YPF Sociedad Anónima
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Welcome to the Q1 2018 YPF Sociedad Anonima Earnings Conference Call. My name is Richard, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Mr. Diego Celaá. Mr. Celaá, you may begin.

[Diego Celaá:]

Great. Thank you, Richard. Good morning, ladies and gentlemen. My name is Diego Celaá, Head of Investor Relations at YPF. I would like to thank you for joining the YPF first quarter 2018 earnings webcast. The presentation will be conducted by our CFO, Mr. Daniel Gonzalez; our VP of Strategy and Business Development, Mr. Sergio Giorgi and myself. During the presentation, we will go through the main aspects and events that explain our first quarter results. And finally, we will open up the call for questions. We will be making forward-looking statements, so we ask to carefully review the cautionary statement on Slide 2. Our agenda today will include the highlights of the quarter, the review of operations, the first quarter financial results, our brief description of our financial situation and a brief summary to conclude. Also, our financial statement figures are stated in Argentine pesos in accordance with international financial reporting standards, IFRS. In addition, certain figures have been adjusted to reflect additional information to let you better understand our key financial operating results. Please Daniel, go ahead.

[Daniel Gonzalez:]

Well, thank you, Diego. Good morning, everybody. First let me introduce you all to Sergio Giorgi who is here with Diego and me today and has taken on the responsibility for Investor Relations in addition to his role of VP for Business Development. Sergio reports directly to me. Has joined us a year and half ago from Total, where he held different positions in different parts of the world. He has a solid technical and business background that I'm sure will be additive to what we have been doing in Investor Relations so far. Diego will continue with his job as a IR Manager where he is doing a great job, but now reporting to Sergio. Let me say a few words about this quarter before Sergio and Diego take you through all the details. This was a strong quarter in almost any aspect. Revenues were up by 33% in pesos on very strong demand of gasoline and diesel and a recovery of prices. EBITDA was up by 45% even before accounting for the nonrecurring gain derived from our dilution in YPF Energía Electrica our power generation subsidiary. And although operating cash flow was somehow below last year's, again we had a positive free cash flow and leverage ratio was therefore down to less than 1.9 times. Hydrocarbon production was 4% below last year but in line with our budget and slightly above the last quarter of 2017. Sergio will walk you through some of the good things we are doing in shale and to better understand where the upstream is going to. So please Sergio go ahead, and I will resume at the end of the presentation and sit down for questions.

[Sergio Giorgi:]

