Earnings Call Transcript - VIST Q1 2024

Alejandro Cherñacov, Strategic Planning and IRO

Thanks. Good morning, everyone. We are happy to welcome you to Vista's first quarter of 2024 results conference call. I am here with Miguel Galuccio, Vista's Chairman and CEO; Pablo Vera Pinto, Vista's CFO; and Juan Garoby, Vista's COO. Before we begin, I would like to draw your attention to our cautionary statement on slide 2. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from expectations contemplated by these remarks. Our financial figures are stated in US dollars and in accordance with International Financial Reporting Standards, IFRS. However, during this conference call, we may discuss certain non-IFRS financial measures such as adjusted EBITDA and adjusted net income. Reconciliations of these measures to the closest IFRS measure can be found in the earnings release that we issued yesterday. Please check our website for further information. Our company is a Sociedad Anónima Bursátil de Capital Variable organized under the laws of Mexico, registered in the Bolsa Mexicana de Valores and the New York Stock Exchange. Our tickers are VISTA in the Bolsa Mexicana de Valores and VIST in the New York Stock Exchange. I will now turn the call over to Miguel.

Miguel Galuccio, Chairman and CEO

Thanks, Ale. Good morning, everyone. And welcome to this earnings call. During the first quarter of 2024, we made good progress towards delivering on annual guidance with solid operational and financial performance. Total production was 55,000 BOEs per day for the quarter, up 40% year-over-year on a performance basis. Oil production was 47,300 barrels per day, 15% above the previous quarter, also on a pro forma basis. Total revenue during the quarter was $317 million, flat year-over-year. We maintained lifting costs flat compared to the previous quarter at $4.3 per BOE, reflecting the full consolidation of our new operational model following the transfer of the conventional assets. In Q1 2024, capital expenditure was $242 million, mainly driven by 12 wells drilled and 11 wells completed during the quarter. Adjusted EBITDA was $221 million, 8% above year-over-year, supported by lower lifting costs amidst stable revenues. Adjusted net income was $47 million, implying a quarterly adjusted EPS of $0.5 per share. Free cash flow was negative at $84 million during the quarter, driven by the ramp-up of our drilling and completion pace, which will boost production over the coming quarters. The net leverage ratio at quarter-end was a solid 0.58 times adjusted EBITDA. I will now deep dive into our main operational and financial metrics of the quarter. Total production during the quarter was 55,000 BOEs per day, a 14% increase compared to last year on a pro forma basis, adjusting for the production of the transferred conventional assets. Without such adjustment, total production grew 5% year-over-year, evidencing that we have fully offset the impact of that transaction. On a sequential basis, total production declined slightly as the wells connected during the quarter only started impacting production in late March. Oil production increased 15% year-over-year on a performance basis or 7% without such adjustment. Natural gas production increased 8% compared to Q1 2023 on a pro forma basis. In line with our annual work program, we tied in 11 new wells during the quarter, 3 in mid-February and 8 in mid-March. This activity has little impact on Q1 production, but will boost Q2 production. We are currently producing 62,000 BOEs per day and have tied in a 3-well pad in Bajada Del Palo Oeste last week, the first part of Q2. We forecast a double-digit production growth on a sequential basis during Q2. We also reiterate our production guidance of 68,000 to 70,000 BOE per day for the year. I will now share exciting news. We recently signed an agreement to secure and import a third high-spec rig to Argentina. This rig is scheduled to start operating in our development hub during the second semester, replacing an on-call high-spec rig currently working in our operation to front-load the 2024 drilling activity. This will allow us to deliver four to eight additional new well tie-ins during 