YPF Sociedad Anónima
Q3 2019 Earnings Call Transcript

Published: 8 Nov 2019

[Operator:]

Welcome to the third Quarter 2019 YPF Earnings Conference Call. My name is Paulette and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.I will now turn the call over to Ignacio Rostagno. You may begin.

[Ignacio Rostagno:]

Great. Thank you Paulette. Good morning ladies and gentlemen. This is Ignacio Rostagno, IR Manager. I'd like to thank you for joining us today. In this occasion, we will present EPS 2018 third quarter results. The presentation will be conducted by our CEO Daniel González, Sergio Giorgi, VP of Strategy, Business Development and Investor Relations and myself.During the presentation, we'll go through the main aspects and events that explain our third quarter results. And finally, we will open up the call for questions.We'll be making forward-looking statements, so I ask you to carefully review the cautionary statement on slide 2, also although our functional currency is the U.S. dollar. Our financial statements figures are published in Argentine pesos International Financial Reporting Standards.In this occasion to let you well understand our key financial and operating results unless otherwise explained the calculation of the main financial figures in U.S. dollar is the right for the calculation of the consolidated financial results expressed in Mexican peso is in the average exchange rate for each period.With this, I would like Daniel to start with the presentation.

[Daniel González:]

Thank you, Ignacio and good morning everybody. Although I typically do not participate in the quarterly calls, this is clearly a very particular moment and we know there are several questions out there, so we wanted to make sure that we remain as visible as we have always been.If anything this quarter saying a few things about IPS

[Sergio Giorgi:]

Moving into our main financial fees measured in U.S. dollar. In this third quarter, they were negatively impacted by decreasing the local crude oil and fuel prices and devaluation. The local average exchange rate variation was almost 60% when compared with the same quarter of 2018.Total revenues stood a reduction of 13%, mainly driven by lower demand and lower prices for our main products gasoline and diesel. They were also affected by a 22% decline on our natural gas revenues as a result of a 10% reduction in prices. In terms of operating costs, particularly leasing our refining costs, in absolute terms, they increased by 8% and 22% respectively. The increase in the lifting cost was mainly driven by higher work over activity tending to improve the production performance of certain mature fields. The high refining costs were drilled by higher maintenance work on conversion units compared to the third quarter of last year that did not affect our processing volumes. However, for the first nine months of the year, refining costs only increased by 5% year-over-year.Royalties, which is the only cost component fully denominated in dollars, were down by 27%, driven by lower natural gas and crude prices in dollars. In turn, crude purchases were down 27%, also driven by lower crude oil prices. As a result, adjusted EBITDA was down by 15% in dollars, maintaining EBITDA margins close to a 30% level. IFRS 16 and IAS 29 effects are not included in our adjusted EBITDA and financial debt.Despite the challenging macro context, our operating cash flow reached $1.2 billion, increasing by 19% year-over-year. The cash flow generation was enough to cover our investments for the quarter, totaling $810 million, 5% lower compared to the third quarter of 2018. The reduction in CapEx was driven by the devaluation of the currency and CapEx reduction initiatives across the different business segments.Besides, as we will show later, we are also able to maintain our production stable at 530,000 barrels of oil equivalent per day compared to the third quarter of 2018 and continue increasing our net shale oil production. As we did in previous quarters, we are focusing the analysis of the adjusted EBITDA of each of our business segments to provide a better understanding on how they contribute with the cash generation of the company, putting aside the impact on depreciation and amortization and impairment which are in fact noncash effect.Focusing on the adjusted EBITDA, as said, a 15% decrease year-over-year was mainly driven by decreasing and devaluation effect. Compared to the third quarter of 2018, lower operating results were outstanding our upstream segment, which showed a decrease of $345 million in adjusted EBITDA. We had growth of 23% in revenues, driven by lower crude oil and natural gas prices, while cash costs of these business segment decreased by 12%, mainly driven by lower royalty payment.The gas and power segment showed an increase of $50 million, mainly due to lower average prices and costs related to the floating LNG bars who would not have last year. On the other side, the downstream business segment showed an increase of $118 million compared to a year ago.Revenues of this segment decreased by 8% due to lower sales in the local market, mainly affected by lower gasoline and diesel space on both lower prices and a slight decrease in demand, although, we had higher revenues from exports. The lower revenues were offset by a decrease in the oil,explained by lower crude oil and bifurcates and lower import of fuels that were partially compensated by an increase in the refining cost.This quarter we added an impairment charge net of taxes of MXN 31.1 billion. That is $540 million at an exchange rate at the end of the period. This exceptional charge is mainly the consequence of the new gas market dynamics with lower gas prices. This price trend is incorporated in the projections for the coming months, all of which impacts on investment and activity, causing the detrition in the value of the assets for the recorded charge.As I mentioned, the cash generation in the third quarter of the year reached a total of $1.2 billion, a 19% increase over the cash flow of a year ago. This increase was mainly due to lower working capital needs partially offset by a lower EBITDA in dollars.During the third quarter our investment effectively reached $804 million 10% below our third quarter 2018 levels. Upstream CapEx in 2019 third quarter amounted to $691 million, 3% below 2018 third quarter levels. Drilling and workover represented a 67% of the upstream CapEx followed by buildup of facilities with 25% and exploration and our activities 8%. During the quarter we drilled and put into production a total of 109 new wells of which 33 are not operated by us.Downstream CapEx amounted to $63 million, 45% lower than Q3 2018. 58% of this amount was invested in refining; 22 in logistics, 17 in marketing and the rest in chemicals. Our financing activities amounted to $796 million include the repayment of CHF300 million bond in September, interest payments of $243 million, almost $50 million dividend and around $90 million of leasing payments.Still our cash position remains strong, including short our medium term liquid cash investments at $1 billion at the end of September 2019. In April, we started collecting the installments of the bond issued by the government for the 2017 plan gas accruals. During the quarter we have achieved approximately $25 million improving our working capital.By year end, we should have collected $300 million out of the $750 million total. We are committed to align our cash generation with our capital expenditures as the financial discipline is one of our key priorities. As we can see in the graph on the right, we are funding our CapEx with our own cash generation reaching more than $0.5 billion during the 9-month period of this year.As Daniel explain, the current context on the company in a strong financial situation enough to cover the debt maturities pipeline for the next year which are not significant. Indeed despite the poor macro scenario, we pay a maturity the CHF300 million on a successfully managed to work on rolling our short-term acuity which most of them are freight facilities.Going forward we can't experience any significant reduction in the banking facilities. Looking in 2020, we have around $660 million of debt maturities related to trade financing. In addition we have an international petroleum bond maturing July and minor local coupons.Our next significant maturity in the capital market is a $1 billion bond during March 2021. We are regularly monitoring the market for a potential liability management transaction. Our leverage ratio stood at 1.98 times net debt to adjusted EBITDA within our 2 times target for the year. While the average life of the debt remains in the 6-year area.The Average interest rates in pesos increased to 55.8% while the average cost of our debt in dollars remained fairly stable at 7.6%. This is also important to highlight that although capital controls have been restated by the Central Bank, we do not prevent the company of accessing the official foreign exchange rate of exchange rate market to pay any debt terms.With this Sergio Giorgi will explain our operational results. Thank you.

