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 Energia's First Quarter 2021 Results Video Conference. We would like to inform you that this event is being recorded. [Operator Instructions]. Let me mention that forward-looking statements are based on Pampa Energia 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 Energia 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.

Thank you, Raquel. Hello, everyone, and thank you for joining our conference call. I will make a quick summary of Q1. You may find more details in our earnings release and financial statements. Today, we are having a Q&A with our CEO, Mr. Gustavo Mariani; our CFO, Mr. Nicolas Mindlin, Mr. Horacio Jorge Turri, our Head of E&P, and also Pito Zulegoulas, our Finance Director. Let's just start off with the quarter's figures. After a soft Q4 gas and power demand recover. Pampa delivered 31% higher gas production year-on-year and 32% quarter-on-quarter, thanks to the new gas pipeline online in August of last year. Remember that Pampa was awarded 4.8 million cubic meters per day out of the 11 of the pipeline's capacity. This is very important as this late summer bloom prevented the country for importing gas and firing alternative fuels. Therefore, there is more local gas output, less FX outflow, a friendlier carve footprint and more power efficiency. Also, we kept boosting shale gas production, representing 40% of our total output of this quarter, a significant increase compared to last year's 14%. In contrast, we've been experiencing significant delays in collecting Cammesa payments, bearing higher working capital. We learned that the Secretary of Energy instructed Cammesa to pay December 2023 and January 2024 transaction in face value dollar bonds. So we booked a $34 million impairment loss on trade receivables. We are awaiting the final resolution, analyzing the course of action. The adjusted EBITDA for the quarter amounted to $189 million. This is a decrease of 8% compared to last year's amount because of the payment her cut of Cammesa's January receivables and lower gas exports in addition to the drop of Petkim petrochemicals and energy spot prices is the latter affected by the sharp peso depreciation in December. Higher domestic gas demand and lower net operating costs partially offset these effects. However, EBITDA grew 70% quarter-on-quarter, mainly due to this recovery in gas and power demand. Notice that the Q4 '23 EBITDA is also affected by Cammesa because of December's transaction. kind of CapEx in Q1 slowed down, being 36% lower year-on-year, mainly because of the strong shale gas activity and PEPE IV was developed in 2023. Plus in Q1, we carry out the last diversements of PEPE VI, our last wind farm, which is estimated to be through the commission by October of this year. This was partially offset by the beginning of the pilot plan for Shale Oil in Nicaragua. Moving on to the power generation as seen on Slide 4. We posted an adjusted EBITDA of $35 million 2% lower year-on-year, mainly explained by the $17 million impairment of Gamesa's January 2024 invoice explained before. It is also impacted by the peso devaluation on the spot prices and Marisa's divestment, partially offset by lower operating costs and commissioning of 54 million in June last year. Q4 dispatch increased 3% year-on-year. This is mainly due to Sierra Chata new CCGT, higher water levels levels at Mendoza hydros, and the best force contribution, partially offset by lower fuel oil fire generation and Lomas gas #5 that after being out of service for 6 months, resume this touch on January. Take-or-pay capacity payment, especially from PPA, explains most of our EBITDA in this segment. It is driven by availability. And in Q1, we reached 96%. This is higher than last year, 93% because last year, there was a lot of thermal outages. Let's do a quick review on PEPE VI expansion. The project's progress is 89% advanced. So it's pretty advanced. We mounted the eighth winter line Monday as seen on the installation status report that you see here. Meanwhile, the power components are keep arriving at the site. The power transformers have already been commissioned, tested and clear by Cammesa Transener, but they are still waiting for China's approval. Finally, to avoid power transmission curtailment, we connected the wind farm to a new 100k high-voltage grid. The first 3 points line protection system in already is a real mine and the second has begun the process for commission. The estimated full COD will be in October of this year. PEPE VI energy will be sold under B2B PPAs in matter. Moving on to RMB. I wanted to quickly comment on the gas deliveries, which recover after Q4 soft demand, thanks to the late summer of boom. As you can see here, domestic sales are way above take-or-pay. Although exports to Chile are still struggling, but better off than what last Q4. The winter season began this May, and we are hitting peak production soon. Commenting on the segment's performance on Slide 7. Our E&P business posted an adjusted EBITDA of $70 million in Q1. This is 14% higher year-on-year. This increase was driven by higher domestic gas demand unlocked by the commissioning of this new pipeline and the hot weather, lower gas exports, which I mentioned before. And crude oil sales that were lower, offset these variations. In Q1, our total production averaged above 73,000 barrels of oil equivalent per day, is 27% higher than last year. Summing crude oil represented 6% of our E&P output, but 16% of the segment's revenue. Gas keeps taking the lead, representing 94% of the total production. Higher maintenance treatment and transportation costs in angulaterachata due to the increased activity explained that our total lifting cost slightly grew by 4% year-on-year. Still, this is very important, the right in output mostly possibly impact the lifting cost per BOE, which decreased 19% year-on-year, recording $5.8 per BOE. Also this quarter, we started activities in Rincon arena, which yielded promise and results. We completed one DUC well targeting Bacamurta with initial production of over 1,300 barrels and currently producing practically at the same rate once the world testing is done and uprear partially commissioned that is due this year a stage of it. We plan to resume production in the well tive back in 2018. Focusing on gas, our production in Q1 increased by 31% year-on-year and 32% quarter-on-quarter, raising almost 12 million cubic meters per day, again, because of the local demand 64% of the quarter's production came from Enanosa and 20% from Sierra Chata, both our flagship shale-gas fields. Regarding the campaign, we drilled one well and completed another free shale gas wells in Sierra Chata. The productivity was outstanding. So we almost double our gas production there. On the other hand in in Manroc experienced a 29% increase compared to last year without drill, new drill or tiny wells. In nonoperating areas, Uruguaiana tied in 5 wells this quarter, maintaining production levels. The average gas price for the quarter stood at $3.2 per million BTU. This is 18% down due to lower exports in volume and price to Chile, as we explained before. We can see right below the higher deliveries of local gas were destined for thermal power generation. The Petkim petrochemicals business posted $11 million EBITDA in Q1. This is a 58% growth year-on-year, mainly because of the higher sales in the reformer and lower cost because of the FX, offset by soft domestic sales due to the economic activity and lower international prices. Quarter-over-quarter, the EBITDA decreased by 45%. This is mainly because the export dollar income was lower. The reformer led the output mostly offset by the reduced demand for Serenix. Well, in Q1, moving to cash flow. We recorded a free cash flow outflow of $187 million. Besides the $70 million haircut on Cammesa January invoice a impacted the EBITDA. This outflow is purely explained by the sharp increase in working capital due to the payment delays from Cammesa, which rose from 73 to 89 days in the quarter. Now it is over 120 days if all the 3 few bills are paid today. May 10 is the due March invoice. So the debt will pile 4 bills if nothing changes. The higher working capital is offset by lower GAAP service, mainly due to the reduced peso stock, debt stock. However, we took advantage of the local market conditions and issue new debt to recover the increased working capital. Also, it is worth highlighting that we collected BRL 45 million in dividends from OCP, OCP, co-control oil pipeline company. This is the second largest and only private pipeline in Ecuador. In summary, we increased $1 million of net cash in the quarter despite the high working capital, achieving an $845 million cash position by the end of March. Moving to the Slide 12, we show our consolidated financial position, including our affiliates at ownership, but let's just focus on the restricted that reflects the Pampa parameter. We posted a gross debt of almost $1.6 billion. This is 6% lower year-on-year and 10% growth in cash. We kept diversifying the currency and source of our debt. And as a result, 73% of the gross debt is in U.S. dollars. The net debt recorded $718 million. It's 21% lower year-on-year and 1.1x leverage. The average life was 2.8 years until 2027. We do not face any relevant debt maturities. So this concludes our presentation. Now I'll turn the word to Raquel who will call for the questions. Thank you very much.

