we would be making up for all the sales lost in April because of rainfall. So I think we need to wait a couple of months to see what, if any, is the effect of prices and demand, but I don't expect it to be significant to be frank with you. In terms of natural gas, it is very soon because I haven't seen the last numbers from our subsidiary Metrogas, but the bills with the increases in prices have very recently reached the residential customers. So only after the customers see the increase, they start eventually carrying the use. The mere increase of tariffs without actually anyone suffering them in the bill that comes at the end of a two month period is not enough to make any adjustment. So, again similar to the answer regarding gasoline and diesel sales, I think that we need to wait a couple of more months to see what kind of effect there will be. However, I do expect some reduction in residential gas consumption to be experienced in the next few months.

Our following question comes from Juan Vazquez from Puente.

The first question is about the gas subsidy. We've seen again an impact in operating cash flow from this account receivable, and in our [thoughts] [ph], hadn't it been for this, free cash flow may have been positive. So if you receive bonds in order to collect the gas subsidy, do you think you're going to be able to sell those bonds into market if you wanted to? The second question is a follow-up to a previous question. We've seen volumes sold in premium gasoline and diesel actually go up. So what is the main reason behind that whenever volumes were flat? And the last question, if I may, is given the increases in gas prices at the wellhead, do you think that in the next quarter the average realization price for gas would be closer to let's say $5.20 per million BTU?

With regards to the bonds, we still have not seen details. There will be some kind of restriction to monetize those bonds obviously. On the other hand, we would not like to go out to the market and try to monetize either way because it will probably have a negative effect on prices. And given the cash situation that we have today, which is very comfortable, I can anticipate that we will do a gradual sell-down of those bonds. On the other hand, they are dollar-denominated, so it helps us in covering, if you want, our dollar-based liabilities which is our dollar-based debt. When do we expect? We understand that this is kind of imminent. Frankly, we were expecting this to occur before this call. It has not. We would be very surprised if it doesn't happen in the next couple of weeks. We are having conversations at both the Ministry of Energy as well as the Ministry of Finance regarding this, and I think that we will see some kind of solution one way or the other very soon. In terms of the premium products, it was a great question that I should have addressed when Frank asked this question regarding demand and effect on price increases, because evidently when there is a significant increase in prices which has a significant impact in demand, the first product that usually suffers is the premium product, and that was not the case. So that again underscores what we have just said that we don't see a meaningful negative effect in our sales derived from price increases. The reason I believe for the continued increase in volumes of premium products, I'd say it's twofold. On the one hand, the car market in Argentina continues to grow with more and more modern cars which tend to use premium products, on the one hand. And second, just for YPF, we believe our products are extremely strong from a marketing perspective. Our Infinia product that was launched a year and a half ago has consistently been eating market share from others. So again, I believe it's just a result of a very strong commercial position. In terms of wellhead prices of gas, we are not expecting any significant change in the short term. The mere application of the gas plan results in an increase in wellhead price of gas in dollar terms in average for us every quarter. But as you have seen in this quarter, the increase vis-a-vis last year was only 4% in dollars. So I think that you will continue to see that kind of increase. However, there are conversations with Ministry of Energy regarding a potential increase in prices of gas at the wellhead. They are preliminary at this stage. But I think what we will probably see towards next year or the end of next year is that prices will stabilize in the $5.5 to $6 range per million BTU.

Our following question comes from Anish Kapadia from TPH.

Three questions please. Firstly just clarification on the accounts receivable from the government I think you mentioned 21 billion peso figure. I just wanted to check, are you going to get – what's the conversion rate that that's going to be converted at, is that the rate at the time of those receivables or is it the current exchange rate? And the second question around your unconventional portfolio and some of the growth, so from the [indiscernible] in Q1, it seems like production fell slightly despite having those two wells. I was wondering if you could explain the reason for this. And then I suppose on the tight gas side, you've seen the opposite, you've seen very strong growth in gas, so if you can give somewhat of an outlook for your tight gas production and is the real constraint some of the prices and capacity? And then just finally, with regards to both those areas, given the situation you are seeing at the moment there, are you seeing a significant increase in interest in farm-outs?

