Earnings call: YPF reported a 20% increase in shale oil production from the Vaca Muerta

In their 2Q 2024 earnings call, YPF S.A. (YPF) executives highlighted a period of robust growth and strategic advancements. The company reported a 20% increase in shale oil production from the Vaca Muerta formation and a 25% rise in crude oil exports.

YPF also achieved a record in drilling and fracking speed, leading to a historic high in gasoline production. Financially, YPF saw revenues climb to nearly $5 billion, a 15% sequential increase, while adjusted EBITDA reached $1.2 billion. Despite challenges such as extreme weather in Patagonia and a negative free cash flow of $257 million, the company maintained operational efficiency and production targets.

Key Takeaways

• YPF increased shale oil production by 20% and crude oil exports by 25%.
• Achieved record drilling and fracking speeds, leading to an all-time high in gasoline production.
• Revenues grew by 15% to nearly $5 billion, with adjusted EBITDA of $1.2 billion.
• Positive net income reported at $535 million, despite a negative free cash flow of $257 million.
• Total hydrocarbon production averaged 539,000 barrels of oil equivalent per day.
• Net debt increased to $7.5 billion, with the company facing $1.4 billion in debt maturities over the next 12 months.

Company Outlook

• YPF anticipates a neutral cash flow in 2024 and positive cash flow in the future.
• Plans to increase unconventional production to 140,000 barrels per day by year-end.
• Aims to continue optimizing cost structures and improving efficiency across operations.
• The company is working on the Vaca Muerta Sur pipeline project, with agreements signed with 2/3 of involved parties.

Bearish Highlights

• Gasoline sales declined by 11% due to reduced premium demand.
• Fuel sales overall dropped by 6% year-on-year, though a 5% demand recovery was observed in July.
• Free cash flow was negative, with cash and short-term investments down by 13%.

Bullish Highlights

• Diesel sales grew by 5%, driven by seasonal demand from agriculture and higher industrial segment sales.
• YPF set a record in gasoline production while reducing the local fuel price and import parity gap to 5%.
• The company is progressing with the Andes Project, which has received substantial interest and over 60 offers.

Misses

• Despite growth in some areas, YPF reported a negative free cash flow of $257 million for the quarter.
• The company is dealing with increased net debt, which has risen to $7.5 billion.

Q&A Highlights

• CEO Horacio Marin emphasized operating in a free market and adjusting prices according to demand and supply.
• Marin confirmed the signing of six SPAs for Vaca Muerta clusters, with two more expected soon, and expressed confidence in their approval.
• YPF is prioritizing investment in Vaca Muerta, with a focus on improving shareholder profits and maintaining capital efficiency.

In summary, YPF S.A. is navigating through a mix of challenges and opportunities, with a strong focus on the Vaca Muerta shale formation and strategic asset management to bolster its financial position and operational efficiency. The company remains committed to increasing production, optimizing costs, and managing risks to ensure stable growth and profitability.

InvestingPro Insights

In light of YPF S.A.'s recent earnings call, InvestingPro data and tips offer a deeper understanding of the company's financial health and stock performance. YPF operates with a significant debt burden, which is reflected in its high net debt of $7.5 billion. This aligns with an InvestingPro Tip indicating the company may have trouble making interest payments on its debt. However, analysts predict the company will be profitable this year, suggesting a potential turnaround from the negative free cash flow reported in the recent quarter.

InvestingPro Data metrics provide additional context to YPF's financial narrative:

• Market Cap (Adjusted): $11.36 billion, underscoring the company's substantial size in the market.

• P/E Ratio (Adjusted) for the last twelve months as of Q2 2024: -741.96, which may raise concerns about valuation among investors.

• Revenue Growth (Quarterly) for Q2 2024: -99.52%, a figure that warrants attention as it contrasts sharply with the reported revenue increase.

While the company has faced challenges, the stock has shown a high return over the last year, with a 41.83% price total return, suggesting investor confidence in its long-term prospects. Additionally, YPF's share price has seen a large uptick over the last six months, with a 22.94% price total return, which may interest investors looking for growth opportunities.

For those interested in further analysis, there are additional InvestingPro Tips available on InvestingPro's platform, offering a comprehensive view of YPF's financial health and investment potential.

Full transcript - YPF SA (YPF) Q2 2024:

Operator: Thank you for standing by. My name is Mandeep, and I will be your operator today. At this time, I would like to welcome everyone to the YPF 2Q 2024 Earnings Webcast Presentation Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Margarita Chun, Investor Relations Manager. You may begin.

Margarita Chun: Good morning, ladies and gentlemen. This is Margarita Chun, YPF IR Manager. Thank you for joining us today in our second quarter 2024 earnings call. This presentation will be conducted by our CEO, Mr. Horacio Marin; and our CFO, Mr. Federico Barroetavena. During the presentation, we will go through the main aspects and events that explain the quarter results. And then we will go to open the floor for Q&A session, together with our senior management. Before we begin, please consider our cautionary statement on Slide 2. 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. Our financial figures are stated in accordance with IFRS, but during the presentation, we might discuss some non-IFRS measures, such as adjusted EBITDA. On the other hand, as of this quarter, the company decided to actively define CapEx instead of reporting the total PP&E acquisitions as the best approximation. In this sense, we also included acquisitions of intangible assets and excluded items charged to operating costs during the period, among others. It is worth mentioning that this new definition does not alter the accounting standards of the company. It simply provides a clearer view of the CapEx. Therefore, the analysis of CapEx since this quarter and the comparative periods is based on the new definition. I will now turn the call over to Horacio. Please go ahead.

