YPF Sociedad Anónima (YPF) Q1 2017 Earnings Report, Transcript and Summary

Welcome to the Q1 2017 YPF Sociedad Anonima Earnings Conference Call. My name is Richard, and I'll be your operator for today's call. [Operator Instructions] I will now turn the call over to Mr. Diego Celaa. Mr. Celaa, you may begin.

Thank you, Richard. 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 2017 Earnings Webcast. The presentation will be conducted by our CFO, Mr. Daniel Gonzalez. During the presentation, we will go through the main aspects and event that explain our first quarter results and finally, we will open up the call for questions. We will be making forward-looking statements so we ask you to carefully review the cautionary statement on Slide 2. Our agenda today will include a review of the first quarter results including update of our shale and tight development projects with the inclusion of our financial situation and a brief summary to conclude. Also, our financial statements figures are stated in Argentine Pesos and in accordance with International Financial Reporting Standard, ARS. In addition, certain financial figures have been attested to reflect additional information to let you better understand our key financial and operating results. Please Daniel, go ahead.

Thank you, Diego. Good morning, everybody. Thank you very much for joining us this morning for the review of our first quarter 2017 results. In line with our expectations, this was really a strong quarter. Revenues were up by 21% when compared with the same period of 2016 and our EBITDA reached ARS16.8 billion, which represent a 35% increase. Net income of slightly below ARS200 million was affected by an accounting loss resulting from the appreciation of the peso during the quarter as the functional currency of the company is the dollar. We also had a strong operating cash flow of ARS24.7 billion which represent an increase of 127%. Total CapEx was down in this first quarter by 19% in pesos, reaching a total of ARS12 billion, mostly as a result of a reduction in drilling activity that we had budgeted for the year. The reduction activity which started a year ago derived in a total hydrocarbon production decrease of 1.5%, this will be a year ago with a 6% decrease in crude oil production and the 2.8% increase in natural gas production. From an operational perspective, we continue to make progress and structural changes in all of our upstream operations especially in shale developments as we will see in a few moment. In this Slide, we show our main financial figures mentioned in U.S. dollars. Before getting to this figure, it is important to mention that in contrast to what we went through in recent years, in this first quarter of 2017, the local currency actually experienced a nominal appreciation. These are the FX at the beginning of the period, but when you compare this with the previous year, the recent evaluation on peso were up of 8%. Revenues were up by 12% in dollars as diesel and gasoline prices increased by 18% and 15% respectively in dollar terms, while export prices in dollars were up 30%, in-line with the recovery of international prices. Such price increases more than offset the declining volume of products sold on both the domestic and export markets. Cash cost expressed in U.S. Dollars increased by approximately 9%. This in cost increase in dollars, but royalties stood below last year figures on lower crude oil prices of the wellhead. EBITDA was up by 24.4% in dollars with a margin expansion to 29.5%. Let's switch back to Argentine pesos to cover the more detailed analysis of the quarter. Operating income increased by 179% as opposed to last year with the downstream segment have suffered the negative consequences of the devaluation of December 2015 that had been passed due to prices. This year, the downstream was responsible for the significant improvement in the results. As the upstream suffered from local crude oil price decline. This underscores again the value of our integrated business approach. Local crude oil prices continue to decline and are getting closer to converging with international prices and fuel price increases during 2016 and early 2017 have reconstituted the economics of the downstream sector. The upstream on the other hand is going through an adjustment of costs that should allow it to be sustainable with $15 per barrel prices. Finally, our gas and power segment showed better results due to our combination of a better tariff for our subsidy Metrogas which actually improves much further with a tariff review that came in line in April and better results obtained from our powers of subsidiary YPF and Energia Electrica. In order to better understand the reasons behind the increase of ARS2.9 billion in operating income, we've broken it down in more detail. Revenue grew by ARS10.1 billion or 21% resulting from different factors. First, an increase of ARS3.3 billion in gasoline sales with higher prices in pesos of 29% and an increasing sales volumes of 1.1%. Second, ARS3.1 billion increase in diesel sales due to 25% higher prices in pesos partially offset by a 3.4% reduction in sales volumes. Third, ARS1.3 billion increase in natural gas sales due to prices which were 6% higher in pesos on a slight increase in sales volume of 0.7%. Then ARS816 million increase in natural gas sales in the retail segment which mainly explained by our subsidiary Metrogas on a 70% increase in prices and 6.4% increase in volumes. And finally, sales of asphalt which increased by ARS400 million explained by 194% increase in volumes sold. On the other hand, fuel oil sales decrease by ARS1.4 billion or lower volumes of approximately 38% and 