YPF Sociedad Anonima

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the YPF Q3 2021 earnings webcast presentation. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. And to withdraw your question, please press star 1 again. Thank you. Santiago Wesnak, IR Monitor for YPF, you may begin.

Good morning, ladies and gentlemen. This is Santiago Wesnak, YPF's IR Manager. Thank you for joining us today in our third quarter 2021 earnings call. I hope you all continue to be safe. This presentation will be conducted by our CEO, Sergio Fronte, our CFO, Alejandro Leo, and myself. During the presentation, we will go through the main aspects and events that explain our third quarter results, and finally, we will open up for questions. Before we begin, I would like to draw your attention to our cautionary statement on slide two. Please take into consideration that our remarks today and answer to your questions may include forward-looking statements which are subject to risk and uncertainties that could cause actual results to be materially different from the expectations contemplated by these remarks. Also, note the exchange rate using calculations to reach our main financial figures in U.S. dollars. Our financial figures are stated in accordance with IFRS, but during the call, we might discuss some non-IFRS measures, such as adjusted EBITDA. I will now turn the call to Sergio.

Thank you, Santiago. Good morning, ladies and gentlemen. Thank you for joining us on the call today. The three months ended last September. constituted yet another quarter with strong financial operational results, all the while our operations and businesses continue to move into the post-pandemic new norm. As we move forward with our focused approach towards delivering sustainable recovery, adjusted EBITDA was above the $1 billion mark for the second consecutive quarter. These results came on the back of a benign pricing environment primarily on brand-related products and natural gas, while we managed to continue recovering our oil and gas production, increasing 7% since the last quarter and 17% year-to-date while containing cost pressures. CAPEX activity continued to be primarily concentrated in developing our unconventional resources. reaching a historic record in terms of completed horizontal shale wells in any given quarter since the beginning of Vaca Muerta's development. At the same time, we maintain our focus on achieving further operational efficiencies and pushing our technical boundaries to the next level, securing further gains in drilling and fracking speeds while also recording the longest well ever drilled in Vaca Muerta with a horizontal leg of over 4,100 meters at our Loma Campana block. In terms of shale production, growth came mainly from the natural gas side based on the tie-ins accomplished during the previous quarter and early on in the third quarter, increasing shale gas operated production by 166% year to date. This temporary prioritization of natural gas was tactically aimed at complying with our seasonal commitments within the planned gas program and allowing for further long-term contracting outside of it, generating a significant recovery in stable and predictable revenues for this segment. On the other hand, while shale oil production grew by 5% during the quarter, recent tie-ins have permitted to resume growth momentum, with preliminary data for October presenting growth of 17% versus the average in Q3, reaching a new record high in shale oil production of 61,000 barrels a day. In addition, domestic demand for gasoline and diesel continued the recovery trend after mobility restrictions were fully lifted by the end of the second quarter, with preliminary data for October showing demand for both fuels being at or slightly above pre-COVID levels of 2019. During the quarter, we kept moving forward with our sustainability and energy transition agenda. We are making progress in concrete actions to reduce emissions and improve efficiency in our oil and gas business, such as the startup of a new ETVE unit in Lujan de Cusco refinery and the beginning of works to revamp gas processing plants in Loma La Lata. Additionally, we are also advancing our new energies portfolio. Our power subsidiary, YPF Luz, made very good progress on the final stages of the new 120 megawatts wind farm at Cañadón León, expecting COD before the end of this month. We will finish the year with almost 400 megawatts of renewable generation capacity, positioning YPF Plus as the second largest renewable generator in Argentina. Besides, the company already delivered growth of 114% on its renewable generation when comparing to cumulative nine months of 2021 with the same period of last year, and still we have new projects in pipeline. Plus, YPF is one of the largest buyers of renewable energy, with about 30% of our power purchases coming from renewable sources, showcasing our clear commitment towards reducing our carbon footprint. We have also decided to gradually increase our participation in a local distributed solar company to enlarge the offering of renewable energy solutions to our clients. And we are putting forward nature-based solutions like forestation projects as the one we have in Neuquén Province. On this topic, I had recently the honor to co-chair the Energy and Resource Efficiency Task Force within the B20, which presented policy recommendations to the G20 heads of state aiming at accelerating orderly and just energy transitions. In that sense, we highlighted the role of low-carbon solutions like natural gas, in addition to renewables, which will be crucial for some countries in their net zero journey, and in our case, the strategic potential that our vast shale gas resources have to contribute to the process of regional and global decarbonization. As a final comment on my introduction to our third quarter results, it's also worth highlighting that despite moving forward with our CAPEX plan, we managed to deliver positive free cash flow before debt repayment for a sixth consecutive quarter. This, in turn, allowed us to continue reducing our net debt, resulting in a steep reduction in our net leverage ratio returning to historical healthy levels. And finally, looking forward, although we remain cautious on the back of local macroeconomic uncertainties that could test our ability to adjust fuel prices in the near term, the robust results achieved so far permit us to revise our adjusted EBITDA guidance for the year upwards to a range of 3.8 to 3.9 billion dollars. We also reaffirm our guidance for full-year capex of $2.7 billion and our oil and gas production targets for the second half. The latter, with some upside, particularly in crude, where shale oil production could end the year above previous expectations, providing for a better entry point into 2022. Before leaving you with Alejandro, I would like to once again tell you that I am especially proud of the YPF team, of their commitment and their efforts. I also want to thank our clients for their fidelity and our investors, partners and suppliers for their continuous support. Good morning to you all.

