Good morning, ladies and gentlemen. Thank you for waiting. I am Margarita Chun from IR, and we would like to welcome everyone to Pampa Energía's first quarter 2023 results video conference. We inform you that this event is being recorded. All participants will be in listen-only mode during the presentation. After the company's remarks, there will be a Q&A session. Questions can only be submitted in writing through Zoom. Should any participant need assistance, please send us a chat message. Before proceeding, please read the disclaimer that is located on the second page of the presentation. Let me mention 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 will turn the video conference over to Lida Wang, Investor Relations and Sustainability Officer of Pampa Energía. Please go ahead.
Thank you, Margarita. Hello, everyone, and thank you for joining our conference call. I will try to make it short and skip some parts already explained in the earnings release so we have plenty of time for Q&A with our CFO, Mr. Nicolás Mindlin, and our special guest here, Mr. Horacio Turri, our Head of Upstream. Let us start with the quarter's figures and go straight to the adjusted EBITDA, which amounted to $206 million in the Q1, 8% less year-on-year, mainly because of Barragán's old PPA, TGS's lagged tariffs, and higher payroll in dollar terms, offset by the addition of PPAs and a solid power dispatch, better gas and spot prices, plus Transener's tariff increase. However, the EBITDA increased 12% quarter-on-quarter because of the PPA additions, Transener's tariff, and higher liquid margins in TGS, offset by soft gas sales and lower reforming sales.
It is worth to note that 76% of the EBITDA was dollar-linked. As you can see in the right below, the share between electricity and oil and gas is almost even, though power is leading the pipe, thanks to our PPAs. CapEx in Q1 more than doubled year-on-year, mainly because we kick off a new wind farm in PEPE 6, plus YPF shale drilling and completion activity in preparation for the winter peak season. Moving on to power generation. As seen on slide 4, we posted an EBITDA of $108 million in Q1, down 11% year-on-year, but up 26% quarter-on-quarter, mainly explained by Barragán's old PPA that expired in April last year, and higher labor expenses offset by the addition of wind farms, plus the kickoff of Barragán's new PPA in late February of this year, and better spot prices, thanks to a special remuneration for legacy CCGTs.
Q1 dispatch rose 11% year-on-year above the national power grid 8% growth in response to a hot wave that drove new records of power demand. Barragán's new CCGT contributed most of the increased load factor, offset by less Bolivian fuel and forced unscheduled outages at some thermal units restored within the quarter. Availability is essential to collect take-or-pay capacity payment, especially from PPAs contributing most of the EBITDA. In Q1, we reached 93%. This is below last year's almost 98% availability rate due to the thermal outages mentioned before, but still outstanding compared to the grid's 69% availability. Moving on to wind farm expansions. Regarding PEPE 4, the project is highly advanced. In April, we commissioned 18 more, so we have 54 MW online out of the 81 that is the total installed capacity.
In addition, almost all the remaining wind turbines are assembled, and we estimate to complete the COD by the end of this month. Regarding PEPE 6, we also kick off the second phase this month, adding 45 MW more. So the total capacity will be 140 MW by investing approximately $265 million. For the first phase of 95 MW, we just started with the civil works for the pads, platforms, and the foundations. For the second phase of 45 MW, we are procuring 10 additional Vestas wind turbines. We estimate to achieve COD next year, the first phase by Q3 and the second phase by Q4. Keep in mind that PEPE expansions are sold under B2B PPAs. Also, to finance this PEPE 6, we issue in May our second green bond in pesos in the local market, raising an equivalent to $22 million due in one year.
In slide 6, our E&P business posted a total adjusted EBITDA of $62 million in Q1, 10% up year-on-year because of the gas export prices and local oil demand, offset by lower gas export volumes and soft retail demand that drove production curtailment, plus there's higher costs for payroll and growing activity. However, quarter-on-quarter, EBITDA is down 14%, driven by steady curtailment and labor expenses. Our total lifting cost almost doubled yearly, explained by payroll and increased activity. However, it decreased quarter-on-quarter due to lower facility costs from El Mangrullo block. Efficiency-wise, the lifting cost per BOE was up 23% year-on-year, but very similar, stays similar quarter-on-quarter, recording $7 per BOE. In Q1, our total production average almost 58,000 BOE per day, crude oil representing 9% of that.
Still, it reached 24% of the segment's revenues, mostly because of increased local demand offset by the drop in the Brent pricing, getting a realized price of almost $68 per barrel. Our gas production in Q1 was similar yearly, but slightly down quarterly, averaging almost 9 million cubic meters per day, mainly explained again by the weaker retail demand vis-a-vis the seasonal contracted volumes under Plan Gas, in addition to lesser exports to Chile as permits were limited. Furthermore, though the country experienced a record high power demand at thermal and stored capacity fire as much as possible, CAMMESA was not able to procure additional gas because of pipeline bottlenecks. Hence, El Mangrullo output was curtailed during the quarter to 5.7 million cubic meters per day. However, Sierra Chata, with 6 drilling connected shale gas well, have been upstanding, dramatically increasing the production.
