YPF Sociedad Anónima (YPF) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the YPF 2Q 2021 Earnings Results Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Santiago Wesenack, IR manager. Please go ahead.

Good morning, ladies and gentlemen. This is Santiago Wesenack, YPF's IR Manager. Thank you for joining us today in our second quarter 2021 earnings call. I hope you all continue to be safe. This presentation will be conducted by our CEO, Sergio Affronti; our CFO, Alejandro Lew; and myself. During the presentation, we will go through the main aspects and events that explain our second quarter results. And finally, we will open up for questions. Before we begin, I would like to draw your attention to our cautionary statement on Slide 2. Please take into consideration that our remarks today and answer 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 the exchange rate used in calculations to reach our main financial figures 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 Sergio.

Thank you, Santiago. Good morning, ladies and gentlemen. Thank you for joining us on the call today. During the second quarter, we delivered very strong financial and operational results and profitability continued improving even surpassing pre-COVID levels. Adjusted EBITDA for Q2 reached $1.1 billion, a 41% jump when compared to the previous quarter and 14% higher than the same quarter in 2019. This improvement was partially supported by higher realization prices across the board, including not only the pump prices that are with similar dollar levels to those registered on average in 2019, but also higher pricing for natural gas, petrochemicals and non-oil products. Besides domestic demand for gasoline and diesel continued their recovery trend despite the setback presented by the mobility restrictions temporarily reestablished since the last week of April until June. During the quarter, diesel demand was almost back to the pre-COVID levels whereas gasoline demand was the most affected is still standing at about 18% below pre-pandemic levels, although keeping the recovery trend to stand in July about 7% below. But our profitability improvement did not only come from improved prices. We have delivered the production recovery that was announced at the end of last year, while prioritizing operational efficiency. Despite the disruptions originated in the 20-day blockade in the Province of Neuquén during April, which had a significant impact in our operations. We managed to grow our total production by 6% sequentially in Q2, further growing by another 6% during July, reaching an average of 490,000 barrels of oil equivalent per day. Shale production led this recovery as it jumped by 22% sequentially in Q2, primarily as a result of 35% expansion in shale gas and even higher 48% jump when considering only our operating areas, comfortably meeting our planned gas for commitments. On the crude oil side, shale production expanded by 7% while our efforts to mitigate natural declining in our conventional sales have also rendered very positive results, allowing for total conventional production to remain almost flat in Q2. Our tertiary recovery continues to prove its effectiveness. For Manantiales Behr, total oil output grew 1% quarter over quarter with tertiary growing 14%. As a whole, production results in the first half of the year have met our guidance for natural gas and came 3,000 barrels per day ahead for crude oil. So casing the impact of our CapEx program and the benefits harvested from our operating efficiency plan. During the quarter, we have the highest number of rigs in operation since the pandemic has started and managed to tie-in 41 wells, 21 of which were on unconventional segment, not only this, we continue to incorporate top-notch technology and world-class techniques. In the last month, we performed two similar frac pilots by fracking two worlds at the same time in [indiscernible] Loma Campana, we did encouraging area results. So we plan to expand its use to other locations as well. And our fracking speed in Vaca Muerta has continued setting new records with 148 average fracs per set per month during the quarter, further improve in July to 194. Plus, in the case of two specific sets, even achieving more than 200 fracs per month. Overall, we’re maintaining our focus on cost reductions and consolidated structural efficiencies resulting on a global OpEx reduction across the company of 17% in Q2 or an even better 20% when normalizing for non-recurring, standby costs associated to the blockade in April. Finally, on the financial side, for the fifth consecutive quarter, our free cash flow before debt financing landed in positive territory, totaling $311 million, despite moving forward with our investment plan for the year. This in turn allowed us to continue reducing our net debt by an aggregate $600 million in the first half of the year, reaching $6.5 billion of net debt by the end of June and leading to a steep reduction in our net leverage ratio now back within covenant limits. Looking forward, given the robust results achieved during the first half of the year, we remain confident in our ability to execute our $2.7 billion CapEx plan. And in turn, we have framed our production targets for the year with the potential bias to the upside in the second half, providing for a better starting point for next year. In our region we now have enough visibility for the remainder of the year to be able to provide the guidance for the full year adjusted EBITDA which is expected to total $3.5 billion plus or minus 5%, while net leverage should continue to decline to around two times or even less by the end of the year. Before we've enjoyed with Alejandro, I would like to once again, tell you that I am especially proud of YPF team of their commitment and their efforts. I also want to thank our clients for the fidelity and our investors, partners and suppliers for the continuous support. Thank you.

