Pampa Energia S.A.

Recording in progress.

Ladies and gentlemen, thank you for waiting. I'm Margarita Chum from IAR, and we would like to welcome everyone to Pampa Energía's second quarter 2023 results video conference. We inform you that this event is being recorded. All participants will be in listen-only mode during the presentation. After the company's remarks, there will be a Q&A session. Questions can only be submitted in writing through Zoom. Should any participant need assistance, please send us a chat message. Before proceeding, please read the disclaimer on the second page of our presentation. Let me mention that forward-looking statements are based on Pampa Anarchia's management beliefs and assumptions and information currently available to the company. They involve risks, uncertainties, and assumptions because they are related to future events that may or may not occur. Investors should understand that general economic and industry conditions and other operating factors could also affect the future results of Pampa Energía and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the videoconference over to Lira Wang, Investor Relations and Sustainability Officer of Pampa Energía. Please go ahead.

Good morning, everybody. Thank you, Maggie. Hello, everyone, and thank you for joining our conference call. I will try to make it short and keep some parts where we explain the earnings release so we can have plenty of time for Q&A with our CEO, Gustavo Mariani, who's here, and Nicolás, who's joining us very soon, Horacio Turri, our head of EMP, that is here to answer many questions that you might have in EMP, and a lot of us, our corporate finance director. So let's start with the poorest figures and go straight to the adjusted VBA, which amounted to $222 million in Q2. 13% less year on year mark by soft domestic demand due to the mild winter. lower commodity prices and peso depreciation affecting spot and regulated businesses, partially upset by the renewable and Barragans PPA plus higher gas export sales. However, the 8% rise quarter-on-quarter is explained by the winter season and PPAs. It is worth noting that 87% of the quarter's EBDA was dollar-linked, And the share between power and EMP is almost even, though oil and gas is leaning in the pie, thanks to Petken and PGS. CapEx in Q2 was 59% higher year-on-year, mainly because of the PP6 wind farm construction, plus EMP shale drilling and completion activity, offset by the commissioning of PP4. PP4. Moving on to the power generation, as seen on slide four, we posted an adjusted VTA of $98 million in Q2, similar year on year, but down 9% quarter on quarter, mainly explained by the impact of peso depreciation over spot prices, certain thermal outages, and lower power demand, upset by the addition of wind farms and Barragán's new PPA. plus the special prices for legacy CCGTs. Q2 dispatch rose 17% year-on-year, led by Barragán, new CCGT, and the wind farms, upset by less dispatch at Piedra Buena due to the fact that lower national power demand and program maintenance at Genelba. Take-up capacity payment, especially from PPAs, explains most of the EVTA. It is driven by availability, and in Q2, we reached 95% below last year's almost 98% due to outages at Güemes and Genelva restored during the quarter, plus the commissioning tests in Barragán, CCGT, fire and diesel oil. However, it is way above to increase availability of 74%. Moving on to expansions, we commissioned the last wind turbines at PP4 in mid-June. Therefore, a total of green capacity of 81 megawatts contributes to the power grid, having invested more than $120 million. This is 5% cheaper than the budget. Regarding the PP6, the project is roughly 17% advanced. We are working on the facilities and have started the civil works for the high voltage substation. We have already received the cages while the remaining wind turbine components are being loaded in China and arriving here within two months. The estimated COD for the first phase of 95 megawatts is in Q3 of next year. And the second phase of 45 megawatts is next year's Q4. So keep in mind that PP expansions are also under B2B PPAs. Last month, actually, another thing is that the Secretary of Energy launched a new tender to add up up to 3 gigawatts of thermal capacity, prioritizing only locations that demand is considered critical. Well, the submission is due at the end of this month, and the schedule award is in October. We are analyzing to participate here. Well, on slide six, our EMP business posted an adjusted EBDA of $97 million a quarter, just 4% down year on year. The oil and gas exports most contributed a quarter, offset by the soft retail gas demand because of the mild winter. However, quarter on quarter, EBDA was up 58%, mainly driven by gas seasonality. Our total lifting costs grew by 50% year on year, and 7% quarter-on-quarter. This is explained by the increased treatment costs. Efficiency-wise, however, the productivity from new walls possibly impact the lifting costs per BOE, which grew at a slower pace of 11% year-on-year and 9% down quarter-on-quarter, recording $6.5 per BOE. In Q2, our total production averaged above 67,000 VOE per day. This is 4% higher than last