Horacio Marin: Thank you, Margarita, and good morning, everyone. Let me start today's presentation by describing the key milestones and developments of the quarter. First of all, during Q2, we produced 20% more shale oil than Q2 last year, highlighting our strategy to focus on Vaca Muerta formation. Inline with this growth, we were able to export 25% more crude oil through the trans Andean pipeline compared to the previous quarter. This was combined with zero fuel imports in our downstream business, while continuing to reduce the gap between local fuel price to import parity to 5%. Operationally, in the upstream, we hit a new record in drilling and fracking speed. Both key metrics in terms of efficiency are fully in line with our guidance for the year. In the downstream segment, we also reached an all-time high production record of gasoline in May at La Plata Refinery. A few days ago, we made significant progress in the Andes project. We successfully executed six SPAs for six clusters represented a cornerstone for the transformation of our production matrix in order to maximize our profitability. We also started the construction of the first tranche of Vaca Muerta South Oil Pipeline, and we are making progress putting together the producing consortium for the second tranche. Finally, together with our strategy partner, we selected the location of the Argentine LNG production in the province of Rio Negro. We will be sharing details regarding all the news after presenting the quarter results. Now, I will turn the call over to Federico to go through the details of the second quarter's figures.

Federico Barroetavena: Thank you, Horacio. Revenues reached nearly $5 billion, 15% up sequentially, mainly driven by higher seasonal sales of gas and local diesel demand, as well as better fuel prices and growing oil exports to Chile. These effects were partially offset by gasoline demand contraction and lower conventional production that affected our Patagonia's operation due to extreme snowstorms and climate conditions that started by mid-June and continued until early August. Inter-annually, revenues grew 13%, mostly on the back of a rebound in fuel prices, plus even higher oil exports, partially offset by a 6% drop in fuel demand. Adjusted EBITDA totaled $1.2 billion, 3% down sequentially, due to a cost increase in dollar terms, reflecting the catch-up with December's devaluation and a drop in conventional output that I mentioned before. Inter-annually, it recorded an expansion of 20%, maintaining a steady EBITDA margin of 24%. This consistently highlights our operational efficiency, despite challenging conditions as we had in Patagonia during this period. Our bottom line continued positive at $535 million, 19% down sequentially, mainly due to lower equity income and increased exploration expenses. Inter-annually, the bottom line was 41% up on the back of better operating performance besides lower amortization linked to the impairment of conventional mature fields. Total hydrocarbon production averaged 539,000 barrels of oil equivalent per day, rising 2% sequentially and 5% inter-annually, driven by a solid performance in our shale operations, which is our core business and current focus. In terms of investments, we deployed $1.2 billion, 3% up sequentially, and we started with the construction of the first tranche of Vaca Muerta Sur Oil Pipeline. In addition, to the investments in refineries to reduce sulphur content. Inter-annually, CapEx was 6% down, mainly as a consequence of last year's inflationary context. Notably, over 70% of the quarter's investment was concentrated in the upstream, mostly for shale operations. On the financial side, we reported a negative free cash flow of $257 million. Although the adjusted EBITDA was similar to the deployment of our CapEx, Q2 was mainly affected by higher seasonal sales, thus increasing working capital in addition to regular debt service, partially offset by a dividend collection from affiliates. As a result, we posted a slightly higher net debt of $7.5 billion, while maintaining net leverage ratio at 1.7x, fully aligned with the target of the year. Now, I will turn back the call to Horacio to continue with the operating performance.