Good morning, everybody, and thanks Daniel for the introduction. We just like to point that I am very happy to join this team and I’m sure we’ll have several opportunities in the future to meet each other and have little conversations. I have been working in the oil and gas industry for over 25 years, different responsibilities, operations, exploration, development, offshore, onshore and conventional, business development and strategy and I hope this will help me bring interesting perspective to the messages we'll be sharing with you. Now we will continue with the next point in the agenda the review of our operations. So let me start sharing with you the slide on safety. As you can see in the chart our injury frequency rate in the first quarter 2017 is in the low range of the last 10 years showing that all the action that we have been taking over the last years regarding safety measures are paying off. We will continue updating this information in our future presentations. Crude oil production in the first quarter decreased 2.7 to 227.6 Kboed. As explained in previous quarter, this decline reflects a reduction in activity of the last year and the natural decline of some mature fields. Natural gas production showed a decrease of 3.5%. We produced 43.7 million cubic meters per day, while NGL production decreased by 14% producing 47,000 barrels per day. As a result, total hydrocarbon production dropped 4.2 vis-à-vis same quarter of 2017 to 549.6 Kboed. Putting this into perspective, it is important though to highlight as Daniel mentioned that total production has increased 1% to the last quarter 2017, we are affirming that production has stabilized in line with our expectations. Now let me provide an update on our shale gas and shale oil operations. Net shale production of the quarter reached 49.6 Kboed and gross operating shale production was 90.7 Kboed. It is worth mentioning that is we add to that the 14 million cubic meters per day of net tight gas production plus the 7.4 Kbbld of NGL then we have a total of 145.1 thousand of Boe of net unconventional production. In terms of our activity as operator during the first quarter of the year, we connected a total of 14 new shale wells taking the total to 621 shale wells in production. In relation to costs in our shale operations in this quarter we are starting to show the development cost and OpEx for both our main development areas, Loma Campana in the oil window and El Orejano in the gas window. As you can see, in the top right part of the slide the development cost in Loma Campana continue coming down and is now below $12 per Boe. Similarly the operating expenses show a significant improvement coming down to less than $7 per Boe from more than $16 in 2015. In El Orejano our shale gas development cost is below $1 per million BTU and operating expenses are also below $1 per million BTU. As we mentioned in past quarter the development of the shale acreage is one of the pillars for growth in production in our next five year target. So we want to share with you the rest of the improvements we have in shale. First of all we continue with the reduction of development and lifting cost in growth area and prepare a new development as we showed in the previous slide. Loma Campana our main development Vaca Muerta we have successfully finished the drilling of the first 3,200 meter long lateral well this 10,500 feet and we are expecting to complete this by the second quarter of this year. We have put this map in the presentation to show all the different Vaca Muerta activity that we are doing. In green, the two projects and the full development, which are Loma Campana and El Orejano but we are expecting to have two to three pilot shift into full development this year. In blue we show the pilot we operate including those in which we have partners Statoil, Petronas, Schlumberger and in light blue you can see the pilots where are partner operate us such in Aguada Pichana, Lindero Atravesado, and La Calera. In terms of activity it is important in mentioning that this year we deploying $650 million in our operated and non-operated pilots. Additionally, we are currently operating 12 drilling rigs eight workover rigs in Vaca Muerta. Finally all the improvements in cost and work efficiencies mentioned above together with our knowledge of Vaca Muerta and the high quality acreage position we hold continuing making YPF a partner of choice for international players. Going now to downstream performance during the quarter the volume of crude oil processed in our refineries was almost 291,000 barrels of oil per day remaining essentially flat compared with the first quarter of 2017. Regarding domestic market total volumes decreased by 1% driven by a combination of lower fuel oil demand which by the way if one of our products below margin an increase in 549 and 4.4 for gasoline and diesel respectively. Now to provide more detail about fuel demand on this slide, Slide 11 we can see on the left hand side how gasoline sales evolved every month compared with the previous two years and on the right hand side the same for diesel oil. Gasoline demand in the first three months of the year is showing the same trend that in 2017 and in 2016 with a total of 5.9 increase as mentioned in previous slides. Diesel demand also show a good performance increasing 4.4 in the quarter. Market share for both products continue to be strong and slightly about 2017 with 56% in gasoline and 57.5 in diesel. Market share for our premium products Infinia gasoline and Infinia diesel were 62% and 60% respectively. With regards to our gas and power business clearly the highlights for this quarter is the closing of the agreement with General Electric to capitalize YPF Energía Electrica our power generation subsidiary in order to fund the growth of the company. YPF participation was diluted 75% and GE acquired a 25% participation in the business for a total cash contribution of $275 million plus a contingent payment of $35 million. With this transaction we have now a market reference with an implied value of our power generation business in the $1.1 billion to $1.2 billion area. We go to CapEx during the first quarter of 2017 the total CapEx for the company amounted Ps 14.9 billion, Ps 24.5% above the level of first quarter 2017 but 1% lower if we measure it in dollars. Upstream CapEx amounted to Ps 13 billion an increase of 37.9 compared to first quarter 2017. This activity was mainly focused in drilling and workover which represented 71% of the upstream CapEx followed by facilities with an 18% share of the total and exploration and other activities representing 11% of the upstream CapEx. It is worth noting that exploratory investment was 60% higher than in first quarter of 2017. During the quarter we drilled and put into production a total of 96 new wells including 14 new shale wells and another 12 wells in tight formation. Most meaningful investment have taken place in the Neuquina basin most specifically in unconventional in all the shale and tight gas blocks where we have activity. In conventional areas Chachahuen in Mendoza was the most relevant in the basin. We continue our drilling activity in all our producing basins Golfo San Jorge, Cuyana and Austral basins. With regards to exploration in the first quarter we completed five exploration wells all of them targeting oil formations. In downstream CapEx Ps 1.3 billion which is almost 2% lower compared to the previous year activity was focused in refining which represented 48% of the downstream CapEx followed by logistics with a 29% share of the total then marketing representing 12% and finally chemicals with 11%. Bear in mind that due to the deconsolidation of our subsidiary YPF Energía Electrica the CapEx of that business is no longer showed in the CapEx figures of YPF Sociedad Anonima. With this, I would like to ask Diego to continue with the first quarter financial result. Thank you.