The first question regarding the 21 billion pesos, they should be converted to dollars at the time that those bonds are issued to us. At this time, the dollar is kind of flat, it has been flat, and actually coming down for the last couple of months, I have to say. So we're not really concerned with that given that it is supposed to be solved just in a matter of weeks basically. In terms of the converted production, you are right, the first quarter experienced a slight decrease. That is because we reduced CapEx by the end of last year preparing for the budget for this year which would have lower CapEx. So we reduced some of the stimulation activity in the last month of last year. Having said that, we continue to budget an important increase in production coming from the shale this year. While we talk, we are making some calculations here in terms of total shale production, both oil and gas for the year, vis-a-vis last year. It's not going to be below 10%. So I'd say between 10% and 15% growth in production this year, of course with the first quarter without significant growth vis-a-vis the fourth quarter but with significant growth vis-a-vis the first quarter of 2015. In terms of tight, you are right also that we have some facility restrictions. As I mentioned during the presentation, we have three main areas of tight gas production and the facility restriction today is in one of those areas, which is EFO, and that is in the process of being solved during the course of the year. The other area that had a facility restriction was Rincon del Mangrullo, and actually in this second quarter you should see production out of that area increase significantly because we are now producing close to 4 million cubic meters a day without any restrictions while we were below 3 million a month or two ago. And in the other area, we have not faced any facility restrictions at all. The other area, it's actually Lajas formation in the Loma La Lata block, and actually to be more precise in the Sierra Barrosa-Aguada Toledo, and there is plenty of idle capacity there because this is, Loma La Lata is precisely where most of the gas came from in Argentina in the last 20 years. That production out of Loma La Lata, the conventional production has been coming down, but most of the facilities continue to be in place of course. So we shouldn't have any restrictions there.

The next question comes from Alex Burgansky from Deutsche Bank.

I just have a question on the profitability of the Downstream division. Your presentation mentioned and you said in the call that that were some product stocks that were written down during the quarter. Can you please quantify that amount? And also if you could provide a little bit more detail maybe on the actual per barrel costs in the Downstream business, refining and transportation logistics, so we can better understand the profitability of the refining unit?

Let me start with the second question. The refining cost, again other than the crude oil purchases, was up 28% in pesos, total refining cost. So it was significantly down in dollar terms. And remember that the crude oil represents 80% of our total refining cost approximately. The problem with this business segment is that that 80% is denominated in dollars and the revenues that we get out of the segment are initially at least denominated in pesos, because they are actually derived from sales of diesel and gasoline in the pump down here in Argentina. So until we are able to catch up with the price increases, you see some reduction in price in dollar terms, while our main cost goes up or stays flat in dollar terms but goes up significantly in pesos. In terms of the first question regarding the write-down in stocks, was of approximately 1.5 billion pesos in the quarter, and we had seen a gain of stocks of 1.3 billion pesos a year ago. That's why the difference is so huge. It was a positive effect last year, it's a negative effect this year. However, that's a result between segments. What that means is that the numbers of the Downstream had the positive effect of revaluation and then we put the provision in negative, an opposite sign, out of Corporate and Other. So it's not a result that goes out of the Company, it's an inter-segment result. I'm sorry I was not very clear with the explanation.

Our next question comes from Alejandra Aranda from Itau.

This is Ricardo Cavanagh. I wanted to ask on your expectations regarding negotiations with the unions and salary increases overall, and related to that, if this is what, exaggerating, keeps you awake at night as main risk to the Company this year?

Yes, you know that this is the main challenge for us. It's a combination of reduction in activity that we said that we would have this year, that we are in the process of putting in place, and the salary discussion. We are only starting that salary discussion as we speak. So we don't expect to have any news in the next couple of weeks. We do expect the unions to behave rationally, because if we are not able to reduce the costs of the Upstream in dollar terms on a sustainable level, it will be very difficult in the long term for all of us producers here in the industry to keep the level of activity that we have today. But we know what we need to execute. We have a very good relationship with unions. They have always been very constructive in these last few years working hand-on-hand with us. So we expect a positive outcome. But I have to say, yes, this is the most important thing that keeps us up at night.

We have no further questions at this time.

Okay. Thank you very much for your attention today and see you next quarter.

Thank you. Bye-bye.