YPF First Quarter 2020 Results

YPF has reported its Q1 2020 results.

Highlights:

• Revenues for Q1 2020 were Ps 174.7 billion, which represents an increase of 33.4%, compared to Q1 2019.

• Operating income for Q1 2020 was Ps 14.8 billion, 39.2% higher compared to the operating income in Q1 2019. On the other hand, Adjusted EBITDA for Q1 2020 was Ps 52.2 billion, 31.0% higher than the Adjusted EBITDA in Q1 2019.

• Operating cash flow was Ps 59.0 billion for Q1 2020, 38.3% higher than the Ps 42.6 billion reported for Q1 2019.

• Capital expenditures in property, plant and equipment for Q1 2020 were Ps 36.7 billion, 21.0% higher than Q1 2019.

• Total hydrocarbon production for Q1 2020 was 510.3 Kboed, 4.9% higher compared to Q1 2019.

• The average crude oil processed for Q1 2020 was 275.4 Kbbld, 2.4% higher than Q1 2019, while refinery processing levels were 86.2%.

Revenues for Q1 2020 were Ps 174.7 billion, an increase of 33.4% compared to Ps 130.9 billion in Q1 2019, primarily due to the below factors. It should be clarified that these variations were impacted by the mandatory isolation measures implemented by the government as of  mid-March 2020 to prevent  the circulation and spread of the COVID-19 virus.

• Diesel revenues in Q1 2020 amounted to Ps 61.2 billion, a Ps 16.5 billion or 37.0% increase when compared to Q1 2019;

• Gasoline revenues in Q1 2020 amounted to Ps 41.2 billion, a Ps 9.9 billion or 31.6% increase when compared to Q1 2019;

• Natural gas revenues in Q1 2020 amounted to Ps 16.3 billion compared to Ps 12.5 billion in Q1 2019, which represents an increase of Ps 3.8 billion, or 30.1%;

• Retail  natural  gas  revenues  (residential  customers  and  small  business)  and  through  its marketing to large customers (power plants and industries) in Q1 2020 reached Ps 5.9 billion, which represents an increase of Ps 0.5 billion, or 9.2%, from Ps 5.4 billion in Q1 2019;

• Other  domestic  sales  in  Q1  2020,  which  include  petrochemicals,  fertilizers,  jet  fuel  and lubricants, among others, totaled Ps 25.5 billion which represents an increase of Ps 5.7 billion or 28.6%, from Ps 19.8 billion in Q1 2019;

• Export revenues in Q1 2020 amounted to Ps 24.7 billion, which represents an increase of Ps 7.4 billion, or 42.9%, from Ps 17.3 billion in Q1 2019.

Costs

Cost  of  sales for Q1 2020 was Ps 145.9 billion,  39.3% higher than Q1 2019. This includes a  54.4% increase  in  production  costs  and  23.0%  increase  in  purchases.  Cash  costs,  which  include  costs  of production and purchases but exclude depreciation and amortization, increased by 38.1%. This increase was driven primarily by the following factors:

a)   Production costs

• Depreciation of property, plant and equipment amounted to Ps 41.7 billion in Q1 2020, compared to Ps 26.9 billion in Q1 2019, which represents an increase of Ps 14.8 billion or 55.0%;

• Lifting costs amounted to Ps 32.2 billion in Q1 2020, which represents an increase of  Ps 10.4 billion, or 47.6%, from Ps 21.8 billion in Q1 2019;

• Royalties and other production related costs in Q1 2020 amounted to Ps 11.3 billion, from Ps 7.9 billion in Q1 2019, which represents an increase of Ps 3.4 billion, or 43.8%;

• Refining  costs  in  Q1  2020  amounted  to  Ps  6.9  billion,  from  Ps  4.3  billion  in  Q1  2019,  which represents an increase of Ps 2.6 billion, or 60.5%;

