YPF Sociedad Anónima (YPF) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 YPF Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Santiago Wesenack with Investor Relations Manager. Please, go ahead, sir.

Good morning, everyone, and welcome to YPF's second quarter 2020 earnings call. I hope you and your families are safe. My name is Santiago Wesenack, and I'm the new Investor Relations Manager at YPF. Let me start by saying that it's my pleasure to have joined YPF, the largest and leading energy company in Argentina. I'm also here today with Guillermo Nielsen, Chairman of the Board; Sergio Affronti, CEO of YPF; and Alejandro Lew, CFO of the company. Before we begin, I would like to draw your attention to our cautionary statement on slide two. Please take into consideration that our remarks today and answers to your questions may include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these remarks. Also, note that the exchange rate used in calculations to reach our main financial figure is in dollar terms. Our financial figures are stated in accordance with IFRS, but during the call, we might discuss some non-IFRS measures such as adjusted EBITDA. I will now turn the call to Guillermo.

Thank you, Santiago, for your introduction. Welcome, and thanks to all of you for joining this call today. Before entering into the specifics of the oil and gas sector in Argentina, where our company does most of its activities, let me start this introduction by saying that after six months of negotiations and following the exchange of numerous restructuring proposals from both sides, Argentina has reached an agreement with the three main bondholders groups of Wall Street to support the sovereign debt restructuring on August the 4, avoiding a potential default. Creditors will have until August the 24 to adhere to the proposal. We are optimistic about the outcome of these negotiations as both bondholders and Argentinians would benefit from a successful agreement, paving the way for large Argentine companies like YPF to return to international financial markets. That said, since our last presentation to the markets, we have seen how the COVID-19 pandemic has unevenly evolved. It has hit hard almost all geographies, including the U.S. and most Latin American countries. And in recent weeks, the news are showing new outbreaks in some European countries that had already left behind tight lockdown measures weeks earlier. As you may well be aware, Argentina has been since March in different stages of lockdown, depending on the provinces and the acceleration of the spread of the virus. The lockdown was intended to flatten the curve of positive cases at a very early stage. Since then, cases have continued to increase, but in a slower pace than in other geographies and with a lower fatality rate, mainly concentrated in the City of Buenos Aires and the Gran Buenos Aires area. We're still highly exposed to the virus, but quarantine measures are becoming more flexible in some parts of the country, considering the impact on economic activity, and with the Government efforts trying to be extremely precise and meticulous about permissions and procedures to contain the virus. In this scenario, we have seen how demand for our products has recovered from the initial stage of lockdowns without reaching yet the normal demand levels. As you all know, the Argentine economy has been hit by several economic crisis in recent decades. But this time around, demand for refined products has been hit hardest, even comparing with the impacts of the 2001, 2002 crisis or the 1989 hyperinflation price. Even though, we're still confident that as COVID-19 contagion curve starts to flatten, and normal economic activity resumes, demand for our products will recover and production will go up. But as we have seen in other parts of the world, the timing of the pandemic evolution cannot be predicted, so must be followed attentively how things develop. Before leaving the floor to the management team, which will be presenting YPF's second quarter results, let me just say that both myself and the Board of Directors, we are satisfied of what has been done and what continues to be done to steer the company in the extremely difficult time the oil and gas industry is going through all over the world. We remain very optimistic of the vast energy potential of our -- that Argentina holds, including the incredible opportunity to become a net oil and gas exporter by fully developing the Vaca Muerta shale play. Having said this, let me now switch to Sergio Affronti, YPF's CEO; and Alejandro Lew, YPF's, CFO, who will go on with the presentation. Thank you very much.

Thank you, and good morning, everyone. I hope you and your families are staying safe in these tough times. In the middle of this unprecedented crisis for the industry globally, we are optimistic and see significant value potential in YPF. And we are taking the action required to navigate the short-term and to capture the value in the long term. First of all, I want to thank the women and men of YPF for the resilience and dedication during these unique circumstances. And express my pride, not only in what we have achieved, but also in what we contributed for the health of the community where we work and live. As I already stated during our last earnings call, protecting our people is not only a top priority, but also core value for us. Our ad hoc COVID committee led by our Vice President of Health, Safety and Environment has established strict protocols and procedures to assure that critical services and operations are maintained with utmost care for our employees, suppliers and customers. By operating under minimum safe money mode, we have reduced the number of full employees. Currently, 97% of the personnel whose position do not require face-to-face interactions are working remotely. We are also monitoring the health of our employees and contractors on a daily basis to prevent contagion, and we have adapted shifts to minimize staff turnover and transit. I would also like to highlight that the injury frequency rate keeps improving and stood at 0.15 for the first half of 2020. Argentina as well as many other countries, has been under strict lockdown measures since March to prevent contagion and to reduce the pace of the virus. Thus, with reduced mobility, we have experienced a big drop in the demand for our products. Since day one, we have taken preventive measures to mitigate the impact on our operations, solid our cash position and strengthen our balance sheet. We have temporarily brought drilling and completion activities to a halt and ensure storage capacity for the excess oil and refined products. In this challenging environment, our oil and gas production has decreased by 9%; however, demand for refined products is starting to recover. And following improved pricing conditions, we should be resuming drilling and completion activities in the short-term. Let me just add regarding gas production that the Government has recently announced that it will be launching shortly, a new gas plan to improve price stability, and contractual terms for producers in Argentina. This will be key to increase cash flow generation to develop our vast natural gas reserves. We are fully aware that to achieve sustainable growth, we must become more efficient and agile when reacting to changing market conditions, improving resilience and leadership in the industry with a strategic relationship with all our stakeholders. We must become leaner in order to be able to move faster. Since appointed as CEO, I have been devoted to bringing YPF back to basics, reevaluating our portfolio and generating the fundamentals for future growth. We're focusing on our routes as a highly efficient oil and gas company. That is why we have been reshaping the way in which the company works, pushing for structural changes and redesigning our operations. As an example, the upstream business has been decentralized and divided into two vice presidencies: one for conventional operations and another for unconventional base in Neuquén province. We have also further encouraged diversity in the workplace, which has so far materialized in additional Board and managerial roles being held by women, both in YPF and its subsidiaries. We have also started an unprecedented company-wide cost reduction program, which includes an open and frank dialogue with unions towards everyone adapting to this new normal. Internally, we have temporarily reduced salaries in a range between 10% to 25% and offered a voluntary retirement program. At the same time, we have put together a system of over 150 special cells to review all vendors contracts aiming at cost reduction and efficiencies. We are uniquely positioned to leverage a larger scale resource with world-class characteristics and quality with both conventional, unconventional operations in a strong foothold. We are focusing on the Vaca Muerta shale play, targeting not just the domestic market with unmet new energy needs, but international markets as well. We are pursuing a unique opportunity to transform Argentina into a net oil and gas exporter in the near future. At the same time, long-term financial stability remains a key priority. To that end, we have reduced our CapEx to maintain a healthy cash position, while also keeping net financial debt on check. Furthermore, in July, we proactively addressed our $1 billion debt maturity in March 2021. We successfully executed the market friendly liability management exercise that reached an acceptance level of 58.7%, significantly alleviating our short-term refinancing needs. For the rest of the year, we expect to manage our activity and CapEx level in line with keeping our net financial debt levels within the range seen for the last 12 months. And thus, oil and gas production should stay at the current level or have a slight decline. In summary, I'm confident that by steering the company through these critical times, we will reemerge much stronger with a linear and more efficient operation and a healthier and more sustainable financial position. The management and leadership team that we have formed has full confidence in our ability to respond successfully and create a new era of growth and value for all stakeholders. Once again, thank you, everyone, for joining us today. And now I leave the floor to Alejandro.