Horacio Marin: Thank you, Federico. In the upstream segment, the total hydrocarbon production grew by 2% quarter-on-quarter and 5% year-on-year, driven once again by Shell (LON:SHEL)'s contribution, which continues its upward trend and now represents more than half of the total output. Net crude oil production continues at high levels, reaching almost 250,000 barrels per day. On the back of a 20% inter-annual shell expansion, offsetting the drop in conventional production due to extreme climate conditions in Patagonia. Our operational activities were affected by heavy snow that resulted in the shutdown of our facilities for safety reasons. During June, our production decreased by around 45,000 barrels per day during 13 days. Since the beginning of August, the climate has improved and we continue to resume activities to normal levels. Despite this contraction, it's worth highlighting that 9% of the conventional output came from tertiary production, increasing by 6% inter-annually and minimizing this impact and the natural decline in mature fields. Beyond crude oil, natural gas production grew by 7% in line with increased evacuation capacity from Neuquina Basin through the new Néstor Kirchner pipeline. Additionally, the installation of the new turboexpander in Loma la Lata contributed to a 10% increase in NGL's production. Moving to lifting costs, we record $16.2 per barrel of oil equivalent in Q2, remaining stable inter-annually, but 25% higher sequentially, primarily due to the catch-up of costs in dollar terms with December devaluation, coupled with the lower conventional production already measured before. This cost inflation also impacted the listing cost of our core hub blocks that stood at $4.7 per barrel of oil equivalent on the gross basis, recording a larger increase due to specific higher pooling and maintenance costs. Regarding prices in the upstream segment, crude oil realization prices averaged $71 per barrel in Q2, 4% up quarter-on-quarter as a result of a better pricing environment in the local market an upward trend in international prices. On the natural gas size prices reach $4 per million BTU, mostly driven by the seasonal winter price of plant gas that started in May. Now, walking through the performance of our shale activities, in Q2 we drilled 58 horizontal wells in our operating blocks, all of them oil, 35% more than quartet-on-quarter and 26% more year-on-year. It's worth noting that shale oil production hit a new record, delivering 130,000 barrels per day. 87% of the shale oil production came from our core hub oil blocks, Loma Campana, La Amarga Chica, Bandurria Sur, and Aguada del Chanar. In terms of efficiency within our shale operation, we achieved another quarter of outstanding drilling and fracking metrics, averaging 292 meters per day of drilling and 237 stages per set per month on fracking, fully in line with our guidance for the year. Also, it's worth mentioning that last June, we achieved the highest lateral length drilling speed for one shale well in [Angostura] Sur block, surpassing 1,500 meters in a single day. Considering all these metrics, we plan to ramp-up shale oil production in the second half of the year to achieve the target of more than 120,000 barrels per day on average for 2024. As a final conclusion, let me highlight that today's production has reached nearly 120,000 barrels per day in line with our target average of the year. Moving on to our downstream segment, processing level averaged 299,000 barrels per day, recording refinery utilization rate of about 90%. Although, the processing level was essentially flat compared to the previous quarter, it decreased 2% inter-annually, mainly due to limited availability at the La Plata Refinery, affected by a shutdown, extreme weather conditions, and a brief disruption in the pipeline during a few days, which was already restored. Despite this decline, let me mention that we set the record high gasoline production in La Plata Refinery, thanks to the new gasoline hydro treatment plant and the revamping of existing units as part of our new fuel specification project to reduce sulfur content and improve fuel quality. In this sense, during Q2, we also continue making progress on the revamping of Lujan de Cuyo Industrial Complex, expected to be fully operational by next year. Fuel sales volume experienced a sequential reduction of 2%, mostly due to an 11 drop in gasoline sales, mainly due to a contraction in retail premium demand. It was partially offset by a 5% expansion in diesel sales on the back of the seasonal demand from agri business and higher sales to the Industrial segment. It's worth noting that, besides the solid performance of our refineries, we effectively address the increased diesel demand by reducing inventory levels, thereby avoiding fuel imports. Inter-annually, fuel sales declined by 6%, particularly affected by diesel demand contraction across both retail and industrial segments. However, let me point out that we are witnessing roughly a 5% demand recovery in July versus June. In terms of prices, during Q2, we continue adjusting local fuel prices, mainly aiming to mitigate the impact of the devaluation and narrowing the gap to international parities. As a result, average fuel prices measured in dollars increased by 3% sequentially and 14% inter-annually, while the spread versus import parity decreased to 5% in Q2, compared to 7% in Q1 and 13% in Q2 last year. Lastly, efficiency-wise, since the beginning of the year, we have been focusing on the optimization of our cost structure, implementing several measures, such as the reduction of specific fuel consumption of boilers and logistic rearrangements, among others. Also, during Q2, we created a new specified and focused team to plan, monitor, and promote the new efficiency and productivity standard within the downstream business. I will now turn the call over Federico to go through our financial results for the quarter.

Federico Barroetavena: Thank you, Horacio. Switching to the financial front, Let us start with cash flow evolution. Although, our adjusted EBITDA was similar to the deployment of our CapEx, working capital items pressured the liquidity, such as increased seasonal billing of natural gas, payment of imported goods and services deferred from last year, and higher purchases of crude oil to third parties due to lower conventional production, partially offset by late collections from Q1. These effects were partially offset by dividend collection from affiliates. Considering also the regular interest payments, free cash flow came at a negative $257 million. In terms of financing, during Q2, we paid the amortization of two international bonds for a total of $268 million, and we issued a local hard-dollar bond for $178 million at a yield of 6% with a two-year maturity. Additionally, we continued securing trade facilities and other loans. After Q2, we issued a local dollar-linked bond for $185 million at a zero percent yield with a 2-year maturity and promising notes for $100 million at zero percent yield with maturities of up to 18 months. On the liquidity front, our cash and short-term investment decreased by 13% sequentially to $1.4 billion as of the end of June. Therefore, our net debt increased to $7.5 billion while maintaining a stable net leverage ratio of 1.7x. Regarding our maturity profile, as of the end of June, the company faces debt maturities in the next 12 months for $1.4 billion, mostly short-term trade facilities for $611 million, both with local and international banks, which we are planning to refinance. The remaining portion includes international bonds for $312 million, and local bonds for $177 million, among other loans. I will now turn back to Horacio to continue with the presentation.