[Sergio Giorgi:]

Thank you. Thank you very much Ignacio. Total hydrocarbon production reached 130,000 barrels of oil equivalent per day this quarter. Remaining stable vis-à-vis a year ago and increasing by 2% versus last quarter. Let's look at this in more detail. Crude oil production amounted to 227,000 barrels of fall per day which represents a 1% increase on a quarter-over-quarter basis and remained flat compared to last year's third quarter.But it have been also higher, if we exclude the production associated to the mature fields divestment performed by the end of 2018. Gas production amounted to 44 million cubic meters per day representing a 9% increase quarter-over-quarter mainly driven by higher winter demand and remained flat compared to last year's third quarter.Finally NGL production increased 6% to a total of 28500 barrels per day when compared with 2018 third quarter. When we break down the sources of our total production we can observe that shale production growth contributed with 44.4 additional BOEs per day.And the good news is that this growth by itself is offset in both the conventional production decline and the tight production decline is that one mainly related to a redirection of investment from gas to oil due to the current gas market project. Fueled by the shale production growth, our unconventional production represents now 35% of our total production. I will come back to that in a few moments.But first we would like to highlight few elements of what we have been doing on the conventional side that still represents 65% of our production. Specifically in the conventional side, we remain focused in continuing identifying new fields for primary development, in improving our secondary recovery results by increasing the amount and the quantity of water injected and based on the positive results of the polymer injection pilot and expansion of dispersion recovery technique into other fields in order to improve the recovery fund.Just to mention a few examples of new primary developments, we can mention the Llancanelo carry over field in Mendoza province, where after agreeing a royalties reduction scheme with the province we are able to FID the first ever field development in the country using low-cost multilateral wells with five horizontal brands. We have successfully drilled one of those wells are currently drilling a second one and plan to drill up to 15 of them dramatically reducing the surface footprint of this development from 75 to just 15 locations.In addition, shale oil will be used for blending purposes with a much lighter oil in our Luján de Cuyo Refinery. Also even those are province after successful exploration and first elimination campaign, we are currently finishing a second delineation campaign in the Cerro Morales field with positive results and producing around $1,300 barrels of ore per day during this early stage. We will be testing a water injection scheme during the next 12 months to then define the best way forward. With the current understanding a potential field development plan would include more than 200 producing wells and 100 injectors and increased current production by 10 times or even more if the polymer injection team is positively tested.In the secondary recovery area, we continue identifying opportunities in mature fields which sounds not properly treated by water injection. For example, intuitional [indiscernible] located in new can province and would used to be one of our main producing areas by the end of this month withstanding low-cost water injection was to increase the oil production recovery of this field. We have mentioned in the past the positive results achieved with the tertiary recovery pilots into gold province we are increasing the number of poly manufacturing plants. In addition, we have also achieved positive results in Mendoza province.Finally, we continue with our exploration efforts aiming to discover new resources and new plays. We are glad to announce that we have recently reached an agreement with Equinor the Norwegian major by which they will come in into our can 100 deep exploration block purchasing a 50% stake with a cash and carry consideration. We are happy to join forces with international renowned deep offshore operator in order to explore this potentially prolific Atlantic margin block.Additionally, we have received expression of interest from other top international companies and are therefore jointly launching a second format with the idea of retaining each one a third of the share.Moving now to unconventionals. Our net production in the third quarter of the year surpassed for the first time the 100,000 BOE per day milestone reaching 102,000 BOE per day which is a 77% increase compared to a year ago and a 25% increase quarter-over-quarter.Net shale oil production showed an increase of 55% compared to the third quarter of last year. Shale oil represents now 16% of our total crude oil production. During the quarter, we connected a total of 32 new shale horizontal wells and used 18 renovate. Our operation is mainly focused in the three shale developments, Loma Campana, La Amarga Chica and Bandurria Sur have also in continued risk in our exploration acreage in order to grow and mature the future development portfolio.In Loma Campana the 50-50 JV with Chevron, we have six trillion rigs working gross production reached 42,000 barrels of oil per day and for the first nine months of the year we have added 20 new wells. In La Amarga Chica the 50-50 JV with Petronas we have seven drilling rigs gross production reached 12,000 barrels for per day and we added 12 new wells in the first nine months of the year.In Bandurria Sur, the JV with Schlumberger we have four billion rigs. Gross production reached 5,000 barrels of oil per day. And in the last days we have connected a new four wells. We also continue with exploration and derisking activity in our shale acreage. On the right hand side of the slide we can see the sustained productivity improvements achieved year-on-year in all of our main shale up developments and also a few of the very promising results we are achieving within the risking campaign.For example Bajo del Toro block the JV with Equinor where after successfully put in two horizontal wells into production with very good productivity results. We are planning to drill four more wells in order to have enough information to define new shallow development