year. Zooming in, crude oil represented 8%. Still, it reached 17% of the segment's revenue, mostly because of increased oil exports upset by the drop linked with rent, getting a realized price of $65 per barrel. This output breakdown should change at the end of next year, following the agreement with Total to acquire the 45% remaining stake at Rigón de Aranda, a shale black oil block in Vaca Muerta. This marks the beginning of our shale oil development, aiming to keep exploiting the full potential of Vaca Muerta. We want to replicate our success story as a sole owner and operator in Emangrucho. That block is ranked as one of the best producing blocks in the Pina Basin. In consideration of Rincón de Aranda, we agreed to swap our Maria Severo wind farm. This move does not prevent us from developing more renewable energy, which is the case with the recently commissioned PP4 and with the current construction undergoing in PP6. About gas, our sales in Q2 grew by 4% yearly, averaging 10.6 million cubic meters per day, mainly explained by higher volumes exported to Chile, even during peak season, and increased demand for thermal generation from Camesa, upsetting the soft retail demand. The average gas price of the quarter was $4.7 per mu BTU, 7% up year on year. This is mainly thanks to the exports to Chile. Let me follow up on the Q2 production. As peak season starts on Q2, Plant Gas agreed the deliveries prioritize retail. But as you can see in slide nine, the warmer winter negatively impacted retail demand, curtailing production to below the maximum volumes agreed under Pangas. The delay in the commissioning of the Nestor-Kirchner pipeline also affected the gas output in July until today, as we are delivering the 4.8 million kilometers ramp-up that we agreed to run for, picking up the production to more than 15 million kilometers per day today. So we are reaching a new all-time high. Despite the weather, the Q2 production increase was mainly supported by exports as we pick up deliveries to Chile, even during the winter, as you can see in the graph below. You can see in this chart as well that this were under takeover pay for the upcoming months, and this actually ends in The clearance ends on April 2024. On top of this, we could add spot sales. Weather is something we can manage, but operation execution, we can't. So as you can see in slide 10, the new Shell Wells performance is unlike what we expected. Note that Sierra Chata's maximum daily production range from 750,000 kilometers to over a million. These results confirm Sierra Chata upside potential, one of the most productive blocks in the Baca Muerta gas window. Pad P2 was drilled and completed during the quarter. We are now completing one pad and drilling another one. In El Mangrucho, we drill and completed PAC-2 and PAC-3 in Q2. PAC-3's daily flow outperform our expectations and PAC-2 is currently under testing right now because it's just started the production. But this is all in line with the average of shale gas well in Vaca Muerta. Nothing out of surprises here. We are also completing one pad and drilling another one here in Mangrush. So let's move on to the petrochemical business that posted $10 million of ABDN Q2, almost half year-on-year, driven by the significant drop in international prices and lower exports, upset by higher volume source of reforming products. However, EBITDA was up 43%, up quarter on quarter, primarily because of better prices and SBR demand, offset by lower styrene and polystyrene sales. Sales volume was 17% up year on year, mainly driven by reforming, as the plan had a maintenance last year, offset by lower exports. In Q2, 41% of the total sales volume was exported. Well, moving on to the financial position. In Q2, we recorded a free cash flow of $44 million. This is mainly due to the expansionary capex in gas and power. Higher debt service driven by peso debt through principal, though principal gets diluted by the valuation. Also working capital improved due to better collection days from Camisa. By Q1, it was almost 16 days delayed And Q2, it improved to 50 days delays, so 10 days better. Now it's substantially improved to 36 days, so almost 15 days more improvement. These variations were upset by seasonality. Additionally, we raised $147 million net from the local markets. In summary, we generated $103 million of net cash flow in the quarter, achieving a cash position of $872 million in the end of the period. So moving on to the slide 11, we show our consolidated financial position, including our affiliates at ownership, but just let's focus on the restricted group that reflects the bond perimeter. We posted a gross debt of $1.7 billion, similar to last quarter. However, the net debt and the leverage ratio substantially decreased due to the divestment of separator wind farm and peso debt dilution because of the peso depreciation, recording $786 million and 1.1 times net debt to APTA. The average life was also reduced to 3.2 years until 2027. As you can see here, there's no relevant death maturities that we face. Well, this concludes our presentation. Now I will turn the word to Margarita and Raquel, who will poll for questions. Thank you so much for hearing us.