Thank you, Sergio, and good morning. I also hope you are all safe and healthy. Let me start by saying that it is a tremendous honor to host this call as new CFO of YPF, after joining the company just 2 months ago. With regards to this quarter's main financial figures, they were fully impacted by the effects of the pandemic. Top of the list, our revenues contracted by 47% year-over-year and 31% in comparison to last quarter to $1.9 billion, with all our segments following the downturn. Particularly relevant to highlight is the higher-than-average decline in fuel sales, including diesel, gasoline and jet, which contracted by about 50% in comparison to the same quarter last year, primarily on the back of significant lower volumes, as will be shown later on in this presentation as well as lower dollar equivalent prices for our products. This decline led to a reduction in the share of fuel sales in relation to total revenues to 52% for this quarter from over 60% in the previous one. To compensate the severe decline in revenues, as stated earlier by Sergio, we have committed to a company-wide structural cost-cutting program that started to show its effects during the second quarter, but to a minor extent. Consequently, while total costs have declined, particularly in areas of purchases of primarily crude oil to third parties and royalties to provinces, they did not follow in the downtrend as much as revenues did; however, I would highlight that on a per unit basis. On the upstream segment, our average lifting cost stood at $9.4 per BOE during the second quarter, which represents a 24% decline when compared to the same period of last year and 17% versus last quarter. The net effect of the evolution of our revenues and costs resulted in a significant deterioration in our EBITDA, as I will go through in more detail in a few moments. But for now, I would refer to a significant reduction in CapEx for the quarter, which was necessary to preserve our cash position and our long-term financial sustainability. Total investment during the quarter reached $162 million representing an 82% year-over-year contraction or 73% when compared with last quarter's figure. This was mainly driven by a full stop in drilling, completion and closing of wells within the upstream segment. Once again, we decided to prioritize financial sustainability over growth and to that end, focused on keeping net financial debt within manageable levels. This was particularly important by the end of the second quarter, ahead of the successful exchange offer executed during July on our $1 billion international bond due March 2021, which significantly alleviated our short-term financial maturities. Consequently, at the end of June, our net debt stood at $7.4 billion or about $250 million below the level at the end of March, primarily as a result of an increase of nearly $150 million in our consolidated cash position. Mainly driven by the contraction in sales, our adjusted EBITDA reached $28 million for the second quarter. It is worth mentioning that this figure does not include nonrecurring items such as the $65 million related to the sale of an 11% stake in Bandurria Sur, and is also adjusted by certain items that have a different treatment on our financial statements based on accounting rules. As a comparison, reported EBITDA was slightly higher and stood at $171 million for the quarter. Allow me now to go briefly through the main drivers for each segment before we move specifically to each one of them later on in this presentation. Upstream was the most affected business. Its adjusted EBITDA contracted by 79% year-over-year, reaching $156 million. Adjusted EBITDA margin for the segment stood at 19% versus 44% a year ago and 37% reached last quarter. While this business benefited from lower lifting costs and lower royalties, these effects were outpaced by lower production and lower transfer and realization prices for both crude oil and natural gas. Adjusted EBITDA for downstream contributed $123 million in the quarter, declining by 16% versus the same quarter of 2019. The segment was significantly affected by a steep decline in demand, particularly gasoline, diesel and jet fuel and also on prices at the pump as measured in dollars. Nevertheless, this segment was able to largely compensate these effects through significantly reduced purchases of crude oil, both volumes and prices; biofuels, mainly on volumes and diesel imports, primarily adjusted by prices, all of which permitted to maintain a relatively stable margin at 8% compared to a 9% average for the last decade. In the case of gas and energy, the negative evolution of adjusted EBITDA, which resulted in a $128 million loss for the quarter was primarily driven by a deterioration in results coming from our subsidiary, Metrogas, due to the lack of tariff increases for over a year, and a non-cash accounting provision of about $120 million related to the likely congressional rejection of Presidential Decree 1053. This decree states that the Central Government is responsible for indirectly compensating natural gas producers for FX adjustments that were not allowed to be passed through to consumers back in 2018 and hence, its potential rejection by Congress could impact the recoverability of our credit. On the Corporate and Eliminations segment, we had a negative net impact for the quarter of $122 million, primarily resulting from a significant adjustment in the value of inventories of crude oil and products on lower prices and net negative results from non-consolidating subsidiaries. And finally, moving beyond adjusted EBITDA, this quarter we registered an impairment in our natural gas assets for a pretax total amount of $850 million, primarily on lower long-term expected prices, even despite the potential improvements on the back of the recently announced new Plan Gas 4. Going into upstream and as Sergio mentioned, total hydrocarbon production declined by 9% when compared with the previous year. Both crude oil and natural gas production contracted, while natural gas liquids output increased. Crude oil production went down by 10% year-over-year to 201,000 barrels of oil per day. This represents a decline of 23,000 barrels per day with conventional declining by 26,000; while unconventionals compensated with an increase of 3,000. On the natural gas front, production came at 35 million cubic meters per day, a decline of 13% versus the previous year, primarily as a reaction to lower market prices as supply overcome in the natural gas market remain in place. Regarding our crude oil realization price, it averaged $28.9 per barrel or 51% down from the previous year, but the price evolution showed two clear trends during the quarter. During April, local prices were fully impacted by the collapsing Brent and lower demand in the local market, with average prices settling below $20 per barrel. However, oil prices got supportive from May 20 onwards on the back of the enactment of Presidential urgency decree 488, which is known as Barril Criollo, which established a minimum reference price for Medanito quality crude at $45 per barrel. On the natural gas side and still as a consequence of excess offer, market prices were also below the previous year's realization price. Our selling price averaged $2.5 per million BTU, including $0.14 of subsidies, compared to $3.9 per million BTU 1 year ago. Going forward, we expect higher prices on the back of the recently announced new incentive plan for natural gas production. This new Plan Gas 4 will establish a competitive auction that should result from Q4 2020 onwards in stable and higher prices for a relevant portion of the total future production. Now moving to the unconventionals. We want to highlight that our commitment to continue the development of our shale assets remains unchanged. While production this quarter contracted 14% sequentially, it showed a 21% increase on a year-ago basis. This trend permitted our shale production to represent 21% of our consolidated output during this quarter compared to 16% in the second quarter of 2019. The sequential decline was mainly due to a reduction in activity at Loma Campana, as we temporarily shut down 41 wells out of the 193 horizontals we have there. This resulted in production contracting from 44,000 barrels per day in March to 27,000 barrels per day in April. We took advantage of the large-scale of Loma Campana as an effective buffer to rapidly adjust production on lower demand. As it has been gradually recovering, activity was almost fully resumed, and output is almost fully back to pre-COVID levels. During July, our production averaged 42,000 barrels per day as we only have three wells to be reopened. On the back of COVID and the cash restrictions that we faced during the second quarter, no new wells were connected in this period. This means that we still have a considerable inventory of drilled but uncompleted wells totaling 71 for