plan there or for instance Vaca Muerta Loma Campana with three months of outstanding production results. We continue searching to improve efficiency and profitability. As we can see here the development cost and OpEx in Loma Campana is remarkably low.As of today, three additional rigs of those under contract have been upgraded to high spec to allow drilling faster and longer horizontal wells. We have already drilled 3,400 meters of horizontal length well in Banduria Sur and are currently drilling our 4,000 meter one.On the completion side we are switching to high-density completion with an average of 60 meter separation between stages in order to improve productivity. All the wells connected is portal have more frac stages. Moreover, we keep on analyzing the use of nearby plant to continue reducing costs.As a result of these metrics, we continue improving our breakeven in [indiscernible] that is now in the lower end of the $35 to $40 per barrel. Our focus is to keep working on the development cost both in drilling and completion, while improving our operating expense metrics. Whereas we do not control oil and gas prices, we do control our breakeven and therefore our main focus is remaining the most profitable shale operator of the basin and the Partner of Choice.Now, let's look into more detail the gas market and production. On the left hand side of the slide, we can see that we have managed keeping a flat production during the third quarter of this year compared with the third quarter last year. And that we have managed coming back again to our historical production levels. However, we can also see that fueled by the excellent results obtained with the Vaca Muerta shale gas developments. We have now a new reality in the gas market which can be summarized as having more gas offer than demand outside of the provision system, which has already led to gas attainments and tensions in price.We have been mentioning in previous communications all the levers that we have activated to cope with this new reality, I would like now to provide some updates. First, as we already mentioned and supported by the optionality of our shale acreage, we redirected investments originally planned to gas field towards oil field.We have also started exporting gas from Chile this year and are actively looking to increase our share of gas export in the future as there are still availability in the existing infrastructure. We started the construction of a new underground gas storage project that will be functioning in 2020 and will allow us to better cope with the summer and winter swing, therefore reducing procurement.I will be exporting in our first LNG cargo ever before in the next phase from our TANGO floating LNG unit. While we also continue working towards finding a long-term solution to further increase gas demand, which is a sizable LNG terminal.Finally, we have requested offers for the expansion of the preferred to urea plant capacity, a JV will have the new terms and we will be evaluating those offers and the market conditions during the first half of next year. The dynamic in the natural gas market together with an increased supply have put pressure on prices. The gas realization price for this quarter was $4 per million BTU compared with $4.5 one year ago. Nonetheless by the end of the quarter, the price was closer to $3.50 per million BTU.Moving down to our Downstream business segment. During the third quarter of 2019, the utilization rate of our refineries increased 2.6% versus the third quarter of 2018 reaching a total of 297,000 barrels of crude oil processed per day and 90% refinery professional.Regarding sales total volumes remained fairly stable compared to the same period a year ago as lower volumes in the local market were partially offset by higher exports. Indeed total volumes in the local market decreased by 2% driven by lower demand for our main products diesel and gasoline.Moving deeper in the analysis, gasoline sales reported a 2% decreased compared to last year driven by a lower demand for our premium gasoline with a decline of 9% in volumes partially offset by higher volumes of regular gasoline.Diesel sales decreased 6% compared to the third quarter of 2018 driven by lower demand of both regular and premium products with a later drop in 5% compared to last year. I would aggregate market share during the quarter slightly dropped, but remained strong at 56% in line with historic levels. In particular market share for our premium products Infinia gasoline and Infinia diesel remained above 60%.Downstream adjusted EBITDA verifying barrel for the first nine months of the year reached $11 per barrel slightly above last year levels, but still below previous year's figures. Price for gasoline and diesel were reduced in dollar terms due to the freezing prices and the devaluation of the pesos. This was in part offset by higher volumes process and lower cost mainly driven by lower crude oil purchases.Reducing propriety of the reference where local prices should converge. The dotted line shows the evolution of import parity and the full line represents the evolution of the blended price of our fuels in pesos in the beginning of the year 2018. The graph shows that at the beginning of the quarter we were able to close the gap within import parity. However after primary presidential elections with the devaluation of the peso and weaker demand, our blended price went below import parity and in August 16 decreased by six gross fuel prices for a 90-day period.Since then the industry engaged with the government to smooth the path to the maturity of the restriction period. Firstly, we obtain legalization of the wholesale prices which allow us to gradually adjust prices on that segment. Afterwards, in September and November the government allowed to increase the prices at the pump by 4% and 5%, respectively totalizing a 9% increase since the mission was put in place. But still our prices have remained below in propriety with a 15% to 20% gas.Once the 90-day period expire, we expect to continue performing price adjustments to gradually close the gap with fuel price. Complementing what we have shown concerning the gap of our fuel prices when compared with [indiscernible], the following chart shows that the local fuel prices at the pump in U.S. dollars are currently at low historical levels.With this, I will ask Daniel to continue with some closing remarks.