• Transportation costs in Q1 2020 amounted to Ps 6.2 billion, which represents an increase of Ps 2.0 billion, or 49.3%, from Ps 4.2 billion in Q1 2019.

b) Purchases

• In Q1 2020 crude oil purchases from third parties amounted to Ps 14.6 billion, which represents an increase of approximately Ps 5.0 billion, or 52.1%, from Ps 9.6 billion of Q1 2019;

• Biofuel (biodiesel and bioethanol)  purchases in Q1 2020 amounted to Ps  9.8 billion,  which represents an increase of Ps 2.3 billion, or 31.2%, from Ps 7.5 billion of Q1 2019;

• Purchases  of  natural  gas  from  other  producers  for  resale  in  the  retail  distribution  segment (residential customers and small businesses) and from its marketing to large customers (power plants and industries) in Q1 2020 amounted to Ps 2.9 billion, which represents a decrease of Ps 0.7 billion, or 20.4%, from Ps 3.6 billion in Q1 2019;

• In Q1 2020, a positive stock variation of Ps 10.9 billion was recorded, compared to the positive stock variation registered in Q1 2019 of Ps 4.2 billion, mainly as a result of a higher inventory generation.

Selling expenses for Q1 2020 amounted to Ps 13.9 billion, an increase of 41.3% compared to Ps 9.8 billion in Q1 2019. Higher charges were recorded for transportation of products, mainly related to the higher rates paid for domestic transport of fuels, higher charges for taxes, fees and contributions mainly due to the increase in exports withholdings, higher charges for depreciation of fixed assets and higher personnel expenses, among others.

Administration expenses for Q1 2020 amounted to Ps 6.7 billion, an increase of 41.5% compared to Ps 4.8  billion  in Q1  2019. The increase was  mainly due  to higher  personnel  expenses,  higher fees  and remuneration for services, higher charges on depreciation of fixed assets, higher IT costs on computer licenses,  many of  which  are denominated in  U.S.  dollars,  partially offset  by lower  charges related  to institutional advertising.

Exploration  expenses  for  Q1  2020  amounted  to  Ps  0.7  billion,  representing  a  decrease  of  52.9% compared to Ps 1.5 billion for Q1 2019.

Other operating results, for Q1 2020 represented a gain of Ps 7.4 billion, compared to the gain of Ps 0.6 billion for Q1 2019. This variation is mainly explained by the Development Agreement of the Bandurria Sur area in January 2020 where YPF was notified of the acquisition by Shell Compañía Argentina de Petróleo S.A. and Equinor Argentina AS of the entire Schlumberger Oilfield Eastern Ltd (“SPM”) share package. This assignment required the payment by SPM of the pending price amounting to Ps 6.4 billion, which has already been received by YPF.

Financial results, net, for Q1 2020 represented a loss of Ps 10.6 billion, compared to the gain of Ps 8.0 billion in Q1 2019. As such, higher negative interests were registered in Ps 6.1 billion during Q1 2020 and compared to the same period of 2019 product of higher average indebtedness, measured in Argentine pesos. Additionally, a lower positive foreign exchange was registered over net liabilities in Ps 7.8 billion, due to the lower depreciation of the Argentine peso observed during Q1 2020 compared to Q1 2019. In turn, there were higher negative charges for valuation at fair value of financial assets of Ps 2.7 billion, mainly  due  to  the  fall  in  the  price  of  public  bonds  BONAR  2020  and  2021  in  the  first  quarter  2020 compared to a gain of Ps 1.3 billion in Q1 2019. Lastly, in Q1 2020 there were greater negative financial updates of Ps 1.3 billion.

Income tax expense during Q1 2020 amounted to a gain of Ps 0.8 billion, compared to a loss of Ps 28.4 billion for Q1 2019. This difference was mainly driven by the positive charge for deferred tax registered in Q1 2020 for Ps 1.2 billion compared to the negative charge of Ps 7.1 billion registered in the same period of 2019, whose origin is mainly linked to the effects of the movement of the exchange rate in both periods. Additionally,   the   2019  charge   is   mainly   impacted   by   the   decision   adopted   by  the   Company's administration on March 21, 2019, in which it informed the Board of Directors the decision to adhere to the tax revaluation and the payment plan for proceedings in the National Fiscal Court.