19% lower prices in pesos as the power generation sector had plenty of gas available to displace fuel oil. Cost of sales other than depreciation increased by ARS2 billion. The only cost component which is fully dollarized as of royalties which are paid to the provinces on wellhead prices which are set in dollars and they presented a reduction of ARS185 million or 4.5% on lower crude oil prices, somehow offset by the 8% devaluation within periods. The other factors explaining this ARS2 billion increase were the lifting cost which was sub by ARS1.2 billion or only 16%, which translates into an approximately 10% increase in dollar terms. Then the refining cost which were subbed by ARS540 million or 31% and finally transportation expenses which increased ARS370 million or 23%. Depreciation on the other hand was up by only 12% or ARS1.2 billion. This low increase in DD&A had to do with a variant of factors. First, the CapEx intensity has been lower than in previous periods; second, the impairment of last year has reduced the fixed assets subject to depreciation and finally the devaluation was also lower than in previous periods and therefore the value of the assets which are currently in dollars did not suffer a significant increase. Purchases of crude oil and other products for sale increased by ARS2.4 billion, mainly as a consequence of higher purchases of bio fuels for ARS1.8 billion driven by significantly higher prices in pesos and a higher blend in the case of the ethanol. Imports were up for ARS250 million due to higher import prices for diesel of approximately 61% in pesos and also higher volumes, but partially offset by the absence of gasoline imports during the quarter. SG&A was up by 25% as a consequence of higher transportation expenses and salary increases. An exploration expense increased by ARS139 million as a combination of higher number of unproductive explorative wealth and lower expenditures on geological and geophysical studies mainly in seismic [ph]. Entering now to our upstream business segment, operating income decreased by 80% against the first quarter of last year to reach approximately $900 million pesos. Revenues showed a decrease of 5% to reach ARS27.7 billion driven by the following combination of factors. On the one hand, lower crude oil sales by ARS2.7 billion or 13% which was due to 6% lower volumes transferred to our downstream business segment and 5% lower prices in pesos and then volumes sold to third parties which is not a really meaningful amount also decreased by 64%. But on the other hand, there were higher natural gas revenues of ARS1.3 billion, on higher prices in pesos which were also higher in dollars also and a slight increase in volumes sold. The average realization price in dollar terms for crude oil decreased to $53 per barrel as a result of a new agreement reached between local producers and refineries and which was signed earlier this year and that considers a sliding scale of prices during the year to seek convergence with international prices. For natural gas on the other hand, the average price was $4.96 per million BTU which was 5% higher than a year ago. On the cost side, these were up by ARS2.1 billion , an 8% increase compared with the first quarter of last year due to ARS1.4 billion increase in items related to lifting cost as explained before, then high depreciation of ARD839 million and finally the offset that came from the lower royalties as lower crude oil prices in pesos were as explained before. Exploration expenses increased 30% also as explained in previous slides. Now lifting cost to a per-barrel equivalent basis increased 10% in dollars compared to the first quarter of 2016 to $12.20 per BOE. Our total cash cost for BOE reached $20.60 including royalties and other taxes of $6.60 per BOE. It is worth mentioning that these figures, the 2017 figures are totally in-line with all seen in previous quarters and the ones which are different are the first quarter 2016 costs that had been unusually low as they were strongly influenced by the devaluation that had occurred in late 2015. Crude oil production in the first quarter decreased 6% to 234,000 barrels of oil per day while natural gas production was up by 2.8% producing 45.3 million cubic meters a day. Natural gas liquids drop by 2.8% producing 54.7 thousands of barrels a day. As a result, total higher current production dropped 1.5% vis-à-vis the same quarter of last year with 573,000 barrels of oil equivalent for a day and this was mainly as a consequence of the reduction in drilling activity started last year, but also somehow affected by sudden labor conflicts and to a lesser extent, flats in the south that affected the operation of last days of the quarter. Actually, these last two factors will have a negative effect in the production numbers of the second quarter. Now let me provide an update on our shale oil and shale gas activity. First, I would like to highlight that in this quarter we have decided to start showing in the shale production chart our net production instead of a gross production as we have been showing the previous quarters. This will allow us in the future to include new production coming from non-operated areas such as the [indiscernible] where we recently announced partnerships. Having said that, the net sale production of the quarter reached 34.3 thousand BOEs a day which represents a new all-time high. Now in terms of our activity as operator, during the first quarter of this year we connected a total of 14 wells, taking the total to 555 shale wells in production and increasing the total gross operating production to 64.5 thousand barrels of oil equivalent per day. We continue to