Welcome to Third Quarter 2017 YPF Sociedad Anónima Earnings Conference Call. My name is Sophia, and I will be your operator for today's call. [Operator Instructions]. I will now turn the call over to Diego Celaá. Diego, you may begin.

Great. Thank you, Celia. Good morning, ladies and gentlemen. My name is Diego Celaá, head of Investor Relations at YPF. I would like to thank you for the joining the YPF third 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 events that explain our third quarter results. And finally, we will open up the call for questions. We will be making forward-looking statements, so we ask to carefully review the cautionary statement on Slide 2. Our agenda today will include the review of the third quarter results, including an update of our shale and development projects, our brief description of our financial situation and a brief summary to conclude. Also, our financial statement figures are stated in Argentine pesos and in accordance with international financial reporting standards, IFRS. In addition, certain financial figures have been adjusted to reflect additional information to let you better understand our key financial operating results. Please, Daniel, go ahead.

Well, thank you, Diego. Good morning, everybody, and thank you for joining us this morning for the review of our third quarter 2017 results. This was, again, a solid quarter, generally in line with our expectations in which we continue to see a strong demand for our fuels in the local market and also a quarter in which we saw important definitions from the government with regards to local prices that should provide necessary clarity to make investment decisions going forward. We have finally reached the full convergence of local crude oil prices with international prices. We are now in the free market for determining fuel prices. Regulated biofuel prices have seen a significant reduction, and we are passing through the effects of those prices on to consumers. Wellhead gas prices for residential customers are steadily trending towards our local market price. And finally, definitions were made with regards to unconventional gas subsidies, which has not come out as we expected, and I will touch on this later on. Revenues were up 18% when compared with the same period of 2016, boosted by that strong fuel demand, coupled with higher prices in pesos. Gasoline and diesel sales volumes were up over 4% in the period. Adjusted EBITDA reached ARP17 billion, which represents a 17% increase. And we recorded a net income, which was positive, for $250 million compared with a significant loss a year ago as a consequence of the ARP30 billion impairment charge that had been registered in our Upstream segment in that quarter. In line with the first half of 2017, we had a strong operating cash flow again this quarter that reached ARP13.6 billion. However, this cash generation was lower than that of an unusually strong third quarter of 2016 when we had collected $650 million of…

[Operator Instructions]. And our first question comes from Frank McGann from Bank of America.

Just a couple of questions, if I could. One, just in terms of production trends, what your expectations are over the next 12, 18 months in terms of whether we'll continue to see declines because of the greater weight of mature fields versus production coming from new developments. And then the second question, just following up on the gas comments that you had. I'm just wondering how serious is this in terms of real profitability from those fields because obviously, the profitability is quite a bit lower, if you're pricing at $1, $1.50 on average lower than -- at least for a year or 2 lower than what you would have otherwise gotten. But the -- my understanding has always been the profitability was still very, very high in those areas potentially at even lower prices. So I'm just wondering if you could just follow up a little bit more about the kind of return effects that new Plan Gas will have. And what's driving your potential reduction in investments?

Thank you, Frank. On our production, as I mentioned, on the fourth quarter, we do expect a higher production figure for crude oil. For natural gas, we are doing fine from an operating perspective. There were a few days in which demand for natural gas was low, so we needed to reduce productions. I like first to understand how this evolves in the next few days before giving you any estimates for the quarter. But in terms -- again, natural gas in terms of -- from an operating perspective, the trend is good. We are doing very well. And of course, crude oil, starting from this low base that we had in the second quarter and then a little bit higher in the third quarter, I think fourth quarter is going to be higher than the 2 previous quarters. So that is good. Now going forward, as you know, we said that we expect to grow total hydrocarbon production approximately 25% in 5 years. So I expressed that as a 5% per year although we don't think that we're going to be growing production 5% in 2018, taking into account that all of the production increases will come from the shale and still the shale is a small part of our total production. Growing, growing substantially. It was actually 10% higher this quarter but still small. So growth in production will accelerate during the course of the plan. With the new gas, and that takes the new gas rules, and that takes me to the second part of your question, I think that we will probably see more growth in crude oil than in natural gas vis-à-vis, what we were ambitioning in the plan, which actually we did not disclose exactly what was the breakdown between the 2. But I…

Our next question comes from Luiz Carvalho of UBS.