[Diego Celaá:]

Okay, thank you Sergio. Moving into our financial result, in this slide we show our main financial figures measured in U.S. dollars. In this first quarter the local currency depreciated by 25.8% when compared with the same quarter of 2017. Revenues were up by 5.8% driven by a string demand and higher prices in dollars for our main products gasoline and diesel. Exports increased as well as price were up in line with the recovery of international prices coupled with higher exported volumes. On the other hand price for natural gas was down in average 3.3% as former playing expire in December 2017. Cash costs expressed in U.S. dollar increased by approximately 5.2% lifting cost decreased by 1.9% in dollars in absolute terms although it was 1.6 up on a BOE basis due to the reduction in total production. Royalties, which is the only cost component fully denominated in dollars were up close to12%, as domestic crude oil prices increased in line with international bank. Crude oil purchases were up 22% as our own production was down while we processed in our refineries similar levels of crude oil than a year ago. As a result regarding adjusted EBITDA was up by 15.8% in dollars. Finally higher depreciation expense contributed to the 5.4 reduction in recurring operating income. Let switch back Argentina pesos to go over the more details analysis of the quarter. Recurring operating income has come up by 19% compared with the first quarter of 2017. This was mainly driven by the better operating results of obtaining in the upstream business segment which show an increase of 1.2 billion vis-à-vis a year ago on higher crude oil prices which offset the lower production of the period. The downstream segment results show a decrease of Ps 355 million or 8.1%. This was mainly driven by 49% increase in crude oil purchases bear mind that we are comparing we have very strong first quarter of 2017 that show a downstream EBITDA margin of 13.4% the highest quarterly margin in this segment for the last five years. The Gas & Power segment also show a reduction of Ps 287 million here it is worth mentioning that from Q1 2018 YPF Energía Electrica is no longer consolidated in the business segment result in Q1, 2017 this company has contributed with Ps 167 million of operating income. In order to better understand the reasons behind the increase of Ps 863 million in recurring operating income we've broken it down into more detail. Revenues grew by Ps 18.8 billion or 33% resulting from Ps 6.5 billion increase in diesel sales due to higher prices in pesos of 30% an increase in sales volumes of 4.4%. Ps 5.4 billion in gasoline sales with higher prices in pesos are of 30% and increase in sales volumes of 5.9%. Ps 1.5 billion increase in natural gas due to prices which we are 25.1% higher in pesos partially offset by a decrease in sales volumes of 8.7%. Ps 1.1 billion increase in natural gas sales in the retail segment mainly explained by the consolidation with our subsidiary Metrogas which registered a considerable increase in prices of 91% as a result of the restructuring of tariff and flat volumes. Other products sold in the domestic market recorded an increase of Ps 2.9 billion highlighting the strong performance in LPG asphalt, petrochemical products, jet fuel and lubes all of them also with higher prices in pesos. Higher export of Ps 2.9 billion on higher volumes and prices and finally fuel oil decreased by Ps 1.3 billion due to the reduction in sales volumes of almost 97% to the power generation sector as it has more natural gas available to display fuel oil. Cost of sales other than the depreciation increased 5.2 billion pesos the only cost component which is fully dollarized are the royalties. The factors has play in the increasing costs where lifting cost which was up by Ps 2.3 billion or 23% royalties which are paid to the provinces on wellhead prices which are set in dollars presented an increase of Ps 1.6 billion or 41% driven by higher crude oil prices in pesos of a 54.4% and a 25.8 the valuation between quarters partially offset by the lower production of less periods. Refining cost which was up by Ps 365 million or 16% higher and transportation expenses which increased Ps 352 million or 18%. Depreciation was up by 60% or Ps 6.8 billion due to an increase in the value of our assets which are carried in dollars and the increase in the rate of depreciation due to the increase net reserves of crude oil and natural gas recorded in the third and fourth quarter of 2017 as a result of a reduction in prices in domestic market of last year. Purchases of crude oil another product of sale increased by Ps 5.5 billion, this increase is mainly explained by higher fuel imports of Ps 1.5 billion especially those of premium gasoline to supply the increase demand and a Ps 1.3 billion increase in crude oil purchases from third-parties. Also higher purchases of natural gas from other producers for our retail segment increased by Ps 623 million and higher purchase of grains due to the bartering in our other business that show Ps 530 million increase. SG&A was up by 32.7% in line with inflation and with revenue increase as a consequence of higher transportation expenses and salary increases. Finally exploration expenses decreased by almost Ps 270 million or 45.5% on lower and productive exploratory wells. As previously mentioned in Q1 2018 a profit of Ps 12 billion was recorded