Welcome to the Second Quarter 2019 YPF Sociedad Anónima Earnings Conference Call. My name is Sophia, and I'll be operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to Sergio Giorgi. Mr. Giorgi, you may begin.

Great. Thank you, Slyvia [ph]. Good morning, ladies and gentlemen. My name is Sergio Giorgi, Vice President of Strategy, Business Development and Investor Relations for YPF. I would like to thank you for joining us today. In this occasion, we will present YPF's 2019 second quarter results. The presentation will be conducted by Ignacio Rostagno, Head of Investor Relations and myself. During the presentation, we’ll 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 statement on slide 2. Also, our financial statement figures are stated in Argentine pesos based on International Financial Reporting Standards. In addition, certain financial figures have been adjusted to reflect additional information to let you better understand our key financial and operating results. Ignacio will present the financial results for this quarter, but before, I would like to provide just a few elements of context to put things in perspective and better understand our performance and excellence. In recent earnings calls we have explained the overall natural gas market situation and how our focus has shifted to increasing our shale oil production. We currently have 18 rigs located in the crude oil window. We continue achieving important results in productivity and development cost, and are also focusing on increasing the size of the current shale oil development cluster and the risking two additional new clusters, one in the north, and one in the south in order to prepare the funnel of new developments that will be the backbone of our production growth for the next years to come. We will be showing later on some of the very encouraging results we are having there. We continue actively…

Thank you Sergio and good morning everybody. Now let me start with our second quarter results highlights. Revenues were up by 72% in pesos and our adjusted EBITDA amounted to ARS41.6 billion reaching our margin of 26%. Please remember that as of the effective date of January 1, 2019 the group has applied the guidelines of IFRS 16 which effects are not included in our adjusted EBITDA and financial debt. Total CapEx of ARS48.8 billion resulted in an increase of 15% compared to Q2, 2018 exceeding our cash flow from operations, which was ARS40.7 billion in the second quarter of this year. It is worth mentioning that this CapEx figures include acquisitions of Ensenada de Barragán and Aguada del Chañar assets Sergio mentioned before. Excluding those one-off transactions, our CapEx before acquisitions was in line with our cash flow from operations. Total hydrocarbon production was 5.3% below Q2, 2018. Net sales on production went up by 57.5%, reaching 32.100 barrels of oil per day. We will explain all these numbers in detail as we go through the presentation. Now moving into our main financial figures measured in the U.S. dollar. In the second quarter the local average exchange rate variation was almost 87% when compared with the same quarter of 2018. Total revenues show our reduction of 7.3% mainly driven by lower demand and lower prices in dollars for our main products, gasoline and diesel. In addition, revenues were also impacted by a 33% decline on our natural gas revenues, as a result of lower volumes and a 14% reduction in prices. On the contrary, total exports showed a slight increase on higher export volumes partially offsetting these decreases. Regarding operating costs, lifting our refining costs in dollars the US increased by 3.4% and 6.5% in absolute terms respectively, as…

Thanks, Ignacio. During the second quarter of the year, total hydrocarbon production dropped 5.3% a year ago to 515.7000 [ph] barrels of oil equivalent per day. However, compared to the first quarter of the year, our total production increased 6%. Let's look at this with much more detail. Crude oil production in the quarter show a slight decrease compared to last year's second quarter at 224,000 barrels of oil per day. It is worth mentioning that due to mature field divestment therefore by the end of 2018, we are not considering 2.1000 barrels of oil per day. In addition, crude oil production in the quarter was affected by a massive blackout in Argentina. So, if we correct for that, our oil production will have been slightly up. The good news here is that our shale oil production growth continues to offset the conventional production decline, and we expect this trend to continue along the year and beyond as our unconventional production will continue increasing. In the gas market, we continue seeing in this quarter, the effect of this significant increase in the local gas supply. Therefore, curtailments in natural gas production kept on occurring averaging 3.2 million cubic meters per day during the quarter. This effect, combined with the mild weather, weaker demand, and the country's blackout resulted in an 8.8 decrease in our natural gas production, compared to the second quarter of 2018, reaching 40 million cubic meters per day. Now, if we hadn't had to curtail our natural gas production and excluding the impact of the blackout, and the sale of mature assets, gas production will have been 3% below the second quarter of last year figures. It is worth highlighting that on quarter-over-quarter basis, our natural gas production increased 15.5% and we expect production to further increase…