As briefly anticipated by Sergio, our third quarter results came very strong on the back of a benign pricing environment coupled with higher natural gas output and the continued recovery in local fuels demand. Adjusted EBITDA reached over $1.1 billion, 6% higher than the previous quarter. When compared to pre-pandemic levels, this quarter's results were 18% higher than Q3 2019, or 11% higher than the average of the third quarters of 2017, 2018, and 2019, showcasing the strong performance achieved in the quarter. On a cumulative basis, for the nine months ended September, adjusted EBITDA reached $3 billion, resulting in an EBITDA margin of 31%, the highest mark for the same nine-month period of the last five years. Within business segments, it is worth highlighting the partial shift of margins from downstream to upstream when compared to the previous quarter. on the back of higher recognized local crude prices, while prices at the pump remained almost flat in dollar terms. This resulted into a margin for our refining and marketing business, which was lower on a sequential basis, but mostly in line with the historical average at about $11 per barrel during Q3, further supported by positive results on the petrochemical segment, that added an extra $2 per barrel when looking into the full adjusted EBITDA generated by our downstream operations. However, the future evolution of margins for the downstream segment, not only for YPF but for the industry as a whole, represents one of the key risks for our sector going forward. Pressure is mounting from local independent producers to reduce the discount of local crude prices with respect to export parity. while downstreamers' ability to pass on price increases to the pump could be challenging, considering recent actions taken by the government to contain inflation. Nevertheless, we will continue to monitor key variables such as effects devaluation and global and local crude prices closely to define new adjustments at the pump. However, should effects depreciation accelerate in coming months, We shall carefully address the pace of any adjustments of our prices in pesos, given the overall macroeconomic environment that could result in high demand elasticity in such a context. Moving into revenues, results showed an increase of 8% sequentially, reaching $3.6 billion in the quarter, mainly supported by a 31% jump in natural gas revenues and a 15% in domestic sales of gasoline and diesel. When comparing these figures with pre-pandemic levels of the same quarter in 2019, revenues were 9% higher. On the cost side, OPEX expanded 6% quarter-on-quarter in dollar terms on the back of increased activity and the recent evolution of market variables. However, on a cumulative basis for the nine months ended in September, total OPEX remains well below pre-pandemic levels, at minus 15% when compared to the same period of 2019, as cost efficiencies secured last year continue to be well in effect despite mounting inflationary and salary pressures, while the currency depreciation has slowed down. As regards CAPEX, during Q3, we managed to accelerate the implementation of our investment program after a somewhat slower than projected pace in the first half of the year. CAPEX expanded by 20% when compared to the previous quarter, accumulating $1.8 billion during the nine months ended in September, 83% of which was deployed into our upstream operations. Finally, these results translated into yet another quarter delivering positive free cash flow before debt financing, totaling $144 million, allowing for our net debt to decline by another $44 million or by a larger $151 million when considering liquidity invested in financial assets accounted as non-current given their maturity being a few months longer than one year, and were not for trading accounting treatment. In addition, when considering the evolution during the last 12 months, net debt was reduced by about $750 million, or a larger $890 million when including the non-current liquidity. Focusing on our upstream activities, total hydrocarbon production expanded by 7% on a sequential basis, accumulating a 17% increase when compared with average production in Q4 of last year. The quarter-over-quarter improvement was primarily concentrated on natural gas, which grew by 14% versus the previous quarter, as we focused our upstream activity on gas, in line with our commitments as part of the new plant gas. More specifically, we managed to grow our shale gas production by 64% when compared to the previous quarter, with an even more pronounced jump of 74% when looking specifically at our operated shale gas production, mostly led by the productivity of the new wells tied in in the Rincón de Mangrucho and Aguada de la Arena blocks. On the crude oil side, production remains stable versus the previous quarter, given the temporary redirection of efforts toward gas, as previously mentioned. Nevertheless, it is worth highlighting the 5% growth in shale oil during Q3 and a further 17% in October versus the average of Q3, with our core hub reaching a new record at over 50,000 barrels per day of net oil. Regarding prices, during the quarter we benefited from a 10% increase in natural gas prices, averaging $4.2 per million BTU, primarily on the back of seasonal adjustments within PG4 contracts. Separately, on the crude oil front, Our average realization price increased by 7% to $55 per barrel, only partially reflecting the rally in international prices, as local crude continued being negotiated between local producers and refiners in a way to smooth out the impact on local fuel prices from the volatility in international markets. Moving into the operational highlights of our upstream operations, during the third quarter, we marked a new record in terms of horizontal wells completions. with 44 total new wells, 37 shale oil wells and 7 shale gas wells, totaling 99 wells during the nine months ended in September. In setting these new records, we took advantage of the relatively large backlog of DAC wells that were accumulated last year during the pandemic. But we also managed to keep drilling activity high as well, stabilizing our drilling and uncompleted inventory at about 60 wells. which we consider fairly reasonable to provide enough flexibility to our operations. This positive evolution in completed wells comes not only as a result of our resumed CAPEX activity, but even more importantly, on the back of the continuous operational improvements that we continue to achieve. Our drilling time on the unconventional side improved by almost 20% when compared to the normalized levels of Q2. or an even higher 35% versus the average of 2019. This was mainly the result of a reduction in non-performing times and