YPF Sociedad Anónima (YPF) Q2 2016 Earnings Report, Transcript and Summary

Welcome to the Second Quarter 2016 YPF Sociedad Anonima Earnings Conference Call. My name is Sylvia, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Diego Celaa. Diego, 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 second quarter 2016 earnings Webcast. The presentation will be conducted by our CFO, Mr. Daniel Gonzalez. And also is with us our new CEO, Mr. Ricardo Darre who will be introducing himself by the end of the presentation. During the presentation, we will go through the main aspects and events that explain our second 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 statements on slide two. Our agenda today will include the review of the second quarter results, including an update of our shale and tight development projects, a brief description of our financial situation and a brief summary to conclude. Please, Daniel, go ahead.

Thank you, Diego. Thanks, everybody for joining us this morning in which we are reporting our second quarter 2016 results. This was a quarter where as you all know, we faced a difficult operating environment with a slow local economy, low international prices, strikes that affected production and a significant devaluation of the currency vis-a-vis the same quarter last year. Still, these results were significantly above those of the previous quarter and totally in line with our budget and with guidance. In this scenario, revenues were up by 32% in the quarter when compared with the same period of 2015 and adjusted EBITDA reached ARS17.2 billion which was a 38% increase. However, operating income was down by almost 5%, as such growth in EBITDA was more than offset by the increasing depreciation expense as our fixed assets are valued in dollars and the peso depreciated 59% against the dollar during last year. Total CapEx was down in the second quarter by 1.8% in pesos, reaching a total of ARS14.5 billion as a result of our scheduled reduction in drilling activity. In this second quarter, total hydrocarbon production showed a slight growth of 0.3% vis-a-vis a year ago, due to an increase of 26% in NGL production, with 2.8% decrease in crude oil and 0.4% decrease in natural gas production. These production results were negatively affected by the strikes we suffered during the period. Similarly to what we went through in the first quarter, the local currency devaluation had a negative impact in our income statement figures when expressed in U.S. dollars. Revenues in dollar terms were down by 17% as diesel and gasoline prices dropped by 13% and 11% in dollar terms, while exports in dollars were down 28% on lower international prices and lower volumes. EBITDA was down 13% in dollars, affected by the previously explained reduction in revenues and the positive impact of a dilution of our cost base in dollar terms as the majority of our costs are peso denominated. Consequently, the EBITDA margin expanded to 33% in the quarter. Actually, EBITDA was almost 50% higher in dollar terms than the first quarter of this year, as this second quarter benefited from additional price increases for our fuels sold at the pump. Let's switch back to Argentine pesos to go over more detailed analysis of the quarter. Operating income, as I said was down 5%. In the upstream segment, the revenue increase resulting from higher prices for both crude and natural gas was not enough to offset the effect of higher depreciation and higher exploration expenses that I will explain in more detail in following slides. Our downstream sector is catching up from the impact of the severe devaluation we experienced at the end of last year as we continued to increase prices during the quarter, but insufficient yet to generate a similar operating income than last year. The offsetting factor was the one-time positive result of ARS1.5 billion generated by the deconsolidation of the Maxus entities, shown under the corporate and other bar in the slide. On June 17 of this year, the Maxus entities announced their filing for reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code. And as a result of these proceedings, YPF ceased to have control or significant influence over the Maxus entities and therefore, will not consolidate the results of the Maxus entities any longer. This deconsolidation has resulted in this ARS1.5 billion gain, as the Maxus entities had negative equity. Continuing on with our operating income analysis, in this chart, we can get in more detail on the reasons behind the negative variation. Revenues grew by ARS12.8 billion or 32%, resulting from a few factors: First, ARS4.4 billion increase in diesel sales due to 38% higher prices in pesos, partially offset by 6% lower volumes. Second, ARS3.3 billion increase in natural gas sales due to prices which were 59% higher in pesos and on approximately similar volumes. And then an increase of ARS3 billion in gasoline sales with higher prices in pesos of 42% and lower sales volumes of 4.4%. The deconsolidation of the Maxus entities, again, mentioned in the previous slide is included in this chart in other expenses. Cost of sales grew by ARS12.4 billion or 42%. As in previous quarters, the main driver of cost increases was DD&A, which was up 73% or ARS4.5 billion, fueled mostly by the 59% currency devaluation and the capital expenditures made in previous quarters. Cost of sales other then depreciation increased by ARS3.9 billion. The only cost component which is fully dollarized are the