as a result of the reevaluation of YPF S.A. investment in YPF Energía Electrica due to the capitalization agreement of YPF Energía Electrica with YPF and GE Financial Services. If we exclude this effect the analysis for the increase of Ps 1.3 million in other operating results arises from the Ps 1.2 million gain resulted from the agreement for the changes of the shares in our Aguada Pichana and Aguada de Castro blocks. Entering now to our upstream business segment operating income increased by almost 139% against Q1, 2017 to reach approximately Ps 2.1 billion. Revenues increased by 29.3% reaching Ps 38.7 billion driven by the following combination of factors. Fuel revenues reached Ps 25.9 million representing an increase of Ps 9 billion or 53.1. The average realization price denominated in dollars increased 22.8% to $65.1 per barrel. Volumes transfers to our Downstream business segment remained essentially flat while those sold to third parties increased by 21.6% and natural gas revenues were Ps13.1 billion, an increase of Ps 2.1 billion or 19.3%. The average realization price in the quarter was $4.84 per million BTU a 3.3% lower than a year ago mainly due to the finalization of the former gas plan incentive in December 2017. However volumes decreased by 8.7%. As mentioned before, this equation explain by 2.3% reduction in volumes delivered and the balance due to an accounting record in Q1 2017 to invoice 242 million cubic meters spread of natural gas that was injected in previous quarters but was spending of ammunition. On the cost side. These were up Ps10.8 billion a 41% increase compared to Q1 2017 mainly due to Ps 6.4 billion increasing deprecations, Ps 2.3 billion increase in items related to lifting costs, Ps 1.6 billion increasing royalties and Ps 0.5 billion increase in purchases. Lifting cost on a per barrel equivalent basis increased by 1.6% compared with the first quarter of 2017 to $12.5 given the production decline, resulted in a reduction in the lifting cost per barrel. Total gas cost per Boe reached $21.2 including royalties and other taxes of $6.5 per Boe. Exploration expenses decreased by 45.5% or Ps 270 million, as we also describes in previous slide. Finally and as previously mentioned, the results of this segment also include an income of Ps 1.2 million related to the agreement for the changes in shares in a share of our Octógono and El Orejano blocks. The Downstream business reported an operating income of Ps 4 billion an 8% lower than 4.5 billion operating income reported in the same quarter of 2017. Revenues were up by Ps 16.2 billion or 36.6%. I explained before these results were up by Ps 6.5 billion on 30% higher prices in pesos and 4.4 increasing volumes. Again, it is worth highlighting that the increase of 26% say volumes of our premium product Infinia Diesel. Gasoline sales were up by Ps 5.4 billion on 30.4% higher prices in pesos and 6% increase in volumes. Sales volumes of Infinia which is our main premium gasoline increased by 10%. Fuel oil sales dropped by Ps 1.3 billion pesos on lower volumes and lower prices as we've explained before. In addition the domestic sales of the rest of the refined products increased by Ps 2.8 million with higher sales of LPG asphalt, petrochemicals and other refined products. Finally sales in the export market increased by 62.5% or Ps 2.9 billion due to good volumes and higher prices of jet fuel, LPG and petrochemical products. Cost increased by 42.5% or Ps15.3 billion compared to the same period in 2017 as a result of higher crude oil purchases of Ps 10 billion on 51.3% higher prices in pesos partially offset by 6.8% lower volumes purchased to third parties. Higher imports of Ps 1.5 billion of which Ps 1.1 billion are related to premium gasoline imports as explained before well higher import prices of diesel and jet fuel also contributed in same increase. Higher purchases of grains in our agricultural business of Ps 530 million, higher depreciation of Ps 430 million and finally 365 million increase in items related to refining costs. Now let's move to our financial situation. Operating cash flow remains strong in the quarter reaching at Ps 21.4 billion. However and despite the Ps 7.7 billion increases regrind adjusted EBITDA, this cash generation represents a 13% year-over-year decrease due to an increase in working capital in the quarter on higher receivables and lower collection of the gas plan subsidy among the others. Nevertheless this operating cash flow more than exceeded the Ps16 billion CapEx of the peers continuing with the detail delivery process that is part of our five year plan. The cash generation including the dollar denominated sovereign bonds still held in treasury resulting in a strong cash position of Ps42.3 billion at the end of the first quarter of 2018. The previously explained cash position is enough to cover our debt maturities of this year since our next important debt maturity of December 2018 has been reduced by the end of 2017 by the repurchase of $409 million of the bonds series 26. Our leverage ratio came down to 1.89 times net debt to recurring adjusted EBITDA within our two times target for the year and average life of debt has been extended to 6.3 years. The average interest rate in peso was 24.8% while average cost of our debt in dollars was 7.4%. With this I would like to ask Daniel to make our final remark before open up for questions. Thank you.