Thank you, Sergio. And good morning to you all. I am glad to say that our results for the second quarter, have continued to show a very significant improvement. Our revenues increased by 26% sequentially reaching over $3.3 billion in the quarter, mainly supported by higher realization prices across all segments and the continuous growing trend in oil and gas production. However, our revenues still remain below pandemic levels, standing 9% below the levels of the second quarter of 2019, mainly on lower volume sale of gasoline and net fuel prices at the pump measuring dollars, which to an average about 5% below. Going through the evolution of OpEx, although it expanded by 18% sequentially, it came 17% below pre-pandemic levels of Q2 2019, or an even larger reduction of minus 20% if we excluded non-recurring standby costs related to the blockade in Neuquén during April. These results, reconfirm our continuous commitment towards maintaining structural cost efficiencies gained as part of our company-wide cost reduction program, introduced last year. More specifically, during the quarter, we managed to keep overall lifting cost per barrel of oil equivalent around 10% below pre-pandemic levels, but increasing by 5% sequentially as expected higher unit costs in the conventional fields surpass the effects of lower unit costs in the unconventional side, where the average lifting costs student $4.60 per barrel of oil equivalent during the quarter. On the back of the recovery in revenues, and the focus on cost efficiencies, adjusted EBITA for the quarter jumped 41% sequentially reaching $1.1 billion or 14% higher than the pre-pandemic fear of the second quarter of 2019. Furthermore, our EBITDA margin increased by over three percentage points in the quarter to 32% standing at the high end of our metrics for the past few years. It is also worth mentioning that our net operating result for the quarter came at $310 million almost doubling the results achieved in Q2 2019. However, our bottom line continues in the revenue due to the registration of a significant deferred income tax liability resulting from the modification of the corporate income tax rate approved by Congress in June. On the CapEx side, we have accelerated the implementation of our CapEx plan, particularly on the upstream side, out total CapEx expanded by 19% when compared to the previous quarter with the upstream accounting for over 80% of a total of $580 million during the quarter, despite the 20-day blockade during April, that affected our operations in Neuquén. Although we continue to be somewhat behind schedule, we remain focus on the execution of our investment program for the year. And I certainly as mentioned by Sergio still expect full implementation by year end. Finally, these results translated into another quarter, delivering positive free cashflow before the financing of $311 million, allowing for a further reduction in net debt to $6.5 billion by June 30. Similarly, on the evolution of our upstream activities, total hydrocarbon production expanded by 6% on a sequential basis, even despite the affirmation road blockage in the province of Neuquén. This expansion was primarily concentrated in natural gas, which grew by 7% versus the previous quarter. As we focused our upstream activity in ramping up gas production to meet our commitments as part of the new Plan Gas, and to be able to do this, we managed to grow our shale gas production by 35%, when compared to a previous quarter, we are even more pronounced term of 48%. We're looking specifically at our operative shale gas production, mostly led by the new wells diving in the Rincón del Mangrullo and Aguada de la Arena blocks, while also increasing production at El Orejano, after performing workover activities on several wells. On the crude oil side, production also showed a positive evolution in the quarter, but with a more or less 1% growth, as a 7% increase in shale oil, which deliver a 48% jump year-over-year in our core hub, more than compensated a small decline in conventional production. It is worth highlighting that the results of our continuous efforts in developing our shared resources, both crude and natural gas resulted in the first quarter in which shale production representing more than a quarter of our consolidated output, standing at 26% of total production during the quarter. Regarding prices within the upstream segment, during this quarter, we benefited from a significant recovery in natural gas prices, averaging $3.80 per MMBTU back in line with 2019 levels. Our seasonal adjustment within the PG-AR contracts was also joined by better terms negotiated with other clients. Separately on the crude oil front, our average realization price increased modestly to $51.60 per barrel, as local crew has continued being negotiated between local producers and refiners in a way to smooth out the impact of the volatility in international reference prices into local pump prices. Moving into the next slide let me provide you with some operational highlights within our upstream business. During the first half of the year, we have completed a total of 55 new horizontal wells, including 17 shale gas wells and 38 shale oil wells. The highest mark since the company introduced horizontal drilling well back in 2015, these new record was not only the result of the ramp-up in drilling rigs and frac stages operation since late last year, but even more importantly, the continuous improvement in operating metrics gained through the focused approach of our people in conjunction with the collaboration of our key contractors and the unions. Examples of these operational improvements can be clearly found in the evolution of our track speed. As we have managed to improve to an average of 148 stages per equipment per month in the second quarter, representing a 42% improvement when compared to the average of 2019, even despite the blockade during April, that affected our operations. And this metric has continued improving after the end of the quarter. During July, we have accomplished any record by achieving an average of 194 frac stages per set with three sets in full