royalties which are paid to the provinces on well head prices which are set in U.S. dollars. And these were up by ARS1 billion. The other factors explaining the increase in costs were the lifting cost which was up by ARS2 billion but substantially lower in dollar terms; the refining cost, which was up by ARS800 million and transportation expenses, which increased by ARS500 million. Purchases or raw material and other products for sale increased by ARS3.7 billion, mainly as a consequence of higher purchases of biofuels for ARS1.4 billion, driven by both higher prices in pesos and a higher blend. And then to a lesser extent, the other purchases that went up were crude oil purchases, which were 32% higher. This is a crude oil purchase from third parties in the domestic market on 15% lower volumes. On the other hand, we experienced a reduction in imports for a net amount of ARS50 million due to lower imported volumes of diesel and higher imported volumes of jet fuel, both at lower prices. SG&A was up by 30% as a consequence of higher transportation expenses and salary increases. And exploration expenses were up by ARS351 million, in part as a consequence of higher expenditures on geological and geophysical studies, mostly seismic, but mostly because of a slightly higher number of unproductive exploratory wells which do not behave evenly across the year. So, in general terms, all of our costs with the exception of DD&A increased at rates which are lower than those of our revenues. Entering now to our upstream business segment, operating income decreased by 32% against second quarter of 2015 to reach approximately ARS1.7 billion. Revenues increased by 42% to reach ARS27.8 billion, driven by higher crude oil sales by ARS5.4 billion or 40% due to slightly higher volumes transferred to our downstream segment but at higher prices in pesos, and second, higher natural gas revenues of ARS3.3 billion on higher prices in pesos, which were also higher in dollars, and as I said earlier, similar volumes. It is worth mentioning that, during the second quarter of last year, we had accrued ARS600 million of revenues derived from the $3 a barrel subsidy, which was in effect at that time to promote crude oil production. And this benefit is not in place this year. The average realization price in dollar terms for crude oil was $60.70 per barrel. And for natural gas, the average price was $4.75 per million BTU, which was 5% higher than last year. On the cost side, these were up by ARS8.7 billion, a 52% increase compared to last year, mainly due to the higher depreciation of ARS4.1 billion explained before, ARS2 billion increase in items relating to lifting costs, higher royalties, and the increase in exploration expenses also just discussed. Now, lifting cost on a per-barrel equivalent basis was down by 20% in dollars to $12.2 per BOE compared with the second quarter of 2015. And total cash costs per BOE, including royalties and other taxes, reached $20.6. Crude oil production in second quarter decreased by 2.8% to 243,000 barrels of oil per day, while natural gas production was down by 0.4%, producing almost 45 million cubic meters a day. NGL production increased by 26% producing almost 50,000 barrels per day. Now, as a result in this quarter, total hydrocarbon production was slightly up vis-à-vis the same quarter of 2015, with 574,000 BOEs a day. Now, production was only slightly below budget, affected by two strikes occurred during the quarter. And normalization for the effect of those strikes would have resulted in total production totally in line with our budget. And therefore, we continue to target flat production for the year, although this could be negatively affected if there are additional labor conflicts. Now, let me provide an update of our shale gas and shale oil activity. During this first quarter of the year, we connected a total of 22 wells -- sorry, during this second quarter, taking the total of 503 shale wells in production. Total shale production of the quarter was above the previous quarter, reaching the highest quarterly average of 52,000 BOEs a day. This increase is basically explained by the improved performance of the new horizontal wells connected to this first half of the year. Additionally, we continue to see improvement in the cost per well in Loma Campana, currently around $11 million per well, in line with a reduction trend that we are expecting for the rest of the year, with a target of getting closer to $10 million per well towards year end. Moreover, substantially all of the new wells were completed with 18 frack stages, in line with a tight well curve, as shown in the lower part of the graph. Another good news is that the initial production rate of those horizontal wells were also in line with our well tight curve. And we expect these wells to accumulate more than 550,000 barrels of liquid plus some natural gas. The new pads of four wells in a row that we started using this year in our shale development resulted in an immediate reduction in the number of drilling wells -- sorry, drilling days of approximately 45% vis-à-vis last year. With regards with our tight gas projects, in this second quarter, the new compression plants for the areas of Rincon del Mangrullo and EFO were put in place and allowed a significant increase in total production compared with last year, which was up 37% and 12%, respectively, for these two areas. We have put in production 16 wells targeting the Lajas formation in the Loma La Lata