Daniel, everyone, just a couple of questions. The first one is related to the pricing policy. We have been, I mean, hearing some news that say now the pricing policy is basically free. And you've just mentioned during the call that you expect that, let's say, you're going to be able to actually pass through the volatility. So I just would like to understand a bit better, how would be the communication? And what would be the, let's say, the company, how can I say, process in order to communicate that to the market?? And also, if you can provide some, how can I say -- I mean, at least a color in terms of what could be the margins impact looking forward. And the second one, I would like to actually come back to this Gas Plan, I mean, disappointment, how can I say, regulations changed that you just mentioned during the last question. You mentioned that probably you're going to have shut down some projects. And I would like to understand, what will be the impact in terms of negotiation with the unions and how this could be, let's say, addressed in terms of -- can you reallocate the workers from one project to the other? Or you're going to have to actually dismiss some of them? And last question, if you have any updates on the asset sales process which, for us, it's one of the main, how can I say, catalyst as well for the attributed case?

Luiz, on the pricing policy, we expect at least once a month to reveal the factors that affect the pricing and decide changes. We have not decided to have a formal communication process of price increases. I don't know up to what extent that is of value generally. But can certainly think about that, especially with you guys. Now the reality is that each time we touch our prices, it is widely known and that's in the front page of the papers anyway, okay. So it's impossible to assume that any price increases or decreases will come out unnoted, okay. So what I'm saying with this is it will be widely known. We do expect to -- the increase in crude oil prices to have a positive impact in our margins, okay. You know that we've traditionally had strong Downstream margins, which we expect at least to maintain. And we always say the same. Remember that selling fuels locally is the way that we monetize our crude oil production. So it will always be very important for us to continue to keep margins. Now at the same time, in a free market, if margins are ridiculously high, market share will be lost because you'll compete with other forces internally and eventually with importers. So I think that we have a strong market share. We have a strong brand. Everything that we need in order to sustain the margins as we have them or higher. I don't expect any negative impact on margins at all. On the second part of your questions regarding the Gas Plan and if we were not to invest in several projects, what would we will do first is to reallocate any CapEx going to gas projects that do not make sense to other gas projects that…

Okay. Just one follow-up in this question related to the earlier comment. Is there any news on the JVs? Because I mean, from the asset sale perspective, you expect something pointed to mid-next year, but what about the JVs? Anything on the short term in the pipeline?

Nothing imminent that you will hear in the next few weeks. We continue to work with different parties that have expressed interest in different properties. As I have said in the call a few months ago, we are in a much more comfortable situation in terms of capital. And therefore, we're going to be extremely picky in terms of doing more JVs. We haven't changed the strategy though, which is to continue to develop the unconventionals with partners. We like that, but for the plan that we have for next year, in which a good part of the pilots are actually going to be 100% funded by our partners because all those JVs that we announced this year and that will have substantial investments in new activity next year are going to be part of the carry agreement in which our JV partners will put 100% of the CapEx, right? So what that is doing is freeing capital for us to go forward with the pilots, those that I have mentioned that we're doing this year and some additional pilots that we're going to be doing next year. So bottom line is yes, you should expect us to continue to do JVs over the medium term. There's nothing imminent on the works right now.

Our following question comes from Ricardo Cavanagh from Itaú.

Well, at your Investor Day, you provide or you give significant importance to the outlook for cost reduction. So thinking about progress in terms of negotiations with the unions, how are you seeing 2018 in that sense on the possibility of making something similar to what you attained last year or early this year in Neuquen province, let's say, in Santa Cruz or elsewhere in Patagonia?