Thank you, Lida. The floor is now open for questions. If you have a question, please send us through Zoom chat. We will read and answer them in the order received. Also, please make sure your name and company are correctly displayed so that we can introduce you to the audience. Should any participant need assistance, send us a chat message or raise your hand. Please hold while we poll for questions. Our first question comes from Mileni Cavallo and Alejandra Andrade from JP Morgan. They have in total six questions covering EMP power and the financial sector. Let's start with the EMP business. Pampa gas volumes were quite strong due to the beginning of winter season, including volumes exported to Chile and deliveries for thermal generation demand by CAMESA. What should we expect for the third quarter?

Hi, good morning, everybody. You are seeing me? Okay. Hi, good morning, everybody. This question gives me the opportunity to make a comment that I wanted to do because to reinforce something that Lida said, that today is a historic day for Pampang. We are very proud of it. Although the Nestor-Kirchner pipeline has been operational since early last week, Enarsa did not request from the producers the full 11 million cubic meters of natural gas per day that the new pipeline can transport. That is because there was still an LNG ship in Bahia Blanca with gas to deliver. So the system needed to empty that ship before being able to inject from the Neuquina Basin the 11 million cubic meters of natural gas per day. Today is the first day that ENARSA is nominating those 11 million, and out of those 11 million, we are contributing 44%, so 4.8 million cubic meters of natural gas per day. So that will... make us a new record of production today above 15 and a half or close to 16 million cubic meters of natural gas per day that as we are seeing online or our system we are already delivering so everything is working as it should we are extremely proud i take this opportunity to congratulate the oracio and all his team because they've done an outstanding job. We are very proud of this achievement that is extremely significant for Pampa. So having made this comment, Horacio, you can complete the question, the answer, sorry.

Okay, good morning to everybody. Thank you, Gustavo, for the introduction. Well, as you mentioned, it is true that we've been able to double our production since 2020. We started with 7 million cubic meters a day on the winter peak, and we are now reaching close to 16 million, out of which around 15 million goes to the local market. And we have a authorization for experts to Chile of around 1 million, a little bit less than that, close to 900,000. All of these comes from our developments, both in Sierra Chata and Rincón del Mangrullo. In both cases, we were very surprised with the performance and the productivity of the rock. And we were able to to strike significant results in both cases.

Thank you, Horacio. Our second question comes from, our second question is regarding the power generation business. What was responsible for the margin construction? Is there any program maintenance schedule for the second half this year?

Hi, Milene. Yes, we do. We usually do some maintainances when there's soft peak season, usually September, October. So yes, we do. But year on year, the production this year greatly surpasses last year, thanks to the combined cycles commissioning and the new wind farm. So the maintenance is partially upsetting the increase year on year.

Yeah, and I would add that part of the margin contraction is because of the fact that the legacy capacity remuneration lags or goes below the appreciation of the official exchange rate and inflation. So that's another reason why margins are contracting on part of our generation business.

Yeah, actually we say in the earnings release, should we not have that differential remuneration for the CCGTs, the thermal power units will have, well, now the thermals are 8% down year on year, but if we didn't have that special remuneration, it will have been down 30%. So it's true, it could have been worse. So the depreciation is killing the legacy margin.

Thank you, Lida and Gus. We have one more question about power generation. Can you comment on your participation on the tender for new thermal capacity?

We are studying a couple of projects. There's not much information that I can provide right now. They have put a cap on the prices, which You have to be very careful when evaluating the projects and also you have to take into consideration what's going to be the macroeconomic condition next year when you will have to develop the projects on 2024 and 2025 for the open cycle projects. You have 24 months to deliver. So we are studying. It has a lot of implications or a lot of complexities that we need to analyze. We don't have a clarity yet. Hopefully we'll be able to provide more information on the next call. Most probably, although the bids are expecting by the end of this month, I think most probably that date will be delayed.