experience cost reduction per well in Loma Campana, currently slightly below $8 million for our 1,500 meter tight well, but additionally, we have been able to complete a 2,000 meter lateral length well with 24 frac stages and we are currently testing several other wells with longer laterals of around 2,500 meters. At least five of these longer lateral wells have been drilled after the end of the quarter, but have not yet been completed. And in line with this, we are expecting to test a steady 200 meter lateral long well very soon. Another important piece of news is that our main shale gas project in El Orejano has reached a peak in gross production of 3 million cubic meters a day. We have also deployed two drilling rigs in order to derisk Vaca Muerta in less explored areas as we have mentioned in our annual call to carry a total of 10 pilot projects this year. In addition to the shale announcement we made in a previous webcast presentation, we have announced a $390 million JV with Schlumberger in Banduria Sur and those are the reshuffling of an existing conventional JV in Aguana Pichana Block that will shift into two new unconventional JVs with a total CapEx plan for the first stage of half a billion dollars. We will operate this Schlumberger JV and we will let others operate the Aguana Pichana JVs. With regards to our tight gas projects as we did with our shale production, we are also showing in this chart our net tight gas production which continued to show encouraging results reaching 13.1 million cubic meters a day. This way, tight gas production represents now 29% of our total natural gas production. In terms of activity, we have put in production nine wells study in the Lajas formation in Loma la Lata where we own 100%, two wells targeting the Mulichinco formation in the Rincón del Mangrullo where we own 50% and another two wells in EFO where we also own 100%. The downstream segment reported an operating income of ARS4.4 billion compared with ARS800 million operating loss of the first quarter of 2016. Revenues were up by ARS8.2 billion or 41%. As explained before, gasoline sales were up by ARS3.3 billion on better prices and higher volumes and sales of Infinia, which is our premium gasoline increased by almost 10%. Diesel sales were up by ARS3.1 billion on higher prices, but that were partially offset by a reduction in volume. However, it is also worth highlighting again the increase of 15% in sales volumes of our premium product, the Infinia Diesel. Sales of asphalt increased by ARS400 million, explained by 194% increase in volumes sold, marking an encouraging sign of pick up in a construction activity. Fuel oil sales dropped by ARS1.4 billion on lower volumes and lower prices. Finally, the export market was strong with an increasing sales of 41% due to higher prices and good volumes of jet fuel, LPG [indiscernible] and Petrochemical products. Costs increased by 8%, vis-à-vis the same period of 2016 and let me highlight the causes. First, lower your crude oil purchases of ARS2.3 billion or lower prices and lower volumes as discussed before. Remember that most of these purchases come from our own upstream segment, then higher purchases of biofuels with higher prices for both the biodiesel and bioethanol of 40% and 44% respectively. Bioethanol volumes increased by 20%, due to the increase in a blend rate for gasoline from 10% to 12%, while biodiesel volumes increased by 22% as there had been a lack of biodiesel in the first quarter of last year. There were also higher fuel imports of ARS250 billion, an increase of ARS540 million in items related to the refining cost and higher depreciation of the downstream assets of ARS388 million. During this quarter, the volume of crude oil processed in our refineries was 291,000 barrels of oil per day which was 1% below last year, mainly due to lower fuel oil production of 31%, therefore the utilization rate of a refining capacity during the quarter was 91%. Regarding the domestic market, total sales decreased by 2% mainly driven by 3.4% decline in diesel and the 37% decline in fuel oil. Partially offset by the previously explained increase in gasoline and asphalts. As we can observe in the graph shown on this next slide, January and February were weak months in terms of demand for both gasoline and diesel. A good March drove diesel sales to similar levels of those in the previous year, but was not enough to offset the cumulative decline of the first two months. Therefore, these are sales decline by 3.4% in the quarter. With respect to gasoline, the path was similar, but the consumption of this product on March was strong enough to drive sales for the quarter 1.1% higher. In April, sales of gasoline were sharply up mainly due to an increase in market share and also up because of strong demand and diesel sales were flat. So this numbers for April would confirm this positive trend that started in March. During the quarter, we also experienced a nice increase in market share for both products with 55.5% in gasoline and 57.5% in diesel. The market share of our premium products was 61% and 59% respectively. As you all know in 2016, we started to report our business segment, gas and power, which includes the results coming from our subseries Metrogas and YPF Energia Electrica. With regards to power, currently we have a total capacity of approximately 1,300 megawatts from a power generation plant in Tucuman [ph] and we will be adding 575 megawatts more from the four newly fully-funded projects that we have already announced last year. All these projects are progressing according to schedule with the exception of a wind farm which is slightly delayed due to the recent floodings