2024, in addition to the 46 wells in our current work program. We expect this to drive an improvement in our Q4 2024 production forecast to above 85,000 BOE per day. By adding one fully dedicated rig, we expect to provide an upward revision of both our activity and production guidance for 2025 once the rig is operational. During Q1 2024, we recorded a solid improvement in our oil realization prices, which were up 6% year-over-year for an average of $70.3 per barrel during the quarter. Realized oil prices were $69.3 per barrel to domestic customers. Realized oil prices from the export market were $74 per barrel. Combining sales to international buyers and domestic buyers paying export parity, 57% of our total sales were sold at export parity. During the quarter, total revenues were stable year-over-year. This reflects a temporary build-up in our oil inventory compared to a reduction in Q1 2023. Lifting costs were $21.6 million for the quarter, a 28% decrease compared to the same quarter last year. Lifting costs per BOE were $4.3, a decrease of 33% compared to Q1 2023, and flat with respect to the previous quarter. This reflects the consolidation of our new operating model, fully focused on our shale oil assets following the transfer of the conventional assets a year ago. Adjusted EBITDA during Q1 2024 was $221 million, an increase of 8% year-over-year, mainly driven by lower lifting costs amid flat revenues. During the quarter, we continued to deliver strong margins. Adjusted EBITDA margin was 68% during the quarter, an interannual increase of 4 percentage points. Net back during the quarter was $44 per BOE, a 1% increase year-over-year. Adjusted EBITDA in Q1 2024 includes $7 million in gains from the repatriation of 20% of the export proceeds at the blue chip swap. This was down from $81 million in the previous quarter, which reflected the large gap between the official exchange rates and the blue chip swap rates. The sequential decrease in adjusted EBITDA and margin is largely explained by this effect. Free cash flow during the quarter was negative at $84 million, driven by two factors. Firstly, lower cash from operating activities due to a temporary increase in working capital. Secondly, payments of CapEx of $148 million as we ramp up drilling and completion activities during the quarter. Cash at the period-end was $152 million as cash from financial activities generated $22 million, reflecting proceeds from borrowings of $96 million and repayment of borrowings of $45 million. Net leverage ratio stood at a very healthy 0.58 times adjusted EBITDA at quarter-end. I will now summarize the key takeaways of today's presentation. During Q1 2024, we delivered strong execution of drilling and completion activity. We tied in 11 new wells, in line with our annual guidance. We recorded a 14% year-over-year production growth on a pro forma basis, driven by shale oil growth in our development hub. We forecast sequential double-digit growth, both in terms of production and EBITDA in the second quarter of this year, which leads us on track to deliver on our production and adjusted EBITDA guidance for the year. We recorded a robust improvement in realized oil prices, exceeding the $70 mark on average, boosted by higher Brent prices and by a higher share of domestic sales at export parity. Combining sales to international buyers and domestic buyers paying export parity, 57% of our total sales were at export parity. Supported by the contracted view we have on the dynamics of our industry, both globally and domestically, and leaning into our conviction on our ability to deliver value to our shareholders, we contracted a third high-spec drilling rig. We forecast this will add four to eight additional new wells, incremental to our original guidance in the second half of this year. This is expected to boost Q4 2024 production about 85,000 BOE per day, leaving us well prepared to potentially increase our production guidance for 2025. Before we move to Q&A, I would like to thank our investors for their continued support. And also, I would like to thank the Vista team for their hard work during the quarter, which leaves us well prepared to achieve our annual target.