standardization of certain activities such as tool maneuvering, cementation, casing tubing, and open-hole registry, among others. In addition, on frag speed, our operations improved to an average of 188 stages per set per month during Q3, a 27% improvement compared to the previous quarter or an impressive 81% when compared to the average achieved in 2019. Let me now go into our downstream business. During the quarter, domestic fuels demand resumed its recovering towards normalized pre-pandemic levels as mobility restrictions were relaxed after the setback in Q2. Sales of our main refined products increased 13% when compared to the previous quarter, primarily driven by gasoline, which jumped 22%, ending September above pre-COVID levels of 2019. In the case of diesel, domestic sales increased 8% on a sequential basis, averaging 3% above Q3 2019. In terms of refinery utilization, our processing levels during Q3 remain almost unchanged on a sequential basis, averaging 263,000 barrels per day. This represented an increase of 13% versus the same period of last year, but about 9% below the pre-pandemic level of Q3 2019. Processing levels during the quarter were negatively affected by the scheduled maintenance works performed at one of the catalytic converters at the La Plata Refinery, which was finalized in August within the planned schedule. In addition, processing levels during the quarter were also affected by complex negotiations with local independent oil producers, we changed to maximize their export volumes on the back of very realized prices. On this issue, it is worth highlighting that during the quarter, we still acquire 19% of the crude processed at our refineries from third-party producers. However, going forward, we expect crude purchases from third parties to decline as we continue to make progress in growing our oil production, particularly light crudes coming from our Vaca Muerta operations. With regards prices for gasoline and diesel, average net prices measured in dollars remain stable during Q3 when compared to the previous quarter, standing at similar levels to those registered on average in 2019. Although retail prices remain stable in pesos, the evolution resulted from a relatively low currency devaluation that was compensated with some adjustments at the wholesale segments. Switching to the evolution of our cash flow during the quarter, I would like to highlight the positive trend in our cash flow from operations, which once again stood above $1 billion, comfortably covering our fully deployed investment plan and interest payments, allowing for further net debt reduction. This has marked the sixth consecutive quarter in positive free cash flow before debt repayment, resulting in a total net debt reduction of about $1.2 billion since March of 2020. In terms of debt financing activity, in mid-July, we successfully tapped the local capital market with a $384 million 11-year dollar-linked bond, with a coupon of $5.75 that was priced at par, taking advantage of a unique opportunity to pre-fund our needs for the remainder of the year. And to minimize cost of carry, the transaction was structured to be reversed in three installments. 230 million of which were actually cashed in during Q3, with the balance settled later in October. On the other hand, during the quarter, we repaid about $190 million in outstanding YPF debt, about half of which came due from trade financing and other bank facilities, $55 million from local bonds, and $43 million from the semi-annual amortization on our March 2025 international bond. By September 30th, total and consolidated borrowings from banks and multis reached the lowest level in many years, at around $550 million, expecting this figure to be even lower by year-end, compared to an average of $1.5 billion in the last five years, leaving significant room within credit lines to handle next year's needs. In terms of liquidity, Our cash and short-term investments total just over $1 billion by the end of September, an increase of $99 million when compared to the previous quarter. In addition, by the end of the quarter, we have $144 million booked as non-current investments, which could be considered as a good proxy to liquidity, as they are held in local dollar-linked securities with maturities longer than 12 months but shorter than 24 months. Although these securities have decent liquidity in the secondary market, given that we do not hold them for trading based on our accounting policies, we are not marking these instruments to market, and hence not accounting them as part of current assets. Finally, we continue to manage our liquidity position with the objective of minimizing FX exposure. To that end, we have an active cash management approach to achieve the difficult task of building an adequate portfolio in the context of limited available instruments in the local market, particularly considering our self-imposed credit concentration limits. Consequently, and given the increase in net liquidity during Q3 on the back of the opportunistic pre-funding exercise, our net FX exposure increased from 6% by the end of June to about 14% by September 30th. Before finishing our presentation, let me briefly go through our maturity profile. But before doing so, let me highlight the significant reduction in net leverage that was achieved during Q3, reaching two times net debt to 12-month adjusted EBITDA by the end of September, showcasing the tremendous recovery in our operating and financial performance after peaking at a net leverage ratio of 4.9 times only six months ago. In addition, for the first time in many years, Our liquidity position exceeds our short-term debt, having less than $1 billion coming due within the next 12 months. In terms of 2022 debt maturities, we have just north of $800 million on a consolidated basis, with a particular concentration in Q2, including the $260 million amortization on our 2024 international bond. With that in mind, We have been working for several months now on a cross-border multilateral-led financing, which is at the final stages of being signed. Should that deal finally get confirmed in coming weeks, we shall be able to closely match amortizations on our international bonds, both the 2025s in March and the 2024s in April, with disbursements from that facility. This should therefore minimize our net demand of FX reserves from the central bank, That's further mitigating potential risks to comply with our obligations, even if current effects restrictions are extended into next year. That finishes our presentation for today. We are now open for your questions.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Our first question is from Frank McGann with Bank of America. Your line is open.

