Ypf Sociedad Anonima Q2 FY2024 Earnings Call

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. Thank you. I would now like to turn the call over to Margarita Chun, Investor Relations Manager. You may begin.

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 open the floor for a 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 define CapEx actively 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.

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 the Vaca Muerta formation. In line 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 and 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 representing 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 the Vaca Muerta South Oil Pipeline, and we are making progress putting together the producing consortium for the second tranche. Finally, together with our strategic 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.

Thank you, Horacio. Revenues reached nearly $5 billion, a 15% increase 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 a contraction in gasoline demand and lower conventional production that affected our Patagonia 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, a 3% decline 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 remained positive at $535 million, a 19% decrease sequentially, mainly due to lower equity income and increased exploration expenses. Inter-annually, the bottom line was 41% higher 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, a 3% increase sequentially, and we started with the construction of the first tranche of the Vaca Muerta Sur Oil Pipeline. In addition, investments in refineries aim to reduce sulfur content. Inter-annually, CapEx was down 6%, 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 a 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.

Thank you, Federico. In the upstream segment, total hydrocarbon production grew by 2% quarter-on-quarter and 5% year-on-year, driven once again by shale'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, backed by a 20% inter-annual shale 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 the impact of the natural decline in mature fields. Beyond crude oil, natural gas production grew by 7% in line with increased evacuation capacity from the 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 production. Moving to lifting costs, we recorded $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 lifting cost of our core hub blocks that stood at $4.7 per barrel of oil equivalent on a 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, a 4% increase quarter-on-quarter due to a better pricing environment in the local market and an upward trend in international prices. On the natural gas side, prices reached $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, which is 35% more than quarter-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 a 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, which was 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 continued 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 agribusiness and higher sales to the industrial segment. It's worth noting that, besides the solid performance of our refineries, we effectively addressed 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 continued 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 optimizing 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 to Federico to go through our financial results for the quarter.

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 from 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 two-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.

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 shale 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 six SPAs with different companies for six 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 negotiations and expect 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 the OldelVal system, facilitating 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 four tranches capacity shall be expected to exceed 450,000 barrels per day by the second half of 2026 when the second tranche starts 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 required. This project is a game changer for YPF and Argentina, significantly increasing the export capacity and alleviating the bottlenecking shared resources of the 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 tariffs, 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 the 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 engineering 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 quotations for the EPC and light pipe supply. Right now, we are focusing all efforts to speed up the progress of receiving LOIs from the different export producers based on terms that will allow us to start the project finance arrangement. So far, we have received LOIs covering around two-thirds of total project transportation capacity, and we are optimistic to conclude this process during Q3. Also, we intend to apply for the RIGI once fully regulated. We 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 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, and 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; once completed, it is expected to contribute around $15 billion annually to Argentina's 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 into a world-class LNG exporter. So with this, we conclude our presentation and open to the floor for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Bruno Montanari with Morgan Stanley. Please go ahead.

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 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.

Okay. Thank you very much, Bruno. First question. As you mentioned, the Pillar 1 of YPF is to focus on the most profitable asset, which is Vaca Muerta oil. So for our goal, we are always open when there is a sale of a very good asset because it's a way to improve profitability for all the shareholders. That said, this is a confidential process. So I am 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. We are foreseeing and working to have an average for all. We think we will have different lifting costs in both quarters, but we are increasing. Remember that we are producing today. Yesterday, our production of unconventional, the daily rate was 127 barrels per day. This is a very good increase. We foresee that by the end of the year, we will have 140,000 barrels a day of unconventional, which is totally our focus right now. And we foresee that the lifting cost for the second half will be $4.4 per barrel. Does that sound okay for you?

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

Core, yes, yes. What is important? The important for our EBITDA is the unconventional. Remember that we have the Andes project, and we are exiting from our conventional fields.

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 is about the free cash flow profile for the next couple of years, right? The company is unlikely to generate cash this year, of course, because of the investments made. But when I look at 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 crude prices drop or if there are any delays in terms of production ramp-up or pipeline construction being implemented in order to allow you to flow production or any kind of other bottlenecks that could put your balance sheet in a more delicate situation, a bit forward. The second thing is about crude and fuel prices. Of course, we've seen a significant improvement when we compare it to the past. But when we look at CapEx and OpEx, it 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.