Operator, Operator

Our first question comes from Bruno Montanari from Morgan Stanley.

Bruno Montanari, Analyst

I wanted to explore the production and the cash flows. On production, very exciting news with the third rig coming in the second half of the year. So how should we think about the incremental number of pads or wells into 2025, assuming that the rig operates at the expected specifications? Is this pace of four to eight additional wells per quarter sustainable or can it be higher? So, any color you can give on the contribution of the rig on an ongoing basis would be super helpful? On cash flows, there was some noise on the cash flows for the first quarter on the back of the working capital situation. So if you could comment on the expectation of working capital release during the second quarter of 2024 and how to think about working capital for the full year, it would also be extremely helpful.

Miguel Galuccio, Chairman and CEO

Starting from the production point of view, so we finished last year with 56 in Q4 and we designed the plan for this year to have around an average 55,000 barrels per day in Q1 2024. That is what we did. In the plan, we said that we are going to have an average of 68 to 70 barrels of oil per day for 2024. That plan didn't consider adding a high-spec third rig. How we see things today? So first of all, I will say that we are entering Q2 with a very good production starting point. If you take the production of April 2023, that was the last one that I checked, we were producing 62,000 barrels of oil per day. And we expect to finish Q4 with an average of 85,000 barrels of oil per day. So, of course, we are not going to give guidance in Q2 and Q3 but you guys can make the number. Okay, we are starting Q2 with 62, and we want to finish with an average of 85 in Q4. This is factored in the third rig that we are adding today. When you look at starting this quarter with 62 and what we have coming in, in line based on the activity that we have, we have Bajada El Palo Oeste 22 that is a very good part of three wells that yet has reached peak oil. We have Bajada El Palo 23 that also shows good production. It's a part of five wells that yet has reached peak oil. We have Bajada El Palo Oeste 24 that is in flow back, and we have a Bajada El Palo Oeste 25 that is going to be tying in May and probably will start to show some oil in June. So saying all that, I feel confident with the production that we are seeing and with the plan that we have. Of course, 2024 is a challenging year. Okay, we are basically putting the bar in terms of growth in production very high. But it's nothing that we have done before. And we have a track record of delivering, and we will deliver this year as well. The question will be probably for 2025. We signal that we are going to have 85,000 on average for 2025. Probably in the future, we should look at that guidance. Now that we are ramping up production. Going to cash flow. So, in 2023, we spent $760 million of CapEx, and we ended up the year with cash flow around $30 million, and with a realized price of $66.7 per barrel. Our 2024 plan was of a CapEx of $900 million. We expect a cash flow of $100 million, and we guide pricing between $65 and $70. We have finished Q1 with more activity, $240 million of CapEx, a negative cash flow of $84 million that, as you mentioned, has the effect of the export cargo that came late. And that effect is an effect of $42 million. And we have realized prices of $70 million. With the plan of adding a third rig, we will have additional CapEx between $150 million and $200 million. So we expect – or I am expecting, and that also will depend on the prices that we get, to have probably negative cash flow for the first semester, and we will probably recover positive cash flow for the second semester toward the end of the year. This is our current view.

Operator, Operator

Our next question comes from the line of Daniel Guardiola from BTG Pactual.

Daniel Guardiola, Analyst

I have a couple of questions. So my first one is related to production. I see you have this goal to basically increase production by Q4 by roughly 30,000 barrels of oil per day. And I want to ask Miguel, this is by far the most aggressive inter-annual growth in production that this company has experienced or is going to experience so far. Which ones do you think are the main challenges that you're going to have trying to reach this new level? And in connection with production, if I'm not mistaken, you are expecting additional pipeline capacity towards the second half of the year. But I think it's not going to be enough for you to actually evacuate 100% of this incremental production through pipelines. So I guess you're going to increase the usage of trucking. And in that sense, I wanted to know the split that you expect between trucking and pipelines and the potential effects on costs of increasing trucking evacuation capacity. So that's in terms of production. And if I may just squeeze another one, and it's related to the exports. We saw during the Q a significant decline in exports as a percentage of total volume sold. So I wanted to know if you can share with us what happened during the Q and what are your expectations for the upcoming quarters?

Miguel Galuccio, Chairman and CEO

Yes, I will agree with you that we have a challenging year ahead in terms of production. Nevertheless, I will restate what I said to Bruno. I feel very comfortable entering with 62,000 barrels per day, aiming for 85,000. And seeing the first results of the pad that we have drilled, I feel super confident. And also, you have to factor in that the 62,000 barrels of oil per day today that we produce come fully from unconventional wells. So that means that, in the last three to four years, the Vista team has managed to develop and produce 62,000 barrels of oil per day. So for us, aiming to add another 20,000 is not much different than we have done before. It's going to be a challenging year, but we have the equipment and the operational capacity and the talent to make it happen. Back to your second and third question. Yes, trucking, as you said, is something that we are going to use this year. As you know, we knew that Oldelval was going to be late. It was scheduled for Q1 2024 and will be delivered in Q4, so we factored it in our guidance, in our plan the expenses to cover that. So we created a trucking plan that basically calls for a cost between $10 and $12 per barrel. In Q1, we were probably trucking around 2,000 barrels per day. In Q2, we think that number will be probably closer to 9,000, and in Q3 it will be up to 12,000 barrels per day. In the guidance, we factored in $25 million expenses related to those costs of trucking. Your third question, if you remember properly was about export volume. In Q1, we had 41% of volume that were directly to export. And we have a new market dynamic in the domestic market where 60% of the domestic volume were sold at export parity. So we sold basically 57% of our volume to export parity. In Q2, we believe that 50% will be directly volume that are going to be exported. And probably domestically, we're basically forecasting that could be around 10%. So 60% of our volume will be sold at export parity. This is what we are forecasting.

Operator, Operator

Our next question comes from the line of Tasso Vasconcellos from UBS.

Tasso Vasconcellos, Analyst

I think I have one here on my side. We have seen increased competition in the past years here in Brazil, coming from the assets sold by Petrobras, which led several independent players to increase their footprint in the industry, and of course, requiring additional equipment, services, employees, and all of that led to higher competition in the industry, right? What are Vista's expectations for this investment process that we're seeing from YPF and probably from some other players? Do you believe we could see higher competition in the industry in Argentina either this year or in the upcoming ones? How do you see this environment growing in Argentina? This is my question.