Okay. Good day. Thank you very much, everyone. I was just wondering how you're thinking about growth from here. You mentioned that oil production could continue to rise and could be a little bit higher levels perhaps than you had originally expected at the end of the year. I was just wondering in terms of looking forward, how much upside do you see over the next couple of years potentially, and how are you seeing that relative to gas upside? I'm just wondering what the transportation limitations are, and now that you've ramped up the production pretty aggressively to take advantage of the planned gas prices, do you see further upside in natural gas output?

Hi, Frank. Good morning. Well, clearly when looking at growth potential, as we have been saying, we see that mostly related to oil, to crude oil. As you have just said, we had a very impressive ramp-up in natural gas activity in the last few months, particularly in line with our commitments within the new planned gas program. And going forward on that particular segment on natural gas, we are not expecting in the short term significant further growth on natural gas. We do see evacuation limitations out of Vaca Muerta for natural gas, and as you probably know, the government authorities have been commenting publicly about their intentions to put forward a new gas pipeline to further increase the evacuation possibilities of natural gas out of the Neuquena Basin. So clearly, for as long as those projects do materialize in coming years, we clearly are very likely to join in the effort of putting forward further growth in natural gas. Of course, always assuming and preserving profitability on that front. But for as long as those new pipelines are not in place, we see current natural gas production as being relatively stable in the near future. On the other side, in terms of oil, as you said, we will continue to see significant potential there. We are focusing our CAPEX efforts on that front. As you have seen during the last quarter, the growth in oil was not relevant, was relatively stable. Clearly, as we manage or as we focus our activity in natural gas, in line with our seasonal commitments, but now, as we have expressed already in October, we are already ramping up activity and production in crude oil, and we expect that to continue going forward. We do see our CAPEX plans to... probably to increase for next year, particularly in upstream. And we have already commented in the previous call our intentions to move forward on the downstream segment with a revamp and an upgrade of our refineries, which will take a significant amount of capex in the next three years. But besides that, we are also expecting to increase our upstream capex, particularly next year. And with that, hopefully and probably bringing a significant improvement and growth in our crude oil production.

Okay, great. Very interesting. If I could just follow up with a second question. In terms of hydrogen, there's, you know, announcements over the last couple of weeks about a large development being done in Rio Negro. I was just wondering, are you participating in that or do you have any other projects perhaps that you might be looking at to do green hydrogen?

Yeah. Well, particularly on that project that was announced, we have nothing to do with it. We are not part of it. We do, although actually are part of a big consortium of Argentine companies from different segments, doing R&D on green hydrogen. So mostly we are participating on that consortium through our YTech R&D subsidiary, which is a joint venture together with CONICET. So we are, I would say, at initial steps of doing research and development on hydrogen, but not being part of that announcement that came on the media in recent weeks.

Okay. Thank you very much.

Sure. Our next question is from Gilherme Levy with Morgan Stanley. Your line is open.

Hi, good morning, everyone. Yeah, so I have two questions. The first one is on the shale production ramp-up. There has been a marked increase in drilling and strikes in the recent past. So I just wanted to get a sense from you of how much more efficient... that speed could get and if the bulk of the efficiency gains was already achieved. So we should assume that the trend speed levels are a sustainable run rate going forward. And then the second question is on lifting costs. Costs have been well under control this quarter. And so I wanted to understand what should we expect going forward for this line, considering both the high inflation rates in Argentina and also the inflation we are seeing in the global oil industry. Those were my questions. Thank you very much.