[Operator Instructions] Our first question comes from Bruno Montanari from Morgan Stanley

Morning. Thanks for taking my questions. First on the longer shale wells, I noticed this on the presentation, but any insights you could give us on how those wells are performing, how they can perhaps improve the current EOR the company has been using on the type curve? Second question would be on the LNG projects. I understand you alluded to the two initial ships that a company is going to work with to export LNG, but how should we think about the larger scale projects that could be done in Argentina, and what would be YPF’s financial commitment to it. And a third quick question if I may, we saw a relevant pressuring working capital in the second quarter. So, I was wondering what should be the working capital trend for the second half of the year now perhaps linking it to the receivables from the government? Thank you very much.

Hi, Bruno. Thanks for your question. So, today our average well in our development is around 2000 and 500,000 meters horizontal rain with 36 fracs. Right. This is where we are using in a majority of ways. Now, having said that, we already drilled a 3,200 meters horizontal well with good results with EORs that are higher of course than the previously mentioned wells around 1.5 million BOE. And of course, we want to extend this. So this is why we are now in the process of drilling 2 wells; one in Loma Campana, one in Bandurria Sur of 4000 meters. So this work will have up to 60 fracs, right. So it is early days to put EORs affected to those, to those wells. But we are always trying new ways to improve our development goals. So this is the way to do it. And in the end, we will continue reading what is the most economic or profitable work. So that’s for the longer world. In LNG as we have been saying, this is part of one of the levers that we are activating to increase gas demand. And as you mention, the sizeable LNG terminal would be the one that would be looking for more production for Argentina. So we have been studying this for some time now, and we hired two engineering companies to perform prefit studies that we will have some further results by the end of the year. We are also having conversations with different companies that would like to join forces with us, because this is not going to be a YPF project, it’s going to be an industry project. So coming to your question, it is very early now to talk about what will be the financial commitment. So having said, that we want to dodge that question. We will be giving more updates as we have been saying by the end of the year. And when we do our webcast by the end of the year. So this is what I can say about that.

Let me interrupt you. Sorry, but is the idea to have more or less than 50% ideally?

No, it's not -- it's not yet decided, Bruno. So we are having conversations with several potential partners. We need to integrate what we will be doing in the upstream, what we'll be doing in the mid-stream, what we will be doing in the LNG. So it is early days to say what will be the percentage that YPF will be taking along the chain. And it's early days to say that we will be taking the same percentage all along the chain. So we will be giving more information about that by the end of the year.

And Bruno, this is Ignacio. Concerning working capital, we will see an improvement. It's important to mention here that the analogy knows we’re in the beat of winter due to distribution company payments and increases in those sales. Yes, there has been some difference in their working capital compared to previous quarters. Having said this, this will improve. And not also something to mention that it’s important in terms of and we have mentioned it that we are collecting the blank gas debt out 2017 and that is being paid in term, so that will help our working capital also.

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

Okay, good day. Thank you very much. If I could just ask two questions. Natural gas, when you list the number of projects that you have that could provide with additional demand going forward with the storage and with potential exports to Chile with the new thermal plants that you've have a stake in, you get to some pretty high potential increases in demand. I was just wondering as you look forward, do you expect to see pretty sharp increases over the next 12 months in terms of your gas demand, even though we're of course still a very difficult supply demand situation within Argentina? And then secondly, just quickly if you could remind us what the current decline rates are you have in your base production, and what you think that might trend over the next several years with efforts that you may have to contain that those decline rates? Thank you.