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

Yes. That'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 do not answer what you are expecting, please ask me again because it was a long question. But I will try to answer the first part of the question. Our expectation of net cash flow is exactly the same as when we arrived here. We have followed the track of the results very well. For 2024, we will be neutral from an operational point of view. So our net cash flow will be negative because of our interest payments, okay? For next year, we foresee that it will be neutral, but we are working so hard that maybe you will have some difference, okay, for going up. We are working hard on efficiency. Going forward, we are foreseeing positive cash flow. All of that is without, I am not talking about LNG, for which we are looking for project finance. No, no, not to invest a lot next year, so we will be different. Also, without M&A, okay? Regarding the prices, if the prices go up, okay, you will have much better results. And why we decided to exit from the mature field? Because we are not efficient there; this way, this company with a lower price will be more resilient. But from next year on, because of our program, our focus, and where we are going, we will be resilient for very low prices because we will be almost, I would say, almost an unconventional company with a very efficient way of working. We are the best company in terms of operational results. So I'm very happy to work in this company, working hard with all the team because we are going to have very low efficiency. We started a new program that we call Toyota World, and we signed a contract with Toyota company. We are going to try to implement the efficiency of the car industry worldwide. That is a very disruptive program. Everyone is very happy about it. Also, service companies from the United States and Europe know that it will change efficiency in Argentina. This is very disruptive and will be extraordinary for efficiency because we will be focused on reducing the well cycle. That will deliver much more EBITDA in the coming years. From the downstream part, we already have a very ambitious program called Growing by Efficiency, which has more than 100 initiatives in La Plata. We do the La Plata Refinery, which is the largest that we have in Argentina, and it's a very big refinery. We have more than 100 initiatives that will significantly boost the margin. My goal when I came to YPF and with the downstream team is to make the margins in this refinery benchmark with the American refiners. So we need to increase our margin through efficiency. And we are on that, okay? I don’t know if I have answered your question. You need – if I missed something you asked me, please repeat, and I will answer.

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

Okay, thank you.

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 beyond the 1,500 meters per day? Or are you already close to a limit? What will be your dream target here in terms of meters drilled 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.

Thank you, Vicente, 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 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, you obtain something. Every time that you think you have reached the limit, you should step away from the company. That means you are an old man. So I like you to know me. I am a crazy guy. I don’t want to know that you arrived at the limit. For me, it’s not the limit. The guys in downstream don't imagine what I’m doing 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 asked me...

Vaca Muerta

The Vaca Muerta, okay. We have already signed two-thirds of the commitments 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 lose money for the shareholders that pay me my salary. 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. 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 at the same table. We think that in a couple of weeks, we will have everything signed, and it is 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 make it as simple as possible. The simpler, the better because midstream is not the main focus of our company or any company in the upstream. So the focus is to increase production significantly. We are going to increase production a lot, and conventional resources. So as simple as it is, what we are doing is the percentage of your paying is the percentage of your capacity. We are going to make an ISPV with all the companies. In the beginning, we say that to have a lot of partners is not good. Any partner that has more than 10% of the share will have a seat on the board of that company. If you have less than 10%, we are not going 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 need more detail.

Yes, that was very complete and interesting. I'm looking forward to meeting you soon. Thank you so much.

Hi. Good morning, all. Thank you very much for taking my questions. I have two questions, if I may, please. The first 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, and 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?

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.

2025 onwards. Thank you, Alejandro, for the question. We are working on short-term, medium-term, and long-term strategy every day. I would like – I prefer to give you the guidance, and I commit here with you and also with everyone else on this call that the day you invest next year, I give you the guidance for the three years with very good results. 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 year. I prefer, if you don't mind, in March, I think it's in March, I prefer to give you a very clear answer for everybody and my personal commitment on the results, okay? If you don't mind, is that okay for you?

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

Okay. It depends on several questions that you have today. Today we think that it will be 15,000 barrels a day because next year it will not be an year of growth because there will be a growing capacity on OldelVal. Remember that OldelVal, by the end of December, will increase the total industry capacity by about 15,000 barrels a day, and in April, 200,000 barrels a day. We will always focus on efficiency, reducing working capital as much as we can to fill our capacity. If we have sufficient capacity and we don't have to expand rapidly, for sure, we’re going to agree and remember that it's open access here, okay? Also, always I will look at EBITDA, CapEx, and profitability of the company. I'm not going to be reckless with higher rigs without delivering efficiency for all the shareholders, okay?

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 crude 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?

Yes, but remember that I have to talk about Argentina. Argentina, we are almost now at international prices. The policy of Argentina and the change of Argentina in the oil is to go in that direction. So it will not be different whether we have that or not. Remember also that we are going to increase our production, and we also have some exits that we have in the Andes. We have some agreements to buy oil in the Mendoza area. For everyone, the best way, the efficient way to sell the oil is to YPF because it is a hinterland that is like closed. It's not easy to open that. So that is easier for the others. Also, some Medanito from us will be as it is today. They will be at the refinery, but our goal is to increase production in the next years. I cannot say next year because it will be different. We are also focused on export. As soon as we increase a lot, I think that question will be irrelevant because you will see that we will be a company where we can easily buy here and export significantly, okay?

Good morning, Horacio, Federico. Congrats on the results. I have two questions. The first 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.