Thank you, Guilherme, for your questions. In terms of operating efficiencies within our shale activity, I would say that we definitely have an impressive improvement, particularly in frack speed, but also most recently in the last quarter in drilling. We are optimistic that we should continue seeing further improvements. I would say that more on the drilling side than on fracking, but still we would expect also some improvements in fracking as well. So clearly the numbers for the third quarter should be used as a basis for future performance, but we expect along the next few months Particularly, as I said, in drilling, but then also some further improvements in fracking as well. And in terms of lifting costs, well, as you said, they've been relatively stable, managing to compensate the evolution of macro variables, clearly as inflation has been running higher than devaluation. Our dollar denominator, I would say dollar equivalent costs, clearly are having some pressure there. But still we've managed to improve or compensate the evolution of those macro variables through efficiencies and through a higher proportion of unconventional of shale within our total portfolio, total production. So going forward, as we expect that proportion to continue increasing, meaning the proportion of shale on the total hydrocarbon production, we would expect the average lifting cost to go down, probably below $10 on average for both segments, conventional and unconventional.

Our next question is from Regis Cargoso with Credit Suisse. Your line is open.

Congratulations on the results. Two topics I wanted to touch on. One of them is the guidance for this year. It seems to imply a big CapEx increase in the fourth quarter. Assuming that you've done so far $1.7 billion and your guidance is $2.7 billion, I just wanted to make sure if I'm understanding this correctly, there would be a big CapEx concentration of about a billion in the fourth quarter. Likewise, still in the guidance discussion, EBITDA guidance for 2021 implies fourth quarter around $800 million to $900 million, which is a sequential decrease relative to the third quarter. Am I reading it correctly? Would that decrease be related to a lower gas price in the plan gas or seasonality? So that's the topic on the guidance information metrics. Two other topics I wanted to touch on. One of them is looking beyond this year and into 2022, how do you balance CAPEX with the leveraging, if any? I mean, would you... maintain two times net debt to EBITDA, and as we were growing EBITDA, you could actually increase your absolute net debt, or do you see it differently? And ultimately, I mean, YPF has been in this position where it has struggled to grow production without leveraging any further, right? So whether you see 2022 as a more benign environment where you could actually either deleverage or grow production more materially. So that's it for 2022. If I made a third one, just on the fuel prices, it appears to us that domestic prices are still below international parity at the refinery gate in Argentina. So I wonder if that entails that you still have some upside, let's say, in the EBITDA front for catching up with import parity, or if I'm seeing it wrong. Thank you.

Thank you, Regis, for your questions. I'm going to start with the prices. And I'm going to let me give you a broader answer. As you probably recall, between August of last year and May this year, we made several adjustments at the pump with the objective of compensating for fuel tax hikes not previously translated into retail prices. as well as recovering dollar margins. And based on those adjustments, we managed to strengthen our operating cash flow and by that time aligned net prices in dollar terms with the average for 2019 when rent prices were at similar levels trading in the mid-60s providing for reasonable margins along the sector's value chain. Since that moment, we have expressed our decision to monitor the evolution of key variables such as the evolution of the FX as well as international and local prices to determine the convenience and timing of any further adjustments while considering the general macroeconomic environment with particular emphasis on the inflationary context. Consequently, on the back of the slower anticipated evolution of the effects in recent months, we have taken a conservative approach to address the volatility in international prices avoiding unnecessary pressure on consumers while we waited for the global market to settle down. And we managed to maintain this conservative approach on the back of a collaborative effort from most actors within our sector that collectively understood the convenience to smooth out the full effect of the rally in international prices to local consumers. In any case, it would be fair to highlight that pump-related revenues, although very relevant for our company, represent less than 50% of our total revenues, between 40% and 55% of our revenues. Going forward, given that market consensus is building up around the notion of international crude prices setting down around the mid-70s at minimum, we will probably consider introducing further adjustments at the pump in the coming months to close that gap. reducing the price distortions currently embedded in the local prices when compared to international ones. However, at the same time, we will have to consider the evolution of the FX and adjust prices in pesos in a manageable and sustainable way. We are convinced that besides short-term fluctuations and distortions, having local prices adequately referenced to international parties is the way to ensure the healthy and sustainable development of our sector, enabling the true potential of our world-class hydrocarbon assets.