Okay. Thanks Frank. So in terms of gas production, as we said, we say first to recover our historical production level over the next 12 months. And as we said in the presentation, we already seen 44 now, and we be adding all these chunks of I would say of gas that you have mentioned that we have been presenting not all of them are at the same time. So we believe that once we reach our historical production level, this production will be flat for some time and we will be increasing later along with all the new projects that will have been mentioned we’ll be increasing demand, right. Your second question was related to decline. So they say that we have an overall decline around 10%.

Okay. Thank you very much.

Our next question comes from Vicente Falanga from Bradesco

Thank you. Good morning everyone. Thank you, Sergio, Ignacio. I had a couple of questions. You mentioned in your press release a very detailed all the projects that you're working on secondary and tertiary recovery. I was just wondering for Loma La Lata Sierra Barrosa which is probably one of your largest fields. We have seen some intense decline there. Are you working in secondary tertiary there also? And what could the company do to slow down the decline in this field? Also my second question, we heard that the government of [Indiscernible] want you to sue in Brazil is potentially talking to Argentina to import gas after this new pipeline is built. I'm just wondering if YPF can make any comment about this? And do you fear the potential development of gas markets in Brazil, that Brazilian government has launched a big program. Could this get in the way of exporting plans for Argentina? And then one last question if I may. Do you still think that YPF with the acquisition of Barragán will generate free cash flow to equity in 2019?Thank you.

Hi, Vicente, thanks. So concerning our secondary and tertiary recovery. You know our focus has been over the last six months to increase focus in in secondary and tertiary recovery. So in secondary, by injecting more water, better quality and with better selectivity than before. So we are seeing good results. For instance, we managed to reverse the position decline and increase the production just by optimizing water injection. And based on this, we are looking to extend these two other fields. In particular where for the field you mentioned La Lata Sierra Barrosa, we do have a second recovery project there with some water injection in the excess of 10,000 cubic meters per day. And it’s producing around two point three thousand barrels of oil per day. And we don't have tertiary recovery plans there. Concerning the Brazil gas policy, of course I mean every country will try to do the best, the best they can to export more gas. So we do have the capacity to export to Brazil as we have the capacity to export to Uruguay and to export to Chile, so we will take any possibilities that will be available. And in terms of competing for exporting gas, well we are doing our gas LNG project. And we believe, we can be competitive in a global market. So we will need to be competitive not only with Brazil, but in an international market. Concerning your question about free cash flow to equity. Listen, what we have been saying is that CapEx is being funded by the free cash flow from operations. Like so far this quarter with these two acquisitions, the ones we mentioned before, there were unique opportunities. So when we see in our long term strategy, there weren't contemplated our annual budget, but free cash flow after all the financial expenses will be negative. We are aiming to maintain our last ratio between our target.

Very clear. Thank you Sergio. Thank you Ignacio.

Our next question comes from Luiz Carvalho from UBS.

Hi, Sergio. Hi, Ignacio. Just quick questions from my end. I mean, we saw the production drop in the quarter. And currently the average might be impacted for the year, the second quarter. So and there’s no much visibility of natural gas demand improvement, so I just would like to understand and get a bit more color on how this might change your forecasts in terms of production growth looking forward? And the second question it's more of the downstream margins. You mentioned that you expect margins recovery on the second half of the year. I understand that third quarter might be a bit better, because your pressures dropped. But I just would like to understand if it’s just a commodity impact or there's something internal that you're doing to try to follow up follow closely the international prices? Thank you.

Hi, Luiz. Thanks for the question. So yes, we expect a recovery in the production on the second half of the year compared with the first half of the year, mainly by recovering the gas production that we already mentioned. And also increasing the overall oil production, which is mainly coming from our shale oil operations, that's in terms of production for the second half of the year.

I just have just one question. I mean it. You kept the guidance but the point is that I mean, at least in our forecast, I mean the prediction for the first half was a bit lower than expected. So I just would like to understand in the long term, if there's something that you may review in terms of production growth for the next four to five years or so, considering a lower base.

Yes I mean our plans for the next five years we are unveiling them you know by the end of the year. Well, now you need to consider that last year we also had some curtailments. So we expect for the second half of the year with all the levers that we have activated and went there last year. And we will be able to do the catch up.