shale oil and 10 for shale gas. In fact, some of them are already fractured and need just to be connected. This process would require investments for about $230 million and once in full production, should add about 50,000 barrels of oil equivalent per day. Switching to our downstream business, demand for most of our products during the quarter was severely impacted by the stringent lockdown. Sales of our two main products, gasoline and diesel, ended up decreasing during the quarter, 54% and 20%, respectively, compared to the second quarter of 2019. The worst was evidenced in April with gasoline volumes dropping by 69% and diesel by 34% on a year-ago basis. Since then, we have seen a recovery in volumes following some flexibilizations in the lockdown. Along this line, our preliminary data for July shows volumes recovering to a minus 39% for gasoline, whereas total diesel volumes, sales are down only 2% year-over-year. It is worth noting that the recovery in diesel is, to a large extent, due to the volumes sold to CAMMESA for deliveries to thermal generation plants. Excluding this particular demand, diesel volumes are still down close to 20% versus 2019 levels. Moving to the chart on the bottom left, we can see the average evolution of our gasoline and diesel prices against import parity. Despite the negative evolution of Brent prices that was mentioned before, pump prices remained unchanged in peso terms. While this resulted in a positive spread to import parity for a good portion of the quarter, recent improvements in international prices as well as the continuous devaluation of the peso have closed the gap. In terms of refinery utilization, we reacted quickly to the fall in demand and immediately adjusted processing levels. Crude oil volumes processed averaged 192,000 barrels per day in the quarter, resulting in an average utilization rate of 60%, down from 82% in the second quarter of 2019. Within the quarter, capacity utilization reached its bottom in April at 47% as we operated only two of our three refineries. In May, we resumed operations at Plaza Huincul, increasing the average utilization to 64%. In line with the partial recovery of demand, our preliminary figures show capacity utilization reaching 75% in July. In addition, as the drop in local demand was joined with a significant deterioration in Brent prices that make potential exports not attractive, we temporarily increased our storage capacity to partially mitigate the activity reduction for our upstream business. Purchases of crude oil to third parties would also reduce significantly, reaching 1% of total crude oil purchased for the month of June. Going into our key reaction to counteract the effects of this crisis, as mentioned by Sergio, we have launched an unprecedented cost-cutting plan across the company targeting a structural cost reduction of 30%, which is based on different pillars. We are working on an optimization plan on the way we run our business. Along this line, we have split our upstream vice presidency into two and decentralized their operations. By moving the central offices of the non-conventional business unit to Neuquén, we have placed the decision-making process closer to the operations. On the other hand, conventional operations are split in two: the south region with its hub in Santa Cruz and the West region headquartered in Neuquén. We believe this new structure, which has become more horizontal and flexible will result in fast decision-making that will optimize our operations and lead to efficiency-related cost savings. Separately, last May, we implemented a temporary reduction in salaries for non-unionized personnel, ranging from 10% to 25% depending on seniority. Furthermore, in July, we launched a voluntary retirement program also for non-unionized employees, which closes by the end of August, and should allow us to organically reduce our overall size and G&A costs. We have also pursued a constructive dialogue with the leaders of the different unions we are involved with to discuss potential modifications to current working conditions. We aim at establishing new working paradigms that should render significant benefits to all parties. So far, these dialogues have been very fruitful, reaching agreements in three provinces: Santa Cruz, Mendoza and Chubut, that should bring savings that range from 10% to 30% across drilling, termination, workover and pooling activities. Based on these concrete savings, we are readying ourselves to move ahead in resuming activity in these provinces in coming days and weeks. Lastly, we have set up special sales to review and renegotiate contracts with all vendors, something it was never done in the history of YPF. We have more than 10,000 contracts, out of which in dollar volume terms, 68% are related to upstream, 18% to downstream and 14% to corporate contracts. It is worth highlighting that this cost-cutting effort should not only render very significant savings in our structural operating expenses but also – and equally or even more importantly, on our future CapEx costs. Further to the significant reductions in our development cost at Vaca Muerta along recent years, we are very confident about the investment efficiencies that we are likely going to achieve and how each dollar invested going forward will help to even further production gains. Turning to cash flow. Financial discipline continues to be our key priority, particularly during these uncertain times. Despite the $28 million adjusted EBITDA figure for the quarter, cash generation from our operations reached a total of nearly $500 million after netting the effects of non-cash items that were deducted from EBITDA and levered by working capital improvements, including, among others, collections from legacy planned gas programs. In addition, during the quarter, we had inflows of over $100 million related to M&A activities, including $90 million coming from the sale of an 11% interest in Bandurria Sur to Shell and Equinor and about $20 million from the transfer of a 50% stake in a deep offshore block to Equinor. However, as total cash generated during the period came significantly below previous forecasts. And as lack of visibility on the future evolution of macro trends prevailed, we took a conservative approach and decided to adjust our investment activities to preserve liquidity. This was particularly relevant within the context of short-term maturities that we had ahead of us, specifically the March 2021, $1 billion bond. Therefore, total cash investments during the period were significantly reduced to $286 million, including purchases of materials and payments due from previous periods, resulting in a decline of about 71% when compared to last year's quarterly average levels. With regards to our financing activities, we successfully managed to roll over practically all of the maturities of the quarter by taking advantage of attractive conditions in the local capital markets. During the second quarter, we accessed the local market several times and managed to raise over $200 million through both peso-denominated and dollar-linked securities with tenures of up to 24 months and at very competitive costs. These transactions added to the issuances of more than $200 million in the first quarter, resulting in a net borrowing from that source of more than $300 million during the first half of the year, after considering the amortization of local bonds that came due in the same period. Finally, let me comment on the recent liability management exercise executed during July. As we recon market concerns on the bulk maturity of $1 billion that lied ahead on March 2021, we decided to proactively engage investors with a market friendly offer to extend early on the maturity of that bond. We presented an exchange offer for the 8.5% notes due 2021 for new amortizing notes due 2025 with the same 8.5% coupon. The offer was aimed at dissipating refinancing risks for that particular maturity, extending our debt profile and smoothing out principal amortizations. More specifically, the transaction consisted of a combination of a partial cash payment upfront, initially set at 10% and subsequently raised to 12.5%, and new bonds for a total consideration that offer positive NPVs for investors to incentivize their participation. The offer expired on July 30, reaching an acceptance level of 58.7%. Based on these results, we retired all notes for a total of $587 million and have issued the new 2025 notes for $543 million. In summary, with this exercise, we have managed to significantly mitigate refinancing risks for the next 12 months, as we currently don't foresee major difficulties in rolling over the remaining maturities, primarily given the liquidity available in the local capital markets and our long-term banking relationships. With this, I would like to thank you all for your participation today, and we are now open to answer your questions. Thank you.