[Daniel González:]

Well, thank you very much, Sergio. In summary, despite the macro situation we performed well and managed to generate a considerable amount of free cash flow from operations necessary to maintain our financial discipline and keep on investing to develop our Vaca Muerta.We are seeing good results in the shale production and our effort will be on improving productivity while continue to reduce costs in the play. We remain focused on accelerating our shale oil developments and will concentrate our investments in the three core shale oil areas; Loma Campana, La Amarga Chica and Bandurria Sur.On the gas side, we will continue to limit our investments until we see we can allocate every molecule of gas we can produce at competitive prices. In the meantime, the objective is to protect our share in the local market, minimize the curtailment and continue to increase exports.As said, we view the freezing prices as a temporary measure that government has taken. Fuel prices are currently at historic lows and we believe in a gradual recovery that allows the continued investment that this sector needs. With recent developments, we are providing new guidance for the rest of the year.We expect EBITDA in the $3.7 billion area, CapEx of approximately $3.2 billion, production decline in the 3% area and net leverage in the 2.15 times area. We believe long-term growth is not being affected by the events of the last few months as Vaca Muerta continues to be a priority not only for us and the rest of the industry, but also for the recently elected government. We may see a little growth in 2020, as we are putting together a plan for next year with a priority in maintaining our sound balance sheet is the only way to assure that long-term vision growth.With that we would like to address your questions. Thank you.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Bruno Montanari from Morgan Stanley.

[Bruno Montanari:]

Good morning. Thanks for taking my questions, and thanks for the presentation, Daniel. I have a few questions. The first one is what would be the company's wish list? Or if you're seeing any signals of upcoming energy policy into the new government. So what would you like to see to make sure that the investment climate remains supportive into the coming years?Second question related to that is since the price decrease were announced and the government or the election outcome what has been the reaction of the IOCs you work with? And how do you read their appetite to continue investing in Vaca Muerta in the coming years?And finally thinking about the gas situation, how would the company frame the potential increase in LNG investments with the bulker size facility you guys were planning? And if I may ask just a quick follow-up on the subsidies receivables that Ignacio mentioned just to make sure I have the right numbers that would be great? Thank you very much.

[Daniel González:]

Good morning, Bruno. Thank you for your questions. Well, let's start from the third question which is one, regarding LNG investments next year. They are negligible, okay? We have our floating barge already in operation. That doesn't require any additional investments. And we're only doing engineering regarding large-scale LNG projects which with everything going on I think in a way gets pushed out let's say a year. But we will continue looking at the projects, continue doing some engineering, but it would not require any significant CapEx next year.In terms of the reaction from our partners, obviously, we are still defining the plans for next year with each of our partners. One of the first things we did is reaching out to each of them, share our views and concentrate plan for next year. And what I can tell you without getting into any details because actually the detailed investment plan or work plan and budget for next year has not been fully approved is that in all cases of the large shale oil developments that I mentioned we're increasing CapEx next year vis-à-vis this year, okay? So I think collectively our partners and us are in agreement that the -- very successful results that we are seeing more than offset the negative implications of this short-term price freeze. And as you know, we make decisions thinking of the next 20 to 35 years of each block, right? So that's definitely good move.In terms of the wish list, again we are not going to be getting into any details now, because we don't have any visibility on who are the people within the new administration that will be key, and I think from that end because I'm sure there are questions regarding that, we all need to be patient as we know the President Elect has not yet announced his cabinet. So thinking about who is going to be key in energy and what kind of agenda they have in mind is something that we will have clarity on in the next few weeks. But again I think that we need to manage our anxiety here.What we want is a very gradual recuperation of our prices, okay? We are and have always been extremely sensitive to the importance of fuel prices in any given country. And we will continue to act very responsibly as we have done in the past. But clearly without the right price incentive, it's going to be difficult to see the investments needed to develop Vaca Muerta as a whole. And I think the new government, if anything they agree with the outgoing government and with the government that we had four years ago of the importance of the development of the shale for Argentina. So regional prices, I think it's a good summary of what's on our wish list.In terms of receivables Ignacio?

