YPF Sociedad Anónima (YPF) Q2 2019 Earnings Report, Transcript and Summary

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 managing our portfolio including divestment of non-core mature assets by closing the sale of two mature conventional blocks in Neuquén province and signing the sale of two mature fields in the province. On the investment side, we have taken advantage of two business opportunities. We acquired -- block increasing the size of our main shale oil cluster adding 14000 acres of premium shale oil position, and we also acquired 50% of Ensenada de Barragán Thermal Power Generation Plant in order to secure this plant as of taker of our natural gas. We keep on implementing technology to improve the safety and performance of our operations. During this quarter, we signed strategic alliance with Microsoft to collaborate in a number of projects and initiatives in order to support YPF digital [ph] formation journey. Those of you who participated in our recent Vaca Muerta field trip would see the real uses of these technologies in our central control room for drilling, completing and producing wells. For example, the use of artificial intelligence to navigate the Vaca Muerta horizontal rigs. Finally, we launch YPF ventures, our corporate venture fund to invest in companies that are innovating with breakthrough technologies. On the macro side, in the second quarter of 2018, the cooling down of Argentina saw a level of activity deepen while inflation kept on figures. Having said this, by the end of the quarter, we saw some stability on these variables with a base appreciating and an inflation rate decreasing. In addition, the average exchange rates in the quarter was 12% higher than in the first quarter. The gas market continues experiencing an excess of supply due to an increase in production after the incentive price programs. These effect, plus mild weather and weaker demand, have affected our natural gas production as we keep on curtailing volumes and also affecting the gas ready station prices. On the positive side, this curtailment is lower than the last quarter. Additionally, we keep on applying all the short, medium, and long time levers to increase gas demand. I will be mentioning them later on. It is worth highlighting that an external event affected our production volumes on refining activity during the quarter. In June 16, almost entire Argentine electric system grid suffered a massive failure. In addition, our NGLs production was negatively affected by a post blackout incident at petrochemical complex in Bahia Blanca. We will provide further details on the impact of this event when we go through our production figures. Before moving to our financial results, as on every quarter recall, we would like to share with you over safety and energy metrics and action plan. As you can see in the charge of the left side, we track the injury frequency rate, an indicator the initial of the measure of the number of people injured every million hours work. The chart shows that despite the small increase in this number for the first half of the year, we are still achieving numbers that are among the lowest over the last decade. We therefore need to remain vigilant in this features of high activity, as we are reminded from time to time that we work in an industry with flammable liquids, high pressure and subject to the environment. ESG is growing in importance globally and we, in YPF, have always been committed to sustainable practices. On this subject we are realigned to achieve our 2023 objective concerning low carbon emissions. Our 2018 sustainability report will be available by the end of August and we will continue tracking our ESG scoring under the Dow Jones Sustainability Index to benchmark our progress. Renewable energies represent now 70% of our total energy consumed. We are analyzing new energy solutions through our R&D subsidiary detect and as mentioned before, we launched our corporate capital to focus in new energy and mobility solutions. Now Ignacio will walk you through our financial results. Then I will follow with our operational metrics and conclusions I will open the Q&A session.

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 we had more activity both in conventional and unconventional. Royalties, which is the only cost component fully denominated in dollars were down by 23.5% driven by the lower natural gas and crude oil prices in dollars, coupled with the lower production of the period. In turn, crude oil purchases were down 6.5% in dollars, as we process in our refineries lower levels of crude than a year ago while our own crude oil production remained fairly stable. As a result, adjusted EBITDA was down by 10% in dollars, maintaining EBITDA margins close to the 30% level. Finally, total CapEx for the company amounted to $1.1 billion, when included in the M&A activity mentioned before. Regular investments in our operations were $900 million, 11% higher than compared to the second quarter of 2018, mainly boosted by more activity in Vaca Muerta. Upstream CapEx in 2019 second quarter amounted $726 million, 5.9% higher than 2018 second quarter. Drilling and workover representing 68% of the Upstream CapEx followed by buildup facilities with 24% and exploration and our activities 8%. During the quarter, we drilled and put into production a total of 111 new wells including 39 new shale wells and another eight wells in that formations, out of which 22 are not operated by us. In Downstream, CapEx amounted $136 million, 19.7% higher than Q2, 2018 of which 66% was in refining, followed by logistics with that 20% marketing will 29% and finally Chemical with 5%. Now let's switch back to Argentine pesos to go over the more detailed analysis of the quarter. As we did in previous quarters, we are focusing the analysis in adjusted EBITDA of our business segment to provide a better understanding on how each business segment contributes with the cash generation of the company, putting aside the FX impact and depreciation and amortization, which are in fact a non-cash effect. Moving on to adjusted EBITDA, it has come up by 68% compared with to the second quarter of 2018. This was mainly driven by the better operating results