Horacio Marin: Thank you, Federico. Let me briefly recap on the progress we made regarding our conventional mature field strategy. Last February, we obtained the approval of our Board of Directors to exit from around 50 blocks that contributed less than 1% of the company-adjusted EBITDA in 2023, with an investment of around $800 million. This important move allows us to reallocate resources to our most profitable assets located in Vaca Muerta, enhancing our focus on high-return Shell projects and optimizing our overall portfolio. In April, we launched the first stage called Andes Project, making the official sales of 30 blocks, grouped in 11 clusters. During the virtual data [round] phase and Q&A session, we attracted significant interest, totaling over 500 interactions from various players. By June, we opened bids and received more than 60 offers from the over 30 local and international independent companies. Following a 30-day comprehensive analysis of all qualified bidders, this week we have been able to execute 6 SPAs with different companies for 6 clusters. Also, we are currently progressing on the SPAs of the remaining clusters. Regarding the blocks that are not included in the Andes project, most of them located in the provinces of Santa Cruz and Tierra del Fuego, we have already initiated negotiation and expected to move forward with this assignment and our reversion to the provincial energy companies in the near future. Otherwise, we will consider the possibility to include these blocks in the second Andes project. As an updated summary of this strategy initiative, we maintain our confidence about closing the transaction for all the blocks by year-end on track with the prospective timeline and terms approved by our Board last February. Now, let me comment on the progress achieved in the oil midstream expansion to unlock the evacuation capacity in the Neuquina Basin. Regarding the evacuation to the Atlantic by the end of May, we initiated the construction of the first tranche of what we named Vaca Muerta South Oil Pipeline, or VEMOS project, connecting Vaca Muerta Formation to Allen. Currently, Allen serves as the access point to OldelVal system, facilitation transport to the province of Buenos Aires. Once the second tranche of VEMOS is operational, it will also be connected to the oil export dedicated port of Punta Colorada in the province of Rio Negro. The first tranche has a length of around 130 kilometers with a CapEx of roughly $200 million. We expect this facility to become online in Q1 next year with a starting capacity of more than 350,000 barrels per day to be initially utilized currently without the last ongoing expansion expected by year-end. The VEMOS 4 tranches capacity shall be expected to over 450 000 barrels per day by the second half of 2026 when the second tranche starts this operation. The second tranche of VEMOS has a length of roughly 440 kilometers with a CapEx of about $2.5 billion. The design starting capacity is 180,000 barrels per day, planned to be expanded to around 500 by 2027. Also, the pipeline system will be designed to reach more than 7,000 barrels per day of total capacity in the basin requires. This project is a game changer for YPF and Argentina, increases significantly the export capacity and the bottlenecking shared resources of Vaca Muerta formation. This tranche of VEMOS will be a fully export dedicated infrastructure and its offshore terminal will be located at the deep water port that will allow VLCCs, the oil mega vessels that transport around 2 million barrels. Besides lower tariff, these vessels open up new international market opportunities for all our Argentina producers, such as the Asian market. YPF is currently leading the development of the project as the main shipper, and we are starting it as an export consortium pipeline, by which the local oil producers are operators of Vaca Muerta formation shall be able to commit and secure a portion of transportation capacity. In terms of progress to-date of this strategic initiative, let me share that from the technical point of view we have already completed the basic design engineer for the pipeline and we are progressing the design review of the storage terminal and oil system. Simultaneously, we have secured all key government approval environmental permits and we are in the process of receiving final quotation for the EPC and light pipe supply. Right now, we are focusing on all efforts to speed up the progress of receiving LOIs from the different export producers based on terms that will allow to start the project finance arrangement. So far, we have received LOIs covering around 2/3 of total project transportation capacity, and we are optimistic to conclude this process during Q3. Also, we have the intention to apply for the RIGI once fully regulated. Continue our focus on growing oil exports and accelerating evacuation to the Pacific. During Q2, we increased our oil exports to Chile, delivering 29,000 barrels per day through the Trans-Andean Pipeline, reaching next export revenue of nearly $220 million. Note that this is 25% more than Q1 and represents now 11% of our oil production. These exports one year ago were only 3%. Before ending our presentation and going to Q&A, let me briefly comment on the progress made regarding our LNG process so far. By end of July, YPF and its strategic partner defined the location of the project in the province of Rio Negro. The decision was taken after a deep analysis of technical, economic, environmental, geographic, fiscal, regulatory aspects. In this sense, YPF decided to hire, at its expense, Aguada Toledo, who reconfirmed our analysis conclusions. Also, let me recall the importance of this project, we once completed is expected to contribute around $15 billion annually to Argentina export revenues, significantly boosting the country's balance of payments. As we mentioned in previous calls, we expect to own between 25% to 30% of the total energy capacity, engaging the rest of the industry to join this project. On the other hand, it's worth mentioning that a few weeks ago, the initiative regime for large-scale investment, also known as RIGI, was enacted, providing a series of incentives we consider as a key way to place Vaca Muerta shale gas in the global market, transforming YPF Argentina in a world-class LNG exporter. So with this, we conclude our presentation and open to the floor questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Bruno Montanari with Morgan Stanley (NYSE:MS). Please go ahead

Bruno Montanari: Good morning everyone. Thank you for taking my questions. I have two quick ones here. The first one, would the company still be interested to look at potential shale oil acreage, which is available for sale in Argentina? It's widely known that Exxon (NYSE:XOM) is leaving the country, so to the extent you could comment on that, it would be great how it would potentially complement the company's portfolio and much more focused on shale? And the second question is about lifting costs. We understand the reasons behind the increase in the quarter. So looking for any trends you can provide us for the coming quarters, if lifting costs would remain stable at the levels from Q2, or if there could be any relief into the coming quarters, that would be great? Thank you very much.