Thank you, Sergio. And Regis, in terms of your questions, I will try to tackle them as best as possible. If I recall correctly, you asked about the capex in fourth quarter of this year. And yeah, the actual number is an expectation of about $900 million. So the aggregate for the nine months is a little bit over 1.7, rounded at 1.8. and so we are expecting a capex level to increase to about 900 million, particularly led by upstream operations, where we see further drilling activity, including on average three more rigs, two in our unconventional areas and one in conventional. We also expect some further investment in facilities, in ground facilities, particularly in our unconventional blocks. And then also we expect a ramp-up in activity in our downstream operations as well, where we are seeing more activity on the next projects, basically the projects, as I mentioned before, the multi-annual project that goes for revamping and improving the quality of our fuels. That's in general for the fourth quarter in terms of CAPEX. In terms of EBITDA expectations for the fourth quarter, you are looking at it correctly. We do see a sequential decrease in EBITDA generation. That is mostly related to the seasonality of the natural gas segment. where we expect there is a significant decline, mostly on prices. As you know, there are seasonal adjustments under the planned gas program, and also a little bit on volumes as well, but mostly on prices. So that is the main problem. impact or the main aspect that will make us project a lower EBITDA for the fourth quarter, together with the continuous evolution of macro variables, as we mentioned before, right? The inflation running higher than devaluation. That also affects somehow our cost structure. And finally, when looking into 2022, We would expect not to further reduce leverage, but rather take advantage of the very attractive opportunities that we have to accelerate the development of our shale resources, particularly the crude oil resources. And I think we mentioned this in the previous call as well. We would expect long-term leverage to be in the order of two times or to max out at two times in the future, providing for any cash flow generation to go into CAPEX to foster or to accelerate the development of our state resources. So not expecting any further deleveraging, but rather further CAPEX activity.

Very clear. Thank you, Sergio. Thank you very much.

Sure. Thank you, Regis.

You're very welcome.

Our next question is from Bruno Amorim with Goldman Sachs. Your line is open.

Thank you very much. My question has actually been answered, but just to make sure. I got it correctly. It's a follow-up on Raj's question on the leveraging going forward. So providing that EBITDA would be in line with this year or even above next year, if you are not assuming a lower leverage, this means that in absolute terms you do expect for net debt to be either stable or higher next year vis-a-vis the current level. Is that understanding correct?

Hi, Bruno. Yes, the understanding is fairly correct. We don't expect net debt to go down next year. Of course, depending on what cash flow generation will end up being next year, which will also depend on many variables, but for as long as we continue to generate similar levels of cash, we would expect to ramp up capex activity, not reducing absolute net debt nor leverage. Thank you very much.

Sure. Our next question is from Constantinos Papalios with Puente Argentina. Your line is open.

Thank you very much. Good morning and congratulations on your results. My question for you today is with respect to price adjustments at the pump. Now, could you share your view for the next month? I mean, if prices are frozen in pesos, pinching your downstream margins, can you maintain your CAPEX schedule? And if so, for how long? Additionally, we know that the MEGA facility has been processing less NGLs in the month of October. So you do have some losses there or some revenues that are coming through the door. So how do you balance all this with prices frozen in pesos in downstream and then less money entering through the other business segments of the company? And if I might just add one more question regarding cross-border financing. Could you give us some detail on the amount and the maturity? And what happens if this cross-border financing does not materialize?

Thank you. Sure. Good morning, Konstantinos. In terms of your question about prices at the pump, I think Sergio went in some detail on our expectations. We do not expect... prices to be frozen, but rather we expect to carefully monitor the evolution of different variables, right? As we've been saying, we now believe that international prices have established some certain floor that probably it would be a healthy decision for the sector as a whole to try to reduce the spread to international parities. And of course, that will also depend on the evolution of the effects, and we will have to carefully address any potential adjustments of the pump to figure out the potential impact in demand that such decisions could have. So we are not assuring by no means that prices are not going to move. not the opposite. We continue to carefully monitor the different variables in the context of the macroeconomic environment that we are all living on. So that's why I would not definitely say that downstream margins are going to be significantly down. If you look at how local crude prices have been negotiated locally, we are above the average of the last quarter. So in the third quarter, we We had an average on the upstream side in Argentina of $55, mostly related to Medanito oil, lightweight Medanito oil. Those prices have been trending upwards. As of now, the... prices that are being negotiated among producers and downstreamers is closer to $60. So already in there, you are seeing an evolution in upstream. So because of that, we are already having a reduction in downstream margins. Going forward, of course, that it's To be able to continue with that process, we will definitely need to address prices of the pump. But again, that will be carefully monitored in coming weeks and months. In terms of MEGA, it's related to seasonality that I mentioned, and also, as you correctly say, MEGA has been processing less amount of natural gas and producing less amount of NGLs. That is related to schedule maintenance at MEGA, which was performed in the month of October. It is already back in full operation, and so, yes, that is part of the process. estimate that we are putting forward to the market on our EBITDA generation for the fourth quarter. So nothing beyond the impact that we are already forecasting when putting forward the full $3.8 to $3.9 billion EBITDA for the full year. And finally, on the cross-border financing, let me, given the fact that it's not closed yet, let me just keep for ourselves the specific tenor and interest rate, although I can mention that it's not short-term, it's a medium-term facility and at very competitive levels. If the deal doesn't materialize, of course, we will have other opportunities or other alternatives, clearly not cross-border, and still consider that our ability to honor our payments, our commitments on our maturities on international bonds next year. should be granted even if current FX restrictions are extended, given the way those FX restrictions currently in place are written or the way they work today, because the amortizations that we have next year are related to bonds that have been part of previous liability management exercises, and so we understand that current FX restrictions, if at all extended, should not impair our ability to comply with our commitments. But again, if this transaction moves forward, which we are very optimistic that it will, we will further provide for an alleviation or for a relief in FX reserves from the central bank when related to the amortizations that we have to own next year by having relatively matched those payments with the disbursements from this cross-border multilateral facility. Very clear. Thank you. Thank you very much.

