Pampa Energía S.A. (PAMP) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for waiting. I'm Raquel Cardasz from IR, and we would like to welcome everyone to Pampa Energía's Fourth Quarter 2023 Results Video Conference. We would like to inform you that this event is being recorded. [Operator Instructions] Before proceeding, please read the disclaimer on the second page of our presentation. Let me mention that the forward-looking statements are based on Pampa Energía'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 video conference over to Lida. Please go ahead.

Hello, everybody. Thank you for joining us to this -- another new quarter. I will make a quick summary of Q4. You may find more details in our earnings release or financial statements. Today, we have for the Q&A: our CEO, Gustavo Mariani; our CFO, Nicolás Mindlin; our Head of E&P, Horacio Turri; our Head of Finance, Adolfito Zuberbuhler, so full team here. Well, so let's quickly review 2023. This is another challenging year, but it did not prevent us from growing and delivering milestones. In 2023, we reached again a new peak in gas production, exceeding 16 million cubic meters per day. This is a remarkable 44% increase compared to the 2022 record, thanks to the new pipeline facilitating additional eastbound evacuation and our active campaign in Vaca Muerta. However, average production did not take off as expected due to soft demand from mild weather and poor thermal dispatch. For the first time in years, we delivered below the take-or-pay. Pampa E&P is mostly gas production. But from now on, we aim to diversify with shale oil from Rincón de Aranda. Power generation did not stay quite either. In 2023, we commissioned Ensenada Barragán's CCGT, PEPE IV wind farm, adding 360 megawatts of efficient energy. We also will be inaugurating this year, PEPE VI, which is total installed capacity of 140 megawatts. So with all online, we will be reaching 5.5 gigawatts by the end of this year. EBITDA fell 12% year-on-year. This is mainly because of reduced gas sales mentioned before and the impact of the steep peso depreciation over our affiliates, this is Transener and TGS. We will address this issue later. Our way of management helped us to gain efficiencies and be savvy of our business and balance sheet. We used our robust cash flow to enhance our portfolio without neglecting our financial position, strengthening our liquidity and substantially reducing our leverage by paying down debt or taking advantage of the local market. Overall, 2023 was another remarkable year in Pampa's history. We look forward to delivering outstanding results going on. So regarding the quarter, we must highlight again this net leverage reduction, which reached the lowest level in years, $613 million of net debt. The situation was coupled with a soft demand for gas and thermal energy. This is our main products. This is -- this was expected because of seasonality. Q4 is an off-peak season. But this was worsened by mild weather, it was a warm spring and cold start of the summer, El Niño effect generating high levels of hydro and, therefore, ranking senior to thermal dispatch and as well as high nuclear availability. So that also kind of lagged behind thermal generation. Another highlight is that we are harvesting our drilling campaign. In Q4, shale gas represented 47% of our total gas production. This is a significant increase compared to last year, just nearly 3% of total gas production. The adjusted EBITDA for the quarter amounted to $129 million. This is 30% less year-on-year because of soft demand. Peso devaluation also impacted us through our affiliates, Transener and TGS and, therefore, because their income in real terms got hit by the steep jump in the FX. The new PPAs at our wind farms and Barragán CCGT plus the additional income from the export dollar offset these variations. Therefore, power took most of the total EBITDA share in Q4. CapEx in Q4 was 50% higher year-on-year. This is because -- mainly because of the ramp-up in E&P, which is concentrated in shale gas drilling and completion of wells plus the construction of the PEPE VI wind farm. So let me give you a quick, simplified explanation of how peso depreciation affects Pampa. There's very important things that during the Q4, we accrued $250 million of income tax. This is as an accrual, not cash, accrued, which is 150% higher than the last year's period. This is because of this temporary lag between IFRS valuation of PPE and its tax appraisal. So tax reporting in Argentina follows the functional currency in pesos and peso is adjusted by inflation. But the steep devaluation that happened in December 13 widened this gap between both valuations. So it generated a temporary noncash deferred income tax, which if the peso recovers, right, both valuations will be similar and the tax, the said tax, should be 0 -- should reduce to 0. Another effect is on the affiliates. So the affiliates, they also follow financial -- their financial reporting follows peso currency. And their figures are also adjusted by inflation. So inflation was outnumbered by the grand devaluation that happened in December last year. Should we all follow functional currency in dollars, TGS and Transener actually posted a higher EBITDA, making Pampa's 2023 EBITDA $831 million instead of $802 million. Taking aside affiliates, the only segment we invoice in pesos today is just legacy. And actually, not the whole legacy, it's just the conventional thermal and the hydros, which accounts less than 10% of our total Q4 sales. So let's move on to power generation. As seen on Slide 6, we posted an adjusted EBITDA of $94 million in Q4. This is 10% higher year-on-year, mainly explained by lower operating costs and new PPAs, offset by soft thermal