block, five wells in EFO, both areas where we own 100% and four wells targeting the Mulichinco formation in Rincon del Mangrullo, where we own 50%. As a consequence, gross production continued to show encouraging results, reaching 5 million cubic meters a day in Lajas, 2 million cubic meters a day net for YPF in Rincon del Mangrullo, and 2.1 million cubic meters a day in EFO. Tight gas now represents 20% of our natural gas production. And we expect to continue to grow tight gas production, as we just completed the acquisition from Petrobras Argentina of a 33% stake in the Rio Neuquen field that we expect to gain control in next couple of months. The downstream segment reported an operating income of ARS3.4 billion, 11% below the ARS3.8 billion profit of the second quarter of 2015, but well ahead of the previous quarter, despite soft demand in the local market. Revenues were up by almost ARS12 billion or 33% because of diesel sales, as I said, up 38% in prices and down 6% in volumes, gasoline sales up 42% in prices and down 4.4% in volumes and fuel oil sales in domestic market which prices were up 55% and volumes were down 11%. In the export market, we noticed an increase in sales of 14% or ARS500 million due to higher prices in pesos, driven by the devaluation, despite Brent price decrease by 26% vis-a-vis second quarter 2015 and affected, obviously, the price of the refined products that we export. Costs in the downstream increased by 39% compared with the same period of last year. And there, we highlight greater crude oil purchases of ARS6.2 billion on higher prices as discussed before, but please remember that most of these purchases were made from our own upstream segment. Second, higher purchases of biofuels with higher prices for both the biodiesel and the ethanol and also higher volumes, 5% higher in the case of the ethanol and 1% higher in the case of biodiesel. Then ARS800 million increase in items related to refining costs, in part due to scheduled maintenance at most of our refineries, especially at Plaza Huincul and finally, higher depreciation of ARS550 million in the downstream. During the quarter, the volume of crude oil processed in our refineries was 288,000 barrels of oil per day which is 5% lower than last year, mainly due to this scheduled maintenance that I just referred to, mostly at Plaza Huincul and to a lesser extent, other units that were halted at La Plata and the Mendoza refineries. Therefore, the utilization rate of our refining capacity during the quarter was 90%. Regarding domestic market and we will get in more detail in the following slide, total sales decreased by 6.2% mainly driven by this 6% decline in diesel and a 4% decline in gasoline. Demand for other refined products as the LPG and fuel oil also proved to be weak across the quarter with a reduction of 14% and 12%, respectively. Monthly sales of diesel at the right hand of the screen that had already been weak in the first quarter were also lackluster during this last quarter. April was particularly weak because of substantial rainfall that affected the agro channel and a strong May was not enough to make up for that loss. With respect to gasoline at the left, the path was somehow different as we were coming from a strong first quarter. However, monthly sales during this quarter were consistently below last year and in line with two years ago. This reflects both a reduction in the whole market because of the soft economic activity and also a reduction in market share as the market has become more competitive. On the other hand, market share for our premium products Infinia and Eurodiesel were 61% and 59% respectively, well above the levels for the rest of our products. During this second quarter, total CapEx for the company amounted to ARS14.5 billion which was 1.8% lower compared with the same quarter a year ago and 38% lower if we measure it in dollar terms. Upstream CapEx amounted to ARS11.4 billion, which was a decrease of 8% in pesos. And our activities mainly focused in drilling and workover, which represented 76% of the upstream CapEx, followed by the buildup of facilities with an 18% share and exploration and other activities representing only a 6% share of the upstream CapEx. During the quarter, we drilled and put in production a total of 175 new wells, which together with those drilled and completed in Q1 reached a total of 358 new wells for the first half of 2016. Most meaningful investments have taken place in the Neuquina basin, most specifically in blocks Loma Campana, Aguada Toledo, Rincon del Mangrullo, El Orejano, Amarga Chica, Chachahuen, and Canadon Amarillo; and in the Golfo San Jorge basin in Manantiales Behr, El Trebol, Los Perales, and Canadon de la Escondida. With regards to exploration in this quarter, we completed six exploratory wells, five targeting crude oil and one with natural gas prospects. In downstream, CapEx was ARS1.3 billion, where our largest ongoing project is the new coking unit being built in our La Plata refinery, which is now almost complete, and we are scheduling its commencement of operations in the fourth quarter of 2016. Let me address gas and power. This year, we have created a new VP in order to develop holistic approach for natural gas development, for midstream infrastructure, energy efficiency, and power generation. In the context of the recent power auctions launched by the government, YPF was awarded two projects in partnership with GE, 270 megawatts in Tucuman, where YPF already