Sure.

Our next question is from Ezequiel Fernandez with Balance. Your line is open.

Good morning to everybody. Thanks for the very complete materials as always. I have three questions. I would like to go one by one if you do not mind. Last year, the company launched an operational expenses savings program that we also are bringing efficiencies in the last quarter. Congratulations on that. Do you think you're mostly done with these efforts? Are you already satisfied with what you've done?

Hi, Ezequiel. Not sure whether you were going to ask the three questions at once, but let me quickly answer that. We are happy. We feel okay with the results achieved so far. Clearly, the evolution of micro-variables in the last few months have reduced somehow the full effect of our cost-cutting exercise executed last year. By the end of last year, we have expressed that we have achieved a structural cost reduction of 20% when compared to pre-pandemic levels. That was sustained for the first six months of this year. Now, when looking at the third quarter and when looking at the full nine months, that amount of savings was reduced to about 15% when compared to the previous year. Sorry, with pre-pandemic. Actually, if you take out some standby costs related to the blockade in Neuquen in April of this year, that would be 17% on a fully standardized basis. And we are expecting that to be maintained roughly in the 15% cost reduction or savings by the end of the year. We are okay with that. We definitely have expected to sustain further savings, but this is a new cultural thing within YPF to continuously look for efficiencies. The same way that we are doing in our shale operations as discussed before, we continue to look for further savings across the company as a new cultural way of doing and moving forward with our business.

Okay, great. Thank you. My second question is, also during the pandemic, YPF entertained the idea of looking for asset sales. Is the company continuing to look for interested parties in non-core assets? And if there has been any progress on specific assets like MetroGas or mature concessions lately?

Thank you, Ezequiel, for your question. With respect to M&A, I'm going to cover the shale activity and also the mature fields. Let me start with shale. We mentioned, as you said, in previous calls and in line with the financial deleveraging that the company has already been achieving we continue to see potential M&A activity as a way to optimize our portfolio rather than as a critical funding source. In that sense, when looking at our unconventional acreage and given prevailing market conditions, In the near future, we shall only see, if any at all, some small-scale divestment in blocks that are outside our core development strategy. With respect to mature fields, we continue moving forward, analyzing potential opportunities in our mature conventional areas. And this analysis focuses into assets or blocks that have some further development upside, but require a niche player to extract full potential. And given the positive feedback gathered through an initial round of conversation with potential interested parties, We have entered into preliminary conversations with provincial authorities where these assets are located to establish a basic framework of understanding in the case the potential disinvestment opportunity ends up materializing. And these are the two areas that we are analyzing with respect to M&A.

Okay, great. Thank you very much. And my final question is related to the last maybe two or three weeks. There were some press articles in which the idea of a $3.5 billion CAPEX for next year was a sort of target. I don't know if this is a formal target already, or does it still need to be confirmed on the guidance or budget exercise that you're probably working on?

Yeah. Basically, that is not a formal target yet. Of course, as we commented earlier, we do expect CAPEX to be higher next year than this year, not only because of the downstream projects that was already commented in the previous call, but also as we expect to continue increasing activity in our upstream operations with a specific focus in oil. So as of today, we have not gone through a formal budget approval for next year. We should be doing so in the next few weeks. And once we have that, then we will be in a situation or in a position to formalize the CAPEX guidance for next year. But for now, I would say it's informal intentions and in line with what we have been commenting in the previous call and during this call as well.

That's great. That was very clear. That's all from my side. Thank you very much.

Thank you again. Our next question is from Luis Carvalho with UBS. Your line is open.

Hi, Sergio, Alejandro, and Santiago. Thanks for taking the question. I'd like to maybe come back on the free cash flow for 2022. And you just mentioned about the informal intentions about a $3.5 billion cap. You also mentioned during the call that you do not have the intention to potentially reduce further the leverage of the company. But assuming you take the $800 million debt that you have for next year and around, let's say, $600 million on that interest plus this CapEx, if you do not roll over any debt for next year, you're probably going to consume a significant amount of your cash. considering, let's say, close to $4 billion EBITDA as you're probably going to deliver this year. So just trying to reconcile it here, how do you think that COPX even can potentially go up? And what are your expectations in terms of EBITDA for 2022? I know that you cannot provide any guidance, but considering this baseline as $4 billion EBITDA, What is the likelihood that you see a higher EBITDA with the current oil prices that we have and the current conditions that we have for 2032 in order to try to reconcile the free cash flow for next year and forward? The second question, I think that you also touched base on a previous question. It's more related to the fuel imports, right? So YPF did import gasoline at a parent. That's what it shows at a higher prices versus the average of domestic prices, right? So even if you consider the difference between the premium and the regular gasoline, I'd like to see if you can provide a bit more details or update in terms of import conditions and import needs as we head towards the fourth quarter in 2022. Thank you.