of training our upstream segment, which showed an increase in ARS10 billion in adjusted EBITDA. With an increase of 60% in revenues, driven by higher crude oil and natural gas prices in pesos, while cash cost of this business segment increased by 66% above revenues increase besides any margin erosion. The downstream business segment saw an increase of ARS3 billion compared to a year ago. Revenues of this segment increased by 78% driven by higher gasoline and diesel sales on higher prices in pesos, although lower in dollars, partially offset by a slight decrease in demand, higher sales of jet fuel, LBC, fertilizers, lubricants and petrochemical products, and higher exports with both higher volumes and prices in pesos. In turn, cost of this business segment reported an increase of 75% mainly explained by higher crude oil and biofuels purchases, which are denominated in dollars. Higher imports of fuel and 99% increase in refining cost. The gas and power segments show an increase of ARS1 billion mainly due to higher average prices in local currency and better commercialized volumes to our LDC Metrohgas. The cash generation in the second quarter of the year reached a total of ARS40.7 million a 48% increase over the operating cash flow of a year ago. This increase of ARS13.6 million was mainly due to an increase in EBITDA of ARS19.4 million partially offset by higher working capital needs. During the quarter, our investment reached ARS48.5 billion including ARS4.3 billion and ARS4.1 million in negotiations of Ensenada de Barragán and Aguada del Chañar respectively. Nevertheless, our cash position remains strong, including short and medium term liquid cash investments at ARS67.2 billion at the end of June 2019. In April, we started collecting the installments of the bond issued by the government for the 2017 planned gas accrual. During the quarter we have received approximately $150 million out of $760 million improving our capital, our working capital. We will collect an additional $150 million along the rest of the year 2019, additionally, ensuring we access the international bonds market. As we can see in the graph on the right, we are funding our CapEx program with our own cash generation reaching ARS1 billion of free cash flow during the quarter. However, if we include the aforementioned acquisitions of the quarter, our free cash flow was negative. The previously explained gas position is enough to cover our short term debt maturities of this year. As said, in late June we say to take advantage of the momentum from the recent Argentine rally and announce a new intraday transaction. This transaction reopened the market for us in [Indiscernible]. After over a year of long supply -- during our period of market volatility for the country and brought us back to the markets after our last issuance in December of 2017. We issued $500 million at 10-year bonds with every three quarters percent yield. Proceeds will be used to cover 2019 funding needs. As we mentioned in our previous earning calls, significant amount of 2019 debt maturities are related to trade facilities, which we have been rolling over and expect to continue doing so. In addition, this year the relevant maturity in the capital markets are the CHF300 million coming due in September. Forward looking in 2020, we have already run portion of their maturities denominated in pesos. Our next significant maturity in the capital markets is $1 billion U.S. bonds due in March 2021 having enough time to work on a liability management as we have done in the past. Our leverage ratio stood at 1.9 times net debt to adjusted EBITDA within our two times target for the year, while the average life of the debt remains in the six years area. The average interest rate in pesos decreased to 44.76% while the average cost of our debt in dollars remained stable at 7.54%. With this, I would like to turn the presentation back to Sergio, who will we explaining our operational results. Thank you.

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 in the third quarter of the year given the winter period, which increases internal demand. In July, we were producing 44 million cubic meters per day. As mentioned in the previous quarter, we are taking a series of measures to mitigate this new reality for the gas market. These measures are focused on the short, medium and long term. We continue to limit investment in natural gas just to those molecules that we are confident we will be able to sell in the market. During the second quarter, we exported an average of 1.2 million cubic meters per day to Chile, at an average price of $4.2 million. We have secure one take or pay contract we made up next for the whole year, the differential volumes. The remaining contracts are interoperable and we expect to resume these exports in the third quarter of the year. Moreover, we will be exporting LNG in September this year, representing an additional 2.5 million cubic meters per day. Last month, we reached a preliminary agreement and in May 2020 with accelerated energy for the charter of LNG carrier. This will be one of the two ships that will be used to export LNG. We have also launched the construction of a new underground gas storage to reduce the peak between winter and summer production. We will start injecting gas on the fourth quarter of this year, having a first production in 2020 winter, and working at full capacity by 2021. In order to further increase gas demand, we have expanded in the gas value chain, Aguada and Ensenada de Barragán thermal power generation plant located near the center of consumption [ph] in Buenos Aires together with Pampa here. Through this iron ore here through this vehicle that was acquired on a project finance basis we will insure up to three million cubic meters per day of natural gas due to a professional player contract. We will continue working towards a long term solution to increase gas demand, which is a sizable LNG terminal. Last month, we awarded a prestige contract to two engineering companies, and we are working with internationally renowned companies that would like to join forces with us for this project that will be an industry project. We expect to provide more details by the