[Daniel Gonzalez:]

Thank you, Diego. Well first let me tell you that the results of a quarter slightly exceeded our plan for this quarter and actually give us confidence to reaffirm our guidance to increase EBITDA by 10% this year in dollar terms and to experience our production decline in the 2% area. Demand is still strong. Actually April figures reaffirmed the good performance of the quarter. And our market share remains pretty much unchanged. During the quarter we have been catching up with fuel price increases to reflect the increase in international crude oil prices and also to reflect the devaluation of the peso which was especially steep this quarter. However the recent spike in the effects would have cost a 10% increase that the industry in agreement with the government has decided to postpone in order to avoid a negative effect in our client base and the overall economic activity. We agreed to make up for these lower prices during the next two months during the second half of the year. That's what we're going to be making the recovery. And if this were insufficient the government has agreed to compensate the oil refining industry for such a shortfall. Our financial situation is strong and we have had raised substantially all of our refinancing needs of the year in December. So we continue to enjoy a solid cash position and additionally we have positive free cash flow. Production of oil and gas that had been weaker than expected last year stabilized and was in line with our budget actually April was above budget. Production growth in the next few years will come from the shale as we have repeatedly said and the result that we shared with you today proved that this development can be profitable if we replicate in the rest of convert what we have done in Loma Campana and El Orejano. We expect to accelerate the shale development and that is why we are engaged in so many pilot projects also we showed you today. And finally in line with our vision to make YPF a modern energy company we have strengthened the pipeline of projects in our power generation vehicle and continue to see plenty of additional growth ahead there. So with this, I would like to finalize our presentation and open it up for questions for all three of us. Thank you.

[Operator:]

[Operator Instructions] Our first question on line comes from Mr. Frank McGann from Bank of America. Please go ahead.

[Frank McGann:]

Just I was wondering in terms of the Vaca Muerta developments and tight gas developments, as you look forward for the rest of this year and into next year. Any specific areas that you think that you will be able to - that will be the key drivers of the growth that you’re talking about? And secondly just in terms of cost, I was wondering what types of additional cost improvements you think you might be able to achieve perhaps a little bit more extended union agreements or new service competition or service supply and infrastructure that could be helping to reduce costs both over the near term and longer term.

[Sergio Giorgi:]

I will try to answer to that question. So first of all, all our growth in Vaca Muerta and tight gas is located [inaudible] as you know. What we are focusing now is to accelerate the pilots that we have. So we can this year arrive to verify the of two to three new developments. In terms of diesel sale, earning sale we like to have optionality so we are focusing both in gas and oil and we have this optionality and we like it. So we will be able to focus on the most profitable parts. And as I said before, in terms of tight gas we continue well developments in Estación Fernandez Oro and Río Neuquén. We also Sierra Barrosa, which is our [inaudible] assets. And we see this as our growth area in terms of unconventional shale. In terms of cost, as we said we are continuously reducing our development cost and this comes from different ways, one of them is in terms of efficiency, in terms of operations, we are drilling longer laterals and this is reducing our costs, productivity is increasing so this is a good combination and this on the technical part. And I would say contractually efficiency part we are seeing reduction in our new contracts and we continue working with unions in order to have smooth operations in Vaca Muerta. So all in all we have achieved so far a cost reductions and we believe we will continue this stuff.

[Daniel Gonzalez:]

Let me add one thing to Sergio's comments and that is the positive effect in cost of the devaluation of peso right. Remember that the OpEx is at least two-thirds or more peso denominated. So in dollar terms the evaluation that we just experienced should help continue to drive down the cost in addition to the real cost reductions and efficiency improvements that Sergio laid out.

[Operator:]

[Operator Instructions] Our next question on line comes from Mr. Luiz Carvalho from UBS. Please go ahead.

[Luiz Carvalho:]

First Daniel congratulations on the appointment and Sergio also good luck M&A position. Basically two questions here, Daniel starting from a very top strategic level, I'd like to know now the CEO of the company, what will be you main goals if I can little max, three to five years and is there any strategy? I wouldn’t say change but adjustment that you would like to make and what are the main challenges you see in this new role. Second question, I mean as you just mentioned in the prepared remarks talking about the recent Argentina developments and the government inflationary concerns [inaudible] mentioned about the agreement and via to the postponement of the price increase, how can we see the – really the – I am going to say the price, the price that just looking forward. My questions is, okay that you postponed for additional two months, but let's say that Argentina situation do not get better, I mean worldwide FDA, but you’re actually to pass through the say price policy to the final - to the domestic consumer and on a monthly basis and so on. And second if I may ask, I really appreciate if you have more visibility about the price adjustments in our website. If you should communicate from the company or something like this. Thank you.