dispatch, overhauls, maintenances in some GTs and peso devaluation that impacted the spot energy plus the divestment of Mario Cebreiro. Despite seasonality, EBITDA remained similar to last quarter. This is explained by the increase in the spot energy of 28% that happened in November. There's another 40 -- 74% cleared from February this year. However, as you can see there, spot prices are still behind inflation and devaluation. Q4 dispatch decreased 3% year-on-year. This is mainly due to the lower demand and outages mentioned before, partially offset by Barragán's new CCGT, the hydros and the new wind farms. Take-or-pay capacity, it's very important, especially for PPAs. It is driven by availability. And in Q4, we reached 93%, below last year's 97%. This is mainly because of Loma de la Lata's outage that affected the whole quarter. Moving on to PEPE VI expansion. The project's progress is 69%. We keep working on facilities and civil works and power transformers that have already arrived from China. As most of the main components, they are stored in the Bahía Blanca port. The towers components are being constructed. On Tuesday of this week, we mounted the first wind turbine. There's 30 more to come, right, it's total 31 wind turbines. The estimated COD, it ranges between Q3, July of this year until October of this year. And we estimate to finalize the whole wind farm. It is worth highlighting that this wind farm, PEPE VI, will be sold under B2B PPAs. Well, moving on to E&P. As you can see here, gas deliveries are recovering after Q4's weak demand. The late summer boom and the return to normal of hydro levels are helping domestic sales and exports to Chile. It is noteworthy to mention the importance of take-or-pay, a kind of insurance for our investment, because for the first time in 2021, we delivered volumes under the take-or-pay contracts. On Slide 9, our E&P business posted an adjusted EBITDA of $50 million in Q4. This is 30% below year-on-year. The decrease was driven by the sharp decline in local and foreign demand, which affected our gas prices, too. This was partially offset by additional income from export dollars. In Q4, our total production averaged above 56,000 barrels of oil equivalent per day. This is 8% below last year. Zooming in, crude oil represented 8% of our E&P output but 22% of the segment's revenue, mainly because we destined 40% to exports, more than double last year. The activity ramp-up explained that our total lifting cost slightly grew by 5% year-on-year. And combined with a lower production, this impacted the lifting cost per BOE, which increased 14% year-on-year, recording $7.4 per BOE. Focusing on gas, our Q4 production decreased by 7% year-on-year. This is averaging almost 9 million cubic meters per day, mainly explained by the lower demand. 53% of the quarter's production came from El Mangrullo and 25% from Sierra Chata, the latter showing a significant growth compared to the 6% of share recorded last year. The average price for the quarter stood at $3.2 per million BTU. This is 17% down due to lower-than-expected exports. Remember that the local production that is sold under Plan Gas, it's covered under GSA. Regarding the campaign, the productivity was outstanding. As you can see, 9 wells from Sierra Chata rank among the top 20 producing wells in Vaca Muerta, outperforming peers, and El Mangrullo, which they are also outstanding by their own right. In this sense, Sierra Chata almost tripled its production year-on-year, thanks to drilling 10 wells and completing 9 during 2023. In El Mangrullo, we drilled 15 wells and completed another 14, ranking 2 of among the top 20 producing wells in the formation. So thanks to these outstanding results, especially at Sierra Chata, we recorded an 11% increase in our proven reserves, amounting to 199 million BOE. We almost doubled shale reserves certified in 2022 to 83 million. Although we held a production record in 2023, the reserve replacement was 1.8x and the average life increased to 8.6 years. The petrochemicals business, that I'm going to talk briefly, posted a $20 million EBITDA in Q4. This is 33% higher year-on-year because of lower cost due to the drop in production and higher income from this export dollar income. And also, that explains the quarter-on-quarter increase. Q4, 45% of the sales volume was exported. This is higher than last year by 30%. In Q4, we recorded a cash flow of $95 million -- outflow of cash of $95 million. This is mainly explained by the expansionary CapEx in shale gas. We also recorded lower debt service quarter-on-quarter, benefited from the peso devaluation, also diluted the principal amount of the peso debt. Working capital improved as we collected winter sales from CAMMESA during December. Additionally, net of redemptions, we paid down $37 million in principal debt. In summary, we reduced $129 million of net cash in the quarter, achieving $834 million cash position by the end of the period. However, we increased our cash position year-on-year. Moving now on to Slide 12. We show our consolidated financial position, including our affiliates at ownership. But let's focus on the restricted group that reflects the bond perimeter. We posted a gross debt of $1.4 billion. This is 10% lower year-on-year. This is accompanied by a 19% growth in cash. Thanks to the strong liquidity position, our commitment to canceling debt and the debt peso -- Argentine peso debt dilution, the net debt and leverage ratio decreased significantly, recording $613 million and 0.9x leverage. The average life was 3.2 years. Until 2027, as you can see, we don't face any relevant debt maturities. So this concludes our presentation. I will turn the word to Raquel. She will poll for the questions. Thank you very much.