Net income for Q1 2020 was a gain of Ps 6.4 billion, compared to the loss of Ps 8.2 billion in Q1 2019. Capital expenditures for property, plant and equipment in Q1 2020 were Ps 36.7 billion, a 21.0% increase compared to the capital expenditures made during Q1 2019.

Revenues were Ps 80.8 billion for Q1 2020, an increase of 45.5% compared to Q1 2019, primarily due to the following factors:

• Crude oil revenues amounted to Ps 61.9 billion, an increase of 54.8% or Ps 21.9 billion compared to Ps 40.0 billion in Q1 2019 as the intersegment price of oil increased by approximately 44.4% measured in Argentine pesos. The average realization price for crude oil in dollars during Q1 2020 decreased by 8.5% to US$ 48.5/bbl. Crude oil volume transferred between segments increased 3.0%;

• Natural gas revenues reached Ps 19.5 billion, 35.8% or Ps 5.1 billion higher than the Ps 14.4 billion in  Q1  2019  as  a  result  of  a  15.3%  increase  in  the  average  price  in  pesos  considering  the devaluation occurred between both periods. The average realization price for the quarter in dollars was US$ 2.76/Mmbtu, 25.2% lower than in Q1 2019. Moreover, volume sold between segments increased by 18.4% compared to Q1 2019 since YPF captured more demand by power plants, distributors, and exports that allowed sales to increase compared to Q1 2019, which was strongly influenced by excess supply compared to domestic demand, and consequently, low production of gas;

• As it was mentioned previously, Other operating results, net, increased by Ps 6.1 billion compared to Q1 2019 mainly due to the Development Agreement for the Bandurria Sur area, where YPF was notified of the acquisition by Shell Compañía Argentina de Petróleo S.A. and Equinor Argentina AS of  the  entire  Schlumberger  Oilfield  Eastern  Ltd  (SPM)  share  package  in  January  2020.  This assignment required the payment by SPM of the pending price amounting to Ps 6.4 billion, which has already been received by YPF.

Total  hydrocarbon  production  for  Q1  2020  was  510.3  Kboed,  4.9%  higher  than  Q1  2019.  Crude  oil production  only  declined  0.6%,  resulting  in  225.1  Kbbld,  being  affected  by  the  process  of  assigning marginal areas which ended in July 31, 2019, whose production during the first quarter of 2019 was 0.8 Kbbld. The production of natural gas increased 10.0% compared to the same period of 2019, reaching 38.2 Mm3d, driven by the increase in demand by power plants, distributors, and exports that allowed to increase sales, thus reducing temporary production curtailments. It is noteworthy to highlight that in the first quarter of 2019 there was an excess supply compared to domestic demand, which impacted natural gas  production  resulting  in  the  temporary  closure  of  production  in  some  locations,  as  well  as  the reinjection of hydrocarbons. In turn, NGL production increased 7.8% to 44.9 Kbbld given that production cuts were reduced during the first quarter of 2020 compared to the first quarter of 2019, when there was a low retention of liquids associated with gas due to restrictions in natural gas production.

Regarding the development activity, in Q1 2020, 69 new wells have been put into production, including the non-conventional shale and tight wells described below, of which 16 are not operated.

During Q1 2020, in the shale areas, YPF´s net hydrocarbon production reached 117.2 Kboed, of which 75.0%  comes from  YPF’s  operated  areas.  This  level  of  production  represents  an  increase  of  62.6% compared to Q1 2019. This production is comprised of 43.4 Kbbld of crude oil, 16.8 Kbbld of NGL and 9.1  Mm3d  of  natural gas.  Regarding  the operated  development  activity,  22  wells  have  been  put  into production targeting the Vaca Muerta formation (3 non-operated), reaching a total of approximately 853 active wells of which 89 are not operated, with a total of 13 active drilling rigs and 5 workovers before it started the quarantine period in mid- March, then they remained stand-by.