has a power operation; and 105 megawatts in Loma Campana, where we are already in the process of installing another 100 megawatts. YPF will co-control with GE and will therefore not consolidate the debt at the project level. Total equity investment will only be $40 million for us. And the expected IRRs are well above YPF hurdle rates. And we also expect the benefits from a reduction of the risk of power outages in our operations. Additionally, and in order to comply with the minimum percentage of renewable energy provided by law, YPF will be constructing a 50 megawatt windfarm in Manantiales Behr in the province of Chubut, where we have been measuring wind for a few years now. The project will be fully funded by a multilateral agency at very competitive terms and conditions. Other than a potential expansion of this windfarm that would significantly improve the project's economics, we are not expecting any significant additional investments in the power sector for now. Now, let us speak about our financial situation. In the second quarter of 2016, operating cash flow topped ARS6.6 billion, which was 34% lower than last year. As in previous quarters, this decrease is primarily due to an increase in working capital, driven by the accrual of accounts receivables, including accruals from the gas plan program and accruals of sales to gas distribution companies. This working capital buildup coupled with the effect derived from insurance collections that have been received last year, not this year, more than offset the ARS4.8 billion increase in adjusted EBITDA. On a positive note, in July and therefore, it's not included in the financials that closed, on June 30 we received $630 million in the form of sovereign bonds for all the gas plan subsidies corresponded to nine months of 2015 that remained uncollected. Hopefully, the government will soon start normalizing these payments for the 2016 subsidies, which would have a very positive effect on our operating cash flow, as we accrue but do not collect more than $100 million per month from gas subsidies. Now, if the increase in gas tariffs that is now being challenged in court is confirmed, then the subsidy would be considerably reduced and would be replaced by the distribution companies and its customers. The average price would not change for YPF, but it would come from the final user as opposed of coming from the state. Now, we financed our ARS14 billion CapEx with this cash flow generation plus the excess cash position that had been built towards the end of the first quarter. We close the quarter with a little over $1 billion of cash. And we substantially increased such position in the first half of July, as we collected thus funds referred to before. And we issued $750 million in peso-denominated bonds placed in the international market. This cash position pro forma for these July movements is enough to cover our debt maturities of the next 18 months. Our leverage ratio is now at 1.63 times net debt to EBITDA. And we expect it to continue to stand above our target ratio of 1.5 times for the remainder of the year, as we transition to positive free cash flow next year. The average interest rates in pesos was slightly over 30%, while the average cost of our dollar debt stands at 7.8%, as we continued to increase the average life of our debt. In summary, we believe to have successfully transitioned this challenging quarter. Year to date, we are in line with our budget and as we have significantly improved the results of the first quarter. The local economy was weak. And that has negatively impacted our diesel and gasoline sales. Although preliminary sales figures for July were not much different, we still expect a rebound in the last part of the year. During this quarter, we negotiated wage increases for the next 12 months. And although the 30% raise was reasonable and only slightly above our expectations, this was not without significant tensions, including two strikes that negatively affected production and results this quarter. Natural gas receivables continued to increase during the quarter. But, at least we were able to collect what was owed to us from 2015. And we also expect to collect in the next few days approximately $120 million of crude oil incentives from 2015 that are still owed to us. And although the situation remains really fluid, we still target a 20% reduction in EBITDA in dollar terms this year. But, we have been successfully -- successful, sorry, and expect to continue to be in preserving our EBITDA margin. On the operational side, we continue seeing a significant improvement in our tight and shale gas developments. I am absolutely convinced that we have built the base for what should be a significant part of our value in the future. Results are encouraging, and significant infrastructure has already been put in place. Our net leverage ratio is slightly above our target, but in line with our expectations, and compares very favorably with the ratios of other companies in this sector across the globe, including some of the majors. And our current strong cash position provides additional comfort. Finally, our Board of Directors and our new CEO have confirmed the plan for the remainder of the year and we will be jointly putting together a budget for the next year and a plan for the next couple of years, speaking of which, I'm very happy to introduce you to Ricardo Darre. And I would like Ricardo to briefly address you before we go to the Q&A session. Thank you.