In terms through refining margins? Sorry

Yes concerning the refining margins. Yes we expect those margins to have a better situation. We must, we must say that in the first part of the year, we had some stoppage that we weren't considering. So and, this should help. Also in addition concerning the impropriety this international, the international prices have been going down. So in that sense, it will help our margins over there. And mainly is that is our ability at the end to keep on with this plus rule that we have been doing. And with more stable or with a more stable scenario, that we have been seeing in the last month in Argentina, that we'd also help.

Okay. Thank you.

Our next question comes from Pavel Molchanov from Raymond James.

Thanks for taking the question. Over the last several years, every quarter, you provide an update on Loma Campana development cost and operating cost metrics, which is very useful. I'm curious, how long will it take before you are ready to provide the similar data for La Amarga Chica and Bandurria Sur.

Okay, thanks for your question. So yes, I mean you are right. When we are always showing the Loma Campana development cost, when we performed a field trip to Vaca Muerta, we showed some of the development costs we were having on the first phases of the development in La Amarga Chica which were just very near to those of Loma Campana because of course we are using all the synergies and all the lessons learned that we have learnt from there and we are passing putting them to the same field. So the figures that we showed when we did that, when we were having approximately $10 per BOE in Loma Campana. We were having around 11 to 12 in La Amarga Chica but that was because we were ready we were counting some words that were coming from the pilot in fact. So we are very confident that now that we are in there in the full development mode, I mean that they will cost and they were productivities very similar in all these fields and this includes as well Bandurria.

Okay. But let me also ask about the YPF ventures, which I remember you announced about a month ago. Realistically, what percentage or portion of your total capital spending over the next five years do you think will be allocated to renewables and low carbon technology?

Well I would say, we have to separate a YPF ventures with renewables, and low carbon technology, because as you know we also have our in branch of a thermal power repair for loose [ph] which is also investing in renewables. For instance, we have a wind farm, where we need a new one. We have projects of solar coming in the future. So and we need to separate in terms of how much of our percentage of CapEx will go to renewables when we consider the aggregate. Now your question coming to YPF ventures. YPF ventures was established couple of months ago. It's our new co-operative venture fund, focused on accelerating innovation, and the CapEx will allocate in to that initiatives are let's say below that 0.1% of the company CapEx. Right. So this is a let's say around $30 million per year globally if we find a good opportunities. And so but this is, I would say this investment is much less of the global investment that YPF is doing in renewables. As I mentioned before, we have already a wind farm, work in a wind farm is being constructed. And also we are looking to increase that size of projects.

Okay. Appreciate the clarification on that. Thank you very much.

Our next question comes from Daniel [Indiscernible] from BPG.

Hi, good morning guys. So I have a couple of questions here. My first question is on reserves. And I was wondering if you could to please share with us your thoughts on how likely it is you may have to book a potential negative revision or impairment on reserves considering lower realized gas prices in 2019. So that's my first question. And my second question, I was just wondering, if you could give us an update on the strategy on Vaca Muerta and specifically, if you're considering to divest additional acreage. Thanks.

So Daniel thank you for your questions. Concerning the question about reserves. We do not expect them to be much really, they are having these changes that you are mentioning. It's not only prices, but also costs and performance that you have to take into account. And also, it's important please remember that, we use domestic prices and not international prices. So therefore, changes are not that relevant in prices. But yes, we cannot anticipate anything. So far, we are not going or we're not seeing that reversion.

Yes, considering our strategy in Vaca Muerta your question was specifically in terms of divestments. So as you see that we mention, we just bought you know a new acreage which is just beside La Amarga Chica and he's giving a lot of synergies to us and we could divest part of this of this block because there are some companies that are interested in joining forces with us to the risk and develop that block. We are not actively looking to divest any of our oil acreage at this time. Once we confirm that we have for instance a new development hub, where we’ll we look at that time if we need to do some divestments or not. But it's not now, and we are not actively pursuing that at this time.

Thank you guys.

We have no further questions at this time.

Okay. So thank you very much. And as always, if you have follow up questions, you can contact Ignacio and the team. And thank you for participating. Good bye.

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