With respect to tight development, net production in Q1 2020 reached a total of 9.4 Mm3d of natural gas, plus 3.1 Kbbld of  NGL and 4.6 Kbbld of  crude oil, of  which 87.0% comes from YPF operated areas. Regarding  the  operated  activity  conducted  during  the  period,  1  new  well  was  put  into  production  in Estación Fernández Oro.

Operating costs (excluding exploration expenses) for Q1 2020 totaled Ps 86.4 billion, a 54.8% increase compared to Q1 2019, of which we highlight the following:

• Depreciation of property, plant and equipment amounted to Ps 35.2 billion in Q1 2020 compared to Ps 23.1 billion in Q1 2019, representing an increase of approximately Ps 12.1 billion, or 52.2%, mainly due to the appreciation of the assets considering their valuation in U.S. dollars, which is the functional currency of the Company;

• Royalties  and  other  production  related  costs  in  Q1  2020  amounted  to  Ps  11.3  billion,  which represents an increase of Ps 3.4 billion, or 43.8%, compared to Ps 7.9 billion in Q1 2019. Of this increase, Ps 2.9 billion, or 48.7% was related to royalties in connection with crude oil production, and Ps 0.5, or 28.0% billion was related to royalties for natural gas production, in both cases due to higher wellhead values of these products measured in Argentine pesos;

• Transportation costs related to production (trucks, pipelines and polyducts in deposit) for Q1 2020 amounted to Ps 2.9 billion, an increase of approximately Ps 1.3 billion, or 84.1%, compared to Ps 1.6 billion for Q1 2019 due to higher tariffs measured in Argentine pesos and higher activity in unconventional areas.

 Exploration expenses for Q1 2020 amounted to Ps 0.7 billion, a decrease of 53.0% compared to Ps 1.5 billion for Q1 2019, mainly due to lower negative results from unproductive exploratory drilling during the quarter in a differential amount of Ps 1.0 billion, and due to higher expenses relating to geophysical and geological studies in an amount of Ps 71 million. Exploratory investment during Q1 2020 was 95.7% lower than in Q1 2019.

Unit operating cash costs in U.S. dollars decreased 12.7% to US$ 17.6/boe in Q1 2020 from US$ 20.2/boe in Q1 2019, including taxes of US$ 4.7/boe and US$ 5.6/boe, respectively. In turn, the average lifting cost for YPF in Q1 2020 was US$ 11.3/boe, 11.7% lower than Q1 2019.

Capex

Capital  expenditures for  the Upstream  business segment for Q1 2020 were  Ps  29.3 billion,  a 18.0% increase  compared  to  Q1  2019.  Of  these  capital  expenditures,  73.5%  were  invested  in  drilling  and workover activities, 23.7% in facilities and the remaining 2.8% in exploration and other activities in the Upstream business segment.

The activity during Q1 2020 was mainly focused on shale oil, on the development of the Loma Campana, La Amarga Chica and Bandurria Sur blocks. In addition, the activity and studies on the Chihuido de la Sierra Negra pilot continues.

Regarding conventional oil, activities were focused on primary recovery projects developed in Ugarteche, Llancanelo, Mesa Verde, Manantiales Behr, Cañadón Yatel, El Trébol-Escalante and Seco León blocks as well  as secondary recovery projects mainly in the  Desfiladero  Bayo,  Manantiales  Behr,  Barranca Baya and Los Perales blocks, among others. In turn, as expected, the investment activity focused on tertiary recovery continued, mainly in the Manantiales Behr, Los Perales and Desfiladero Bayo blocks.

Shale gas activity during Q1 2020 was focused on the non-operated La Calera and Aguada Pichana Este blocks.