Okay. Good morning, everyone. Thank you, Daniel, for this introduction. After many years of working around the globe, it's a pleasure to return to Argentina and join this great team of professionals. I've only joined the company four weeks ago, but I had the opportunity already to visit the field and I was impressed with what I saw and with the very high level of competence of our teams. Of course, YPF was born in 1922. So, yes, some fields are mature and produced with a high BSW, but the inventory of good assets is impressive. On the upstream, we're sitting or YPF is sitting over a massive acreage, 3 million acres of good quality rock in Vaca Muerta. Over the last three years, very good infrastructure of development was built on this Vaca Muerta, including sand supply, water supply systems, roads, pipeline networks, processing plants, like the ones are going to be start up in Loma Campana in the next few weeks. There's also an excellent well performance control center for Loma Campana that is at the very first level of technology worldwide. We're starting to see the first improvements of the batch drilling in forward clusters in Loma Campana. Daniel mentioned a target of $10 million per well by the end of the year. I'm a bit more optimistic than that. Another particularity of Vaca Muerta is that, contrary to what some groups present in the U.S., in Argentina and in Vaca Muerta, fracking is not the mother of all evils. In fact, it's accepted as a good industrial technical practice and is not challenged with far-fetched arguments. Same for the water usage, all the fracking in the Neuquen is done with waters of the Rio Neuquen which in fact only, I think the number is 5% of its water is used by the communities before it is, it drops into the sea. So, the volumes that we, of water we used in Vaca Muerta are not challenged at all by the community or the environmental groups. Same thing for the downstream. I had the chance to visit, the opportunity to visit the refinery in Lujan de Cuyo in Mendoza. YPF has clearly a solid industrial base with refineries having very, very high availability. The Company probably profits from the know-how that was brought by Repsol in some years ago and continued making investments in our facilities that have put the refineries of YPF at the very top level of international, I would say, availability and reliability. When I visit the refinery in Lujan de Cuyo, I asked all the difficult questions. I visit all the key spots, like the [fairing] systems or the water disposal facility. And I was impressed because it's really a worldwide top-class facility. Lastly, I visit last Friday the research center of Y-TEC in Berisso. And again, I was very, very positively impressed. I saw a world-class group of engineers, Ph.D.s, and technicians carrying applied research on subjects critical to our business, frack propagation, propane qualities. In particular, I was impressed by the work being done on nanotechnologies oriented toward oil and water separation and, again, other subjects key to our operations. And I repeat a world-class research center in Berisso here in neighbor to our refinery in La Plata. Overall, a very-very good first impression, I won't expand much more. I'm very green on this Company. So, I can only say I look forward to meet each one of you individually in the future. And I would like to pass the call back to Daniel to conduct the Q&A session. Thank you.