[Operator Instructions] Our first question will come from Luiz Carvalho with UBS. Please go ahead.

Hi, everyone. Thanks for taking the question, Sergio and Alejandro. I hope that YPF team and families are safe. I have basically three questions, if I may here. The first one, you already mentioned in your first comments, but if you give more details on the new gas plan being discussed and then how the company might be affected within this -- the new rules? The second question is about the free cash flow generation. Second quarter realization price was close to $29 and your EBITDA was pretty much breakeven, right, but you were able to generate some cash. So I'd like to understand a bit more, if you can give more details about your free cash flow breakeven under the new environment? And the third question is a follow-up. If you can share some update on the divestments front? Thank you.

Thank you, Luiz, for your questions. And we also hope you are safe and your family as well. To your questions, and to start with the first question on the gas plan, basically, what we see from the recently announcements by the government is a general positive signal, as we see that it should create price stability for the contractual term that is being discussed of four years. We believe that, that should bring some normality to the market. As you know, this is a market that has been severely distorted from recent -- or previous government initiatives to incentivize production. Basically, we believe that new investments will likely to be deployed on the back of this new program, and that should mitigate production decline. And probably reduce the likelihood of needs or future needs for the country to import natural gas from next year and onwards. More specifically, on the program, we understand that the new mechanism that still lacks some specific details should bring forward a single auction that should aggregate demand for both gas distribution companies as well as to supply CAMMESA, the natural gas needed for thermal power generation. And that basically should minimize the way it is being brought forward. That should probably minimize excess supply during the summer months. Also, as we understand the program will probably establish that producer participating in those auctions will not be able to bring more than 70% of their total production to be offered at the -- within the program. So that should leave enough supply or enough natural gas to be supplied to industrial clients. So basically, all-in-all, on that front, at YPF, we expect to participate in that program, of course, and to be able to through that program secure long or, I would say, medium-term prices that should support further investments into our natural gas business. On your second question about free cash flow in comparison to adjusted EBITDA, I would say that it's important to mention that the major adjustments or major reconciliation between the two are related to some non-cash items that are included in our adjusted EBITDA, including, as was mentioned during the presentation, the recent -- the impact in provisioning that the recent news from Congress about the potential rejection of decree 1053, which relates to the FX adjustments on receivables from the gas distribution companies. Well, that's a provision that is for over $100 million that impacted our net adjusted EBITDA and is taken back when considering free cash flow. And also when considering non-cash items, we also need to take into effect or to take into consideration the revaluation effects on inventories, on the evolution of prices. So -- and when adding to those non-cash effects, we should also take into consideration the cash that was generated by improvements in working capital, primarily on the back of the installments that we collected on legacy plan gases. That's the plan gas from 2017. And finally, some adjustments in terms of reconciliation for accounting -- IFRS 16 accounting rules related to leasing payments. So all of that, those are the primary issues that are taken into consideration when reconciling adjusted EBITDA to free cash flow. And based on that, yes, we can say that even though this was a difficult quarter, as was commented during our presentation, we managed to still make about $500 million in terms of operating free cash flow. Now -- yes, in relation to the…

Divestments.