operation and a fourth one on call. Along the same line, on drilling speed for our horizontal wells, while the metric that measures the average meters drilled per day per week declined to 156 during the quarter, down from 166 in Q1, when adjusting for the non-productive time generated by the blockade, the adjusted figure will jump to 181, representing a 13% improvement versus the average for 2019. And further in late July, we set the new record as we finished drilling a new well in Bandurria Sur in less than 20 days, including total depth of over 3,000 meters and about 2,500 meters of lateral length. Switching to our downstream business, domestic demand for our main refined products constructed 3% sequentially on the back of the new mobility restrictions introduced in late April, which included 10 days of strict lockdown during May. As a result gasoline demand, which is more retail driven contracted 17% on a sequential basis, returning to volumes will be low pre-pandemic levels at minus 18% versus 2019. In contrast, domestic sales of diesel were supported by demand from the agricultural, industrial and power generation sectors increasing by around 7% on a sequential basis, which in levels almost flat versus pre-COVID levels standing at only 3% below Q2 2019. And more recently in July, demand for both gasoline and diesel continued with the positive trend, that started in June as mobility restrictions, where we lacked, landing at minus 7% for gasoline and the positive 5% for diesel, when compared to the same month in 2019. As a result, our processing levels during Q2 have slightly decreased on a sequential basis, averaging 266,000 barrels per day, by decreasing by almost 40% versus the same period of last year. This was also the result of lower availability at our La Plata refinery. As we start to major maintenance at one of our catalytic converters in late May, the tasks that have been postponed from its original schedule earlier in March to minimize the impact from stronger than expected demand in late Q1. Finally, with regards to prices for our main domestic refined products. During the quarter, we continued with an active pricing strategy at the time in line with what was publicly announced by the President of our Board earlier in March. These latest increases have allowed us to regain our dollar margin, taking our prices almost fully in line with 2019 levels. Our average net prices for the quarter mentioned in dollars expanding by about 15% sequentially, standing roughly 25% above the average net dollar prices for the same period last year. It is worth noting that the recovery and profitability on the Downstream segment during this quarter was also supported by better volumes and prices for other refined products, as well as petrochemicals and non-mined products, which have benefited from the recovery in global economy growth and the correlation with Brent and other commodity prices. Going forward, we shall continue monitoring the evolution of international and local crude and biofuel prices, as well as key macroeconomic variables, such as currency evaluation and inflation to define future pricing strategies, focusing on maintaining reasonable margins along the value chain. Moving into our cash flow. The continued recovery in profitability permitted another quarter with strong cash flow from operations that totaled just north of $1 billion. This result allowed us to comfortably cover our investments and interest payments, and also provided for the possibility to further reduce our financial debt, which declined on a net basis by another $253 million during the quarter, while maintaining our consolidated liquidity relatively stable within the proven target established earlier this year. In terms of cash management, we have continued administering our liquidity with an active asset management approach to minimize FX exposure while also considering the corresponding cost of carry of such strategy. Given our efforts in this regard, during the quarter, we were able to further reduce our net effects exposure standing at a very low 6% by the end of June, despite regulations currently enforced that prevent us from holding a larger portion of our liquidity in foreign currency. Turning to our debt profile. The continuous deleveraging process mentioned before has permitted to not only we use total indebtedness, but also provide significant a relief in short-term maturities. Total short-term maturities as of June 30, meaning those coming due within four months stood at $1.1 billion compared to $1.6 billion by the year end 2019, and about half of the $2.1 billion that was due by December, 2017. And within the total amount of short-term debt, less than 40% is due under the 2024 and 2025 international bonds coming due in September of this year and during the first half of 2022, with a reminder being composed mostly of pre-export financing and local bonds. Further to this in July, we successfully tapped the local capital market with a $384 million 11-year dollar linked bond. With a coupon of 513.25% that was priced at par, to fund practically all of our financing needs for the second half of the year. As a consequence of the lower net indebtedness coupled with our improved operating cash flows, the net leverage ratio calculated us net debt over the last 12 months, adjusted EBITDA declined from the 4.9 times in Q1 to 2.7 times by the end of Q2, putting us back inside convent threshold. All of these further contributing for us to feel fully confident on our ability to comply with our financial commitments and deploy the investments needed to continue delivering growth in oil and gas production. Finally, we are proud to say that the hard work we have been doing achieving significant improvements in our operations and financial condition has been recognized by moves in Argentina and fix as reflected in the rating upgrades announced during July. In the case of moves, our long-term local credit rating was upgraded to AA miners, while fix upgraded its corresponding rating by two notches to AA. And with this, I finished our presentation for today. Now we are open for your questions.