Sylvia?

Thank you. We will begin the question-and-answer session. [Operator Instructions] And the first question comes from Bruno Montanari from Morgan Stanley.

Good morning, everyone. Thanks for taking my questions. So, my first question is related to these natural gas receivables from the government. So, regarding these $630 million you mentioned that were collected in the form of government bonds, just wondering if you could give us some details on that, especially on the exchange rate. So, did you receive the original amount denominated in dollars at the current FX rate, or was it somehow settled differently in local currency? That's the first question. And then the second question I have is about fuel prices. We've seen quite favorable moving fuel prices in the first half of the year. So, should we expect more hikes if currency continues to devalue and inflation decreases, or would you say we're about done for the year? Thank you very much.

Thank you, Bruno. Morning, a very good question in terms of the receivables, unfortunately, the government decided to pay us the equivalent in pesos of the receivables of last year. So, we did not receive those receivables at the ARS15 per $1 exchange rate. Therefore, that created a difference, not accounting, but a different in value in terms of what we expect and we believe that we should be paid. And what the government decided to pay -- this is to us and to the rest of the industry. It's not just to YPF. So, we are currently analyzing our different alternatives in order to protect our interests because we strongly believe that we made the investments based on the notion that the gas plan subsidy was dollar based and not peso based. With regards to your second question and fuel prices increases for the remainder of the year, I think what we will monitor is also the evolution of demand because, as I said during the call, the second quarter was really soft. July was soft, especially in diesel, less so in gasoline. So, we need to determine when and if there is the potential to continue to increase prices. Of course, if the currency devalues further, we would have no option and continue to increase prices. But, in the meantime, we will just monitor demand and make sure that prices are the right prices in order to move our products to the consumer.

Perfect. Thank you so much.

Our next question comes from Frank McGann from Bank of America Merrill Lynch.

Okay. Good morning, and thank you, both. Just in terms of costs, I was just wondering how you're seeing the cost structure right now, what additional costs, concessions you can potentially get on the supplier side or other costs that could help to alleviate some of the pressures that were seen in the quarter and that probably will occur over next 6 to 12 months from the adoption of the new labor agreement. And related to that in terms -- same trends perhaps that what you see on the cost side related to the shale oil and tight gas developments, can you get substantial reductions from here on top of the -- for example, the well cost reduction that you've gotten to 11 million currently and 10 million expected by the end of the year? And then for a second question, maybe just following up on a comment you made during the presentation, where you mentioned that the diesel market had gotten quite a bit more competitive, I just wondered if you'd give us a little bit more detail on what you're seeing there.

Thank you, Frank. Well, in terms of costs, as you have seen, we have significantly diluted in dollar terms our cost base this year, of course, in a big way helped by the devaluation of the currency. And we are expecting to maintain this cost reduction of close to 20% in dollar terms for the full year. Okay? It is true, though, that the second part of the year, the wage increases will kick in. I believe that we were able to get away with a reasonable increase in terms of wages, this 30%, which kicks in, in three different installments, 18% in July, 5% towards the end of the year. and 7% next year, results in an average increase of labor costs this year closer to 25% vis-à-vis last year in pesos. So, that is clearly below the valuation. And I think it's a very good first step in order to take our cost bases to a more sustainable level going forward. In terms of suppliers, there are some contracts in which we've made significant improvements, fracking for instance, directional drilling, and other contracts in which the old contracts expired, there is more idle capacity, there's more competition. And we're able to get away better terms. So, those, I'd say, three factors, the dilution of the cost basis in dollars because of a devaluation, the better contractual terms for new services or the same services with new providers sometimes, and some efficiency initiatives that have been put in place and are slowly providing results should help us in achieving this very challenging target of having total cost basis down 20% and vis-a-vis last year. Now, with regards to costs for the shale and the tight, which more talking about more efficient CapEx, if you will, I think that the trend is pretty much the same with the additional advantage that here, we're making significant progress in our learning curve. We're doing things differently. We're doing things better, which is to be expected, right? After 500 wells, it is reasonable that we start seeing the results of this learning experience. So, Ricardo said it during his remarks. We are optimistic that we will get to those costs per well that we just outlined. And I think, with those costs and the productivity that I mentioned during the presentation, with hopefully accumulating close to 600,000 BOEs in the life of the well, if prices at some time recover in the next couple of years, I think that we can prove very economic reasonable returns for the shale. For the tight, we already have very good returns because the prices of gas are really attractive. And we are seeing the same improvements in terms of productivity and in terms of costs that I just mentioned for the shale. With regards to the competitiveness or the competivity, I'd say competition in the diesel market in Argentina, where clearly the, as I said, the economy is slow, with a slow economy, some competitors may be willing to provide higher discounts on prices. We have been protecting our pricing power. This has been a priority to us. If that results in a slight reduction in share, we will make sure to recover that share over time. But, we are comfortable with our strategy going forward. And then there are more imports of diesel oil than before. With the previous government, this was in a way closed. This is not the case any longer. So, there are more imports coming from competitors, coming from traders and that just makes our lives tougher. We are very confident in our commercial backbone and we will protect our share and we will protect our pricing going forward.