[Ignacio Rostagno:]

Yeah, in terms of receivable concerning the plan gas 2017 that's the financial debt that the government [indiscernible] has. We have collective cited so far $235 million. And our rumors have more or less $25 million coupon per month.

[Bruno Montanari:]

And the total exposure you mentioned that was around $700 million. What was that sorry?

[Daniel González:]

That was your original plan, of which as Ignacio a good part of that close to half of it is going to be collected by the end of next year, if they continue to work with a monthly payment as they have done very diligently this last year.

[Bruno Montanari:]

Got it, perfect. Thanks a lot.

[Operator:]

Our next question comes from Frank McGann from Bank of America. Please go ahead.

[Frank McGann:]

Okay, good morning. Just one question. There's talk that the new government is preparing a new law that would help to provide security for investment in Vaca Muerta and other factors related to new investments in non-conventional. I was just wondering if you are working with people within the new government to try to define that. And what your expectation is as to what that potentially could include or should include?

[Daniel González:]

Hi, Frank. Well, as I said there is still not a clear person within the Fernández administration that we can have a detailed discussion regarding this potential new law. We believe it's a great idea if they do that, I'm sure that if they have that in mind we and the rest of the industry will have the opportunity of providing advice or list of things that we believe are helpful, definitely we have very high expectations for that.And as I said previously, if anything the President Elect as I mentioned in many occasions how important development of Vaca Muerta will be for his government. And if that comes together with a law or not, we don't know yet. Hopefully we will have some clarity in the next few weeks. But as I said let's be patient and optimistic.

[Frank McGann:]

Okay. Thank you very much.

[Operator:]

Our next question comes from Luiz Carvalho from UBS. Please go ahead.

[Luiz Carvalho:]

Good morning, everyone. [Indiscernible] appreciated. And I’ll talk about some questions that involve the recent political change, but maybe how the company can react to some of these new scenarios. So looking to your last lag, you mentioned four, basically five interesting points rather then; first. talking about a bit more focus on the unconventional. Second, you also book natural gas. I mean to certain extent and a bit more on the top line even though you have some more higher subsidies. You mentioned about the challenging price scenario, which is nothing really new. You mentioned about new play, something that called my attention that has been kind of the current question from my side in terms of the portfolio management and also the updated guidance, right? So, if you may help us to try to give a bit more details on each of these topics and how they match with a neutral to negative free cash flow this year, next year that will be very, very good in each of the topics?The second question is about the freeze in the oil and fuel prices that should end next week as you come in on the call. Has the industry been talking to the new elected government regarding the fuel price policy in the country or not, at this moment, we haven't seen many lots of comments from the new person or any advisory study that it doesn't make sense fortitude to fall the international prices. So, just wanted to try to actually get a more details on how you've seen this challenge? And how this could also match with particularly Vaca Muerta investment in the long-term? Thank you.

[Daniel González:]

Well, Good morning, Luiz. Unfortunately, it's been very hard to hear. There's very noisy your line. I -- regarding the last question, regarding pricing going forward, and what kind of interaction we've had with the new government taking office, I think the answer is the same to the previous two questions, which is we don't know exactly who we will be talking with.I think that the message from us and the rest of the industry is clear and we will continue to make it clear. There's a commitment from all of us to continue to invest. All we need is prices that gradually adjust towards international prices as we had been seeing and we were getting there and converging there by mid this year before the price freeze food as playing catch up again.Regarding all the previous point, the only thing that we heard clearly from you was something regarding negative free cash flow. And that, we can tell you that's not the way that we are planning next year. We are planning next year with flat free cash flow or breakeven from a FICA actual perspective, considering interest, okay? So we are basically assuming that our debt will remain essentially flat.Now, this is just a vision for now, and it's not yet a plan, because that's going to be embedded in our budget for next year that will only be approved by the board in December as we do every year. And once we have that approval, we'll make sure to reach out to you all to provide you guidance with regards to next year. So, how does a flat free cash flow interact with all the previous years? Well, it's possible that some of the growth that we were previously envisioning for 2020, it’s a pushed out a year or so, okay?Other than that, we will continue focusing on Vaca Muerta, I said, with probably more focused than before because the core areas of the shale oil window are the ones that are going to be getting most of our investment within Vaca Muerta. And as I previously said, significant increase in CapEx and in production of course from those areas.When we come out with reserves and that we do it once a year, kind of relay, let's say in late February, early March. You will be able to see how relevant the shale oil developments have become of our total reserve, of our total fuel reserves, okay? So again, proving the case that we are going in the right direction, and the way to go for us, especially next year is a concentration on Vaca Muerta oil without neglecting the rest circo spent quite some time during the presentation going through the different things that we're doing and in conventionals, not only from a drilling perspective but also from a secondary recovery and tertiary recovery project.So we have a nice portfolio. We intend to develop it, maybe at a somehow slower pace next year than we had previously intended and that has to do with the macro situation more than anything else. You mentioned, Metrogas also still very unclear how the situation with the utilities generally will evolve. It's not a key driver for us. It has never been. It's a nice asset to have, and we will do what we have to do in order to optimize its operations and its margins. But again, I understand the questions, but unfortunately we don't have yet a lot of answers hopefully in the next few weeks as the agenda for next government is clearer, we will be able to start providing some of these answers.