[Operator Instructions] So our first question comes from Alejandro Demichelis from Jefferies. The first one, he says how do you see upstream production and sales evolving in 2024?

Sorry for the delay. The question was about the sales -- can you repeat that, please, Raquel?

Yes. How do you see upstream production and sales evolving in 2024?

Okay. Oil productions, we see it fairly flat. We will put in production wells from Rincón de Aranda that we will be testing in the next few months. But that will have a marginal impact on our overall production of oil. Regarding natural gas, as you recall, in July or August of last year, once the gasoducto, the Nestor Kirchner Pipeline, became online, we began to sold what we were awarded in the last round of the Plan Gas auction. And there, we were awarded a flat 4.8 million cubic meters of natural gas per day throughout the year. So when you compare what we are expecting in 2024 vis-a-vis what we sold in average in 2023, we believe it's going to be around a 30% increase in sales in natural gas 2024 vis-a-vis 2023. That means around an average of 13.5 million cubic meters of natural gas per day average in 2024 vis-a-vis 10-point-something, 10.3 million, I believe, was the average quantity of gas sold during 2023. That's upstream sales, yes.

Thank you. Alejandro's second question says how do you see power generation sales and prices evolving in 2024?

Healthy leader here, but the power generation sales will be increased by the fact that we are currently building a new wind farm, over 140 megawatts, that will be fully online by the third quarter of this year. But probably, it will have partial inaugurations beginning in June, July of this year. So sales from those wind farms, as they become online, will increase our production capabilities this year. Regarding prices, as you know, 2/3 of our EBITDA comes from PPAs, from sales through PPAs where prices are fixed. And so we don't expect any change there. Regarding legacy capacity that accounts for about 1/3 of the EBITDA generation of the power generation segment, we were just granted in February an increase of 74% through -- but -- so we hope that the remuneration will remain, in real terms, fairly flat despite the inflationary environment we are living. Regarding eventual regulatory changes, we still don't have any visibility on that.