[Operator Instructions] Your first question comes from the line of Bruno Montanari with Morgan Stanley.

Hi, good morning. Thanks for taking my questions. I have two questions. The first one is a little bit more color about the CapEx deployment in the second half of the year. I understand that you are reaffirming the guidance, but looking at execution in the first half, then some inclined one for the second half, the company would need to increase the spend by around 60%. So just I was wondering operationally, this is roughly easy thing to do because that's a level at which the company has not invested for a few quarters. So what needs to happen or what needs to change in terms of execution in order for CapEx to reach that level and in case you’re both short of expectations on CapEx if there are any implications for them some targets either this year or next years or next year. And the second question is more about the timeline for further liability management for the 2022 maturities. You do have one of the international volumes do it in the second quarter of 2022. So wondering if the plan is to hope that you are able to access the dollars and just rebate that to the cash balance or if the company sees the space to issue more dollar linked debt in Argentina or eventually try to do another bond repurchase and a rollover. Thank you very much.

Good morning, Bruno. And thank you for your questions. Let me go with the first one, CapEx, yes, as you have just said we need to ramp up our activity in the second half. Clearly the first half was a little bit below or behind schedule primarily in the first quarter as we have mentioned in our previous earnings call clearly as we – it took a little bit longer to ramp up activity us versus what was expected. However, in the second quarter, we feel much more comfortable with the evolution you need to bear in mind that we had the blockade in Neuquén for 20 days, which clearly affected our operations there with focusing back on more time in general in the Neuquén region. So when adjusting for that, we feel comfortable that the CapEx that we need to deploy in the third and fourth quarter are manageable, of course, it’s a challenge. We are not going to say that it’s not a challenge, but we feel comfortable that we can achieve and be up to the task. And that’s why we are reaffirming our plan for the year the $2.7 billion being comfortable that we should be able to mobilize all the investment needed in the second half. Clearly we have already started with our July already increased activity and the CapEx numbers for July are already surpassing the average for the previous quarter. And so I would tend to say that although it’s a challenge, we feel – we still feel comfortable that we should be able to fully execute it by year end. And because of that is that we are also reaffirming our target for production for the year. I would say that with the bias on the second half to the upside as again, as we are complying with the guidance for the first half, even though we were a little bit behind schedule particularly in the unconventional because of the blockade in April. So we – the expectations for all the well completion and tie-ins for the second half we might be a little bit higher than the guidance provided, but so far we would just say that that will be affirmed like our target and with that small bias to the upside, which will end up being a much better starting point for next year. So hopefully, we will be able to deliver that. And hopefully, we will be able to in the next earnings call to confirm that that upside in a few months. In terms of liability management or debt maturities for 2022 as mentioned in the – during the presentation, we feel very comfortable now we – the maturity that we have in front of us for the next 12 months it’s one of the smaller or the smallest amount of short-term debt in quite a few years. So now with a $1.1 billion, most of it or a good chunk of it concentrated in bank facilities and the bank fund – sorry, and local bonds for a total of 60% roughly and 40% being in the hands of or being composed of international bond maturities. Those primarily related to the amortizations on the 25 – on the July 25, sorry, the March 25 security, which are due in September and March of next year. And then the first amortization on the 2024 international loans next April. On top of that, we have also the full maturity on the peso link bond that was issued back in 2017, which expires in May of next year. All in all, we feel that we – the local bond that was issued a couple of weeks ago, we have already pre-funded our needs for the rest of this year. So if we concentrate only on the maturities for next year, which are roughly a little bit over $600 million in the first half, I would say that we feel very comfortable with the ability of refinancing the maturities coming on the international front with further facilities of further financing in with our relationship banks and with local bonds. Clearly, by the end of this year, the amount of total local bonds, outstanding and bank facilities are going to be relatively low when comparing with the recent years averages. So we feel very comfortable that even not having access to international markets that we should be able to refinance those maturities coming on the international loans with other sources of funding, such as local bonds and bank facilities with relatively ease. Clearly, on the foreign exchange potential restrictions, we feel that based on the liability management executed earlier this year, we should have already provided the cash relief for the foreign exchange reserves in leaf for the Central Bank enough to be able to access all the dollars that we will required to own our commitments next year. But of course – and current regulations expire by the end of this year. So we don’t know whether those restrictions will be extended or not. And if extended, we feel that based on the exercises that we’ll already perform, we hope that we should be able to access that reminded all as required to honor our payments. Remember that, the cash relief that we obtained through the liability management exercise earlier this year provided for a postponement of about a little bit over $300 million in foreign exchange reserves requirement for 2022. And on top of that, we are also working on a potential cross-border facility together with a multilateral agency that if needed, it could provide also further sources of funding also of foreign reserves or foreign currency cross-border financing to also contribute to the repayment of the maturities for next year. So all in all, I would say that we are not expecting right now to do a specific liability management on the maturities for next year, but rather replacing some sources of funding without this, right.

Very thorough. Thank you very much for that.

Your next question comes from the line of Frank McGann with Bank of America.

Thank you very much. Just to follow-up a little bit on the CapEx and production issue. Clearly, if you’re – as you indicated, as you spend more in the second half and into the beginning of next year. You should have – one would expect at least the potential for a nice acceleration and output. And I was just wondering how you’re thinking of next year really is as much as anything else. Can – could we see a pretty substantial pickup both on the oil and on the gas side as a result of the increased spending that you are seeing? And how do you think about the long-term, it’s been so long since we can think about the long-term during of the pandemic and other issues that you have a resource, of course, that seems to have almost unlimited potential is if you have the capital to deploy. Do you see potentially very material upside here as we look out over the next two, three years. And it’s not – when might we see that if you think we still could. And then secondly, just in terms of costs obviously inflation remains pretty high. You’ve been pretty aggressive on the cost side as well. Do you see cost pressures building a bit at this stage?