[Luiz Carvalho:]

Okay. Thank you and sorry about background noise, there was a

[Daniel González:]

Thank you very much.

[Operator:]

Our next question comes from Regis Cardoso from Credit Suisse. Please go ahead.

[Regis Cardoso:]

Good morning, Daniel, everyone. Thanks for taking the question. And I think, congratulations for the results. It was quite an achievement to -- I mean, maintain the solid results through the tough times. But I think at this point in time, I mean, following the results and the election and the stress that has caused to the capital market, the increase in your percept -- the market's perception of your risk, which translates into higher yield maturities and so on.I mean the financial discipline you've had really has paid off, because it appears it could otherwise be in a very tough position right now, if you needed liquidity in the short term. So my -- this is for me the biggest concern now. I wanted to discuss with you, how do you think about this access to liquidity going forward? What are your liquidity sources and how -- what are the levers you have to maintain leverage under control and guarantee that YPF won't find itself in any sort of liquidity shortage? Thank you.

[Daniel González:]

Well, thank you, Regis, for that. I completely share the concern. Luckily, it's not a new concern to us. It's something that in the last eight years has always been a priority to keep a sound balance sheet. And at times, at rainy days like the ones that we've just seen, it's definitely been a differentiating factor.The way we are dealing with this going forward, I think, has several legs. First is, as I said, planning a year in which we are not going to be increasing debt. Okay? Now from a ratio perspective, the ad ratio increases slightly or not will depend on our ability to keep EBITDA flat next year, or if we see a small decline you might see a small increase in the ratio, but still starting from this year from two times very reasonable ratio going forward. So it's not just about short-term liquidity. It's also about long-term balance sheet, the way we are looking at it.In terms of short-term liquidity, we have been able to raise some money in the local markets recently, as Ignacio have said, we have not had any difficulties at all in rolling over all of our trade finance. We have not seen any of our short-term bank facilities go away.So we believe that we are in a very good situation to face, which by the way, are very low maturities next year. Okay? So it is reasonable to assume that we will be absent from the international capital markets for quite some time and we are not looking at doing anything there.We have been absent from the local capital markets for last few years, maybe that's something that we might like to revisit again. But it's not something that we are -- we see as a problem, again, because we're starting from a very, very good situation. And remember, with $1 billion cash position that we are not intending to use, because as I said, we expect to roll over all of our short-term debt coming due.

[Regis Cardoso:]

Thanks. And If I may, just a follow-up on that one, because I mean, for one side it's very important to keep leverage stable, but we would also like to see production at least stable or growing. Right? So you don't risk finding yourself in a vicious cycle where your cash flows would be compromised by declining production.So that all boils down, I guess, to CapEx efficiency. And I wondered if you could maybe comment on what do you think is roughly the level of CapEx required to maintain production flat? And if you could maybe what is the sensitivity for each 1% production growth or something that sort you might have on top of your mind? Thank you.

[Daniel González:]

Well, yes, I fully agree with your views regarding production going forward and trying not to affect the reduction in CapEx, not affecting production growth, capacity, if you want. And although, we cannot talk about specific plans for next year, because we have not yet presented them to the Board and therefore they have not yet been approved.We are not foreseeing a situation of production decline at all for next year. Okay? Maybe, yes, in natural gas for decision that we took earlier this year of slowing down those investments in order to prevent additional cuts. But for crude oil, with that additional CapEx that I mentioned we will be putting into La Amarga Chica, Loma Campana and Bandurria Sur.I think that we will start -- or that -- not start but continue to see the significant production growth coming from unconventionals that we have been seeing in the last few quarters. I think, it's a very impressive hopefully you found the same to see a 77% production increase year-over-year.So, what I'm saying is, with a level of CapEx that's definitely going to be below this year and as I said, I cannot tell you how much below this year, not yet, we should be in a position to keep production at least flat but likely seeing growth in crude oil production.

[Regis Cardoso:]

Thank you, Daniel.

[Operator:]

Our next question comes from Santiago Wesenack from AR Partners. Please go ahead.