Horacio Marin: Okay. Thank you very much, Bruno. First question. As you mentioned, the Pillar 1 of YPF is to focalize in the most profitable asset, which is Vaca Muerta oil. So for our goal, always we are going when there is selling of very good asset, because it's a way to improve the profitability and the profitability for all the shareholders. Saying that, this is a confidential process. So I cannot, – sorry about that, but I cannot give you more information on that, okay? Regarding the lifting costs, in this quarter we had particular issues. But your question is for what I see. I think that it will be in the second half. And we are foreseeing and we are working to have an average for all. We think that we will have a different lifting costs in both quarters, but we are increasing. Remember that we are producing today. Yesterday, our production of unconventional, the daily rate – the daily report was 127 barrels per day. But this is a very good increase. We are foreseeing that for the end of the year, we will have 140,000 barrels a day of unconventional which is totally our focus right now. And we foreseeing that the lifting cost for the second half, it will be $4.4 per barrel. It sounds okay, the answer for you?

Bruno Montanari: Sure, just to follow-up, this $4.4 is just for core shale hub, right?

Horacio Marin: Core, yes, yes. What is important? The important for our EBITDA is the unconventional. Remember that we have the answer, Andes project, and we are going out of our conventional fields.

Bruno Montanari: All right.

Operator: Our next question comes from the line of Luiz Carvalho with UBS. Please go ahead.

Luis Carvalho: Hi, everyone. Hi, Horacio, Federico, Margarita. Thank you for taking the questions. Congratulations on the results. I would like to touch base on two main points here. The first one is about the, I would say, the free cash flow profile for the next couple years, right? The company is unlikely to generate cash this year, of course, because of the investments that have been made. But when I look to the debt profile, in 2025, you have something close to $2 billion to be paid and sequentially in 2026 and 2027. So my point here is that I would like to understand from you how you see the external risks, like if the crude prices drop or if there's any delays in terms of the production ramp up or the pipeline construction being implemented in order to allow you to flow the production or any kind of other bottlenecks that could put your balance sheet in a bit more dedicated situation, a bit forward. The second thing is about you'd say the crude and fuel prices. Of course, we've seen a significant improvement when we compare it to the past. But when we look in terms of CapEx and OpEx, seems they're still, I would say, at a bit higher level. So if you can share a bit of expectations in terms of CapEx and OpEx reduction or efficiency gains for the second half of this year and 2025, it would be great? Thank you.

Margarita Chun: Thank you, Luis. We can start with the first one.

Horacio Marin: Yes. It's a lot of questions. I would say, for a second language guy, it's a very long question, okay? Luis, thank you for the question. I know you personally, so I remember you. If I not answer what you are expecting, please ask me again, because it was a long question. But I tell you, I tried to answer the first part of the question. Our expectation of net cash flow are exactly the same as when we arrived here. And we have followed very well the track of the results. For 2024, we will be a balance of neutral in operational point of view. So our net cash flow will be negative, because of our interest payments, okay, or debts, okay? For next year, we are foreseeing that it will be neutral, in the order of neutral, but we are working so hard, so hard, so hard that maybe you will have some difference, okay, for going up, okay? Because we are working so hard in the efficiency. For there on, we are foreseeing positive cash flow. All of that is without, I'm not talking about LNG, that we are looking for project finance. No, no, not to invest a lot in the next year, so we will be different. And also, without M&A, okay? Regarding the prices, if the prices goes up, okay, you will have much better results, okay, much better results. And why we decide to go out for the mature field, because we are not efficient on that, because in that way, this company with lower price will be more resilient. But from next year on, because our program, our focus, and where we are going, we will be resilient for very low prices, because we'll be almost, I would say, almost, an unconventional company with very efficient way of work. We are the best company in the results of the operational. So I'm very happy to work in this company, work hard with all the team, because we are going to have very low efficiency. We start – it's not in the question, but maybe for everybody and to share with you. For the acting size, we started a new program, what we call Toyota (NYSE:TM) World, and we signed a contract with the Toyota company. We are going to try to put the efficiency of the car industry in the world. That is very disruptive program. Everybody is very happy on that. And also, I would say the service company come to see me from the United States, the CEOs, from Europe, and everybody knows that it will be a change in efficiency in Argentina. This is very disruptive, and it will be extraordinary for the efficiency way of work because we will be focused in reducing the well cycle. And that will deliver much more EBITDA for the coming years from now. From the downstream part, we already have a very, very ambitious program that is called Growing by Efficiency, that we have more than 100 initiatives in the La Plata. We do the La Plata Refinery, because it's the biggest that we have the biggest of this is in Argentina, and it's a very big refinery. We have more than 100 initiatives that they will put the margin much more up. My goal when I come with YPF and all the team of downstream is to have the margin in this refinery and the refinery YPF in a very good benchmark with the American refinery. So we need to increase by efficiency our margin. And we are in there, okay? I don't know if I answered your question. You need – if I lose something that you ask me, please repeat, and I will answer.

Luis Carvalho: No, no, that's very clear and thankful for the complete answer and looking forward to seeing you in person again soon. Thank you.