Our next question comes from Anish Kapadia from TPH.

Hi, I had a question, first of all, just on YPF's longer-term strategic vision for the Vaca Muerta. You've now had I think well over five years to study the Vaca Muerta, drilled a lot of wells, got a lot of data. So, I just wanted to kind of get an update on what your thoughts today about the optimal pace of development where you're seeing the constraints, where production can get to in the next five years and how returns compare when you look at oil versus gas? And then just returning to the point on the costs, you've got well costs down to $11 million now. If you look at some of the comparable plays in the U.S. targeting these kind of similar very high-quality rock to what you've seen, you're getting breakevens down to less than $40 per barrel and I think well costs are more than, obviously, less than half of what you're getting at the moment. So, just seeing -- how long do you think it will be until you can get to U.S.-style well costs, or are there kind of certain factors in Argentina that mean the well costs will stay significantly higher than what we see in the U.S.? Thank you.

Okay. I can -- this is Ricardo. I can probably half answer that question. The future of Vaca Muerta is not as simple as might be seen as the distance. It's not one single reservoir. It's not one single structure. There are different qualities of rock. There are different productivity or expected ultimate recovery per field. It goes from very dry gas to full condensate. Making a point and saying we will be in Vaca Muerta developing this field or this fluid or this portion of the rock today as -- is not literally possible. We have to break the Vaca Muerta into different areas, different fields, and treat each one separately. Today, we're concentrated in the three fields Loma Campana, El Orejanoa, Aguada -- help me -- Amarga Chica. And we are looking at moving forward into other small fields within the Vaca Muerta. But, today, giving a full picture of saying we'll be in Vaca Muerta producing so much in five years, it's a question that is literally impossible to answer. Now, on the cost side, it's correct that we should be -- to think that we should be getting closer to the cost of the U.S. But, the U.S., you have to make a distinction also. You can go to -- compare Vaca Muerta with the Barnett, and we'll be killed. The Barnett is $2 million per well and $3 million to frack, while the Utica is probably more in the 8 million to 9 million per well all included. If you want to get the most recovery out of your well, you might not want to control the number of stages or -- that you frack or the length of the drain. Of course, we'll concentrate on the fixed cost of drilling and get it to the rock. And then on the unit cost of the elementary cost of the frack, the sand, the water, the pumping operation, I think the comparison with the U.S. is not straightforward. We're not talking about the same depths. We're not talking about the same rock. We're not talking about the same needs for stimulation on the rock. So, again, I'm sorry that I'm not giving you a straight answer with numbers. But, the concept is the Vaca Muerta cannot be projected as a whole on -- with a horizon of five years. And the cost of the wells will improve. The reference of cost in the U.S. is probably not the most valid reference. We will have to look at dollars per barrel equivalent. Thank you.

Our following question comes from Felipe Santos from JPMorgan.

Yes, good morning, everyone, just a quick, two quick questions. First one, you mentioned about the gas and power initiatives. How much of this energy generation will be used to your own needs, and how much use are you going to be selling to the market? This would be the first question.

Okay, Felipe. In the case of the windfarm, it'll be initially fully used for our own operation. In the case of the 105 megawatts in Loma Campana, again, significantly all of that for our own operation and that of our partners because there, we operate on a 50/50 basis with partners, although the project is being carried by us and GE, not with our partners. And in the case of Tucuman, it's 100% for the grid. That's in the same area where we are already generating power, YPF and General Electric already has an operation in place. That's why it's so synergetic to build that 270 megawatt plant in that area.

Okay. Thank you so much.

And following question comes from Ricardo Cavanagh from Itau BBA.

My question also goes on the strategy of the Company. Basically, how do you foresee the growth path of YPF in the coming years, understanding EBITDA generation well might suffice to sustain production, without the capability of growing much, and the scope to augment leverage is limited? And in relation to this question, do you foresee in the new scenario for Argentina the possibility that the country starts attracting relevant interest of international companies, basically referring more to tight gas that seems to be the most profitable area as I understand? Thank you.