that affected the province of Chubut. We like power. We believe the demand for new power generation is there, the economics are compelling and additionally, half synergies with our businesses as we are the largest purchasers of power in the country. We have already identified 2,000 megas of additional projects that we can sponsor. They include a combined cycle power-gen [ph] projects in our existing refiners and additional wind farm and other renewable energy projects. However, we have decided not to allocate additional capital into the sector and we have therefore started a process of identifying potential partners to capitalize YPF Energia Electrica. The idea is to create a standalone non-consolidated subsidiary where all of our power assets will reside. During the first quarter, total CapEx of the company amounted to ARS12 billion which was 19% lower than last year, or 46% down if we measure it in dollar terms. Upstream CapEx amounted to ARS9.4 billion which was a decrease of 23%. Our activity was mainly focused in drilling and recover. We presented 62% of the upstream CapEx followed by a buildup of facilities with 24% participation and exploration activities which represented 14% of the upstream CapEx. During the quarter, we drilled and put in production a total of 96 new wells including 14 new wells in shale areas and 13 new wells in tight gas formations. Most meaningful investments have taken place in the Neuquina basin, most specifically in unconventionals in the Blocks Loma Campana, Aguada Toledo, Rincón del Mangrullo, El Orejano, La Amarga Chica, EFO, and only Chachahuen in a conventional site. And then in Golfo San Jorge Basin in Manantiales Behr, Los Perales, Canadon Seco Leon and Barranca Baya. In the Nequina basin, we continued the development of Barrancas, Mesa Verde and [indiscernible]. With regards to exploration, in this quarter, we completed 11 exploratory wells, six for them for natural gas and five of them with crude oil targets. In downstream, CapEx was $1.3 billion, which is 21% lower compared to the same period of 2016 and we can highlight the advance of the revamping of the topping three unit in our Lujan de Cuyo refinery and then some logistics and safety improvements. Now let's speak about our financial situation. The strong operating cash flow of ARS24.7 billion which represents 127% vis-à-vis last year was mainly driven by the ARS4.3 billion increase in EBITDA, but also an improvement in working capital which is mainly due to collections of receivables including some arising from the gas plant program, but also lower income tax payments. For the first time in quite some time, we are showing positive free cash flow. We can see in a graph at the left how operating cash flow exceeded CapEx in close to ARS10 billion in the period. We expect to give back some of this as we are still planning to be free cash flow neutral for this year. This cash position of ARS26.2 billion including the dollar-denominated sovereign bonds sale in treasury is enough to cover our debt maturities of almost the next two years as our next important debt maturity solely in December 2019. This cash position was strengthened further with a recent $300 million equivalent of peso-denominated bonds with a five-year [indiscernible] and a 16.5% fixed rate that was placed last week. Our leverage ratio has come down to 1.87x net debt to EBITDA which is in sight our 2x target for the year. Please note that in this quarter, we have included consolidated figures in the financial amortization debt schedule chart as opposed to what we have been showing previous quarters, which were not consolidated with subseries. The average interest rate in pesos was 24% while the average cost of varying [ph] dollars was 7.8%. In summary, we are adapting to this new micro-environment and speaking to our objective of having an upstream segment which is viable with oil prices at $50. The agreement with the unions to implement productivity measures for the development of the unconventionals in [indiscernible] but also for the development of conventional production shows that we are committed with this objective. We know there will be tension around these changes, but we believe these changes are structural modifications that the industry needs and we are therefore willing to pay the cost of these tensions. Part of this cost will come in the form of lower production. At this point, we believe production for the year should be approximately 3% below last year. There were several positive developments with regards to the price of natural gas, the normalization of wellhead prices started last year is now complemented with a new tariff for transportation and distribution and additionally the new gas pricing program for unconventional developments that goes until 2021 provides the clarity needed to continue to accelerate our natural gas project sanctioning. The economy is looking better, volumes sold in local market in the last two months have shown an improvement and we are optimistic that the rest of the year will improve further. Another highlight of the quarter is the substantial improvement in the development of Vaca Muerta, the economics in Loma Campana are really compelling and provide with plenty of optimism regarding our ability to replicate them elsewhere in Vaca Muerta. Evidently, we are not the only ones seeing this as the number of joint venture deals during the quarter is clearly a testament of this. In summary, this was a solid quarter, in-line with our expectations and we are reaffirming our guidance with respect to EBITDA, CapEx and cash flow for the year. With that, I would like to stop here and answer your questions. Thank you.