Okay. Hi, Frank, thank you for your questions. Complimenting on CapEx, yes, as you have mentioned that we do expect a significant increase – significant, these are relative words, right? But we do expect continuous growth in oil and gas production into next year, particularly into oil, not that much into gas, as you probably know, the – with a new plan gas, the year round demand for gas is pretty much satisfied. Then you have the peak seasonal demands during winter months, which based on the current realities of midstream infrastructure as well as economics. It’s hard to supply those – that big demand with we look at production and we still see at least in the near future that demand being supply through the input of LNG and natural gas from Bolivia. So on that regard, even though, we are seeing some incremental demand from other sources, such as GNC in English, well natural compressed gas. We are seeing some extra demand or some further demand on that front. And we have signed actually some medium term contracts on that front for an average of about 2 million cubic meters per day. So we are seeing some marginal incremental demand, but at least for the next few years, we will not expect a significant increase in gas production. Hence, most of our activity will be focused on clearly maintaining current levels of gas, but then increasing total crude production where we see potential for further progress particularly in Vaca Muerta, particularly in our hub core to compensate and more than offset the natural decline in conventional fields, even though we are continue to – we continue to make good progress in mitigating the natural decline in mature fields, not only through secondary production, but also through enhanced recovery. And we feel very comfortable with further progress and further opportunities on that front as well. So all in all, when looking into 2022, we do see some – potentially some increase in CapEx particularly as we also start pushing forward with the revamping in our refineries to not only adjust for further growth coming from Vaca Muerta and also to comply with a new legislation and new demand trends in terms of quality of fuels. But then also we do see some potential pickup in activity on the upstream front as well. On the medium-term, on expectations for the long-run, I would say that so far, we still don’t feel very comfortable in providing much guidance. We are working on that front. As you know, there’s also been a lot of conversation and debate about the new hydrocarbon law, which we will also expect to be materialized or to see it being materialized before being able to fully decide what our long – medium and long-term strategy would be. But we have high expectations on that as well. And we will see to fine tune our medium-term program in terms of CapEx once that law ends up seeing the light. And on costs pressures, I would say that effectively, inflation it’s having its toll on our costs, particularly as inflation runs higher than devaluation. So that is creating some pressure on our dollar-based costs. Even though, we have managed to still maintain the structural cost reduction. As we have said in the previous earnings call, in the first quarter we had a 21% reduction in costs when compared to the first quarter of 2019. In this quarter when adjusting for the non-recurring costs related to the blockade in April, we were sitting or we stood at about 20% below 2019 operating costs. Down the road, we might see some pressure there, or we are seeing some pressure there. So we are doing our best to maintain the 20% reduction. Although, for the rest of the year, we might see some degradation in that – in those cost efficiencies, provably being closer to a range of 15% to 20% reduction instead of a full 20% reduction that we have as of today. But all in all, we are doing all our best to compensate those macro economic pressures with further efficiencies, all that possible.

Okay. Thank you very much.

Your next question comes from the line of [indiscernible] with Bank of America.

Good morning. Thank you very much for the call. Congratulations on the good results. I was just hoping you could give us a little bit more of your perspective on prices for the second half of the year, given that there will be some elections coming up and if the increases you’ll be able to keep closer to international parody that you’ve already achieved. My second question, I think you’ve answered it has to do with access to FX on the upcoming maturities very complete answer. And then I was hoping you could give us a little bit more information on what your expectations are for your lifting costs and your all in cost for the full year? And maybe end up with what is your investment plan that your CapEx committed on the ESG front, which is becoming increasingly important to investors. Thank you very much.

Thank you, Ann. I’m delighted to take the question about pump prices. As we commented along our previous calls, campaign adjusting prices of the pump since August of last year to accommodate our need to restore dollar margins, so return to healthy cash flow generation. Statutory realignment process in the past, an aggregate nominal price increase in pesos in the order of 60%, which permitted to pass through tax hikes by fuel increases and leading to about a 40% improvement in net margins in pesos taking our net contributions in dollars back to 2019 average levels. This process resulted in a price mix that is currently well balanced when considering local goods prices that have been freely negotiated between producers and pioneers are the variable discount to international reference prices to avoid passing through the volatility, implant to the local pump. Therefore, the future evolution of pump prices will depend on the evolution of local crude as well as macro economic variables, such as inflation and evaluation, which we will continue monitoring closely. For as long as these key variables remain within expected parameters, we don't foresee any relevant adjustment in pump prices in the near future. And when you compare with respect to the import quality in terms of the comparison to import quality, our local prices are currently about 10% to 16% below on average, where the gasoline been somewhat further discounted than diesel. However as we mentioned before, the pump prices are currently reasonable set based on the pricing of local crude, which is allowing for healthy margins along the value chain without generating unnecessary pressures on local consumers.