Thank you very much. The next question comes from Bruno Montanari from Morgan Stanley. First one is can you walk us through Pampa's 2024 CapEx budget for each of the business segments? What projects are already sanctioned? And are these projects that can still be considered this year?

Projects already sanctioned, what does it mean? Because that's confusing.

PEPE VI, we already doing it.

Okay. Thank you, Bruno, for your question. Regarding CapEx, we have a very aggressive plan. But we are currently revising that aggressive plan, given the, let's say, financial crisis that we are living on CAMMESA, which is an important part of our revenues. Thankfully, CAMMESA today accounts for around 40%, 45% of our overall revenues. But the delays that we are suffering are causing us to revise our CapEx plan. Basically, before this situation, our CapEx plan were around $700 million, $500 million on the E&P segment, basically, half of it, new wells, and the other half, infrastructure, both for Rincón de Aranda and for Sierra Chata. On power generation, CapEx were around -- we were expecting to spend around $200 million. Around $130 million, it's the wind farm, PEPE VI, which is already on the track and, I have already mentioned, where we are expecting to be online and that won't be delayed. The other $70 million is regular maintenance of our power plants. And we are currently revising what can be delayed and at what cost. So we are currently revising those plans as well.

Thank you very much. Next three questions from Bruno are for the E&P segment. First one says there were increasing news from Sierra Chata supporting the increase in gas reserves. What is the production profile expected for the period?

Thank you for your question. We've been pretty successful in developing so far Sierra Chata field. And what we foresee in the future is a significant increase of the production that will account approximately to 3.5 million cubic meters a day. We moved our early production facilities from Mangrullo to Sierra Chata due to the productivity we found there. And therefore, that's the total amount of gas we will be increasing in Sierra Chata from approximately 6 million a day to 9.5 million a day. That's on an overall basis, considering our share and Exxon's share.

Thank you, Horacio. Your next question says can you elaborate on your strategy to be more active in your development and production of unconventional oil blocks?

Yes. We've been pretty active, particularly in derisking and trying to understand better our new shale oil field, which is Rincón de Aranda. As you probably know, we already drilled and completed one well, Rincón de Aranda 2000, which had pretty good results. And now we are currently testing Rincón de Aranda 2001 that has, as a target, the Orgánico Inferior. And we only have 8 days of testing, so there's not much to say about that other than all the operations are developing normally. We expect to have results probably in 30 days from now.

Thank you. And last question says is the company interested to participate in LNG projects being discussed in Argentina? What can we expect Pampa's role to be on future LNG supply?

As you recall, we mentioned in previous calls, we were starting through our subsidiary, TGS, one rather small project, what we call, a modular project that could begin with small size and replicate those modules. Although the studies have not finished yet, our impression is that the lack of scale is a problem, that this project will lack the necessary competitiveness. So the LNG export in natural gas is key for Argentina, it's key for Pampa in the long term. So Pampa is definitely interested in participating in a big national project like the one that YPF is carrying on with another partner and we hope to be invited in the future.

Thank you very much. Next question comes from Marina Mertens from Latin Securities. There has been some noise regarding payment from CAMMESA, including Transener's recent release. Could you comment on what Pampa is experiencing regarding these issues and how it might affect working capital needs?