Horacio Marin: Okay, thank you.

Operator: Our next question comes from the line of Vicente Falanga with Bradesco. Please go ahead.

Vicente Falanga: Hello, everybody. Thank you for taking my questions. I have two also. The first one, congratulations on the drilling speed metrics. Do you think there's still room to increase the 1,500 meters per day? Or are you already close to a limit? What will be your dream target here in terms of meter drills per day? Then my second question, when will YPF and the other interested parties decide on how to split the interest on the Vaca Muerta Sur pipeline? Could we have a decision already this year, maybe next? Thank you very much.

Horacio Marin: Thank you, Vincente for the question. First of all, I would like for you to know me because I am a crazy guy, okay? I'm not using Adidas (OTC:ADDYY) in my life. I'm sorry if I took Adidas, but I love. Impossible is nothing in life. So what I'm going to – I don't really – the technical limit for me is the ceiling. I don't care if I cannot improve, but I push, and always when you push, always you obtain something. Every time that you think I arrive at the limit, you have to go out of the company. That means that you are a – I am an old man. That means that you are an old man from the mine. So I like you to know me. I am a crazy guy. I don't want – I don't like that you arrive to the limit. For me, it's not the limit. The guys of downstream, they don't imagine what I'm here. As soon as we have that margin, we will have another new problem, okay? That is for the first part. For the second part, you ask me…

Margarita Chun: Vaca Muerta

Horacio Marin: The Vaca Muerta, okay. We have already signed a 2/3 of the compromise for that project. I'm totally focused. I'm focused on everything. But we are totally focused on that because I don't want to make losing money for the shareholders that pay me my salary. And so we cannot delay one day, okay? You know that we are discussing with one big company in the United States, and we are in good shape, but as soon as we have an agreement, I will tell you. But we are – our program is to mobilize the equipment in November, and that program is the program. Yesterday, we said that we are doing that with all the industry in the same table. And we think that in a couple of weeks, we will have 100% already signed, and it's our focus. From the part of the split, remember, YPF has to lead the industry, and we are leading the industry. Our idea is to do as simple as possible. The more simple, because the midstream is not the focus of our company or any company of the upstream, the others. So the focus is to make and increase a lot the production. We are going to increase a lot the production and conventional. So as simple as it is, what we are doing is the following. The percentage of your paying is the percentage of your capacity. And we are going to make like an ISPV with all the companies. And at the beginning, we are saying not to have one – a lot of partners. Any partner that has more than 10% of the share will have a share in the board of that company. If you have less than 10%, we are not to have a board, because if not, it will be very difficult to manage the company. Okay, I think I answered your question. Tell me if you are comfortable or you need more detail.

Vicente Falanga: Yes, no, that was very complete and interesting. And I'm looking forward to meeting you soon. Thank you so much.

Operator: Our next question comes from the line of Alejandro Demichelis with Jefferies. Please go ahead.

Alejandro Demichelis: Hi. Good morning, all. Thank you very much for taking my questions. I have two questions, if I may, please. The first one is, you mentioned the share growth that you're expecting by the end of this year, 140,000 barrels a day. What can we expect, say, for 2025, 2026, 2027, that's probably the first question. Then the second question is, you gave us a good update on Andes, but also when we look at the quarter, you mentioned that some of the refining margin impact was because of third-party oil purchases. So once you are out of those conventional fields, should we also expect that your refining margin is structurally lower because you need to buy more third-party oil?

Margarita Chun: Thank you so much. We can start with the first question, Ale. And then if you can repeat the second question, if you don't mind. The first question was about the shale production of 2025 onwards?

Horacio Marin: Okay. 2025 onwards. Thank you Alejandro for the question. We are working in short-term, medium-term, and long-term strategy all day for I would like – I prefer to give you the guidance and I compromise here with you and also with all the guys that they are in this call that the day you invest next year, I give you the guidance for the three years with very good. It's not that I cannot tell you, because there are some issues or things that I would have a better idea for – by the next of the year. And I prefer, if you don't mind, in March, I think it's in March or March, I prefer I give you a very clear answer for everybody and my personal compromise on the result, okay? If you don't mind. Is it okay for you or?

Alejandro Demichelis: Yes, it's okay. But can you give us then how many more rigs do you expect to add, say, in 2025 then?

Horacio Marin: Okay. It depends on several questions that you have there was today. Today we think that it will be 15,000 barrels a day because next year it will be an year of not growing because there will be a growing of capacity on OldelVal. Remember that OldelVal by the end of December, they will increase the total capacity for all the industry in the order of 15,000 barrels a day, and in April, 200,000 barrels a day. And so we are going to always – we are going to go efficiency, reducing work capital as much as we can so and fill our capacity. If we have fair capacity and we don't have the race to reach, for sure we're going to agree and remember that it's an open access here, okay? And also always I will look at the EBITDA, CapEx, and profitability of the company. I'm not going to be crazy into higher rigs and not deliver efficiency for all the shareholders, okay?

Alejandro Demichelis: That's great. Thank you. And yes, so the second question that Margarita asked me to repeat was, once you get out of the conventional fields, you will need to buy more conventional oil from third parties for your refiners, right? So the question is, would that also put a bit of an impact or pressure on your refining margins structurally?