Yeah, but even before the divestments, you were also asking in terms of our breakeven – sorry -- in terms of breakeven, it's clearly hard to relate a specific breakeven price on our free cash flow generation, primarily as you know, we -- our free cash flow is primarily made of the realization prices at the pump, and not that much, specifically on the price of crude. Of course, on the long-term, they have a significant correlation, but not that much in the short term. So it's hard for us to establish a specific figure for to come up with a breakeven price to relate it with free cash flow.

Alejandro here and good morning Luiz. Again, I'd like to take the third question with respect to divestment. As I commented before, we are focused on strengthening our core activities and in that regard we are evaluating potential in these investments in non-core assets. Within the financial restrictions we face, cash generation through the divestitures on non-core assets should alleviate our constraints and permit a more rapid deployment of resources into oil and gas. In addition, we know there are upstream areas with higher profitability or prospects than other; and in some cases, we hold some that are marginal to us and do not add material value. Through the last few years, YPF have divested some small and mature conventional fields and expect to continue doing so within our focus on those assets that create true value for the company. Currently, we are evaluating some alternatives, but now nothing specific to comment on any potential conventional.

Thank you. Our next question will come from Bruno Montanari with Morgan Stanley. Please go ahead.

Good morning everyone. Thanks for hosting and taking my questions. First one is as a follow-up on Luiz' question about free cash flow. Looking at your cash flow statements, it seems that all of the free cash generation came from a release in working capital, as you also highlighted on the explanation, but how sustainable is that into the second quarter of the year? Now, as you are resuming activity, prices are going up, demand is improving, should we expect this to be partially, if not fully reverted in terms of working capital needs in the second quarter of the year? And my second question is, I understand the company is rightly focusing on near-term response to the prices. But I was wondering when we might expect a more thorough review of the strategic plan to assess where YPF will deploy capital in the coming years? What conditions need to be present in the industry and in the macro environment in Argentina for the company to move forward? And third question, if I may, is how should we expect the evolution of CapEx in the coming quarters? And does investing such a small amount in the second quarter has any impact on how you can recover your conventional production at all? Thank you very much.

Okay. Thank you, Bruno for your questions. On the first one, tackling the working capital one. Clearly, the benefits on working capital during the second quarter were mostly related to the net collections from legacy gas plants. Not that much on adjustments on receivables or payables related to activity. So what we expect on that front is to continue generating extra cash from further collections on those legacy plans as well as we are clearly working on some past due debts from other government entities that we hope during the second half of the year will also materialize. So, all-in-all, on top of clearly some expectations for EBITDA margins that in the second quarter were affected by non-recurring items, just as we mentioned, the provision on the decree 1053, so we expect a more normalized EBITDA margins. And on top of that, we should expect working capital to continue contributing, primarily from those legacy Plan Gas programs. On your more strategic question in terms of how we see the future and I will probably tackle both your second and third questions together. As we commented during the presentation, we are clearly still navigating through very unprecedented times, right? And we still lack significant visibility on how things will continue shaping up. Clearly, on that front, we will continue monitoring and the -- how demand for fuels evolves and have the relevant prices for our products also end up materializing in coming months. So, just to continue in the same -- with the same philosophy that we presented in the presentation, we will probably continue moving during the following months within three very narrow concepts. First of all, we'll be maintaining, our indebtedness or net indebtedness levels within sustainable levels, which we believe them to be at the ranges that we've seen in the last 12 months. We will definitely continue, as we mentioned, with our relevant effort in terms of cost cutting all along our value chain. We believe that it's a critical aspect, not only to improve margins but also to improve efficiencies when thinking about resuming CapEx activity in the near future. And finally, and also as we said, we will limit our capital deployment to core businesses to -- mostly to our oil and gas activities. Clearly, there, we continue to focus on the attractiveness of crude of overall business. But again, as mentioned before, with the recently announced new gas plan, we are also going to push forward with further investments in that front. So, in the back of that, and as mentioned by Sergio at the beginning, all-in-all, in the near future, this should result probably in the total or the total production for the year to remain below the 2019 average, probably in the level -- similar to the levels seen for the second quarter. And going even more forward, I would say that as we expect or as we see market signals providing more clarity in the future, we are targeting or considering a new strategic plan; hopefully, sooner rather than later, but it's impossible to exactly predict at this time. And clearly, that strategic plan should lever on the structural cost reductions that we are working on, as mentioned before and that hopefully should allow us to present a more aggressive plan for the medium-term that will allow us or enable us to provide further value for all of our stakeholders. I think that answers your two last questions.

It does. Yeah. Maybe one quick follow-up and – just is there any concern operationally on the decline on the conventional production? I think the slide show something around 49,000 barrels a day. I know that shale is recovering quite nicely from the controlled topics and not really on completing. But conventional sometimes can be trickier to recover, so how are those barrels responding?

Yeah. On the – as you mentioned on the unconventional, we have recovered our pre-COVID levels. And so even though we have not resumed drilling activity, we have managed to recover our production to pre-COVID levels. On the conventional wells, and as you've seen, we have a reduction in production. As of today, we are probably around 20,000 barrels a day below pre-COVID levels, and that's a combination of natural decline, but also some specific losses related to, on the one hand restrictions based on COVID in a way to enter and operate the fields regularly, but also some liquidity restrictions, as we mentioned during the presentation, we wanted -- we have a great priority of preserving liquidity. And in that regard, we had limited the cash deployed, specifically in marginal areas and in areas, which don't have breakeven prices that are not efficient. So – but very specifically, we are targeting – and with the cost reduction program that we have put in place and, as we mentioned, with the agreement so far reached with the unions in some of the provinces like Santa Cruz and Chubut, we are very likely to resume activity in the very near future, I would say, coming days and weeks. And that should allow us to restore about at least 10,000 barrels a day of production at our conventional areas or field.