Okay. Thank you Andre for your question. You hear Margarita, and I don’t know why he called me Andre because I know you're Andre. But anyway, remember, because – they don't like my English, so that's why always they repeat the names, but sorry about my English. It doesn't matter. I'm doing my best, okay? For the divestment, you're talking about Pillar 2, but I always control myself. The Board of Directors approved last month, and we started the process of seeing a proposal, and after we come back to sell YPF Brazil, which is a lubricant company. YPF Chile, we are selling some lubricants and sheds. If you see EBITDA, it's not for YPF. So we are going to sell that. We also started negotiations for Refinor, as it's not a key asset for us. If you are talking about Metrogas, we are going to sell, but not today because if I sell today, I think I would not be 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 reduces, the macro will be stabilized, the price of Metrogas will go up. So it's not that I'm not focused on that in this company. The person who is working there, the general manager, totally understands that we are going to sell, but we are waiting because I believe it will be better for you and for all shareholders, okay? Regarding Profertil, we are focusing on the gas energy business because it’s very, very profitable. So because of this profitability, it's my incoherence in focusing on energy, but I have now a good slogan to maintain that it's gas that makes food. So, energy makes food. In there, I take out my idea. This is very profitable, so we are going to maintain it. We are going to see what happens with the sales on the other side. At that moment, we are going to look for partners to duplicate the plant. Remember, no. Remember, it's not like I 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 there on energy; there is no more talking about harvest or crops or anything to do with that. Also, last month or in the 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, 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 need more detail from me.

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

YPF Luz, no, sorry, sorry. I forgot YPF Luz. YPF Luz is a wonderful company, and 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 do 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 that it will be water, okay? Because one week ago, we take out a very low water percentage of the fracture. We are at less than 5% of total water that we used in treatment. It has very good pressure, very good pressure. The pressure is double the water, which means it's similar to Shell’s production. The reduction in pressure we have in a choke of 4 millimeters is very good. It is comparable with my experience in another shelf, and the well is in the order of 700,768 meters, and the rate is very good. We are at 4 millimeters in 100, and if I remember, it's 150 kilometers, which is 1,000 barrels a day. 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'll see the result, and we expect that the first oil, if it comes, will arrive in the next weeks, okay?

Thank you guys, and congrats on the progress. Good business.

Thank you.

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 regarding the downstream segment – this quarter showed higher prices, reduced volumes, and normalized margins. How do you anticipate these dynamics to play out in the next quarters? Thank you.

Okay. First part of the question, with the current prices of today, our weighted average is around 3% lower than import parity products. If they continue to decline, that is your question, we will reach import parity. And when you have import parity, if you are in a free market, you have to consider the free rider could put you in trouble 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 it is challenging to 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. If we reduce a lot, I always declared that I will be the first to reduce the gasoline. But also, if the price increases significantly, I will increase the prices. Sometimes when there's a spike in prices, it happens in all countries that you cannot in one day 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 competition and all that, okay? I understand that for everybody it's tough to comprehend, but we are doing that. And the second part is with the margin, Marina. The second part you asked me about the margin of the downstream, no?

Yes. Yes.

Okay. This quarter, particularly due to several problems, we couldn't refine. We had maintenance stoppages, also due to problems in the weather in the south; we couldn’t refine all the quarter as expected because we didn’t have the oil to do that because of those problems, 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 prepare for the second half; 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 diligently. So I think I answered the question. Tell me if it’s okay for you or you need more details.

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

Our final question comes from the line of Leonardo Marcondes with Bank of America. Please go ahead.

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 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 we could expect from the company in terms of capital allocation in the next year? So if you could provide more color on what the expectations are here? If we could think about these events or if this cash should go to accelerate projects in Vaca Muerta? Thank you.

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 explained your question, and after I answer the question in English. So one second. Go ahead. Okay.

Sorry, Leo, but I was a bit confused by some of the additional questions. To be fair, I will open the floor for Margarita to explain your question in Spanish. This way, those who understand Spanish will hear her response, and then I will answer your question in English. One moment, please. Go ahead.

Okay. Okay. Thank you, Leonardo, for the question. Don’t be. That is life. Okay. I'm not ashamed because I had to ask you. We already signed six. I think in six clusters of 11. I think in a couple of days or more, I expect it. If not, I will be very, how do you say, very optimistic. No, I will be disappointed 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, an export contract. We are trying to give that export contract to another company, and after that, 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 by the 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 we are in very good shape, really very good shape. The only thing that I’ve received from WhatsApp and from people in the industry is congratulations because of what we did; people in Argentina think that we are superb. I’m not superb. The guy who did acquisitions, sometimes they are superb, sometimes they are not, but they are superb in this case. 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 it 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 will have a bottleneck in capacity, if we have to save the money, save for next year, we will save for next year, okay? But we are not going to waste your money ever in my life. Is it okay?

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

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 with 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.

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