[Daniel Gonzalez:]

Thank you for comments and the questions. Let me say that there is no change in strategy at all coming from my appointment. I have been with the company for six years and I was clearly part of the team that had put together strategy. So that will not change. What we are doing of course and we actually committed to you all is update our strategic plan every year, we’re in the process of doing that and around the beginning of the last quarter of the year or the end of the third quarter of this year, we are going to be laying out the changes which should be on a course of business kind of changes not more than that. Main goals of course is to grow what we have seen from our production perspective in the last year and a half and from our reserves perspective is that the upstream business has been stagnant and what we have shown in the five-year plan is that we believe that we have the resources in order to change that and to see meaningful growth going forward. I am very optimistic regarding this, everything that we have said today and what we are doing is aligned with this, because as we said, all of that growth will come from unconventional especially from the shale and the results keep getting better. Quarter-after-quarter both from productivity as well as from cost perspective they keep getting better and better. So growing and growing in upstream specifically is part of the goal. Downstream as you know it's very aligned dependent on the local economy. Fortunately the local economy has been doing good and specifically our volumes have been doing excellent and we believe that we have the platform in order to replicate this year-after-year. So very confident about that also. So that has to do with growth. And then of course what we need is to improve efficiency or reduce cost. What we are seeing is that our costs are increasing below our revenue increase, that’s a good thing, but starting from a high base. It’s a big challenge because a good part of our operations are result from very old mature legacy assets that are more difficult to reduce cost especially when you see that production declines. So because of the fixed component of the costs its usually difficult to dilute that cost basis when your volumes are coming down. That is different with the shale because we do not have any other of legacy issues to deal with. And we have been building everything from scratch, I think the numbers are actually showing that we are extremely efficient and we are comparable to many of our shale place in the U.S. Actually we do benchmarking with our partners and what we are seeing specifically in Loma Campana has very little to look up for in other parts of the world. So, I think we are doing well and as our production and service are more shale related and less legacy related, I think that the combined numbers are going to be looking much - in fighting decline in increasing especially productivity of all of our secondary recovery efforts and which we haven’t said, but we will be saying more about this year launching massively our tertiary recovery in style recovery, which we have been pillorying for a couple of years now, a few years I would say and now we are actually moving to a new phase of full year development there also. So that has to do with the production growth and the sales growth and as I said efficiency we will continue to be active in terms of our portfolio management meaning getting out of those fields or assets where we do not think that we are competitive and hopefully you are going to be hearing some news soon about that, it's nothing huge, but step by step we are going that direction and also opportunistically if we find that the right value are more acreage to acquire or more assets for us to operate, we are absolutely willing to do that. I think that we have a very good track record in terms of our acquisition discipline where we have found assets to be expensive. We have not bought in and we have acquired assets at very good valuation in the last five years. So I do expect that to continue. Financial discipline, we have talked about and I think numbers speak for themselves. That will continue to be a key aspect of managing this company going forward. Key aspect of our strategy I should say and lastly not because its less important, but it has through with safety and the environmental issues. The safety of our people and their assets is key to us. Sergio has shown that in 2017 actually we had the lowest or the best register index of accidents since we have record okay. So that’s amazing, but we are still below our objectives. So that is integral part of strategy going forward, making sure that what we do we do it safely and we do it on a sustainable way. So that’s on strategy. On the agreement and specifically and how we’ll continue basically what the agreement says is that we are postponing the price increases for a couple of months and that we intend to catch up with that postponement in the second half of the year. How are we going that, I think it is likely that we are going be doing price increases on a monthly basis so we have been doing first part of this year and hopefully catching up on what we are not doing today. Now the good news about the agreement is that the government is reaffirming decision to have a free market which was actually put in place in the last quarter of last year. And so much we are affirming that, that we are actually committing to finding ways to compensate or to make up for any price increases that for market reasons we might not be able to do this year. So at the end of the day, this seems to be just postponement of increases and why we’re doing this because we all need the country to do well, the government to do well, okay. And we are in a good financial situation so we can actually help in that respect and when I say we it’s not YPF I am talking about the refining industry as a whole in Argentina. This is a competitive market, we do command more than 50% of the share of that market, but we are not the only one. We have three or four other refiners, new people have entered the market so it’s an active market and it seems that we are all aligned in terms of helping out – the government in this moment and in a way helping up ourselves and our client base. Because frankly if we have decided just to increase prices by 10% or 12% overnight I think that we would have a very negative effect on demand. And the one thing we are very happy about is how strong demand has been during the last 12 months and we expect that to continue to be strong in the future. Lastly regarding more visibility on prices we will take your suggestion. We will work with Sergio and Diego on the team to see how we can come up with more visibility in terms of how we have defined prices always keeping some of that information close to our chest because as I said this is a competitive market. We always have threat of new entrance and threat of imports and we don’t intent to make the lives of those people easier.

[Luiz Carvalho:]

If I may just one follow-up regarding the costs and I know that’s probably for Sergio but from the initial labor agreement signed with the unions. I mean so far what are these two improvements that we can see from a cost perspective. I mean are all of them being implemented or can we have further I am going to say achievement in terms of cost reduction from that end? Thank you.