Thank you. And as you mentioned I think the question on FX is, I think it was fully answered right on or let me know if you need anything else there. And in terms of lifting costs, we do expect for the remainder of the year to remain relatively stable on average to the levels that we have seen in this last quarter in the order of $11 per barrel of oil equivalent. Clearly, we see a trend where the average lifting cost on the conventional side probably goes up a little bit by the end of the year and that being compensated by a further reduction in the lifting cost on the unconventional. But all-in-all, we see that level of $11 probably in coming years being able to review that a little bit as we increase the share of shale on the overall mix but all-in-all, we would tend to say that we would probably see it relatively stable as an increase in the conventional side is compensated by a further decrease in unconventional and further proportion of unconventional in the mix. And then on your last question on ESG in terms of specific CapEx, we don't have a specific amount allocated. Although, clearly we continue to work on the reduction of CO2 emissions, mostly through the reduction of flaring and methane emissions at our refineries and very specifically, we continue joining the efforts or allowing for the efforts that are being devoted by our subsidiary, 75% owned subsidiary YPF Luz, as mentioned in the past. Clearly, we see YPF Luz as our strategic arm in the – I would say in the marathon towards energy transition. As you know, they have reached COV on a wind farm earlier this year and they are expect on the status for a little bit over 50 megawatts. And they are targeting COV on Cañadón León and other wind farm for over 100 megawatts for later on this year. And I would say that they are also working on other projects for probably for to be announced later this year or next year on the renewable side. So more specifically or very specifically, we continue to look on those investments as part of our general strategy on energy transition. While also analyzing of course CO2 reductions – emission reductions on our activities and other potential sources of energy transition as a strategic view for the medium and long-term.

Excellent. Thank you very much.

Your next question comes from the line of Marcelo Gumiero with Credit Suisse.

Good morning, everyone. Thank you for taking the question. Congratulations on the Luz. Most of my questions were already answered, but I have a follow up on CapEx as well. So looking forward to Q2, how do we expect the balance between YPF increasing CapEx due to the reduction, also collaborating [indiscernible] another second question on the new hydrocarbon law. If you could provide us any topics that are being discussed and what’s the new charges and new topics that interests YPF? Thank you very much.

Thank you, Marcelo for your questions. I'm going to start with the hydrocarbon law. And as you know, there has been significant talk recently about a new hydrocarbon law that should be brought to by the executive power to Congress in the near future, the objective of faster investment in our sector to accelerate the profitable development of oil and gas, or we serve some resources at our country has, while also incentivizing investment industrialization projects. This has included the explicit the will from President Fernandez, who has publicly stated his intention to present a new bill to Congress this year. And as far as we understand, the executive power is consulting with several factors within the sector, with two other different deals, with the intention of presenting a bill project that provides the right sign to the broadest possible audience. Even our leading role in the industry, we are a key actor that is also maintaining an active dialogue with the government authorities, providing our own views on the matter, but will not be able to say at this point, what the final bill to be presented to Congress and what would include and what the actual timing of such presentation could be. But we would expect such new legislation to primarily provide the right incentives to accelerate profitable growth by dissipating some macro risks that currently distort the true opportunities that lie in our underground. With respect to our main focus or aspirations in terms of what the law might include. We are very much interested in the incentives to promote investments by offering a specific export contest while also guarantying access to the FX market for portion of tax exports. Although we are currently a net buyer of crude to supply our refineries, we do expect to become a net exporter in few years, as we continue to factoring the full potential of our [indiscernible]. In addition, we are also focused on the opportunities to expand our natural gas production and to that extend, if the new law provides some scheme to allow the around export to regional markets would be very interesting, it was – would also be very interesting to see incentives, to facilitate investments in mature conventional fields, where we see that there is a field value to be extracted, although economics make it more difficult to allocate capital. Finally some specific fiscal benefits that could speed up industrialization projects such as one being considering by preferred deal or free up capital by more enticing tax credits would be very welcome to take there. Alejandro if you want to take the…

Yes. Thank you, Sergio. Marcello on your other question, on CapEx versus deleveraging as mentioned during the presentation, we are now expecting to be around or even below two times leverage by the end of this year that is faster than expected the leveraging process than we have previously anticipated, clearly in line with the faster recovery in profitability, which allows us also to continuously reduce the net debt. For the medium term, we do see that level of two times leverage reasonable based on the opportunities that we have to further develop our resources on a very profitable way. So we do not – we do not see a need to further deliver or we do not see the convenience of further delivering, because we do see that, that we can add more value for our shareholders by maintaining these levels of indebtedness or leverage to maximize the potential growth as soon as possible primarily from Vaca Muerta resources. So we clearly we'll be adjusting opportunities on the CapEx side, which are plenty to the realities of our cash flow generation in a way to be as cash neutral as possible in coming years, maintaining that level of or trying to the best possible to maintain that level of two times leverage relatively stable.

Thank you very much for the answers.

Sure, Marcelo.

Thanks.

Your next question comes from the line of [indiscernible].