Horacio Marin: Yes, but remember that I have to talk about Argentina. Argentina, we are almost now in international prices. The policy of Argentina and the change of Argentina in the oil is to go in that region. So they will be not different to have or not to have that. And remember also that we have increasing in our production and also we are with some exit that we have in the Andes. We have some agreements of buying the oil in the Mendoza part, we are the – for everybody, the best way, efficiency, to sell the oil is to YPF, because it's a hinterland that is like closed. It's not easy to open that. So that is more easily to the other. Also, some Medanito from us, it will be as it is today. They will be at the refinery, but our goal is because we are going to increase the production in the next years. I cannot say next year because it will be the other. We are focused also in the export. As soon as we increase a lot, I think that question doubt will be out because you realize that we are going to be a company that – we can buy here easily, and we can export a lot, okay?

Alejandro Demichelis: Okay. Thank you very much.

Operator: Our next question comes from the line of Andres Cardona with Citi. Please go ahead.

Andres Cardona: Good morning, Horacio, Federico. Congrats on the resource I have two questions. The first one is about any progress on non-core asset divestiture beyond the conventional crude processes that you have mentioned. If we can expect any announcement over the next 12 months. I remember you wanted to focus on the core business and mentioned some assets that could be divested there. So any update? And the second one is there were some interesting highlights about early results on Palermo 8-K. So if you can share some thoughts about those.

Horacio Marin: Okay. Thank you Andre for your question. You hear Margarita, and I don't know why he tell me Andre, because I know that you're Andre. But anyway, remember, because – they don't like my English, so that's why always they repeat me the names on that, but sorry about my English. It doesn't matter. I put the best that I can, okay? For the defense, you're talking about Pillar 2, but I make always control of myself. The Board of Directors approved last month and we start the process of seeing a proposal, and after we come back to sell, is YPF Brazil, which is a lubricant company. YPF Chile, we are selling some lubricants and sheds. If you see EBITDA is not for YPF. So we are going to sell that. Also, we are in a process to see and sell Refinor that for us is not a key asset. We start the negotiation and go into the way to go out there because it's not for YPF also. If you are talking about Metrogas, we are going to sell, but not today because they are, if I sell today, I think I'm not doing my job for you, for the shareholders, properly. Because I'm selling when Argentina will improve a lot in the macro, and when it's reducing, the macro will be stabilized, the price of Metrogas is up. So it's not like I'm not focused on that in this company. The guy that is working there the general manager has totally the idea that we are going to sell, but we are waiting on that because I think they are, as I will repeat, it's better for you and for all the shareholders, okay? And Profertil, you can say also in the noise down thing, but we call it gas energy business because it's – in Profertil use our gas is very, very profitable. And so because it's very profitable, it's my incoherence in, say, focusing energy, but I have now a good slogan to maintain that it's gas that makes food. So, energy making food. In there, I take out my idea. It is very profitable, so we are going to maintain. We are going to see what happens with the selling on the other. And at that moment, we are going to look at partners to duplicate the plant. Remember, no, remember, no, but this is, you don't need to put money there, it's the project final, or with a new partner, we will see how to do that, okay? And in White Tech what is the research and development company we are totally focused now in energy there is no more talking about harvest or crops or nothing to do with that and also last – last month – or last weeks I don't remember exactly the date, sorry for that, but it was, I think, two weeks ago, we started a new program, VEMOS what we call Vaca Muerta, what is to work with the oil industry to solve a common problem for the industry. I don't know, if it's okay for you, or you need more detail from me.

Andres Cardona: This is great color. And I just wanted to ask about YPF Luz. What are your thoughts on that asset?

Horacio Marin: YPF Luz, no, sorry, sorry. I forgot YPF Luz. YPF Luz is a wonderful company, and we are always, we have positive EBITDA. A bit of that is good. We are growing. They don't need capital from YPF Group. We always refinance with the new projects, and we are growing now. We are a company that produces renewables for 700 megawatts, and we are an oil and gas company that consumes 420 megawatts. So we are in good shape in the transition period, okay? You can make the numbers there. And Palermo Aike, sorry, I forgot that, but Palermo Aike is one week ago. I would say, we are producing only water, but it's not like I'm saying that it will be water, okay? Because one week ago, we take out very low water percentage of the fracture. We are in less than 5% of total water that we use in the treatment. It has a very good pressure, very good pressure. The pressure is double the water, which means it's similar to shells that produce. The reduction in pressure we have in a choke of 4 millimeters is very good. It's comparing with my experience in another shelf, and the well is in the order of 700, 760 meters, and the rate is very good. We are in 4 millimeters in 100, and if I remember, it's 150. It's 150 kilometers, which is 1,000 barrels a day. And so we are expecting, and really I cannot tell you it will be oil. The pressure is a very good index on that, and I think in the coming weeks you will see the result, and we are expecting that the first oil, if it comes, comes in the next weeks, okay?

Andres Cardona: Thank you guys. And congrats on the progress. Good business.

Horacio Marin: Thank you.

Operator: Our next question comes from the line of Marina Mertens with Latin Securities. Please go ahead.