Yes, as mentioned, we are experiencing again delays from CAMMESA payments. And the lack of visibility of how this will evolve going forward is adding some uncertainty and stress. To explain the issue a little bit further, prior to February 1 -- and why February 1? Since February 1, there's been an increase, what we call the seasonal price. The seasonal price is the price that distribution companies charges -- national distribution companies all around the country charges to the final users, final users being residential customers, commercial customers or industries. And that seasonal price should cover the cost of the fuel for thermal power plants, the cost of generating electricity and the cost of transmission. As I was saying, prior to February -- in February 1, there was an increase in that price that will partially help solve the situation. Prior to February 1, the situation, to give you a rough idea and to give you an idea of the magnitude of the problem, the cost of a monthly transaction for CAMMESA was around $550 million. How those -- and that $550 million, it goes to pay for the fuel, basically natural gas, to power generation companies and to transmission companies. How those $550 million were collected by CAMMESA? Around $200 million were collected from -- or have been collected from distribution companies, around 40%. So that is what was being covered by the final users. And the other 60% was the subsidy -- around $350 million was the subsidy that the national government was injecting into CAMMESA. From February 1 onwards, given the increase in the seasonal price that was announced, the money coming from distribution companies went from $200 million to $350 million. And the subsidy that the national government needs to inject into CAMMESA went down from $350 million to $200 million. So figures reversed between distribution companies and national government. Now 2/3 of the money needed by CAMMESA should come from distribution companies and 1/3 should come from the national government. Despite this being the situation starting on February 1, we will start seeing this situation beginning April or May because February transaction is collected or is paid by CAMMESA to power generation companies and transmission companies in April or May. Until that moment, the situation was the previous one, where the money needed monthly from the government was around $350 million per month. And the situation is that in 2024, the government didn't transfer any money to CAMMESA in January, had only transferred to CAMMESA $140 million in February. And so far, nothing in March. And we don't have any visibility how this will evolve. So this is the uncertainty that we are living or that we are suffering ourselves and all the industry, both transmission companies, power generators and natural gas producers, is the issue at the national government is sending to CAMMESA less money than what it should have offer and, on top of that, that the behavior of the distribution companies. Distribution companies, because they have not received the price of their services adjusted by inflation as they should have, they used the money they collect from the end users to finance themselves and pay less than what they should to CAMMESA. In the last few months, they have been paying around 50% of what they should have. We hope that now that the national regulated distribution companies have received an increase in the value added of distribution, the price for the service they provide, they have received a significant increase beginning February 1. So for the future, they won't need to finance themselves by using the money that should be paid to CAMMESA. We hope that beginning April or May, the situation will accommodate. But it's going to get very tough to get to that moment if the government continues with this -- with the same behavior we have been seeing in the last few months.

Thank you very much. Next question comes from Cristián Fera from Balanz. First one says it seems the linear hit hard on results. Do you expect this phenomenon to ease by first half of 2024?

Well, although we are not meteorologists, we understand that 2024 is coming as a neutral year in terms of hydrology. So that's all we have to say about that.

Thank you. Next one says considering the north reversal delay by ENARSA, what are your expectations for gas exports to Chile during the winter? Yes, considering the north reversal delayed by ENARSA, what are your expectations for gas to Chile -- for gas export to Chile during winter?

Okay. So during the winter, the exports to Chile, particularly through the GasAndes Pipeline, which accounts for the most important export share to Chile, is capped in 5 million cubic meters per day. So our understanding is that, that will be fully supplied. So that's the -- what we understand is going to be exported to Chile during the winter.

Thank you very much, Horacio. And the last question from Cristián, he wants to know if we are experiencing delays in CAMMESA.

Well, yes, I explained at length what we are suffering, the situation of CAMMESA. But basically, what it means is that the invoice that we should have collected early January, we have only collected 50% from the invoice that matured. At the beginning of February, we haven't collected anything. And we will have new invoice maturing, I think, the next Monday. So next week, we will be owed 2.5 months of -- 2.5 transactions. Roughly, a transaction for Pampa is around $50 million, between $40 million and $60 million per month of transaction. So as you can imagine, this means a significant effort in terms of working capital.

Thank you very much. Next question comes from Paula La Greca...

Sorry, this graph that shows here is for the full transaction. So it's not like we are today, 28 days delayed. Today, we are more than 50 days delayed, all right? This is just to clarify. And that transaction that Gustavo mentioned is still not collected yet. Once we collect it, it will be amounting more than 50 days of delays.