Ricardo, well actually, even before 2018, because we still have a couple of months to go, we are making some changes in the province of Santa Cruz where our cost structure is the highest. We did a big part of the adjustment in the last 12 to 18 months in terms of reducing the activity to those developments that actually made sense from an economic perspective given that high cost structure and the reduction in prices that we have been seeing in Argentina as we converged with international prices. But the second part of the adjustment has to do with O&M, with the lifting and the OpEx in Santa Cruz generally. And we do expect to move forward with some of the changes in the next few weeks, and those should have a positive impact in 2018 and onwards. So Santa Cruz and the south of Argentina generally is, as I said, where cost structure is highest. And when we talk about reducing OpEx generally in average, a good part of that reduction is coming from these areas, whereas the unconventionals, for instance, have already pretty low lifting cost which still can be optimized but we don't need that big of savings over there. And to your point, we have made a lot of progress in changing the agreements with the unions applying to unconventionals this year. So cost reduction continues to be a big part of our focus going forward. We are not going to be waiting to some of the changes that we need to do. Now we're not having any discussions with the unions regarding the 2018 labor agreements because we're just almost 6 months away from that, right? So you will hear eventually news towards the end of the first quarter.

Our following question comes from Pavel Molchanov from Raymond James.

You mentioned that you're not anticipating 5% production guidance for 2018. Have you formulated a specific plan at this stage for 2018 in terms of capital budget and production growth expectations? And when might we be able to hear the details of that?

Pavel, thank you. We do that as part of our budgeting process for 2018. We are obviously very advanced on that process, but it will only get approved in our next board meeting in the first half of December. What I can anticipate at this point is that CapEx will be around $4 billion generally, okay. So pretty much in line with the guidance that we have provided this year, although this year was going to be below guidance in terms of CapEx. I still do not feel comfortable in providing guidance in terms of production. It's definitely going to be substantially lower than that 5% per year average, which is not surprising to us because when we put together the plan for 5 years, we knew that we were coming from a low base and a big part of our production is that legacy mature production that experiences high decline rates and that we will gradually replace that with unconventional production. But as I said in one of the questions earlier, that's going to take some time, right, because still the unconventional is a small part of the total production. So bottom line is we will see some growth but are far away from that 5% average, but that doesn't change our 25% production increase for the full period as a whole. That guidance for 5 years is not changing at all.

And let me also ask about the Vaca Muerta partnership that you have signed earlier this year, for example, Schlumberger and Total and so forth. Have any of those partners expressed concerns or criticisms of the revised gas price policy that you've discussed?

Well first, most of the partnerships have to do with the oil window of Vaca Muerta. And therefore, the effect on the economics of the total development, the effect of this gas pricing program is not that significant. Second, because all of these JVs are on new development areas, they will all have 100% of the benefits of the subsidy. So there isn't any harm. And third of all, this regulation just came out a few days ago. So we haven't had the chance of revisit any of the plans with our partners. But I don't anticipate any pushback.

Our following question comes from Andres Luzona [ph] from Citibank.

Just follow up regarding the gas pricing policy. Do you think this is an issue that is closed for the government or there is room to further negotiations? And the second one, if you can help me to understand how much of EBTIDA came from Loma Campana power plant facility during the third quarter.

The Andres, gas pricing policy is a resolution that came out of the ministry a few days ago, and that is definitive. As in everything, there are always gray areas and things that we need to be confirmed and that we are already in consultation with the ministry to understand the details. But what I have described during the call applies. And no, we are not expecting any changes at all there. I didn't understand your second question.

Sure. There was a power plant, if I'm not wrong, at Loma Campana that kicks off during the third quarter. How much was the EBITDA contribution for that power facility?

Well, it was completed very, very recently. So it had no impact at all on the EBITDA of the quarter.

Our next question comes from Regis Cardoso from Credit Suisse.

Daniel, two topics that I wanted to touch. The first one is rather simple. It's regarding production recovery from the automation, the residual effects of the floods and storms from the previous quarter. Do you expect production for the fourth quarter to fully recover from those weather impacts? And then the second topic is regarding prices. First, on prices, I wanted to get a sense of how much pricing power do you believe to have and how much room for imports you believe there is for them to take market share from you. So let's put it this way, if let's say Brent continues somewhere around, let's say, $60 or slightly above it, how much more room do you think would there be for price increases? And let's say you pushed too hard these price increases. Do you have a sense of how much market share do you believe you could lose? And then still on prices, you've mentioned in the strategic -- in the event you carried out in New York about the strategic plan that you did not intend to have a pricing policy that was as volatile as daily, right? But maybe that is one way you could maybe not make your price adjustment so visible to the press every time because I mean, if you adjust it every day, then it is not so much of a big event, right? Have you considered this? Are you still looking for monthly price adjustments? How do you think it will impact your pricing power in the domestic market?