Miguel Galuccio, Chairman and CEO

The short answer, probably yes. First of all, I think the rationalization of the portfolio that YPF is going through – and basically, we went through the same rationalization of portfolio knowing that the unconventional opportunity is the main opportunity for us where the scale is and where the margin is. I believe it's a very rational decision and it's a good path that YPF is taking in that direction and I applaud them for that. I guess I think that will create more activity in the basin. It will probably attract more investment towards conventional fields that today, for the ones that hold both in their portfolio, cannot compete for capital allocation. And if you're referring to the fact that we create within the service sector, yes, I think it will be more demand for services. And I will add to what you said that the other effect is that competition is growing. We see more activities. We see basically more people asking for rig and frac fleet and so on. In that sense, I believe we have a competitive advantage compared with the rest. We have, from day one, adopted a model called One Team where we have made our main service providers partners. Partners mean that they've been working with us nonstop since day one where we basically give 100% of the activity to them. So that gives us a preferential relationship with those people. We have no problem adding equipment during the good time and during the bad time. And I think this is a clear example of that, which is the high-spec rig that we are adding this year. So, yes, I think there will be more pressure, but I think we will be okay.

Operator, Operator

Our next question comes from the line of Andrés Cardona from Citi.

Andrés Cardona, Analyst

I have two questions. Coming back to the free cash flow concern that Bruno expressed before, there was a second item at least for us that was surprising, the advanced payment for midstream expansion. So could you please give us some context about the outlook for these potential expenses? How will it be deployed over the coming quarters? I understand there is a commitment of close to $150 million, out of which close to $60 million have been deployed. So I wanted to understand what should we expect on this front just to be more accurate on the free cash flow forecast. The second point I wanted to understand is with Brent at $88 per barrel, we have seen the big effort the industry has done to improve the domestic prices, the domestic realization prices. What are you seeing in the second quarter? What should we expect going forward? Do you expect a slowdown on this following trend that we have seen in the first quarter? And perhaps the last question is, going back to the third rig point, what should we expect for 2025? Will it be high for the full year? Is it yet to be decided? Just trying to get some color about what to expect for the next year.

Miguel Galuccio, Chairman and CEO

First of all, starting from the free cash flow, so I don't think Bruno expressed that he has a concern. We don't have a concern either. We basically have been growing with our own cash flow generation. And we can continue growing toward the third rig using our own cash flow. So we are in that sense privileged compared with other developers of unconventional resources. As I said before, the first semester, of course, because of the activity, how it picks up during Q2 and Q3, we will have negative cash flow, and we will have positive toward the end of the year also next year. And probably I take advantage of answering your question on the third rig, I think you can factor it in that we're going to have that third rig fully operational during 2025. Back to the question from midstream and probably putting context. The overall capacity, the additional – the well capacity that was tendered was 315,000 barrels per day, from which we secured 31,000 of those. And we note, from also the same volume, we secured 37,000 barrels of oil per day. We prepaid $58 million for both. And in Q2, Q3 and Q4, we should have additional cash calls or expenditures of around $70 million, $40 million, $20 million and $10 million if I remember properly. Related to your question about domestic pricing. In Q1 2024, we saw a domestic price of $66. The export parity was around $79 with Brent at $80 per barrel. Going forward, we are assuming that $66 should be the floor. Refiners should gradually upgrade prices toward export parity since there's no regulation in Argentina today to maintain the domestic prices fixed. Refineries also, as I mentioned before, have a new dynamic. Local consumption has dropped and they're starting to export refined products. And therefore, they're willing to pay for that additional volume at export parity. One third of our local volume was recognized at export parity. So I believe we should see local prices coming up. I don't remember if you have an additional question. I think there were three of them answered.

Operator, Operator

Our next question comes from the line of Marina Mertens from Latin Securities.

Marina Mertens, Analyst

During the quarter, we saw inflation coming up by 56%, while FX went up by only 7%. However, lifting costs remain mostly unchanged. Are you seeing any pressure on the cost side due to this dynamic? And what are you expecting for the remainder of the year?