Thank you very much, Lida. The floor is now open for questions. [Operator Instructions] So the first question comes from Ann Mill from Bank of America.

The first question is, how do you see the evolution of the power generation sector on such things as spot energy pricing and price adjustments, construction on future generation facilities, future PPA contracts and what are the implications for the profitability of Argentine generators.

Thank you for your question. Unfortunately, this discussion that is public with the Secretary of Energy and with the Ministry of Economy regarding the Cammesa payments have put on hold all the conversations regarding regulatory changes going forward. I hope that we are a few weeks away from being able to to start those conversations again or that the Secretary of Energy could focus on this issue. Certainly, the spot energy pricing needs an adjustment. Desperately needs an adjustment very soon. So we hope that the secretary will have time to focus on this issue in the next few weeks, but we don't have any visibility on that matter. Regarding construction of future generation facilities, as you know the auction that was awarded at the very end of the last administration has been put on hold or more than put on hold all the signals are that it will be canceled. So there is no visibility there. And you also asked about future PPAs, but I don't believe that this administration is thinking about PPAs, at least not in a way that we have seen in the last decade. It's not PPAs where the counterparty. It's basically Cammesa or the secretary of energy. But probably the scheme that this new administration will propose will be PPAs where the counterparty of the power generation will be the distribution companies directly. But that is the regulatory change that has been mentioned and likely discussed with the authorities, but we haven't seen that, again, we had those conversations during our summer. But since then, there's not been further discussion on this topic.