Very clear. Thanks, again.

Thank you. Our next question will come from Andres Cardona with Citigroup. Please go ahead. Andres, your line is open. Please go ahead.

Good morning. Apologizes, I was on mute. My first question has to do with the fact that some private producers have been taking advantage of international prices to export some of its production. And at the same time, they have been able to get better quality discounts. So I have two questions here. The first one is, if you see any structural change to local crude realization prices due to this lower quality discount of Medanito for your international markets? And the second one is, if you have considered to export any of your production given the low demand in the local market. And the second one is, if you can comment about fuel prices, talks with Government. There have been some headlines suggesting that it's likely to see something in the short term. So any update here, it's appreciated.

Okay. Thank you, Andres, for your questions. In terms of exports, as you know, at YPF, we are an integrated company, which typically processes all the crude that we produce. And typically, we also have purchases for around 20% of the total process amount. But clearly, in this particular time, with the reduction in demand, we did have some excess production for the purpose of – and at the beginning of the crisis or of this period or this quarter, given the very low realization prices on the export markets, we have secured temporarily storage capacity in the form of war chest. All of that crude was finally processed and used, but even though we did that with our Medanito crude, we did export some heavy oils taking advantage of better export parity prices on those qualities very specifically. But we don't see a structural change there. We will remain a producer that will refine, for the most part, all of its production and only temporarily or very tactically, in some cases, go and look into the export markets. That's for now, of course. As production, hopefully, will increase substantially in coming years, we hope we can become a net exporter as well. But it's too early to claim clearly a victory or a strategic view on that front for now. And probably, Sergio, will take the question in terms of local prices discussions.

Thank you, Alejandro, and thank you, Andres, for your questions about price adjustments. As we mentioned in our presentation, during the second quarter, we maintained prices at flat in pesos despite the deteriorating conditions for crude oil and refining products internationally. This led to a positive spread when comparing to import parity, but that has changed recently on the back of raising international prices and lower dollar equivalent prices locally on the back of the depreciation of the currency. We believe our prices need some adjustment to strengthen our cash generation capacity. And through that, regain our fire and power of -- on the CapEx side as we consider it critical to revert the trend of production decline. However, and at the same time, we need to remain realistic on the overall delicate economic environment our country has been immersed, particularly since the outbreak of COVID-19. Consequently, we are currently assessing the impact from potential price adjustments on the already deteriorated levels of fuel demand and even more broadly, the ramifications of our decisions on the economy as a whole. And this is what we can comment with respect to the three questions.

Okay. And maybe if I can ask another one about Plan Gas, do you think there could be a partial reversion of the impairment if the new Plan Gas is officially launched?

On that particular front, as this new Plan Gas was rumored for some time and it was announced before the release of our earnings, we did already take into consideration potential outcomes in terms of long-term outlooks for our realization prices on that sector, on that segment. So, I would say that the provision or the impairment that we have registered in the second quarter, already considers our best understandings in terms of the long-term outlook of prices, including the recently announced Plan Gas. So clearly, we cannot say whether or how the value or our perceived value of the assets will evolve over time. But for now, what I can say is that what was done and what was registered in this quarter, already contemplates our best estimates of how this new announcement will affect us.

Okay. Thanks very much.

Thank you. Our next question will come from Frank McGann with Bank of America. Please go ahead.

Okay. Thank you very much. I was just wondering, you mentioned that the production in Loma Campana had come back up almost to the levels that had been prior to the cutbacks that you had. Looking forward, I was just wondering, what your JV partners in general are doing? How you're seeing the willingness to invest, to expand in the numerous joint ventures that you have and what that could mean for output over the next year or 2? What would it take if they're not -- if they're holding back, what would it take do you think to have them start to move more aggressively? And then along the same lines, looking out longer-term, even perhaps over the last several years, there's been a lot of talk in the industry about looking for outlets -- major outlets that could lead to a sharp rise in opportunities to increase production for natural gas that would be LNG or expanding petrochemical projects, what do you see now is the potential for that? Is that something that is not likely could happen is -- appears to be more or less likely? And what are the current thoughts on that?

Okay. Thank you, Frank, for your questions. In terms of JVs and as you can probably imagine in this uncertain times, as we continue to say, we are having an active dialogue with most of our partners. We -- there is nothing very specific that we can comment at this point in time, neither in terms of evolution for the coming months, neither and most importantly, for next year. However, having said that, we do have -- we do expect to resume some activity in some of these areas and particularly related to putting a couple of frac sets at work in Loma Campana to tackle our backlog and also drilling within Bandurria Sur, and this is all for the next few months. But beyond those very specific considerations, more broadly, the compensations are undergoing. And of course, our partners are the same as we are, expecting for more visibility or for the horizon to clear up before being able to make more strategic decisions. Okay? And I would say that, that is also true for the major plans or potential plans in terms of big investments to industrialize natural gas. I would say that in this context, it's hard to predict whether those plants will materialize anytime soon. I think we need more clarity on several fronts to be able to have any news on that.

Okay. Thank you very much.

Thank you. Our next question will come from Walter Chiarvesio with Santander. Please go ahead.

Hello. Good morning. Thank you for taking the question and congratulations to the new management team to get in the company. I have two questions. The first one is related to a longer-term strategic view. I know that you still want to present your strategic plan, but I think it would be useful to hear your guess or your opinion on how the CapEx dynamic needs to be in the upcoming several years, let's say, five years? Because when we take the last year cases of the company, CapEx in E&P has been like $3 billion per year. And production has been barely sustained or in some cases, even probably negative evolution. So a question specifically is, what is your guess about how much CapEx in E&P will you need in the next five years to sustain production at the level of 2009, at least, or to show some growth, like, let's say, 3%, some positive growth in the future? And my second question is more short-term is about how do you see the eventual impacts of the macroeconomic imbalances in Argentina because the monetary policy has been so easy and monetary expansion may trigger once the lockdown decreases some inflation or more FX volatility in the future. And what we see in the past is prices usually lag FX or localization. And that could put YPF in a second year of low cash flow generation, needed to invest to get production growing looking forward. So, how do you think that you will deal with an eventual jumping effect? You need to jump -- adjust prices in a fast way. Those are my two questions. Thank you very much,.