Thank you. [Operator Instructions] And our first question in line comes from Mr. Frank McGann from Bank of America, Merrill Lynch. Please go ahead.

Hello. Good morning. Two questions if I might. One, just in terms of volume expectations in upstream with the decline you had this quarter and you indicated that the next quarter might be fairly soft, how are you thinking both this year and as you look out over the next two, or three, four years with the increased JV activity which clearly will take some time to have results? But how are you thinking now about the ability to expand volumes over the next several years? And then secondly just in terms of the downstream environment from a competitive and pricing standpoint, Shell has reported trying to sell their assets and there is some thoughts certainly expressed by different market participants and that potentially could change the competitive dynamics. Just wondering how you're seeing that and you think prices will trend going forward relative to international prices as you move into this more open environment?

Well, thank you, Frank. In terms of volumes, as said and as posted in your question, clearly 2017 is not going to be a strong year in terms of higher government production. We are envisioning with some of the conflicts that we went through with the unions that have to do with these structural changes which again I think this is a great thing for a long term. But also with the negative weather that affected the province of Chubut recently. At this point, we are targeting a 3% decline in hydrocarbon production for the year. Now the reason why we have signed these JVs and that we might sign new ones is precisely that we want to accelerate our total production going forward. You have heard me many times saying that I believe that 3% to 5% per year should be a run rate of growth of hydrocarbon production. The only way to do that is to accelerate the development of the shale and the tight and we're going to be doing that with partners. We are not there yet to provide any kind of guidance for 2018. I think for the medium term, again, 3% to 5% per year and a good part of the growth will come from these JVs that we have been announcing clearly. In terms of the question regarding the downstream. The downstream sector in Argentina, although we command a pretty high market share, north of 55%, continues to be a competitive market. Shell could be going through changes, the same thing regarding what used to be Petrogas. It has been rumored that something similar could happen with the oil network. The reality is that we haven't experienced any changes in the competitive dynamic so far. We are prepared to continue to compete. We do not think that any changes here will make things easier to us. So nothing has changed. We are really happy that in the last few years, we have really closed the pricing gap with the competition, and preserved market share in this specific quarter actually increased market share. I think we're looking really good in terms of competitive position there and not envisioning any change in the competitive landscape in the short term regardless of potential changes in the shareholdings of some of our competitors.

Okay, thank you very much.

Thank you. Our next question in line comes from Bruno Montanari from Morgan Stanley. Please go ahead.

Good morning, everyone. Just had a few quick questions. First, how does being the acceptance of the new fuel pricing policy across the chain and the inflation seems not to be included. What happens is there is a spike in inflation. So is there a provision for price hikes outside the quarterly schedule? And, Daniel, following up on the question about the JVs in Vaca Muerta. What we've seen in terms of announcement so far, had those been in line with management expectation? Have they exceeded expectations and should we see the same level of intensity in new JVs for the remainder of the year? Thank you very much.

Thank you, Bruno. Well, in terms of the price formula or the price agreement, I think there is a general acceptance among all parties to go forward with this. Prices continue to be free from a former perspective, but I think all participants in the industry have decided to adhere to the pricing mechanism negotiated earlier in the year. It is true what you're saying that the formula does not include any effects of inflation. This year, this could be headwind to all of the refiners. Given that, it looks like inflation is outpacing the devaluation and probably will continue to do so for the remainder of the year. Long term, we think ourselves in dollar term, so the fact that we have prices that we are keeping them essentially flat with a slight increase in dollar terms for the year, the quarter, you should not take into account. The quarter was really strong in terms of pricing in dollars, but because we are comparing vis-à-vis quarter which had been affected by the deval. But the fact that we are keeping prices essentially flat and with a small increase in dollar terms for the year, I think should be a good sign for the medium turn. Although I acknowledge the fact that it could be somehow of a challenge this year where we do have inflation in dollar terms. In terms of the second question regarding JVs, as I told Frank earlier, we've always seen this as an important factor of growth because we don't have the necessary capital to develop all of the shale by ourselves. Now the same time, we have been disciplined in not forming out areas that are not ready to conduct a meaningful final project or to start development really soon. We have been trying to protect our asset base and not [indiscernible] early on. That has not changed. What we have seen is a significant increase in the interest of different third parties regarding Vaca Muerta. If the question is do you have more aligned parties willing to team up with us for Vaca Muerta? The answer is definitely yes. If the questions is are you going to be announcing a few JVs per quarter as we did this quarter? The answer is probably no. We are going to be careful in terms of teaming up with the right partner at the right evaluation and only when we are really needing to develop an area. Should you expect more JVs to come this year? Probably yes, but not as same pace.

That makes sense. Thanks a lot, Daniel.

Thank you. Our next question on line comes from Luiz Carvalho from UBS. Please go ahead.

Thank you, Daniel. How are you? Just three questions here. The first one is regarding the prediction drop that you mentioned about here today around 3% this year. But at the same time, you kept in that guidance [indiscernible]. I just want to have a bit more color how this would be possible? So that's the first one. The second, it's mainly when see the share prediction, you basically added 14 wells on a quarter-over-quarter basis and when I see a prediction, it basically increases on the graph, we don't have the map [ph] but only by 2.3 thousand barrels a day. So I just want to see how do you see the activity of these new wells versus the decline rates from the legacy wells if I can put this way. And the third question, it's about the fracing ban; I talked with Diego yesterday and there were some news on the press talking that [indiscernible] which is not relevant province, then the frac. We try to find some data about this and there are, I don't know, 50 cities which already went to the same direction and there was one process in Neuquén and the Supreme Court and we didn't have the final decision yet. I just want to have more color, what are the rules and with this process, how am I going to say is a political one just to have your view on that. Thank you.