Thank you, Gus. The next question is regarding the financial area. Are you seeing any difficulty to access to the dollars?

Hello? Perfect. Well, in fact, the situation has been tighter the latest months, especially regarding the access for paying services. However, every critical good imports that we needed, especially for our new wind farms, were accessed. So it is true that access to the official effect is being harder and takes more time. It did not affect so far our CAPEX plans and any delay has not been critical so far. So we expect to continue this, hopefully. without any delays in capex.

Thank you, Fito. We have one more question. Just to confirm that the roughly $56 million of new debt in Q2 is what allowed you to have all the dollars for the $93 million of the 23 bond repayment?

Yes, that's exactly correct. There is this 60-40 rule in which if you can get dollar finance for the 60%, you can access the official effects for the remaining 40%. And that's why we issued only $55.7 million, which is exactly the 60% of the 92.9 million holdouts. The transaction was a two-year period. local hard dollar bond at a 4.99% rate, which is very convenient for us. And with that, we gain access to the remaining 40% at the official FX using our pesos and paid fully without any issues the 2023 hold-up.

Thank you, Fito. Additionally, they asked, it seems that the state of the local capital market is quite healthy. Could you confirm that, the local market, local capital market?

The access to the local market? Yes, it is. If you see, year to date, we get total financing of around roughly $450 million using both capital markets and local banks. And we issue different instruments at different moments. Dollar link bonds at 0% rate for five years and peso rates at fixed peso rates below inflation rate. So there's a lot of pesos in the local market that we profited of that situation to finance this year's CAPEX. So as long as there is an overhang amount of pesos, I think that we will profit from that situation. And it's for every company to profit.

Thank you, Fito. Our next question comes from Bank of America, Gustavo Faria and Anne Milne. They have several questions as well. We will start with the EMP business. The export prices of gas to Chile was a big driver for higher gas prices in the quarter. Pampa has approval to export until April next year. However, how do you see the gas export to Chile in the mid months? Do you see the export to Chile a relevant driver for gas prices from 2025 onwards?

I would say that, yes. Ready now? Okay. I would say that definitely there will be a driver. I think there are three elements to take into account. The first one is that it's very probable that we will be shifting from yearly contracts as we have today to multi-year contracts. given that the government has the certainty that there is enough gas to supply both the local demand and the regional market. So this is something that should be seen as from next year. The second issue is that it's very probable also that during the winter, at least in the central area of Argentina and Chile through Basandes, we will see the 5 million per day authorization expenses EXPERTS BEING REPLIED AS FROM NEXT YEAR AS WELL. AND WE HAVE TO TAKE INTO ACCOUNT AS WELL THAT THERE IS A PLAN THAT'S ALREADY BEING APPROVED AND IT'S ON ITS WAY TO REVERSE THE FLOW OF THE NORTHWEST PIPELINE that will eventually make it possible to reach the north Chilean market, the north Chilean electricity market with Argentinian gas. So again, we think that Chile is going to be a major player in Argentina exports in the coming years.

Okay. Next question from Gustavo Faria. Thermal power plants tender. How is Pampa's appetite for the thermal power generation tender in October? I think we covered this.

Which power plant is the most likely to receive an additional capacity?

which cap is per megawatt do you see for additional power plant capacity?

Yeah, we already covered, but to answer the question, I would say that we have a mild appetite, quite different from the voracious appetite or hunger that we had in the land gas tender last year. The conditions, the surrounding conditions are quite different. The uncertainties of the macroeconomic scenario for Argentina going forward is uncertain. So we have quite a different appetite than the one that we had before. For example, for plant gas auction last year. Regarding which plant, we are both studying a green field and a brown field. But we are not studying two projects. Most likely, if we go, we go with just one project. regarding which CapEx per megawatt of installed capacity, we still don't have the, we requested from the suppliers prices, we still don't have those, but guessing about $800,000 per install megawatt of open cycle capacity, And about a million for a combined cycle, that I would say would be the prices that we are initially working with.

Okay, the other question is renewables growth. You recently announced this asset swap with an all EMP focus. decreasing renewables capacity, what levelized cost of energy or energy prices breakdown for new projects do you see for renewables projects in Argentina for new auctions? What's the main bottleneck for the renewables growth?