Good morning and congratulations on your results. I would like ask a follow-up question regarding your net international trade balance. Right now, quite some periods your international trade balance has been negative mainly due to the influence of premium refined products, such as gasoline, diesel, and premium gasoline. Now, you mentioned aid to be net exposures, both crude oil and with demand rising in Argentina after the pandemic restrictions have ease. What's your guidance or what's your view on your trade balance? Are you going to keep importing premium diesel and gasoline, or is it something that should be had been growing better in the next year? Thank you very much. And again, congratulations on your results.

Thank you, Constantino [ph] for the congratulations. On your question when you look at the broader trade balance, we are – we've been for the past few years, structurally and net exporter, not of a few words or not of hydrocarbon-related specifically, but when looking at the full spectrum of all of our exports including other type of refined products, as well as non-oil products on average, we've been a net exporter in the order of I would say on average $500 million to $1 billion a year all in all. We do expect that to continue. And again, we do see incremental activity on the non-oil side. And so we do expect to continue to be a net exporter down the road. But looking in specifically into your question about fuels, we do see a structural need in the country, once demand completely stabilizes to continue importing some particularly premium diesel in line with what we have been doing in the past. And so we would expect to continue doing that. We will not see as efficient to invest in further refinery capacity to supply that excess demand when that actually takes place. Bear in mind also that there's a lot of debate also on the long run as to what demand for refined fields could be. So at this point, we will not see any for the country to invest in expanding refinery capacity. But as mentioned before by Sergio, when [indiscernible] also about the question about the hydrocarbon, we do see ourselves as becoming a net exporter of crude primarily in a few years, not in the very short term. But in a few years, as we continue expanding our production in Vaca Muerta, which further compensates the natural decline in the mature fields. We do see YPF being a net exporter and the whole country being a net exporter in a very significant way probably that will take a few years, but we do see that possibility. And that would be – that would more than compensate the imports of refined products, which might include premium diesel and to some extent, some premium gasoline as well.

Very insightful. Thank you very much.

Your next question comes from the line of [indiscernible] with UBS.

Hi, good morning. Thank you for taking my questions. On the regulatory framework, can you provide how the Plan Gas moving forward and have negotiations and payments done for the program? I mean production has went up, but just on the financial side of the things. And also how YPF is seeing the interest in activities in Argentina by other companies that could either lead to divestment from YPF, as opposed to in the past or potential partnerships. And if you can also provide on how YPF strategy to optimize the company's portfolio has been advancing in the past few months? Thank you.

Hi, Matthews. [ph] Thanks for your questions. Regarding the new Plan Gas as you have just said, clearly we have experienced a tremendous ramp up in activity, which led to a significant increase in production as mentioned during the presentation, which allows us to not only comply, but exceed our commitments that were challenged as we had mentioned in the previous call. We have put ourselves in an interesting challenge, which require a significant assumption in activity in natural gas production and the good thing, or the good news is that we were up to the challenge. Managing through to increase our production in the Neuquén ranges to a little bit over 31 cubic meters, a million cubic meters per day, on average for the period of May to July, which was the one that was to basically to comply with, based on the contractual agreements on the new planned gas which were a little bit below that about 1 million cubic meters per day below the mark that we had achieved. So on the production side, we managed to we up to the task. On the financial side, although as we had said before, there were some delays at the beginning of the program then the government paid on time, the bill for the April subsidy. And now in terms of the specific monthly bill for May, they are running a few days and behind schedule that should have been fully paid or the 75% preliminary payment was due in late July. So we had about 10 days behind schedule as far as we understand the well, the payment instruction was already issued by an authorized by the Secretary of Energy. So it should be a moderate of hours if not days for us to collect on that amount which is close to $14 million it's about 1.2 billion pesos. So about $14 million and we should be able to or we should be collecting that amount very soon. So with that, the other thing that, the government is threatening behind schedule on the payments on the reminder 25%, the balance is for all of the previous months. We understand that it's just an administrative issue. They need to end up compiling all the final details and information to be able to finalize their assessment of the different bills presented by each company. And without, we are also hearing that in coming days and weeks, we should have the news of the government finally paying those amounts that as of today are overdue. All in all, it's about 300 million pesos that are overdue from those a receivable 25%. So it's not a big amount, roughly a little bit over $3 million. So we are not auto – worried about that amount for now. And as I said, we do track very closely the bill payment or the subsidy payment for May, which is a more relevant amount and a status we understand, even though, they're running a few days behind schedule, we understand that should be fully paid in the very near future. And they leave Sergio to answer the question about the portfolio allocation.