Thank you, Louis. Good morning. Regarding your first question on production decline and how is that consistent with sticking to our guidance for cash flow CapEx and EBITDA - the answer is we will have to make further adjustments to those that were already contemplated in the budget in order to keep our cash flows in line with what we had estimated and what we have guided the market although production will come lower. Of course there always was the easy way out which is to lower guidance for EBITDA, in-line with a guidance for production decline. We are not doing that. We know the challenge is much bigger than it was before, but we are sticking with our guidance and we think we have the elements trying to come up with that level of cash flow that we have expected and again, being free cash flow neutral for the year. That is the main driver for us for the year. In terms of shale production, you're absolutely right. The first quarter was somehow slow in terms of our completed and connected wells and that is why the production growth, vis-a-vis the fourth quarter 2016 was not really relevant. I think we are going to see a nice improvement in the second quarter because there were a lot of wells that have been drilled but were not completed or were not connected. Okay? That actually happened during April and it's actually happening as we speak. I would not look at that as a red flag or as an early sign of production growth flattening in the shale at all. Regarding your last question regarding the fracking ban in Entre Rios. Well, it's always easy for a province that doesn't have a single barrel of oil production to ban fracking. Right? It's probably a nice populist measure, but it doesn't mean anything. What we have seen is a very high degree of consensus regarding the development of the shale in Argentina and you have seen how the government have come up with this price incentive program for natural gas coming from the unconventionals, which mainly is shale or tight. That goes for the next five years. And you have probably seen in the papers how the governors of the provinces there is - specially the province of Neuquén where there is unconventional production and really committed with having this production continue to grow and continue to develop. As we speak today, the minister of production is actually visiting Vaca Muerta today. We have delegation of congressmen visiting Vaca Muerta the next few days also. I think there's an overwhelming consensus in Argentina that the development of the shale is a way to go in order to develop or to grow oil and gas production in Argentina. Of course it is on us and the rest of the producers to prove every single day that we do this on a safe manner that we care for the environment and we have been doing this. I don't see any reasons why this will change. It is always something that we keep an eye on of course, but I am not concerned at all regarding what has just happened in Entre Rios and I don't think that that will be replicated - at least not in provinces that really count for our shale development.

Perfect. Thank you very much.

[Operator Instructions] Our next question on the line comes from Ricardo Cavanagh from Itau. Please go ahead.

Hi, Daniel. How are you? Diego, and all? My question is in this - well first of all, congratulations on the cash flow because I know that this is a priority and it shows and it has already started to show on the last quarter. So I want to say that. Secondly in a context where CapEx is falling and where drilling activity is falling, how do you foresee or how are you able to manage the tension that that involves particularly on the south of the country with the unions and then also how are you perceiving the agreement that you have signed in Vaca Muerta and Neuquén with the unions? What are the benefits or how do you see that foregoing? Thank you.

Well, thank you, Ricardo. Let me say first that on the cash flow, this was not just a one-off quarter. Actually, April was really strong in terms of operating cash flow as well. We are really happy and pleased with how operating cash flow is evolving and I think this will only improve during the course of the year. Regarding tensions with the unions, every time of course that structural changes like those that are part of the new collective agreement sign for the unconventionals and also, the changes to the collective agreement also signed for the province of Chubut last week, they always come with tensions. These are things that we need to deal with on a daily basis. It's probably the most important focus of a good part of our management team. And I think at the end of the day, these agreements, what they reflect is that the society in general, the workers, the union leaders and the politicians understand that over the long term, the only way to have more investment and more production is if we're really sustainable with reality. And reality is the price of oil is not $100 per barrel, it's $50 per barrel and that we need to be competitive at those levels. I think this as a very good sign of maturity of understanding all of us that we want to grow and that the good news is we can grow, we have plenty of resources and how in order to grow, we need to make sure that we are competitive and this is a step in the right direction in terms of competitiveness. As I said during the presentation, we are not assuming that this year is going to be free of tension - quite the opposite but we are willing to deal with it and I think it's for a good cause. It's for the long term survival of the industry.

Okay, Daniel. Thank you. Thank you very much.

Thank you. Our next question on the line comes from Anish Kapadia from TPH. Please go ahead.

Hi, Daniel. I have a question on your Vaca Muerta acreage. Previously, YPF have talked about three million acres that's perspective to Vaca Muerta, about two-thirds in the liquids when they're about a third in the gas window. I was wondering, given some changes in your acreage and some of the deals that you've done, can you give an updated net acreage position and then maybe split that into how much of the acreage you see as core for the Vaca Muerta liquids, how much for the Vaca Muerta gas and how much for the tight gas? And then kind of related to that, I was wondering how much more acreage do you see there being available for you to farm down? One of the other things, given the number of transactions you've announced and potential further transactions, the CapEx guidance, I think you talked about for this year was about $4.4 billion originally. Is that likely to be lower, given you're also seeing higher efficiencies on the drilling costs? Thank you.