[Santiago Wesenack:]

Hello everyone, and thanks for taking the question. Just a follow-up on the regulation. But on the short term specifically on resolution price it takes, taking into consideration that oil prices are going down 25% year-over-year. While gasoline, it's only down 9%. and actually this is up of course is because of the wholesale market. But it seems like the upstream segment is paying most of the cost of the regulation. So if we assume that next week the resolution type it takes would not extend it? What would be YP's strategy to be -- to increase price of oil to take it back to export parity? And how do you see the market -- the pump prices adjusted to that? Thank you.

[Daniel González:]

So thanks Santiago, it will decrease by 66 will expire next week and as we said, we don't believe that there's going to be any extension. I do not necessarily agree that the impact is more on one segment than the other. It depends a lot on how you calculate that. You can calculate that as a what kind of catch up that's the segment needs in order to reach import parity in the case of fuel, export parity in the case of crude oil. And there you will see that the catch up is not that different. You can measure that in terms of what kind of return on invested capital each of the segments has and in that -- and I can tell you that the invested capital that we have in the downstream is very, very significant.And the maintenance CapEx that you need to put into the Downstream segment. It's also significant. Moreover, we need to make significant investments to reduce the sulfur content of our fuels and we will be making those investments in the next few years, which by the way there was an extension in the time by which we need to comply, which is good news, because it will allow us to push out some investments there. So I think that breakdown between Upstream and Downstream and who gets affected the most, it's one that we do not necessarily share.Now as I said, once the decree is over, we will be very responsible in how we increase prices. We are very aware of the social and economic situation in Argentina. We care about our clients, not just for the short-term, but for the long-term so we will do what needs to be done, but always being sensitive to the needs of our clients as I said. What will happen in the crude oil sector and the upstream part of the equation. We don't know yet.We are not price centers there. We do buy some crude oil locally and we buy that at the same price at the rest of our competitors too. So that will depend. The logical thing is to assume also a gradual recovery in crude oil prices pretty much in line with a recovery in Downstream prices is what we want is a healthy integrated industry and not just one sector making money and other sectors being broke. And I don't think anyone wants that.

[Santiago Wesenack:]

Okay, perfect. Thank you for taking the time.

[Operator:]

Our next question comes from Pavel Molchanov from Raymond James. Please go ahead.

[Pavel Molchanov:]

Thanks for taking the question. So you highlighted the three areas of Vaca Muerta where you are already producing commercially. Historically, you have only disclosed cost and well data for the Loma Campana. And I'm curious if in 2020, you plan to begin reporting the same kind of information for Amarga Chica and Bandurria Sur?

[Daniel González:]

Hi, Pavel, absolutely yes. For Vaca Muerta in general for different areas within Vaca Muerta and including in some cases for those areas that are only in pilot mode. That is something that we did not do in the past. I think that -- hopefully what you're seeing from our presentation is that we are gradually providing more details actually in this presentation Sergio provided IPs for one well which is only three months old. That's something that we've never done, but it's to try to show that we are seeing positive results in other areas of Vaca Muerta, which are again a consequence of the delineation effort that we have been doing these last couple of years. And that hopefully is going to be paying off in the next few years.So the answer to your question is definitely, yes. And of course, you can talk to the IR team with what kind of information you can help us out in terms of letting us know what kind of information would be helpful for you. I cannot guarantee that we will be providing 100% of that, but will definitely be guidance that will take into account.

[Pavel Molchanov:]

Understood. Let me also ask about the low carbon. You've highlighted this as a priority you clearly want a higher ESG score as a company. Will low carbon be a greater portion of the capital program in 2020 as compared to previous years? I know you cannot say what the capital program will be but at least as a percentage should this be a larger portion.

[Daniel González:]

Well, a good part of that will come from YPF Luz from our power generation vehicles. That as you know we control energy. Fortunately none of that CapEx comes out of YPF because that company finances itself. But just to give you a clue that's a company that today has like 100 megawatts of wind power and it's going to 450 megas of wind power.And then we have a transformational or what we call a transformation initiative. You know that we have a transformation office and this is an initiative that involves not only our three business segments but a good part of the corporation that has to do with energy efficiency throughout our operations.And that we are tracking very, very closely. That's probably a subject of our colony itself improving the efficiency of our operations. And obviously also focusing on reduction of emissions generally CO2, generally and methane specifically.Now in addition to that what I can say is that we will be investing give or take $100 million next year that have to do with reducing the sulfur content of our refineries but not go directly to the carbon question that has to do with our sustainability effort overall.

[Pavel Molchanov:]

Okay. That’s helpful. Thank you very much.

[Operator:]

Our next question comes from Pedro Medeiros from Citigroup. Please go ahead.

[Pedro Medeiros:]

Hey, good morning. Congratulations on the results. Thank you so much as well for like I echo my French words improve disclosure and opening up these remarks. I have a couple of follow-ups, okay? The first one is that we have read the local news some specific reports showing that tracking activity has been materially reduced in the last few months. So I just want to hear a little bit more color on that like -- and just as some guidance on short-term potential production for the fourth quarter.My second question is also aiming for -- to understand the environment in the short-term for gas prices in dollar terms, okay? It's part of the freeze and the volatility in the currency. I just wanted to understand how has gas price has been behaving in the last few months and whether that brings any risk of impairment to gas reserves by the end of the year. Those are my two questions. Thank you.