Thank you very much, Gus. And second question is, can you provide an update on the construction of the various new pipelines that will help producers to evacuate production during off peak times or thanks to neighbor countries such as Bolivia, Brazil and others.

They're currently a couple of things. One is the reversion of the North pipeline, the pipeline that currently brings gas from Bolivia and from the North Basin of Argentina to the center of Argentina. That pipeline is in the process of reversing its flow of gas. Now it's coming north to south. And once this reversion is completed, natural gas from the Neuquina Basin, we'll be able to reach the north part of the country and eventually Bolivia. Unfortunately, we don't see this infrastructure being completed by this winter. We hope it will be completed by the end of the year by next summer or early next year. So it will be online by then. Just to keep in mind that will not increase the amount of gas that Neuquina Basin will be able to export, but rather gas that currently goes to literal to the today's side of Argentina, we will be able to reach the north part of Argentina that because of the decrease in imports from Bolivia because of the decline of production there needs to be satisfied. While the other side of the country could be supplied with LNG or eventually with liquid fuels. The other important infrastructure project is the completion of the gas compression plant in the Gasoducto Nestor Kirchner . So the first tranche of the gasoline execution was put online at the middle of last winter. Now the 2 compression plants will be able to double the capacity of that first tranche of the Gasoducto Nestor Kirchner. The first of that compression plant will be ready, we hope, in the next month or so. Before the end of the winter, increasing the capacity of the pipe in 6 million cubic meters of natural gas per day. The other EUR 5 million will be once the second compression plant is ready, which we expect we don't have much visibility, but we expect will be by the end of the year or during the summer.

Thank you very much. The last question from Ann is, are there any other regulatory changes that are you monitoring closely.

No. As I said, all the attention has been, unfortunately, during the last couple of months has been on this issue of the payment. So we hope to be able to resume the Secretary of Energy can focus on these other regulatory changes in the next few weeks.

Thank you, Gus. Now Alejandro Demichelis from Jefferies. I have 3 questions.

First one is, could you please provide an update on negotiations with commensal regarding payments and a potential bond? Could you please confirm the outstanding balance with Cammesa.

Yes. Thank you, Alejandro, for the question. I think you all know it was released yesterday published in the official gazzet this morning, Resolution 58. The catalyResolution 58 was cess in Casula it puts into brackets the payments of the transactions of December, January and February of this year and the proposal is to pay December and January transactions with bonds that currently trade at around 50%. And the transaction of February will be paid in cash. This is assuming that the generator reached set of this agreement with Cammesa. In terms of numbers, the December and January transaction for Pampa is MXN 85 billion. That is what the minister of economy is proposing to pay with bonds. And the February transaction is MXN 53 billion. What it means we need further clarifications on the resolution that has been published. It implies a significant haircut. And as Lida explained, we have already accounted for that on our balance sheet. Well, I think is already public as well. Is that AGEERA, which is the association of all the power generators of the country, have formally rejected the proposal in the name of all its private members. I mentioned private because AGEERA composed both of private generators and state-owned generators. We believe this is an ongoing negotiation. We are very optimistic that an agreement could be reached with the government with minor improvements and taking into account the restrictions that the secretary of energy the treasury is facing. Obviously, as we and all the power generators that all the creditors of Cammesa have mentioned that is crucial to this negotiation is the fact that we have going forward, the visibility that payments will begin to be current and on time from now onwards. So that the stock of that, the one that we are taking a haircut is limited and will not continue increasing. So again there's not much that I can tell you, but we are optimistic that an agreement will be reached, but we then not accepting this current proposal.

Thank you Gus. Next question from Alejandra. He wants to know how do you see upstream volumes evolving during rest of 2024?