Hi, Luis. Good morning and thank you for your questions. In terms of how we intend to balance our informal expectations for next year so far, as I said before, we still have to go through a full revision of our CAPEX plan for next year and of our EBITDA generation estimates for next year. What I can guarantee you is that we plan on maintaining a healthy financial approach, both in the sense of net leverage, as I said, with net leverage being maxed out two times, and cash balance, where we expect to continue having – working with a minimum cash balance in the order of $800 to $1 billion. You know that temporarily we've been above that level in some cases, but roughly speaking, in the past we have been saying that we would be or we targeted $1 billion plus or minus 10%. Right now we have reduced that target a little bit, probably to a range of $800 to $1 billion. That is related also to our short-term maturities. As we commented during the presentation, for the first time in many, many years, our net cash position is higher than our short-term maturities. We expect that to remain the case for the next few months, and I would say a couple of years, given that maturities will continue to be relatively low. So because of that is that, of course, when you look and when you try to estimate what the EBITDA number has to be to get to that level of capex that was informally mentioned in the media, then definitely we need to finalize our budget for next year and come up with the final numbers for capex. But again, as previously said, We expect to increase our CAPEX level, and probably for that we will count with still strong EBITDA generation, as well as working capital contributions that we have. We have a few fiscal credits that we can cash in, and we also have some other contributions account receivables that we have been making very good progress in collecting. So when you combine all of that, is that we feel pretty comfortable with our ability to increase our cash, sorry, our capex next year without jeopardizing the financial health, both in terms of leverage and in terms of liquidity.

And in terms of... Yeah, so if I may challenge, let's just pretend that oil prices comes down to, let's say, $50 next year, right? I don't know, something happened at OPEC level. I just would try to understand what would be the flexibility on the CAPEX because, of course, the cash generation for 2022 will be, you know, negatively impacted because of the lower oil price in that scenario. And as a consequence, with the debt profile that you guys have and the commitment, what will be the flexibility in order to try to reduce the CapEx in order to cope or to keep you to the net leverage at two times? I just want to understand that around two times net debt to VDA would be the main target, or production growth for CapEx would be the main target for the company?

Yeah, no, thank you for asking for the clarification. Yes, it's completely clear for us that the main target is the financial health. So I would say that the main target would be to be within that two times net leverage. And based on that, we will have to flexibilize our capex in line with the cash flow generation to maintain those financial targets. So clearly the answer to that would be flexibilizing CapEx and accommodating our CapEx target to whatever cash flow generation capacity we will end up having. even though we still believe that there is a tremendous opportunity to add value and to generate value for all of our stakeholders by accelerating the development of our shared resources, primarily the shared resources. But we do believe, and we are very serious about that, that the only way to seriously or sustainably do that is by maintaining a prudent financial framework. So that will be the main driver.

Okay. Sorry. And I interrupt you about the fuel imports. Sorry. But thank you. Very clear this point.

Sure. In terms of fuel imports, as you said, most recent data given the rally, primarily since October, the massive rally in international prices, our prices at the pump today are below import parity levels. That's why we have to bear in mind the full equilibrium of the market as a whole. And in that sense, we try to balance the relatively small amount of our inputs in the context of the general business that we have undergoing. So in that sense, yeah, the ramp-up in demand, both in gasoline and diesel, is tremendous. creating the need to increase our imports in the fourth quarter primarily of gas oil as you know we are structurally for the last few years we've been structurally a net importer of diesel uh not that much of um of gasoline and uh so on average in the fourth quarter we will be probably imported what was the average for the last few years which is in the order of 20 of our diesel sales uh That could be challenging in the context of the current relationship between local fuel prices and import parties, yes. Definitely that is a challenge, and that's why, as Sergio commented when talking about pump prices and the future evolution of pump prices, we do carefully monitor those variables to ensure basically make the right decision in terms of the future evolution of prices.

Okay, very clear. Thank you very much, and yeah, thank you very much. Good decision. Sure.

Thank you, Luis. Our next question is from Walter Chiarivesio with Santander. Your line is open.

Yes, hi, good morning. Actually, all my questions have been answered, so thank you very much for that.

And with that, I am showing no further questions. I'll turn the call back over to the presenters.

Thank you very much, guys, for your interest, for following YPF, for your comments and reports, and have a good day.

Ladies and gentlemen, this concludes today's conference call and webcast. You may now disconnect. Thank you.

Thank you.