[Daniel González:]

Thank you, Pedro. Regarding fracking activity, generally for the industry, yes we have also seen deceleration or a reduction in activity in the last few months. There are a few other players that have put their drilling rigs on standby mode. It has not been our case, not thus far at least not in the shale oil areas. What we have been reducing if anything has to do with our shale gas operations and that is part of a different decision that was taken quite some time ago and has nothing to do with the price freeze.It is slightly though that we will see some reduction in activity next year vis-à-vis what we experienced this year, definitely a reduction regarding what we were all expecting would be 2020. Because the things that we're hearing so far is that activity generally will come down.In terms of our own activity, as I said, are still early to say exactly how -- what is going to be our rig count for conventional for next year, it will be below this year, no question about that. But as I said, with a focus on those three shale oil areas in which in each of them we are going to be seeing significant CapEx investments or increase in CapEx vis-à-vis last year, okay?Now with regards to gas prices and how we have behaved, well they have clearly come down quarter-after-quarter. As Sergio mentioned, although the average for the quarter is $4, the average for September it's more like $3.50 and the average in the fourth quarter is going to be below $3 per million Btu, okay? We are not yet providing guidance for next year but we'll clearly -- we will clearly see prices next year below this year.And that's coming from each of the segments within the natural gas market in Argentina. And as long as there is excess supply of natural gas, a good part of the year, this behavior of natural gas prices is logical. I think that we will see that oversupply of natural gas outside of the winter will slowly go away as many or most or I'd say even each one of the Upstream players has been reducing its investments in natural gas.And because of the high decline rates that unconventionals have you will see a reduction, a gradual reduction in natural gas production. Argentina with lower production is going to be less excess supply. And we believe that prices will gradually go back to normality quarter-over-quarter.

[Pedro Medeiros:]

Okay, thank you so much, Daniel.

[Operator:]

Our next question comes from Daniel Guardiola from BTG Pactual. Please go ahead.

[Daniel Guardiola:]

Hi. Good morning. I have a very good -- and it is related to the announced focus on financial discipline. And I would like to know if you could share with us some color on the company's dividend policy under the current uncertain environment.

[Unidentified Speaker:]

Well. Daniel, as much as that is a great question to ask. Unfortunately, I cannot give you a precise answer, because that will be part of the discussions that, we're going to be having at the Board, by the end of this year.And I'd say, maybe even with the shareholders, early next year. So, we have always intended to keep a predictable dividend policy. We were expecting in our last business plan some growth in dividends that maybe gets pushed out with a new reality.And it will depend a lot of course in the cash situation. As we have said, many times during this presentation and the Q&A session, protecting, preserving cash and keeping a sound balance sheet is a priority to us and if that require not increasing at the end for now. We will make that recommendation to the world.

[Operator:]

Our next question comes from Lilyanna Yang from HSBC. Please go ahead.

[Lilyanna Yang:]

Hi. Thank you for the opportunity. And could you give us an indication of the CapEx plan, in dollar terms for 2021 or combined for the three crew development areas on shale? I of course understand they might change soon.But as of now what you have had in budget? And also the other question is, regarding the underlying gas price assumption that you used for the gas active impairment. Thanks.

[Daniel González:]

Thank you, Lilly. Unfortunately, I cannot give you any figures regarding CapEx for next year. Because as I said, the plan needs to go through the board first and that will happen in December.All I can say again is that, for those three crude oil areas in the shale oil areas that are under full development there's going to be an increase in CapEx, in each one of them, okay? Of how much, I'm not yet in a position to disclose.With regards to your second question and regarding the natural gas prices used for the impairment test, all I can say is that, we have used prices for next year which is below this year, totally in line with our expectations today.And that we have kept long-term prices pretty much unchanged, in the $4 per million BTU areas. Because as I said in the previous question, we do believe that eventually with reduction in natural gas prices -- sorry natural gas production, natural gas prices will go back again to the $4 area.

[Lilyanna Yang:]

Thanks. And just a follow-up on the first question, so the increase in CapEx for the acceleration in CapEx, should I have seen a higher number of wells or something else?

[Daniel González:]

Yes. You should assume a higher number of rigs and therefore a higher number of wells. But again, good out of the answer has to do with the wells are not exactly the same wells that we drilled this year. I'm definitely very different to those that we were drilling in the previous years.In terms of the length of the lateral, in terms of number of tax pages per well, and in terms of what we call high-density completers, the intensity of the program that we put in each of those frac stages.So in a way what we are saying is, we are finding a recipe for lower development cost for unconventionals. Generally and that has to do with a significant in productivity coming from I think I have just outlined. So, it's not linear. That's what I'm trying to say, the increase in CapEx with increasing well.

[Lilyanna Yang:]

Okay, great. Thank you.

[Operator:]

And we are showing no further questions.

[Daniel González:]

Okay. Thank you very much to all of you for participating on the call. And as we always say, please feel free to follow-up with Sergio, Ignacio and the rest of the team at your convenience. Have a great day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. And you may now disconnect.