[Sergio Giorgi:]

No, I think if you are referring to the cost reduction coming from some of the productivity provisions that we included in last year’s agreement. I think those are coming slowly okay. We have some of that, which are reflected in the reduction of costs that we have been showing, but as we have been saying this agreement was not so much about the short-term gains of labor cost reduction, but about a change in trend and having all of our labor force focused on productivity. Okay, which is going to be positive to us and to them as well. Right because that is the only way that we can assure sustainable growth for the industry. So I’d say labor relations are in a very good moment. A labor or union leaders have been constructive. You know that we have an agreement for labor or for salary increases that was put in place in the last month that provides for 15% increase in salary in two installments April and October and of course with revision at the end of the year based on inflation. So if inflation is higher than this 15%, we might have to chip in with some additional increase, but the good news here again is that we always talking about salaries moving in line with inflation. So if we can really be more efficient and more productive that means that labor cost in real terms will come down okay.

[Operator:]

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

[Regis Cardoso:]

Congratulations Daniel and Sergio wish you the best of luck in your new roles. Thanks for taking my question. I really would like to take this opportunity to understand better the downstream dynamics especially now that the new agreement is in place. So can you comment whether there will be any sort of impact to the upstream side of the value chain as well. And if there is not how will refiners cope with an eventual increase in crude prices and devaluation of effects let’s say in case that happens because I know it’s only two months, but things can get ugly pretty fast right. It’s a margin’s business so if you can comment on that I would very much appreciate? Thank you.

[Daniel Gonzalez:]

That’s a very good question. First the agreement is just between the refiners, so initially it doesn’t involve the upstream operators, which doesn’t mean that at some point individually we refiners might try to get better prices for the crude that we buy locally okay. But that’s normal supply and demand dynamics. So that I’m not concerned with the other thing which is relevant to have in mind is that as Diego said during the presentation this quarter was one of the best quarters in terms of margin of our downstream segment actually the best in the last five years if I don’t recall wrong. So we are starting from a good base. At the end of the day you are absolutely right okay. It’s not sustainable over the long-term, that’s why the agreement was put together after a short-term agreement okay by which any shortfalls that we have during the course of this two month period will be recovered okay. So I think everybody understands that what you are saying is absolutely right. At some point, we need to make sure that we have the appropriate margins in the downstream segment otherwise we would not be able to make the investments that the segment needs. So give us the benefit of the doubt I think in the last few years especially in last few months we have shown pretty clearly how we have been adjusting our prices to what was going on with crude oil prices and with the FX generally. And the fact that we are putting this in sort of parentheses for a couple of months doesn’t mean that we are changing the strategy. So as I said, give us a benefit of doubt we are very focused on profitability at a company level and at our downstream segment level also.

[Regis Cardoso:]

Thank you Daniel for the answer very clear. If I can just make a follow-up can you comment a little bit what is the position right now in terms of your positioning relative to import parity prices in Argentina and if you could also compare or describe to us how has the competition been in these few months so far that – that you have had free prices I mean have trading companies organized themselves and started bringing in products has that pressured market share has it not logistic barriers were actually higher than you thought I mean how are you seeing the downstream pricing dynamics? Thank you.

[Sergio Giorgi:]

Well the second part of your question, yes we have seen more activity from traders clearly that’s why I was referring to a competitive market the one that we are in. Having said that our market share was actually up if you look at once slide in the presentation that shows a market share of the quarter vis-à-vis the previous two years and we almost 1% vis-à-vis 2017. Both in diesel and gasoline a little bit below 1%, but again very, very strong. So we have a platform that we believe puts us in a very competitive position to fight traders or fight the rest of our competitors are locally. Our objective is not market share. Our objective is profitability and that’s why we have always been very careful in not gaining market share at the expense of prices. We have never done that nor at least in the last five, six years since I am around. And we don’t expect that to change in the future, but we acknowledge that it is a more competitive market than before. Regarding your first part of the question on import parity and where we stand we are approximately 10% to 12% below import parity.

[Operator:]

Our next question on line comes from Muhammad Ghulam from Raymond James. Please go ahead.

[Muhammad Ghulam:]

My first question is around currency. Can you tell us what effect the following pesos is having on your business and how management is dealing with it.

[Daniel Gonzalez:]

Sure well, as long as we can over the medium term continue to pass through the effects or the effects to prices. In fact the evaluation has a positive effect on our numbers because we have a good part of our cost structure, which is denominated in pesos okay. And that’s actually part of what you have seen with the numbers of the first quarter of the year. There is a portion of our prices, which are fully dollar denominated like natural gas sales, like exports, like sales of petrol chemical products, or jet fuel and others and there are other parts of the business like gasoline or diesel, which are very highly correlated with the dollar or with the medium and long-term, but as we have just discussed over the short-term we might have some lag in terms of that pass-through okay. But in general terms the evaluation is a good thing for the company. From a pure financial perspective what I can tell you is that we have more debt denominated in pesos than cash denominated in pesos that means that also we benefit from the evaluation of a currency.