Thank you, Walter. On the first one, again, it's -- we -- I would relate it to our, I'd say, a very strong effort in terms of reducing costs across our value chain. And I will relate that because that not only will help us in improving our EBITDA margins by reducing OpEx, but also -- and I would say, probably even more importantly should make our CapEx more efficient. So it's still too early to call a success. We -- it's a process that we are undergoing, that we are targeting, as we just mentioned, a 30% of reduction overall in our costs. And that's why that not only affects our OpEx, but also our CapEx. So when you compare to past investment volumes, clearly, what we expect is that, in the future we will need less dollars to affect or to increase our production. So, we are still going through those numbers. And hopefully, we will be able -- and again, as things develop, hopefully, we will be able to come up with a combination of factors in terms of increase in EBITDA or cash flow generation and reduction in CapEx costs that will allow us to not only sustain production, but also increase it in the future. So sorry for not being more precise. But again, there is no magic number as of today that we can comment that will either stabilize, or for sure, increase production in the future. Hopefully, we will be able to come back with more clarity on that in coming months. And in terms of macro policies, again, it's related to what Sergio was explaining on our efforts to -- or our analysis in terms of adjusting prices currently, we clearly have to continuously monitor how our decisions also affect not only the demand of our products, but also the macroeconomic variables of the country as a whole. We have to understand that the country is undergoing a significant macroeconomic crisis. And based on that, yes, as things evolve, we will have to be very careful. And for the one hand, not affect our cash flow generation capacity, so not -- about lagging the potential distortions that will bring -- that should be brought by inflation and further devaluations. But at the same time, we have to be cognizant of the reality of, again, the depressed demand and overall macro trends. So hopefully, we will be able to come up with a fair solution and a fair balance to combine our needs and those of the markets.

Thank you very much. Appreciate it.

Thank you. Our next question will come from Pavel Molchanov with Raymond James. Please go ahead.

Thanks for taking the question. You've talked a lot about the impact of COVID on demand. I would like to ask about the impact of COVID on the in-house operations of YPF. Can you talk about the social distancing and the -- any restrictions or costs at the upstream fields, as well as in your refineries that you have been implementing?

Thank you, Pavel, for your question. As I was commenting also during the presentation, clearly the company takes our employees health very, very seriously, and it's clearly our top priority, mostly under the environment that we are leaving through this COVID pandemic. So basically, the first approach was to suspend all activities that were -- that didn't mean to have a face-to-face interaction. And with that, we are working -- 97% of our headcount is working remotely where possible. And then in terms of our upstream and downstream operations, we have maintained minimum guards, clearly, to keep our operations up and running. And in terms -- specifically on the refineries, we have -- except for the suspension of the Plaza Huincul, the smaller one of the three, for a few days, the three of them are up and running. But again, maintaining strict protocols in terms of social distancing and health protections. In terms of incremental costs, what we can comment is that on the refinery side is mostly related to the lower production. So basically, the lower production increases the average cost per unit, not that much because of the actual situation of the pandemic, but rather because of the overall production levels. And on the upstream side, yes, we did have some standby costs in terms of some activities that were suspended, that were not related to the minimum guards that in normal conditions could be capitalized as part of our investment programs. But in this time around, you have to take those in your income statement. So roughly, that is over $50 million for the quarter. And that's the major impact that we have from specific COVID-related costs, I would say.

Can I also ask about Plan Gas? I remember three or four years ago, the guaranteed gas price for the initial Plan Gas was $7, even $7.50 per Mcf, very high. Do you anticipate something similar to that in this new version of the program?

Yes. No, this program has -- the price reference is significantly lower. What has been announced so far is that the way it's going to be treated is with a maximum price, but considered on a net present value basis. So, all producers interested in submitting bids would have to offer a fixed price for the four years of the contractual term. And that price that is going to be fixed along those years is going to be on the basis using a 10% discount rate. And that present value that -- the price at present value will be capped at $3.4 per million BTU. So basically, it's significantly lower than the previous Plan Gas. But again, still a very important, I would say, step in the direction of normalizing what is now clearly unnormalized or not normal market because of the excess supply that took place on the back of the previous -- mostly the previous program related to Resolution 46.

Thanks very much.

Thank you. Our next question will come from Marcelo Gumiero with Credit Suisse. Please go ahead.

Good morning and thank you for taking the question. Most of the questions were already answered. But if I may, I have two more here. First one is on capital discipline. I mean, we saw that you were able to roll out an important part of the debt of 2021 maturities and how do you plan to deal with short-term maturities, which means on 2020 and 2021? And another question, if I may. How do you see downstream margins going forward this year, after the Barril Criollo decree implemented in May? I mean, I think we should expect lower margins, but there is clearly some discussions ongoing in terms of pump prices. So, I mean, how do you see downstream margins going forward? Thank you, very much.

Thank you, Marcelo. Clearly, on the refinancing or on the financial side, market conditions remain volatile. That's for sure. But however, that's the case we currently perceive a significantly lower refinancing risk going forward. We have about $750 million left in maturities for the rest of this year. Out of which, about $150 million correspond to local bonds. And in the context of a local market that is -- that has significantly more liquidity, we expect that source of funding to provide us with extra funding in coming months. So, we would expect to tap that market probably in the near future, in coming months, also both in peso and dollar-linked securities. We might, as said, in the first half of the year, we took about $300 million net of additional funding from that source, and we expect to continue doing so and that is providing also some relief on our bank relationships as the rest of the maturities that come from the bank market will probably not be -- not need to be full, but lower, so in that context, we expect to -- given the fact that we have long-term relationships with our primary bank counterparties. We do expect to have those I would say, financial -- not committed lines, but financial lines available in case that we need to tap that source in the first half of next year. But in any case, after the exchange that we pursued and that we successfully executed in July, we now see even the first half of next year not being a major risk, as we will be tackling less than a $1 billion of refinancing next year and, again, a good portion of that coming from the bank market. So all in all, what I would say is that our perception of refinancing risk has improved very significantly. We are seeing that also in our ability to start lowering our refinancing cost with -- in the trade lines. And so even without having access to the international market, which, again, we understand that it could still be a possibility down the road afterward. It's being done by the Republic. But even without – counting, without source of funding, we believe that the combination of the local market and the efficiencies that we can achieve in the local market with tenures, probably up to three or four years now in terms of dollar-linked securities. And couple that with the facilities available in our banking relationships, which should not have any major problem in dealing with our short-term maturities. And in terms of the downstream margins, again, this is related to the ability and the possibility to adjust prices at the pump in the future. It's hard to say today, exactly how that will evolve. But we hope to maintain margins on the downstream side at healthy levels, not only for the benefit of an integrated company like ourselves, but also for the health of the general market, which needs to have reasonable margin levels to be able to continue to operate and to supply the fuels demanded by our market. So hopefully, the dislocations that we are seeing these days in the market will start to clear up, and margins will start to normalize in -- hopefully in the near future.