Thank you, Matthew for the question about portfolio management and allocation. As we commented, we continue focusing our strategy on our core oil and gas activities and prioritizing the rapid development of our valuable Serbs with a particular focus in Vaca Muerta, in that regard, even the significant improvement in our ability to generate healthy cash from our operations. We are not actively looking for the best features to fund our CapEx plan, but rather to contribute to an optimized capital allocation. We therefore continue having active conversations with key international players for the possibility of entering into new farming agreements in Vaca Muerta, but do not foresee any relevant deal to be concluded in the near future as evaluation, assessment continue to be well apart. In addition, along the same lines that we commented during our last calls, we are also analyzing and having some preliminary dialogue with a potential interested parties on a group of mature conventional areas that might be subject to some form of investment. This particular case, we are prioritizing capital allocation under the assumption that there could be assets with further potential to be developed by a focused new player that shall render benefits to all parties including the provinces that's capitalized from renewed investments in the assets leading to incremental oil and gas production, and hence more royalties. In summary, our strategy going forward, will be focused on optimizing capital allocation, analyzing all potential opportunities, including not only these investments, but also potentially strategic new investments with a clear view on prioritizing the profitable and rationale development of our world-class resources.

Thank you. Very comprehensive and congratulations on strong results.

Thank you.

The question comes from the line of Ezequiel Fernández with Balanz. Ezequiel Fernández: Hi, good morning. This is Ezequiel Fernández from Balanz. It was great to see these results and thank you for the pretty complete materials as always. I have three questions. First, if you could comment it on the new bio, your slow and what the reduction in mandatory fuel cards and the prohibition for oil companies to get involved in by fuel production mean for YPF? Second, and going back to what [indiscernible] and asked about fuel pricing and you commented as well. We should see fuel prices at the pump, but same level measured in pesos, I believe till year-end and maybe going into a bit more detail on that. What do you think it’s going to imply for the internal crude prices measured in dollars on the downstream spread in the second half, basically who might absorb more of the expected devaluation till year end? And my final third question is related to conventional crude production. And what are you planning there in terms of maybe secondary or tertiary recovery efforts?

Hi, Ezequiel. Thank you for your comments and your questions. Very briefly on the first question about by appeals. We do see constructively the new law basically using the capture requirements with bio-fields taking it down to 5%, which see that as very reasonable and of course that also alleviate some supply pressure we have seen on the – particularly on biodiesel. We are producers, so we are not being able to deliver all the volumes required by the downstream segment. So all in all we do see that's very constructive and of course that will permeate healthy stabilization of both markets, right. Of the biofuels market and clearly on the refining side as well, and within out we – we don't seeing at this point any particular challenge given these, these new requirements are not being able to integrate the biofields into the genital downstream chain. In terms of pricing what they are asking is a very delicate question, right? And we see a head, a very delicate balance, as we have mentioned in the presentation. The local group has not been fully tracking international reference prices, particularly under the – basically on the understanding both on the producer side and as well as on streamers, clearly we have a different reality by being fully integrated. But clearly the value chain needs to have some equilibrium and didn't all the market understands that the local economy today cannot fully absorb the complete evolution of international prices into our pump. Down the road as long as these variables remain relatively stable, as Sergio had mentioned, we do not expect any relevant increases in peso terms at the pump, as you clearly stated that would imply some degradation of our dollar margins between now and the next few months. Of course, we do expect these under some particular expectations in terms of what the evolution of the effects will be. And that's why Sergio mentioned, if the microbial evolve in a different way than what we are anticipating, we will probably revisit, or we'll have to revisit our strategy in terms of pump prices. But then, clearly then it's a delicate balance and delicate equilibrium on how the industry will continue negotiating the local crew, probably maintaining the differentials that you currently see, maybe reducing it marginally, if international prices remain as strong as they are today. Although, clearly in the industry, you will find very different views in terms of what the evolution of international group prices will be in the incoming months. So we will expect that delicate balance to be maintained in coming months with all actors, with all relevant actors being up to the challenge and contributing to maintaining a reasonable equilibrium, all along the sector, all along the value chain. And if things evolve in a very different way, of course, that will require a revisiting of the general strategy. And finally, on the conventional production slide. As we've been mentioning, we are very focused on third-party production, we are expanding investments both on pilots and also full development on different blocks. Clearly our [indiscernible] where as Sergio mentioned, we have reached already 5,000 barrels of oil per day in production in the last quarter. So we continue making very good progress there. And we are further expanding that to other blocks not only in – but also in the province of Mendoza, for example and in Santa Cruz. So we expect to invest a significant amount of money, probably in the order of $100 million just on in recovery in coming months to continue fostering tertiary production. And through that continue mitigating the – or at least partially mediating the steep natural decline in conventional field. And just to round up that with that, as Sergio mentioned also, right, we are – we have expectations also in terms of potential incentives in the new law that will also contribute not only for us, but also other players to continue investing in conventional assets. As Sergio said, we will see further potential on those assets and maybe on the optimization of our portfolio, those are not the key opportunities for YPF, as we do see even more interesting opportunities in shale. But no matter, and that we continue having a big portion of our production roughly close to 75% of our production coming from conventional. So of course, we cannot look aside and forget the efficiencies and maintaining as high as possible production in our material and conventional field.

That's great, and thank you very much for the complete answers. Thanks.

Thank you.

There are no further questions. This concludes today's conference call. Thank you for participating, you may now disconnect.