Next question comes from Paula La Greca from TPCG. Any thoughts on government [indiscernible] energy?

We understand that the government is working on regulatory changes, but -- and so far, we don't have any clarity or visibility on what those changes are effectively going to be.

Thank you very much. Now Daniel Guardiola from BTG asks what is the EUR of Rincón de Aranda?

We've so far drilled and completed only two wells. So it's too early to give information about the EURs or IP of the block. We still have a long way to go.

Thank you very much. Thank you. Pedro [indiscernible] asks can you explain how Plan Gas works during off-peak season? Could you explore the remaining production related to Plan Gas extension? Yes, can you explain how Plan Gas works during off-peak season? And could you export the remaining production?

Either on-peak or off-peak season, what you do have is a take-or-pay that has to be committed by the offtaker. And yes, you're okay to export all the surplus gas to Chile. But as I mentioned before, there is a cap, which is the transportation capacity, 9 million -- always talking about GasAndes, 9 million during the off-peak season and 5 million during the winter.

Thank you very much. And another question from Pedro is related to Plan Gas extension since 2028 price was $3.5 per million BTU. Is there some price adjustments further?

No, there is not.

It was a fixed price.

It was -- everybody bidded and it was awarded from down to top. And that was it. It was a tender.

Thank you, Horacio. And last question is from Alejandra Andrade from JPMorgan. Can you comment on the health of local capital markets?

Well, local markets, as you know, there is a very tight capital control. So there are a lot of pesos still trapped in the economy. That gives companies and whoever needs to cover peso needs great opportunities. You've seen us last year issuing local dollars at 5%, dollar-linked bonds at 0% or peso fixed rates below inflation, so negative in real terms. These pesos are still available for companies seeking pesos. We were always ready to take any opportunity to cover our needs. And until the cepo is still tight, I think there will be another opportunity for companies to finance in the local markets.

Thank you, Nicolás.

Yes. But as the last comment, what I wanted to highlight, especially for those of you that, like me, have a very hard time reading these financial statements, very complicated, given the sharp depreciation of the peso just a few weeks before the year-end, the inflation accounting, et cetera, et cetera, the way I see the year -- or the way I simplify year 2023 for Pampa that I think was a remarkable year is by taking two pictures, end of 2022 vis-a-vis end of 2023. And what you see in those two pictures is that, among several other things but just to highlight a few points, Pampa in 2023 increased its power generation capacity by 80 megawatts. Part of that was money spent in 2022, around half of it. The other half of it was around $150 million, was spent during 2023. So we increased our capacity by 80 megawatts of wind farm. We -- Pampa did a huge increase in its natural gas production capabilities in 2023. In 2022, we had the capability to produce 11 million cubic meters of natural gas per day at the peak production. In winter 2023, we raised that capability to 16.5 million cubic meters of natural gas per day. That's a 45% increase in production capacity. That is not only drilling new wells but also building pipelines, building gas treatment plants, so significant effort in terms of capital expenditures. And while doing so, thanks to again several things, basically the strong free cash flow generation of our assets, thanks to a very successful management of our liquidity and an excellent liability management, as we explained, given by the peso debt that we took at the beginning of the year, Pampa was able to reduce its net debt by 1/3. We went -- we had a net debt position of $900 million at the end of 2022. We now have -- at the end of 2023, we have a net debt of $600 million. So we were able to reduce indebtedness by $150 million and increase cash position by $100 million. So $300 million reduction of net debt, putting us in a situation of very strong financial situation with a net debt of less than 1x EBITDA. That gives an idea of Pampa capacity to finance future growth. So I wanted to end with this optimistic comment.

Thank you. So there are no more questions. Thank you very much for your questions. I will now turn to Lida for final remarks.

Okay. Thank you, everybody. I hope all this answers your questions. If you have any more, just contact us. We will be more than happy to help you. And we bid you a good day. Bye.