Thank you, Anish. The question of the acreage, there's not an easy straightforward answer because it all depends on what is the core acreage that we're really targeting. What has not changed is that the liquids window is over 60% and the gas window is more like at 40%. What we are envisioning today as the core areas of Vaca Muerta that we hold acreage and that we're willing to develop with what we know today is probably more around the 2 billion acre number than the 3 million acre number. But again, a good part of this are things that we're going to be developing in the real long term. We are not really fixated in here in terms of number of acres. You know very well that two acres do not necessarily mean the same. Right? What we are more focused is in the quality and determining what is the right acreage that we want to develop over short term and that is why suppose to the previous years in which we were basically focusing on a capital of very large pilot projects this year, we have significantly increased the number of pilots, but with limited number of wells per pilot. I said that we are going to be running around 10 pilot projects this year, but these are pilot projects, most of them with two or three wells per pilot. Okay? This will give us a much better understanding of what it is the acreage that we really want to develop going forward. I think that there's still plenty of acreage for us to farm out. We as I said earlier, we do not intend to farm out all of our acreage right now because the strategy behind the farm outs is to find someone that can provide the necessary capital for the development. We'd rather do the risking ourselves and only farm out when there is some value because there's more knowledge of a specific area. I think we have plenty of things to farm out. What we don't have this year is a big need of farming out in order to reduce our commitments and that goes to the second part of your question regarding CapEx. The JVs with Shell and with Schlumberger took care of the two areas where we have the largest CapEx commitments for the next couple of years. So we have unloaded this weight on others and that of course freezed capital either for accelerating growth further or for reducing CapEx. Most of these commitments were not so much in 2017, were more 2018 and 2019, so they should not have a meaningful impact in CapEx for the year, to your question. So we still are targeting $4 billion in total. Given that we were a little bit slow in terms of CapEx in the first quarter, we might be a little bit below the $4 billion mark, but it is still early to say if we are not going to be catching up.

Thanks. Just a follow-up. Judging by those comments, if you have a similar activity level next year, you'd probably expect to have lower CapEx given that you've got a significant amount funded by your partners.

Yes. I think what this is telling us is that for next year, we'll have more capital available to go after other areas because some of the areas that are already in our plans are now being funded by our partners. Yes.

Great. Thanks. Very helpful.

Thank you. Our next question comes from Andre Natal from Credit Suisse. Please go ahead.

Hi. Good morning, guys. Thank you for taking the question. This one would be in regards to the production from a conventional field. This production increased maturely in the quarter if you compare it with the previous one, at least. So with the addition of these 14 wells, we wanted to understand a little bit of the highlights behind these production numbers, mainly where it came from. Was it mainly tight gas that the main field is contributing? If there was an increase in productivity of particular wells? And if you could also comment on what we should expect of the phase of the addition of new wells and those unconventional fields going forward? That would be great. The second question would be in regards to the lifting cost. If you look to the numbers on the quarter-over-quarter basis, we can see that there were kind of under control, at least, even slightly better than the previous quarter. Even in an environment of no devaluation of the pesos, we wanted to understand from you how we should interpret this in regards to is there any result already we can see of the actions you're doing to reduce costs to gain efficiency. Is that already a reflection of any positive impact from the negotiations in Neuquén, with the unions and it's good to have also comment on the remaining negotiations in other regions, how they're going and what we should expect from there? It would be also great. In the end, if I still have one more question, I would ask in regards to the working capital reduction we could see this quarter, a good portion of your cash generation came from a reduction there, but there was no clear item responsible for those reduction. So we wanted to understand from you if possible, what are the main causes there and to what extent these number are recurring or not. Thank you very much.

Okay, Andre. Well, first let me make a clarification. I should have made it during the presentation regarding the production from unconventional specifically on the tight. The graph on the presentation includes areas that we are not operating and therefore had not been included in similar charge in previous presentations. I'm talking about two areas [indiscernible] and Aguana Pichana to tight gas areas where we hold a significant stake, but we do not operate. Also they include the acquisition that we made from Petrogas [ph] of Río Neuquén and [indiscernible]. When translated with this, if you are comparing the tight gas production of the graph with previous graphs, I think that there's change. Now where is the unconventional production growth coming from? There's no single source that explains all of it. I have to say that the most relevant one in terms of shale is actually El Orejano, shale gas and in tight, it's basically Rincón del Mangrullo and the Lajas formation in Loma la Lata. The good thing I believe about production growth in unconventinals is that it's not coming from one single source. Maybe we can follow up with you offline with a little bit more detail if needed. In terms of the lifting cost, yes, it is under control. It is a challenge for the year clearly. I have to say that the first quarter, the lifting cost is probably going to be below the next few quarters because we still do not have the impact of the wage increases in the first quarter. There's actually -- in the second quarter and continues to be outstanding for the remainder of the year depending on how the other macroviables behave -- the deval and the inflation that would give you the exact number - but you should assume that lifting cost will be somehow above those numbers of the first quarter. In terms of the working capital improvements, the most important contributor to that improvement is the collection of the gas plant subsidies. Remember that in the first half of last year, we have not collected a single month of subsidy. In this first quarter, we collected two months - months of May and June of the previous year and now in April which is not included in the first quarter of course, we collect another two months. That collection pace is improving and that is in itself the main contributor to improvement in working capital, but there are others including also a lower payment of taxes, of income taxes, more than anything else.

Thank you. Our next question comes from [indiscernible]. Please go ahead.