The main bottleneck is transportation capacity. That's why until there is a growth in the grid, it's not easy to increase renewable capacity in the system. The way we circled or way around that situation for our PP6 expansion is going directly to the 500 kilowatt high voltage grid. Most of all, our other wind farms were connected to 132 kilovolt grid. So for new auctions or for a significant expansion of the renewable power generation, it is required to expand the generation grid.

All right, let's move on to another analyst. This is for InferServe. Bruno Montanari from Morgan Stanley. Can you give us more color on the development of plan for Rincón de Aranda? What will be the timeline for development and potential shale oil production coming from the field? Can you give us an idea of the necessary capex for the development of the yard area?

Okay. We already have one well drilled and completed in Rincón de Aranda. We've tested that well. We have a DOC well as well. But to go to your question, we will be starting the pilot plan for Rincón de Aranda in the first quarter of 2024. Our plan is to drill two paths out of four wells each. and also the surface facilities in order to be able to evacuate the production that will probably end by the end of 2025. And the total amount of capex for this initial pilot plan will be around $200 million. Now the second stage or the development stage for Rincón de Aranda will probably take the plateau production of the block to around 20,000 barrels a day. But that will happen a couple of years now in advance since we start the negotiations for additional transportation capacity in order to equate the full production of the block.

Okay. This question is quite similar to one that asked, but can you comment on the challenges of $10 for the import equipment and other international purchases? I think we covered this. Yeah. The next question is from Lucas Caldi from PPI. We have noted a deceleration in El Mangrucho gas production due to low residential demand. Iron plant gas contracts undertake or pay? Have you generated revenues despite the lower production? How are you analyzing natural gas demand risks now that the Nestor-Kishner pipeline is working and will enable higher gas output?

Yes. Well, we don't see a risk in natural gas demand. I would say that, as Lida mentioned before, we had a very mild winter. This does not happen every year. So the planned gas was structured in order to be able to match the demand and the supply of the local market. And this is how we see it. There is a take or pay of around 75%, but we foresee in the future that the plant gas will be fully called and supplied by the industry. We don't see any major risks there. And what was the other part of the question again? Generated revenues by the... Yes, we did generate revenues despite the lower production because we were able to export additional volumes to Chile apart from our firm contracts. And that's basically what we explained before regarding our increase in total revenues, although we were restricted in local production.

Well, the other question from Lucas was about Rigbonerana, so we'll skip on that. We already answered it. Alejandro de Michelis from Jefferies, he's asking, how do we see domestic and export volumes going forward until next year? I think you a little bit, yeah, you did that. And you also asked for Rigbonerana and it's also covered that. Walter is also asking about Rincón de Aranda and I think we also covered that. He says also, why the average price of energy sold has been declining in the recent quarter versus the previous year. This is the same, the fact that the increases granted in the spot energy. it's discretionary, they are not covering the depreciation, the defecial effects, that's why. However, the differential remuneration that is contributed by the dollar for CCGT is helping, but it's not helping to cover the depreciation. The next question comes from Marina Mertens from Latin Securities. She asks, Well, about Rincón de Aranda, which we cover, and the timeline of the capital deployment, which we cover. Do you have the estimates of crude oil we cover? This one is new, is what do you expect in terms of carrier adjustments for legacy units and the regulated segments of TGS and TransCenar? Do you think the upcoming tariff reviews will take place?

To our surprise, there's been significant tariff increase for both for TGS and Transener this year in an election year, which is the first time it happens in a decade. So, although as national elections approaches, I'm a little bit more reluctant to think that there will be significant increases from now on. The truth is that the remuneration goes for power transmission, for electricity transmission, for TGS, for natural gas transportation, and for legacy capacity in power generation. tariff prices are significantly lagging all the variables and the industry and it's hurting the industry significantly so although I don't expect anything significant there is a chance that we get some adjustment in the next couple before before year end. Did I answer the question? Was there anything else?

Well, the other question from Marina, it's about what's the focus? What's Pampa's focus the most in the medium term? I will say it's self-planatory, but if you want to confirm it again, what's the focus in the medium term?