Okay. Good morning to everybody. Going to your question, Alejandro, we have to separate between gas and oil. In terms of gas, as Lida mentioned before, the demand is picking up. So currently, we are delivering a bit more than 14 million cubic meters a day. Our commitment, total delivery is in the range of 15.7% for the winter, which we think is going to be achievable. And then this includes approximately 600,000 cubic meters of exports to Chile during the winter season. And then we will probably go back to the 13.8% that we also have committed for the off-peak season, including around nearly 1 million cubic meters per day exports to Chile. So that's regarding natural gas. In terms of oil, we will see a significant decrease in Pampa's production. We are currently in the range of 4,500 barrels per day with the Rincon de Aranda 2001, delivering 1,300 barrels a day plus the tying in of the Rincon de Aranda 2000 is approximately more than 400 barrels a day. We will be adding up like 1,800 barrels a day of crude oil, which represents a little bit less than 50% of our contraction.

Thank you. Alejandra also wants to know an update on the performance of the Rincon de Aranda.

Okay. Going to Rincon de Aranda 2001 well, we have very good news. The well was extremely successful. We reached almost 1,400 barrels per day of initial production, which gives you an EUR of around 1.3 million to 1.4 million barrels. This is particularly good. If you compare this well with the average of wells that had been drilled with 2,000 meters of lateral leg in the area. You can see there in the slide that we rank among the top when we compare with La Marca Chica, Baja del Palo and Aguada Canpar, which approximately accounts for around 300 wells. We see that the behavior of the Rincon de Aranda 2001 is very promising. And as you can see also in the slide, we are way above the average wells that have been drilled with 2,000 meters of lateral legs by far. They accounted for initial production of 150. We are in more than 200 and also the EURs are particularly above that. In terms of future development, we foresee the drilling and completion of 2 parts during 2024, 2025, which have the basically the objective of derisking the area and also adding up production. If we are successful with these 2 pads, we will be adding up approximately 2,000 cubic meters per day to the current production. And the only constraint we will be facing is the transportation capacity to evacuate this oil into the BahÃa Blanca port. We already acquired 1,000 additional capacity from the older valid and we are optimistic that we will be able to find alternative ways of moving that oil into the export facilities in BahÃa Blanca.

Sorry, if I could just add something to Horacio just to recall to all of you that Rincon de Aranda is the area that last year, we acquired the other 50% from our former partner by swapping by exchanging a wind farm of 100 megawatts that we own in exchange for their 50% ownership. Rincon de Aranda is EUR 240 million square kilometers or 60,000 acres area. And we knew at that moment that we were doing a very good and cheap transaction, probably the cheapest acquisition of acreage in the Vaca Muerta area. Now with the results of this first well and having the first well among the best 3 of the area is extremely optimistic. So confirms that we did an excellent transaction, and we are very optimistic with the development of this area moving forward.

Sorry. Just a little bit more information about Rincon de Aranda. As Gustavo mentioned, those 60,000 acres account for approximately 220 wells that could be drilled. And we think that in due time, we might be able to achieve a total production ranging from 35,000 to 40,000 barrels a day. So it's quite a challenge and an opportunity for Pampa in the shale oil segment.

Thank you very much. Next question comes from Gustavo Faria from Bank of America.

Last week, Brazilian government stated its intentions to import gas of Vaca Muerta. In your view, what is the most farsible time line for this? Do you have any preliminary estimates on how Pampa's gas production could grow? And what internal CapEx should you perform to increase the gas production?

All right. Currently, we know that there have been developing negotiations between the Brazilian and the Argentinian government to make use of this big gas capacity. We are still waiting for the outcome. There are different alternatives in place. One of them is making use of the current Bolivian gas pipeline capacity in order to export gas from Argentina. This necessarily needs the second tranche of the Nestor Kirchner pipeline to be finished as well as the reversion octava mentioned before. Either if we want to go through Bolivia or through the Uruguaiana pipeline connecting Uruguayana to Portolan. So we are still trying to understand what the final negotiations will end up with, but definitely, this would add off-peak demand of around 20 million to 40 million cubic meters per day. And if the necessary capacity is built in order to overcome the winter shortage, we eventually might have that additional capacity all year round. But we are just seeing the first steps of the negotiation.

Next question comes from Bruno Montanari from Morgan Stanley.

Regarding the developers with a proposes passions and credit impairment other than the impact this has on the working capital pressure. What other financial implications could arise from the current situation based on the company's interactions with Cammesa and the government, what is the best alternative to fix the current problem. Given that the mindset of the current administration is to have free market practices across all sectors, should we see a faster pace of tariff hikes to the consumer, which would allow Cammesa to honor its payments with the power industry.