Thank you, Regis. The first question, yes, we have fully recovered from those events of the second quarter. As I said during the call, on the third quarter, just the effects were -- I think I said residual effects were not that significant. But you should not expect any effects at all on the fourth quarter, not coming from those events on the second quarter. And on prices, we believe that they're at or around $60 per barrel. We have the prices that we need today, okay, give or take, okay. We will need to review because today we are at $63 and change per barrel, okay. So we will review that, as I said, at least on a monthly basis. We are not expecting to lose any market share. We believe that with these prices and the protection that we have for having the logistics that we have countrywide in Argentina and the quality of our products, pricing, locations of our service, network -- service station network and so on, we are not expecting any market share reduction. Of course, also as I said, if we were to increase prices well beyond what is reasonable, then you start creating an incentive for our people to come in. But we will always monitor that in a way that we have the price that we need to have based on market -- on market dynamics, okay. So if we are in a free market, I think that our prices will just reflect what is the fair price based on import parity and based on our competitive position. I will take note of your suggestion regarding daily price adjustments. We probably don't think that, that is a good idea. It would create a lot of confusion with clients and wholesalers and service stations generally. But I get the point. Obviously, I think that as time goes by and people get used to pricing changes more often than in the past, the whole importance of our price change will gradually go away and we'll have a lower profile than what we have today. But I don't think that we will move to daily pricing changes.

Our final question comes from Santiago from AR Partners.

My first question is related to the current Plan Gas. Can you give us an update regarding the timing of collections for the government considering that I believe until recently, there haven't been any payments and they have been paying with considerable delay. Then my second question is related to the new Plan Gas. What do you think will be the impact of the plan since January 2018 in your average gas price as you received it today? Besides -- and regarding pricing, 100% of the new conventional projects will be paid $7.50 per million BTU. But as I understood from what I heard earlier in the call, you need to increase production in like 16 projects to get the subsidy. However, if you were to increase production in an existing project, will you get the $7.50 price for the whole output or only for the incremental production? And third question, if I may, now that the price of crude have reached full convergence with international benchmark, what's the pricing outlook you expect for 2018?

Thank you, Santiago. Actually, you raised a couple of questions of -- I think that I should have mentioned during the call. On the Plan Gas collections, we collected after the close of the quarter, the months of fourth quarter of 2016, okay. So that was on the good news side. But that means, of course, that everything that we have accrued this year, we have not collected, okay. We are in constant dialogue with the government regarding that. We are, in fact, in the same situation than the rest of the industry is in Argentina. And we -- the government is fully aware of this, and we expect to have some collections before the end of the year. And gradually, as the subsidiary goes down in terms of size for the government, I think that the arrears will also come down as it's going to have less of a fiscal impact for the government. So we expect in 2018 to see an improvement in terms of the number of months that it takes the government to pay its subsidies. On the new Plan Gas and its impact on the average realization price for natural gas, it's a little bit too early to provide numbers. But we should say that we expect a slight reduction in the average wellhead price of gas for us in 2018, and again, an increase in 2019 and onwards. To understand -- and this goes to the next part of your question, which is some of the developments that are in production today, and in many cases, provide for a substantial amount of natural gas production, we'll probably not get the effect of the subsidy, but we'll get the market price of the basin that is actually increasing every quarter. In terms of which projects get and which do not get the subsidy, you're right. The subsidiary is only on the incremental production, okay. But remember that all of the new projects almost do not have any production at all today, okay. So you should assume that substantially all of the production that those projects throw out will have the benefit of the subsidy, okay. So the negative effect will not be on those new projects which are exactly in the same situation than they were before this resolution came out. The negative effect is on the projects already under development. And in terms of crude oil prices, we never provide an outlook of where crude oil prices will go. We haven't changed our long-term view that we should plan for crude oil prices at or around where they are today or maybe a little bit lower than where they stand today. We would obviously try to profit as much as we can from these high prices that we are experiencing. But we never provide an outlook there.

We have no further questions at this time.

Okay. Well, thank you very much, everybody, for participating. And as always, if you have any follow-up questions, you feel free to call me, Diego or Pablo at any time. Have a good day.