Okay. Thank you very much. Very clear.

Thank you. Our next question will come from Ezequiel Fernandez with Balanz Capital. Please go ahead.

Good morning. Thanks for the time today. I have three quick questions. The first one is related to your drilling and completion plans. If you could give us an idea of the new unconventional wells that you are targeting for the remainder of this year? My second question is related to the reduction in lifting costs. If we can -- this is a structural saving, if we can expect it to go forward? And finally, if you could tell us if there have been any conversations with the Government regarding the new hydrocarbon law that was discussed in December last year? Thank you.

Thank you, Ezequiel. Good morning. In terms of drilling activity, we mentioned something a little earlier, but generally speaking, in terms of unconventional, we do expect -- on the oil front, we do expect mostly to put a drilling rig at work in coming months in Bandurria Sur. And then start putting a couple of frac sets relatively soon and probably one or two more in coming months to start tackling our backlog as was mentioned during the presentation. In terms of lifting costs, clearly, this quarter -- it's hard to use this quarter as a parameter to project going forward. As a general comment, this quarter was characterized by suspensions of non-essential services, and that clearly had an impact on the average lifting costs. So that's why it's hard to use this as a basis to predict. But in any case, we do expect the -- as was mentioned before, that the company-wide cost cutting effort that we are pursuing to have an important impact in our lifting costs going forward. So all in all, what we can say by now is that we would expect to maintain -- at least maintain average costs at similar levels to the ones that we managed to materialize in the second quarter.

Hi, Ezequiel, this is Sergio. Thank you for your questions, your three questions. I'm going to tackle the new hydrocarbon law. In order to Argentina to be self-sufficient in terms of energy, the country needs to incentivize in the industry to produce more. And there is a big incentive for the Government, first, to ensure that the local market; and second, promote to the international market, mainly considering the past oil and gas resources that our country have. However, we have been providing some ideas that should contribute to a more predictable, favorable environment to deploy significant investments. We are not aware of the timing of the actual measures, if any, at all, that the Government might end up announcing. And this is what we have, we think that this could be a good initiative for them to have a -- can incentivize the investments and the production in our industry.

Sorry, Ezequiel, I forgot to mention also when talking about the drilling, the future drilling. I was only commenting on oil. And clearly, on the natural gas side, as the new plan ends up materializing. We do expect some further activity in terms of drilling on natural gas wells, in our non-conventional. So there, we might end up having between two or four drilling rigs active, between now and the end of the year, to prepare our supply or our production curve, to supply what could potentially be our participation in the new Plan Gas.

Thank you for the extra comments. That was very clear. That's all from my side.

Thank you. Our next question will come from Daniel Guardiola with BTG. Please go ahead.

Hi. Good morning. And thank you for taking my questions. I have a couple of ones. My first question is on leverage. And obviously, during the quarter, we saw a significant deterioration in leverage, reaching levels close to three times. And I was wondering if you could remind us, your debt covenants? And what would be the implication of breaking these covenants? So that's my first question. And my second question is on oil prices. And I want to know if you can share with us, what is the current gap between YPF's crude realization prices and import parity levels? Thank you.

Thank you, Daniel. On your leverage question, as you correctly mentioned, our number shown in the presentation was at 2.9 times. Clearly, that increased significantly from the previous quarter, mostly as a result of the reduction in our adjusted EBITDA levels, on a last 12 months basis, as our net debt remained relatively stable and even decreased, in the quarter. In terms of covenants, the specific wording on the documentation has a relatively different way of calculating the covenant. It's a bottom-up approach, as opposed of the typical definition of EBITDA. And also is based on our, reported financials which are done in pesos. So all in all, when calculating the covenants or the evolution of our numbers in terms of the covenants, we do have a leverage covenant, which basically is an incurrence one at three times EBITDA, but with a different definition. And so for this quarter, that number was slightly below, 2.5%. So in terms of complying with the covenant, we were -- we still have some room there. And as I said before, it's an incurrence one. So in case in the future, that level is surpassed. It will affect our ability to incur new debt -- new additional debt, right? Because, as you probably know, in these definitions of covenants, we do have the allowance to continue doing refinancings and also to -- we do have a basket that will allow us to also raise some additional funds, under very specific circumstances. So, at this point in time, we don't foresee, even in the case -- and again, this is only related to some of our instruments, because it's not present in all of our, neither bonds nor loans. So it's mostly related to the older securities that we still have outstanding. But in general terms, as I said, we are in compliance with the covenants in this quarter, we have some room. And in the case numbers continue deteriorating in terms of last 12 months EBITDA, in the future, even if you surpass the three times incurrence test, we do have some flexibility in the baskets to avoid any type of material effects, on our regular operations. So right now, we don't see any negative impact coming from that front.

Thank you. I'm showing no further questions in the queue, at this time. I'll turn the call back over to management, for any closing remarks.

Well, thank you very much all for participating in this call. We know that these are difficult times for everyone. And so, we thank you for your time. And we hope you continue to be safe, in this environment. Thank you. Have a good day.

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