Miguel Galuccio, Chairman and CEO

What you're asking mainly has a dynamic impact on our lifting costs. So from the devaluation, we saw a positive impact on our lifting costs that we captured in December. And you saw our $4.3 per barrel lifting costs. And in Q4, we were already reflecting that saving. In Q1, we basically – when in Q4, we got only one month of effect of that devaluation, we captured that in the full quarter during Q1 2024. That allowed us to have the number that we have today that is $4.3. So part of the saving, really, we are offsetting by higher activity. We have a slightly lower production than in Q4 2023 and a bit of cost inflection during the quarter. So, if you look at our lifting costs going forward, I think you should go back to the guidance that we have that is $4.5 for the year. We will continue having effects of inflation with a flat effect. Nevertheless, we plan to almost double the production that we have at the beginning of the year. So, that will dilute lifting costs. So, if I have to take a guess, I will probably, with some fluctuations, move closest to the $4.5 per barrel per BOE that we have forecasted and guided.

Operator, Operator

Our next question comes from the line of Alejandro Demichelis from Jefferies.

Alejandro Demichelis, Analyst

I have two questions, if I may, please. The first one is on that extra rig capacity that you mentioned, Miguel. How are you thinking about splitting the rig capacity between the different fields? Is this kind of going to be focused entirely into the BPO, BPE kind of hub or should we expect something in the less developed areas? That's the first question. The second question is, last quarter, you mentioned about potential M&A activity or you were looking at some of the assets in Argentina, so how are you thinking about that today?

Miguel Galuccio, Chairman and CEO

The main activity continues to be focused on the development hub, that is Aguada Federal, Bajada del Palo Oeste, and Baja del Palo Oeste. Those three blocks continue to be the main target of our development. Related to an additional rig, we just brought a new one. As you know, we are ambitious, so I will not discount at some point of time we dream of adding more. But for the moment, I think we should consider that we will run full speed with three rigs and 2025 will consolidate that activity right from the beginning. So it will be another year of growth. Related to M&A activity, as you know, we are participating in the Exxon tender. As I said before, it's a very competitive tender. It's not that we are desperate for more resources, but we are participating and we see what happens from there. We have a hub of further development in the north that is not in our plan yet, but at some point in time will come to realization. So that is the view I can give you so far.

Operator, Operator

Our next question comes from the line of Oriana Covault from Balanz.

Oriana Covault, Analyst

This is Oriana Covault with Balanz. I have maybe one brief clarification and a follow-up. So the first one with regards to the contracted third rig that is expected for the second half, just to clarify, are you expecting any CapEx revisions due to this increased activity? Or was this already contemplated in your annual budget? I'm sorry if you already mentioned that, but I think I missed it.

Miguel Galuccio, Chairman and CEO

Oriana, yes. It's what I mentioned before. So you should consider that with the third rig, we will upgrade the $900 million of CapEx that we have by $150 to $200 million additional due to the new rig. And of course, that increased production. So we are now aiming for an average of 85,000 barrels of oil per day for the fourth quarter.

Oriana Covault, Analyst

Maybe just following up on the delays that you are seeing in Oldelval, can you remind us what is Vista's current evacuation capacity and how do you expect that these delays from Oldelval impact your production guidance that you provide in the earnings presentation? It seems that it continues to ramp up gradually towards above 85 million barrels of oil equivalent by the end of the year, but just how should we think of current evacuation capacity and the increased Oldelval by year-end?

Miguel Galuccio, Chairman and CEO

First of all, just to clarify, we have no impact. We have enough evacuation capacity for the year, so we will not have any negative impact on our production plan due to the evacuation. Our actual evacuation is 50,000 barrels of oil per day. We have trucking capacity. That means we can truck 20,000 barrels of oil per day, and we use that based on what is needed. Oldelval, with that, another 15,000 barrels of oil per day toward the end of the year is aimed for October. In 2025, we will have the second phase of Oldelval that for us will mean another 15,000 barrels of oil per day of additional capacity. So 50,000 plus 20,000 plus 15,000, you have right there 85,000 that we have for 2024.

Oriana Covault, Analyst

And just one last one. Seeing the pricing evolution in the local market and your ability to sell volumes at export parity prices, should we think of or expect any meaningful deviation from the export mix targets, seeing that you've actually been able to place some of these volumes at export parity locally?

Miguel Galuccio, Chairman and CEO

Really, we are seeing, as I mentioned Q2, 50% of our volume will go to export. We are building up on that already. And we are forecasting 10% of our local volumes to go to export parity. So you should work around that 60% number. Thank you very much for participating. Thank you for the support and for the continued interest in Vista. Have a good day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.