Thank you everyone, thank you for taking the question. So we'll just follow-up into forward-looking questions. First, we saw the ARS34,000 peso debit to Vaca Muerta reported in the first quarter. If you could possibly give us some sort of guidance for the next three or four years, so I think one at -- we have forecasting production growth. Within CapEx you have in mind for the next four years, where do you see the production from Vaca Muerta for the next three to four years? The second question is on regarding lifting cost Vaca Muerta as well. We saw first quarter reporting the impressive $8 million per well for payments. How do we model going forward? Where should we see this number because it seems to be already a pretty low number. But should we expect any further decrease for this number going forward? Thank you.

Hola, Felipe. Unfortunately, we do not provide guidance in terms of the production for Vaca Muerta going forward. Of course as you know, significantly all of our production growth comes from Vaca Muerta and also from tight gas. If you assume that we are expecting 3% to 5% production growth over the long term every year and that we are doing big efforts to keep our conventional production essentially flat fighting the natural decline rate. You can try to build the number with [indiscernible]. I'm sorry, not to be more precise, but frankly, we've never provided that kind of projection going forward. In terms of the CapEx per well on Vaca Muerta and the $8 million number, yes, we are expecting additional savings, but more importantly I think what we are doing is we are moving away from this 1,500 meter lateral wells which is the one that is actually costing us $8 billion [ph] or less and we actually tried to drill longer laterals with more frac stages. Evidently what we are trying is to improve the economics here, the costs of longer lateral wells have on more frac stages are obviously going to be higher, but the cumulative production should also be higher and hopefully that should result in a reduction of the breakeven prices for those wells had improvement of the IRRs. What I'm trying to say is we are not done yet in terms of efficiencies of CapEx, the stiffness of the curve is not the same. It's easier to go from $50 million to $8 million that it is going from $8 million to $6 million. But we are still not satisfied and we continue to identify ways to lower the cost per well.

Okay. Thank you very much and that would be it.

Thank you. And our last question comes from Pavel Molchanov from Raymond James. Please go ahead.

Thanks for taking the question. Can I just ask you to clarify a simple point? If the labor disagreements that you described did not exist hypothetically, would you be reaffirming 0% to 2% production decline for the year?

Thank you, Pavel. First, let me make a clarification. I have actually said minus 3% production for the year. It is a change in terms of guidance. And the answer to your question is no, we would clearly have a better production if we didn't have this disagreements as you said with the workers or with the unions. We have not broken down exactly what percentage of production is affected by these tensions and sometimes it's not easy to come up with a precise number. But clearly, production is being affected and in the absence of those tensions of those disagreements, production for the year would clearly be higher than the one that we are forecasting today.

Okay. So all of the change in production guidance from the original level, 0% to 2% to the new level of 3% decline, all of that change is attributable to labor. Is that right?

No. That is not right. Part of the change also has to do with some severe floodings that we had in the province of Chubut during the month of April and the 0% to minus 2% also was accounting for some labor disruptions during the year. We already knew when we put a budget that this will be difficulty in terms of changes that we want to affect that have to do with labor conditions. But I'd say the most important factor contributing to the additional decline has to do with these tensions, but it's not the only one - weather is also a factor.

Okay. Clear enough. Appreciate it.

My apologies. We have a question that just came in from Juan Vazquez from Puente. Please go ahead, your line is open.

Yes. Hello, Daniel, thank you. I wonder if you could give us some color on whether we should expect significant CapEx on the refineries in order to be in compliance with the sulfur labels or refined products that are required for the next years. The second question would be whether you're foreseeing in the short term a higher volume of bioethanol and biodiesel in the gasoline and diesel mix from the 12%, 10% currently in place? Thank you.

Good morning, Juan. Yes, over the medium term, we will have to adapt part of our refineries to new rules of lesser sulfur content in gasoline and diesel. That will clearly require CapEx. Various CapEx will be invested during the four or five-year period. We don't have an estimate yet, but should have a slight increase in terms of the annual maintenance CapEx if you want that the downstream actually needs. In terms of your second question, we are not expecting any increase in the blend of bios at all.

Okay, thank you. And one last question if I may, regarding the energy business, [indiscernible] interest in business for us and the question is whether you are playing to be an inactive player in both thermal and wind energy? Signing PPAs [ph] contract with Gamesa in addition to supplying your own energy?

Yes. We have participated in the auctions last year and we've been awarded few PPAs. We might decide to participate in new auctions this year. But again, remember what I have said, the ideas of YPF power will be standalone subseries, hopefully catalyzed with funds coming from new partners coming in and that company with its own management will make its own decisions regarding in which options to participate or not. But in general, we do like the idea of having a significant part of the capacity bringing in being supported with PPA from Gamesa.

Okay, perfect. Thank you so much.

At this time I see we have no further questions. I'd like to turn the call over to Diego for closing comments.

This is Daniel. Thank you very much, everybody for participating. As usual, myself, Diego, Pablo, we're all available for follow up questions. Have a great day.