[Muhammad Ghulam:]

One other one on labor issues. In the past you had labor issues anything going on right now or have those mostly been addressed at this point?

[Daniel Gonzalez:]

Well that is dynamic situation. It’s very difficult to say that those are behind us clearly we are not having any meaningful issues today, but that does not mean that we might not have those in the future. It’s something that we manage on a daily basis. It does take a portion of my time and my priorities and that we have a great team of people dealing with that. And as I said in one of the previous questions we have found that the union leaders have been very constructive. So from time to time we will have issues. We don’t expect anything extraordinary or anything significant that can derail our plans.

[Operator:]

Our next question on line comes from Florencia Torres from TPCG. Please go ahead.

[Florencia Torres:]

Thanks for the result and also to take my question. Just a question regarding the Upstream business regarding production. I remember that in the earnings call of 2017, you mentioned that production is expected to decline around 2% or 3% after their positive trend quarter-over-quarter basis during this quarter, what is your target or guidance regarding production.

[Daniel Gonzalez:]

Well production actually as you mentioned quarter-to-quarter important this time is that in the first quarter we have seen production just 1% above the production of last quarter of last year so that is actually positive because we are affirming that production has stabilized and we continue having this outlook of production for the rest of the year seeing that in the second half of the year we will see production again coming up. Guidance for this year, now we are in the minus 2 time area. So, it’s in line with what we have already said in the past.

[Operator:]

Our next question on line comes from [inaudible] from Citi. Please go ahead.

[Unidentified Analyst:]

Just one quick question. Is there any impact to the plain gas receivable agreement announced earlier this year because of the evaluation or is it fully dollarized just want to confirm that. Thank you.

[Daniel Gonzalez:]

No effect at all. That agreement has fully dollarized so we are going to be collecting that in 30 installments starting next year and all of those installments are fully dollar based.

[Operator:]

Our final question comes from [inaudible]. Please go ahead.

[Unidentified Analyst:]

Regarding the agreement, you’re going to wait two months to do price hikes. I would like to understand how you plan to schedule the hikes and how much is going to be each month during the second half of 2018.

[Daniel Gonzalez:]

The reality is that we don’t have a number to give you. What we want is to just make sure that we make up for the price increases that we haven’t done or that we will not have done in the next couple of months during the second half of the year. If we are going to be doing it on equal installments or not has not been defined. It will depend on many factors including competitive factors and thus including how international crude oil prices does behave, right. So if crude oil prices come down then we have less of pressure to increase prices initially. If crude oil prices go up, we might have more pressure to increase fuel prices initially. So all we can say at this point not because its confidential just because we have not defined anything further than to what I am telling you now, is that we expect to fully recover those effects during second half. And again the agreement also says that the government will determine mechanisms before the end of the year for us to recover whatever we have not been able to recover in the second half of the year. So clearly acknowledging that the objective here is the refiners do not suffer any damage based on this postponement of price increases.

[Unidentified Analyst:]

And just a follow-up question. During these two months you are going to have some increases in cost the dollar denominator or caused by inflation. I would like to understand how much are margins going to contract due to these agreement?

[Daniel Gonzalez:]

Well, yes there are some costs that are dollar denominated, but also remember that we have plenty of revenues, which are dollar denominated. There is agreement this regarding gasoline and diesel we export our products, we sell natural gas locally, so there a lot of other products, which prices are dollar denominated and will probably offset, I don’t have a precise number, but in general terms I would say that pretty much offset the increase in dollar denominated costs. So you might see some short term pressure on margins, but as an integrated company, I think that margins should not have any meaningful decline.

[Unidentified Analyst:]

And finally how much of your revenues are dollar denominated? Do you have a percentage.

[Daniel Gonzalez:]

40% of revenues are dollar denominated. But again the other 60% has a very high correlation with the dollar or with the medium term, okay. So when we look at the company for the next few years, we believe that close to 100% of our revenues are dollar denominated over the long term.

[Operator:]

At this time I am seeing we have no further questions.

[Daniel Gonzalez:]

Okay. Thank you everybody for the call. And as usually Sergio, Diego or Pablo, myself we are all available if there are any follow-up questions. Have a great day.

[Operator:]

Thank you. Ladies and gentleman this concludes today's conference. Thank you for participating. You may now disconnect.