Marina Mertens: Hi. Good morning. Thanks for taking my questions. I have two questions. So the gap between local prices and international parities has narrowed significantly. If rent continues to decline, how do you foresee local prices adjusting? Could they converge or even exceed export parity? And the second one regarding the downstream segment – this quarter it showed higher prices, reduced volumes, and normalized margins. How do you anticipate these dynamics to play out in the next quarters? Thank you.

Horacio Marin: Okay. First part of the question, with the current prices of today, our weighted average is in the order of 3% lower than import parity products. If they continue to reduce, that is your question, we will reach import parity. And when you have import parity, if you are a free market, you have to take into account the free rider could make you in the problem because they can import and make money, okay. So there we have – we have to understand and I understand that you are abroad and for you is very difficult to now say what happened in Argentina. But so far what we are going is in a free market and here we have you can imagine that – the thing that happened is the same in the United States for saying a country. So if we reduce a lot, I always declare that I will be the first guy to reduce the gasoline. But also, if the price increase a lot, I will increase the prices. Sometimes when there is a spike in prices to the fruit, very, very high. It's happening in all the countries that you cannot in one day to increase that, even in different countries. We are working as it will be a free market and decide on demand and supply and see what is the competence and all that, okay. I understand that for everybody it's difficult to understand that, but we are doing that. And the second part is with the margin, Marina. The second part, you asked me for the margin of the downstream, no? Yes?

Marina Mertens: Yes. Yes.

Horacio Marin: Okay. This quarter, particularly because of several problems, no, because of maintaining stoppage. Also, because of the problems in the weather in the south, we couldn't not refine. Even though we have a record, we couldn't not refine all the quarter as expected, because we didn't have the oil to do that because of that problem, problem and maintenance, okay? So as you make two numbers, because you cannot reduce in the figure, and so that's why our margin, I don't like also, okay? Our margin was a little less than expected. What we have is, you have to spare for the second half, is that it will be better than that. But don't imagine to duplicate, duplicate is our program. What we call growing by efficiency. That will take time. We are working hard. So I think I answered the question. Tell me if it's okay for you or you need more details.

Marina Mertens: No, it's okay. Thank you.

Margarita Chun: Thank you, Marina. And since we are running out of time, we are going to take the next question as the last one.

Operator: Our final question comes from the line of Leonardo Marcondes with Bank of America (NYSE:BAC). Please go ahead.

Leonardo Marcondes: Hi, guys. Good morning. Thanks for taking my question. My first question is related to the divestment of the conventional assets. Although, the sales for some assets under the divestment plan have already been signed, do you guys see any risk for the conclusion of these sales as they still need to be approved by the provinces? And my second question is more regarding the capital allocation. With the conclusion of all the assets under sale, their cash generation should improve by around $750 million in the next year, right? So I would like to have a better grasp on what could we expect from the company in terms of capital allocation in the next year? So if you could provide more color on what are the expectations here? If we could think about these events or if this cash should go to accelerate projects in Vaca Muerta? Thank you.

Horacio Marin: Sorry, Leo, but I was lost in some of the further questions. To be fair with you, it will be open the microphone and I will ask Margarita to tell me in Spanish. So everybody knows Spanish will know that Margarita explain me your question and after I answer the question in English. So one second. Go ahead. Okay.

Margarita Chun: [Foreign Language]

Horacio Marin: Okay. Okay. Thank you, Leonardo, for the question. Don't be. That is life. Okay. I'm not ashamed because I have to ask you. We already signed six. I think in six clusters of 11. I think in the – I would say in the couple of days or more, I expect it. If not, I will be very, how do you say, very optimistic. No, I will be disappointing with the guy that works in merchant acquisition. Okay? So I think we are going to sign two more in the next week. The other that they have there, there is one that is impossible because we have first to discuss a contract, export contract. We are trying to give that export contract to another company and after it will be already out. The other two, we are negotiating, and I think we are going to be out. I'm going to be out first of January. I will not have those. If not, I don't know what I will do with the guy of merchant acquisition, but it will be good. I'm sure that we will be out of there. Regarding the provinces, as soon as we have that, we discuss with them, and so on. When we sign, we know that we expect, because I have to say that, we expect that it will be approved, okay? So I think that we are in very good shape, really very good shape. The only thing that I received from WhatsApp and from people of the industry is congratulations because what we did, people in Argentina think that we are superb. I'm not superb. The guy who made acquisitions, sometimes they're superb, sometimes they are not, but in that way, they are superb. So I'm very happy on that. After that, we have two provinces that we are discussing, and also I am very positive that we are going to be out of that. So what we are doing with the capital, if I can put all that capital in Vaca Muerta. I will put there. If not, it will be a safe capital for you, because if I save the capital and make more EBITDA, but I have the opportunity to put more production on board, I'm going to lose your money. But next year, because we are going to have like a bottleneck in the capacity, if we have to save the money, save for the next year, we will save for the next year, okay? But we are not going to waste your money never in my life. It's okay?

Operator: That concludes our Q&A session, I will now turn the call over to Horacio Marin, CEO, for closing remarks.

Horacio Marin: Okay. Thank you very much for all the questions and we are very happy to have the work that we are doing in YPF and also we are very happy of your questions because it's a way that allows us to improve. Our goal is to improve the profit for you, okay? This is our goal. There is no other goal. Thank you very much.

Operator: This concludes today's call. You may now disconnect.

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