Let me address the second part of the question. And Ricardo will try to answer the first part of the question, which is a more difficult one. I think, for tight gas, we are already in discussion with a couple of partners for certain areas. We will not disclose in more detail and not at this stage what we would be willing to do. But, yes, we agree with you that the economics are encouraging on those tight gas projects. Having said that, with everything going on in Argentina with the gas tariffs, I think investors like yourselves would like to understand a little bit better what kind of visibility there is with gas prices for the future. If you ask me, I feel very comfortable that, while Argentina will continue to need to import gas for at least the next 10 years, local prices of gas should trend towards import parity. And at those levels, our projects are really attractive. Now, with everything going on, with gas tariffs being challenged in court, [I also warn] it might probably not be the ideal time to go looking for a partner for natural gas project. But, there are a couple of projects that we have already been showing. And we've seen a lot of interest from a couple of partners. And there are projects in the tight where we already have partners. Okay? I just mentioned that this acquisition of Rio Neuquen, we are very excited with that acquisition. We believe there is a lot of value there. But, we've only acquired a one-third stake there, right? So we will operate, but we will have two partners in that case. Rincon del Mangrullo is another case. We have a partner. So we believe in developing the tight and the shale with partners. We will continue to do that. But we will always be careful in doing the transactions at the right time, as I believe we have so far, in order to protect our value going forward. So, I don't envision any change of strategy in terms of partnerships, tight or shale, Ricardo.

Yes, I agree with the concepts expressed by Daniel. Clearly, we have to grow now, protecting our financial base. We don't have the capital to develop the full Vaca Muerta ourselves. We will open to partners, to new investors. We're already in the trend of discussing with other companies or investors for beyond the three fields we're operating now with Dow, Petronas, and Chevron. We will have to concentrate also on our core activities. Do we need to be a drilling company and hold onto YPF Servicios Petroleros? Do we need to have 100% equity in all our midstream network in our refineries and the whole of our assets? We will have to develop, being very careful with our use of capital and use or divest the assets that are not really core to our business and our growth. The second big axis of work is cost control, cost cutting. We have to change the way we work. YPF has probably a history of being a consolidated company. I don't want to be not with the corporation, but be a Gazprom we do everything, from step one to step 100 of the energy chain. We're probably not the best to do everything. We have to concentrate on where we're good. We're good on our industrial base, on refining and petrochemicals. We're sitting over a massive acreage of good rock. We have to concentrate our exploration efforts on prospects that will lead to a quick development. I'm thinking about deepening on fields in Golfo San Jorge. We have to stay away from prospects that will take too long from discovery to first oil. I'm thinking about offshore. We have to stay away from prospects or plays that have a very high CapEx and OpEx. I'm thinking about heavy oils in Mendoza. We have to concentrate our investments where it pays and where it pays quick. Now, I'm probably talking too deep strategy for somebody that has been only four weeks in the Company. So, I'll moderate my words. But, I hope that answers your question at least on the baselines.

Yes, sure they do. And thank you, both.

Next question comes from Francisco Schumacher from HSBC.

Thanks, Ricardo, Daniel, and Diego, for the call. I would like to know if you have already assumed the operation of Rio Neuquen. What did you find there, any things you can improve? I heard in the past that you consider Petrobras Argentina's gas assets were good quality. What are your plans in that area? What is the potential you're seeing there? Thanks.

Thank you, Francisco. Unfortunately, we have not yet taken control of the operation. We -- that transaction between Pampa and Petrobras only closed a week ago. And we paid our first share of the two areas that we are actually acquiring in south part of Rio Neuquen and 80% of Aguada de la Arena. I believe that we will be taking control at some point in the last quarter of this year or maybe end of the third quarter. We -- it's a little bit too early to say what we are going to be doing there. Remember that we will own a third. So, we will have to discuss the budget with our partners. But, as I said, we like the area. We like tight gas. We learned a lot about tight gas. So, we are very excited with the prospects. And hopefully, towards year end, we'll start providing some guidance in terms of the strategy to operate that field going forward.

We have no further questions at this time.

Okay. Well, thank you, Sylvia. Thank you, everybody, for joining us on the call today. If there are any follow-up items, please feel free to run them through Diego and [Pablo] whenever is convenient. Have a good day.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.