end of this year. Finally, we are also working towards reaching RFID for expansion of their Profertil urea plant -- with Nutrien. In line with a lower natural gas production NGL production decreased 5.3% to a total of 39.4,000 barrels per day. During the quarter, NGL production was also affected by the June power outage. In addition, following to the power outage, one of Dow’s petrochemical plant, an important a taker of Mega, our affiliate company suffered an explosion in an exchange, decreasing their activity which in turn affected Mega’s production therefore affecting our NGL production. When we break down the sources of our total production, we can observe that shale production contributed with 27,000 additional BOEs per day, while tight production showed a decrease of 19,000 BOEs per day mainly related to a lower production of natural gas as explained before. In the conventional side, we remain focused on improving secondary recovery and expansion of your payloads, to improve the recovery factor of our crude oil mature fields. Our plans include injecting more water than last year, and having 10 polymer injection plants working before year end, and we are well aligned to achieve this target. Moreover, we continue optimizing our mature field portfolios with some investments of non-core assets in order to focus on the most profitable fields. Moving now to unconventional, net shale production in the second quarter of the year reached 82,000 BOE per day showing an increase of 48% compared to a year ago and 16% quarter-over-quarter. But more important in the current environment, net shale oil production showed an increase of 57.5% compared to the second quarter of 2019. Shale oil now represents 14% of our total crude oil production. During the quarter, we connected a total of 39 new shale horizontal wells, almost doubling the connections of last quarter. The development costs in our Loma Campana shale oil development continues coming down, being down in the $9 per BOE area already in line with the target we set previously for this year, while operating expenses are now at around $5.5 per BOE. Additionally we see a potential to continue this reduction trend and we are still having a few words with development cost of $8 per BOE. We started drilling two horizontal wells with 4000 meter drains, one in Bandurria and one in Loma Campana, and we are bringing along it's now in unit that will help increase in the speed of waste cleanup. On the fracking activities, we have already achieved a performing 10 fracs per day on a few occasions, we are using our own sandboxes for the last mile logistics. We are currently doing test of nearby sand and our propane plant we have a capacity to process one million tonnes per year before year end. Let's go into more detail about what we are doing in Vaca Muerta which is where our production growth will be coming from. As mentioned before, our shale portfolio contains acres in dry gas, in wet gas and in oil in different stages of advancing. We own some of those acres at 100% and some are NJVs either operator, operated by us or by our partners. We own a portfolio full of optionality in terms of redirecting investments when necessary. We are currently developing three shale oil fields in what we call cluster oil number one. In Loma Campana, production was 40,000 barrels of oil per day during the first half of the year. We will be producing 50,000 barrels of oil per day by the end of the year, and we’ll achieve a production plateau of 100,000 barrels per day in 2023, being able to sustain this plateau for at least 10 years. The treatment facilities are being upgraded, and we will be ready this year. And the new 88 kilometre pipeline that connects our operation to the main evacuation route is already in operation. June, we had six weeks work in Loma Campana. La Amarga Chica field production was 12,000 barrels of oil per day during the first half of the year. We'll be producing 20,000 barrels by year end and would reach a plateau of 65,000 barrels of oil per day in five years, being able to sustain that plateau for more than 10 years. We are currently building a new treatment facility for this field, and in the meantime, the production is being treated in our Loma Campana facilities. In June, we had eight weeks in this field. Bandurria Sur production was 6000 barrels of oil per day during the first half of the year. We’ll be producing 10,000 barrels per day by the year end, and will reach a production plateau of around 60,000 barrels per day in five years. In June, we had three rigs working there. We are also working in increasing the size of this cluster number one. In June 2019, we were awarded in a bid 100% of our block, 14,000 acres located next to La Amarga Chica in the Vaca Muerta oil window and including some existing facilities. We will start the pilot on this block early next year. Our efforts do not stop there as we are also preparing the next wave of shale oil developments. In our cluster number two, we are working with our partner Equinor in Bajo del Toro block. During the quarter, we put into production two horizontal wells that have been producing oil for four months by now and are showing top type quartile productivity potential when compared where Loma Campana was. Indeed, we identified four potential Bacca [ph] Morado landing zones in this block, and define it type well with an AP 60 of 1800 barrels of oil equivalent today an ER of 933,000 BOE. Based on these good results, that are somehow limited as we are using temporary facilities, we have sided with our partner to drill another six horizontal wells and if we confirm these levels of productivity, then we could launch a new development there. But that's not all. In [Indiscernible] our joint venture with Chevron, just general when I look at our joint venture with Chevron just north of [Indiscernible] we plan to drill four was this year and think she will block just north of [Indiscernible] we have already drilled four well and will put them into production before the end of the year. We have also started exploration activity in Las Manadas block. So even if it's still early the production results we have seen in cluster number two are compelling and if