Difficult question to answer, Bruno. Regarding credit impairments, I believe basically, what the haircut that we took into account in the first quarter accounts for roughly 40% discount. I think worst case scenario could be in the 50% discount range. So it would be a marginal further haircut that we may need to take. Regarding ongoing working capital pressure, I hope and as I explained before, I hope we have seen the worst and that from now onwards, Cammesa will begin to pay current and on time. That is crucial to the agreement. And I think that the secretary of energy has been doing an excellent job in order to ensure that basically doing what it needed to be done the most that was increasing tariffs and a significant portion of the demand is currently paying the full price of electricity. Only those, what we call the M2 and M3 that are the lower middle l income residential users are still subsidized. And those I think it will need to continue to be subsidized and the pace at which those subsidiaries will disappear. I'm not in a condition to say that it's more a political and social issue that the government needs to decide on. Let me read the question versus the anything else that I'm missing. It was a long question. So just a short-term question, so I can answer them completely. Well, I think I have basically civered.

Pampa has indicated it wants to pursue investment in its shale on average, how should we think about the time line for CapEx acceleration? And how does the issue with CAMMESA impact the capital allocation through process in the short to medium term?

Okay. We don't see any relationship between the Cammesa problem and our investments in oil. It's a completely different market. And we don't see any relation between those 2. Regarding the investment base, sorry, as we mentioned before, we will probably be drilling and completing 2 pads that of 4 wells each, so it's a total of 8 wells, and that will account to approximately $160 million, plus the necessary facilities in order to evacuate that initial production.

Thank you, Horacio. Next question come from an Yang from HSBC.

First one, could you give more detail about the write-off of commercial receivables? And in which circumstances you would be able to reverse such write-off unexpected payment for the remaining balance.

More details about the write-off. The write-off, as I explained before, December and January transactions account for MXN 85 billion, that is capital plus interest. Regarding the interest, there is doubt how those will be accounted for, whether we should do a complete write-off whether they will be paid with bonds or whether they will be paid in cash. The 3 alternatives, and it's not clear what the proposal is. And just depending on that outcome, the discount could be between 30% and 50%. So our write-off stands right in the middle. It could be a slight decrease or increase depending the final outcome of the negotiation in the case that we eventually decide to assess the proposal if we are being granted other issues that are not related to the discount, but with things that may happen in the future. As this is an ongoing negotiation, I'd rather don't give much information.

Next, if we can give an update on the Nestor Kirchner pipeline status and outlook for easing the infrastructure constraint. And if there are any changes in the outlook for the pricing step of natural gas?

Okay. I think also we covered this. But again, Gasoducto Nestor Kirchner increased the evacuation capacity from the Neuquina Basin in 11 million qui meters of natural gas per day that happened in August of last year. Once the 2 compression plants that are currently being built, already, the capacity doubles. So it goes from 11 to 22. The first of this compression plant will be ready in a month or so, increasing 6 miles, so going from 11 to 17. Once the second compression plant is ready, goes from 17 million to 22 million cubic meters. And the other question is any changes in the outlook of, as you know, there is the plan gas scheme that hasn't basically said volume and prices, commitment of volume and prices for the industry until 2028. So no, we are not expecting any changes to that.

Next question comes from Paula Larga from TPCG.

First one is, is there any other Energia as tariff increase in the upcoming months? The last one was 74% in February.

Paul, yes, you are right. It was a 74% increase in February. I don't recall when it was the previous adjustment, but I think it was in February of former year. So this 74% lagged significantly. The inflation that was accumulated throughout the former 12 months. So it was short of the expectation of the industry. And since then, we have been running, unfortunately, high inflation every month. So we hope it will come in the next few months. Actually, we hope it will come in the next few weeks. But honestly, I cannot give you any clarity because, as I said previously, there haven't been any at least from our side. I don't know if our colleagues but from ourselves, we haven't been any discussion with the authorities.

Second, would you please give more color on the petrochemical business sales.

The petrochemical business sales. The Petkim has 2 parts. One, what we call the reformer that it's a business that its drivers are more related to international prices, basically price of crude, vis-a-vis refined products and this international spread of those pricing drives the economics of this part of the business, which in the past few years has been profitable has been in good levels vis-a-vis former years, and at least what we are seeing in the future markets is that this trend will continue. The other part of the business, what we call the credits, those are more related to the economic activity, especially because it's related to across all industries, especially constructions, but many other industries, durables, many other industries we've suppliers of many industries. And so it's more dependent on the economic activity of the country. We have already seen significant declines of 15%, 20%, 25% vis-a-vis and part of that, you've seen that on the figures that we published yesterday. And we think that this trend will continue until the rewon the economy comes, hopefully at some point in the second semester.