The medium term, as Horacio explained, is to become a player on oil production as well. So to diversify our EMP segment that is today almost fully concentrated on natural gas, we We are projecting an expansion in oil production. That's why we've done this acquisition of Rincón de Aranda. By the way, if the wells deliver what we are expecting they will deliver, the acquisition of Rincón de Aranda was... exceptional transaction when compared to all previous transactions done in the market in terms of cost per acreage. So we are extremely happy with this acquisition, although we have to, we have, instead of, we would have preferred to pay it in cash. Instead of paying in cash, we had to give one of our wind farms in exchange, which was costly for ourselves. But on the other hand, we have been developing wind farms quite significantly last year, and we are in the middle of a very significant project going forward. So we will replace with, we will, more than replace what we have given to Total in exchange for Rincón de Randa. So we are quite happy with this transaction.

Well, the next question comes from Florencia Mallorca. She makes a lot of questions, but I figured they are all answered. The only one that I would say, Fito, you can say, is if we have more projects or whatever, the funding should be local market?

We're revising the CapEx numbers for this year to see how much we still need to finance, if any. We'll probably use a mix of our own cash capacity, which is huge, and probably maybe some local debt if there is a very good opportunity. But so far, with what have been done this year so far that we incurred a lot of bank debt and local debt, we think we are pretty much covered for the year. So if any new issue is being done in the following months, will be some more opportunistic case to grab an opportunity in rates. or more on the opportunistic side than on the need side of cash, because we probably have funded the capex for this year already.

Well, thank you, Ofito. Well, the next question comes from, well, Ludovic Cuseres from Autonomy. I think we answered pretty well from Rincón de Aranda. Jamie Patel from Bloomberg. He also asked for the U.S. dollar's access and how the access of dollars it is. Fito covered that. Ludovic Kuzarash is asking, according to the press, Exxon has put in its RG assets on sale. Would you be interested in making an offer? Exxon. Exxon.

We have been invited to participate in the process. We are studying the asset. It's a very interesting asset. There's not much information that we can provide at this point other than that we are analyzing the opportunity.

Great. Here's, well, Ezequiel Fernandez asked for Rigonde Aranda. Ezequiel Fernandez from Balance asked for Rigonde Aranda. I think we covered that too. Flor Mayorga asking for legacy prices hike. I think we covered that too. A question from the audience says, how Pampa prepares for upcoming elections and how do you think? the different outcomes can affect the company performance?

The answer to that is we are not preparing in any special way. And that's basically because we feel that we are in the segment of the economy that it's in a way, we don't think that the energy policies will differ significantly going forward depending on the outcome of the elections. On the major issues, we think there will be changes on the margins, but nothing significantly. And we have a business on the EMP side, on the power generation side, on the petrochemical that is, we feel isolated from the different potential outcomes of the election. Probably more on the On the financial side, the way that we've been preparing is by having a very strong balance sheet with a lot of liquidity with a debt profile very well spread over time. We feel quite strong to face any potential outcome of the election or any turmoil that the political uncertainty might generate.

Right. Well, this one I think quite covered, but it says, actually it's tricky one, it says, Alejandro Aranda from Itaú, would you be willing to increase oil acreage in the short term?

Well, we just acquired Rincón de Aranda. We definitely have a very significant challenge there, but we are always looking for new opportunities. If the price is right, we eventually might be willing to consider that.

Well, I think the last one is about a large part of your cash position is in generation vehicles. Could you please explain in which financial instruments are invested, particularly if part of that is hard dollars? I think he wants to know.

As you can see in our balance sheet, we have a very well diversified portfolio. Our Main investors are dollar or dollar denominated. And what is important to note is that recently this year we've been issuing peso debt. So our peso position is short. So we expect any speed in the valuation or call impact when in our peso position we'll be upset by our short term debt in pesos. And that's it.

All right. There's no more questions. And it's 10 minutes to 12. I don't know if Gustavo, Horacio, Nico, anybody would like to add something else. If you have any questions that is left and you want to do it, just contact us. We are more than welcome, more than happy to help you. It's been a great quarter and hope to see you soon in November, the first quarter conference call. Thank you very much, and have a good day.