confirmed, then we will be converting this cluster into a new development hub. Finally we are also performing new exploration in the south potential expanding even more the boundaries in what we call cluster number three. We are performing and shale pilot in the La Amarga West where we drill three words for which we will have production results soon. In addition, we put into production a well in Sierra Barrosa while in Al Norte de la Dorsal we drilled one well and we plan to drill another one. With all this expected production growth, and even if we don't foresee any major bottleneck in our oil production on the short term, we are currently performing a meticulous study of the oil mid-stream sector to ensure that we will be able to evaluate any drop of oil in the years to come, either to our refineries or to export routes. These studies include reverting some existing pipelines, increasing the pumping capacity of the old level system, upgrading the existing export terminal in the Atlantic or activating the export route to the Pacific. Moving now to our downstream downstream business segment. During the second quarter of 2019, the utilization rate of our refineries decreased 4.4% versus the second quarter of 2018, reaching a total of 263,000 barrels of crude oil processed per day. This decrease was mainly driven by Argentina's power outage in June 16 and to a lesser extent to planned stoppages. Regarding sales, total volumes were 3.5% below the same period a year ago. Total volumes in the local market decreased by 4.1% driven by a lower demand for our main products diesel and gasoline, which both dropped 2% compared to last year results to last year as a result of lower economic activity. This was partially offset by higher export volumes of jet fuel, that drove total exports up by 3.1%. Now to provide more detail about fuel demands, on this slide we can see on the left hand side how gasoline sales evolved every month compared with the previous two years. And on the right hand side, the same for this alone. In the second quarter of 2019, their sales shows some deterioration in response to the contraction of the economy and a slowdown in consumption. In this scenario, gasoline and diesel demand in the overall market declined by 5.3% and 3.2% respectively while our fuel sales decreased just 2% compared to the same quarter last year. Therefore, our aggregate market share during the quarter remains strong 57%. In particular, market share for our premium products in Infinia gasoline and Infinia diesel remained above 60%. Going deeper in the analysis. Gasoline sales reported a decrease of 2.1% driven by a lower demand for our premium gasoline with a decline of 24% in volumes partially offset by higher volumes of regular gasoline. Diesel sales also decreased 2.1% compared to the second quarter of 2018 driven by lower demand of both regular and premium products, with the later dropping 5.9% compared to last year. As we have been explaining over the last quarters and as we will see in the next slide, the evaluation combined with higher crude oil prices put an increasing pressure to our downstream margins as prices for gasoline and diesel were reduced in dollar terms. This, plus a contraction in the demand and the blackout, affected our downstream adjusted EBITDA per refined barrel which was $7.2 per barrel similar to the second quarter of last year. We expect margins to recover in the second half best of normalized refining volumes. We use import parity as a reference where local prices should converge. The dotted line shows the evolution of the import parity and the full line represents the evolution of the blended price of our fuels in pesos since the beginning of the year 2018. The graph shows that on the second quarter even if we continuously increase prices, the combined scenario of high crude price, the valuation and weaker demand resulting in our blended price being below impropriety. The graph also shows that these last months, we have been able to reduce the gap with import parity. We will continue doing periodic pricing adjustment when necessary as we have been doing. In summary, sustainability and safety are core values for the company. This quarter we continue achieving good safety track record and we invite you to read the 2018 sustainability report that will be issued by the end of August. In terms of production, we remain focused on accelerating our shale developments, while at the same time we keep on reducing the development and operation costs. Shale oil production is now offsetting conventional oil decline and we are confident that we can achieve the oil production targets we set for our three main shale oil developments located in cluster one for this year. Furthermore, we increased the size of our core Vaca Muerta shale oil position in this cluster by acquiring 14,000 acres that will start that we’ll start de-risking early next year. We are also having very compelling results in the shale oil cluster number two, with productivities in the top quartile and we will keep preparing this cluster for future developments. We also keep on expanding Vaca Muerta boundaries and we are continuously analyzing the missing capacities to ensure we can keep on with the potential production growth. On the gas side, we will continue to limit our investments until we can increase the demand using all the short, medium and long term levers we already mentioned. Our EBITDA figure in USD for this quarter was impacted by the lower natural gas production, and prices, and also by lower downstream revenues. Despite the challenging local and global environment, we are able to tap the global bond markets in June, reopening the market for Argentine issuers. We will continue monitoring the market to be able to respond as soon as necessary. Considering all the elements that we have already shared with you, we would like to make a final point on the 2019 guidance which is CapEx being in the lower end of the $3.5 billion to $4 billion to remain in the minus two, minus three production range we set for this year, and EBITDA target close to $4 billion. With that, we'd like to address your question. Thank you.

[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.