As you can see below the production, the results of Sierra Chata outperformed the benchmark. El Mangrullo also performs very well within the average among peers. We rely on both blocks to ramp up production, each reaching an all-time high, supported by excellent results from our shale gas wells. The average gas price of the quarter was $4 per million BTU. This is an 11% year-on-year increase, mainly due to export prices. In Q1, sales were skewed to CAMMESA as they were buying gas to up from the high power demand. Exports were lower, but remain under take-or-pay contracts until June of this year. The petrochemical business posted $7 million EBITDA in Q1, primarily contributed by styrene and polystyrene sales, plus lower cost of propane, offset by a fall in SBR volume and higher labor costs.
However, quarter-on-quarter it shrunk by more than half, driven by a reduced supply of raw gasoline and export margins. Sales volume was up 13% year-on-year, mainly because last year some reforming products were dispatched as façon, so not billed as volume sold. In Q1, 39% of the total sales were exported. Moving to the cash flow. In Q1, we recorded a free cash flow outflow of $29 million. This is mainly due to the expansionary CapEx that we are doing in power and gas. Higher debt service, driven by peso debt through principal debts diluted by devaluation, plus worsening of payment collections from CAMMESA that it went from 70 days to 100 days full cycle collection. That represents roughly $80 million of working capital burden. In addition, we raised $97 million net from the local market.
In summary, we generated $68 million of net cash flow in the quarter, achieving $768 million cash in the end of the period. Moving to slide 11, we show our consolidated financial position, including our ownerships, the affiliates of ownership. Just let's focus on the restricted group that reflects the bond perimeter. We posted a gross debt of $1.7 billion. This is similar to the last quarter. Net debt and leverage ratio decreased thanks to our solid cash flow position generation, recording $900 million and 1.2 x leverage. The average life also reduced to 3.4 years. Taking advantage of the domestic liquidity, we kept diversifying the currency and source. As a result, 81% of the dollar denominated offshore bearing an interest rate of 8.5%. Peso debt bears an interest rate below trailing CPI, so onshore debt in dollars is zero coupon.
Also, as mentioned before, we recently raised a second green bond for ARS 5 billion, that's $22 million roughly, and issued $56 million of hard dollar bonds in the local market. This is known MEP, maturing in 2025 at 5%. A few days ago, we announced the redemption of the remaining 2023 bonds for around $93 million. Until 2027, Pampa Energía does not face any relevant debt maturities. This concludes our presentation. Now, I will turn to Margarita, so she will poll for questions. Thank you very much.
Thank you, Lida. Now, the floor is open for questions. If you have questions, please send us through Zoom chat. We will read and answer them in the order received. Also, please make sure your name and company are correctly displayed to introduce you to the audience. Should any participant need assistance, send us a chat message or raise your hand. Please hold while we poll for questions. Our first question is from María Moyano from the company Adcap. She would like to know, regarding the company situation, to access to the official effects for principal of debt payment and import of equipment. What are the company tools to have access to the official effects of the Central Bank?
Okay. My turn. Okay, so as for now, we are not having any issues to access to USD for imports of capital goods and raw materials. But we have seen some delays in the case of services, but nothing significant. For the maturities and interest payments, we have not had any problem so far. If the Central Bank stops selling us USD, we will need to finance those dollars abroad. But I think that given the current conditions, it will be at very expensive rates. So, if that happens, I think we should reassess our aggressive strategy regarding CapEx and investments. But we don't see this happen in the near future.
Thank you, Nico. The next question is from Paula La Greca from TPCG. She has three questions, and the first one is: how are collections from the Plan Gas, and the Néstor Kirchner pipeline doing? Has there been any delay?
The situation with CAMMESA's payments, and also regarding Plan Gas subsidy, have deteriorated a lot in the last few months, and it has reached a delay equal to the worst that we have seen, that is of approximately 100 days. So as of today, the debt amounts to ARS 40 billion, approximately, in the case of CAMMESA, and ARS 2 billion in the case of Plan Gas subsidy. This debt accrues interest per Banco Nación active interest rate, that is around 104%. But to mitigate this issue, we issued everything pesos in the last few months, taking advantage also of the liquidity in local markets, and this acts like a hedge against a discrete devaluation. So we are hedging this with these instruments, and also we can hedge this in the future dollar market.
Thank you, Nico. The second question of Paula is: is there any plant that could enter into the new PPA contract under the Resolution 59? This is the differential remuneration for combined cycle in the spot market.
Hi. Sorry. Yes, besides Loma La Lata legacy CCGT and Genelba legacy CCGT, we managed to include Ensenada gas turbines. They are part of a CCGT, but the gas turbines are under legacy, though they are very important, so we managed to include them as if they are CCGT. All in all, we are calculating that the total impact of Resolution 59 will be around close to $19 million in 2023. However, a lot of that it's offset by the devaluation curve, if there's any further inflation adjustments to the legacy pricing.
Thank you, Lida. The last question of Paula is regarding E&P business. Do you have any sensitivity analysis of how much an increase of 1% in inflation impact on lifting cost? She has one more in the E&P, but let's focus on the first one.
Hello, everybody. Okay, can you hear me now? Well, this question needs further analysis, since now we have most of our costs based in US dollar-linked. What we are seeing is particularly a significant increase in wages and dollar inflation is starting to pick up. But all in all, we understand that probably we will have 1/3 of the inflation being transferred to the lifting cost, not more than that.
Thank you, Horacio. Paula's last question regarding E&P business is, how much more expensive or cheaper is to produce natural gas in shale fields than in tight gas fields?
There is a trade-off there between CapEx and OpEx. In terms of CapEx, obviously the shale wells are more expensive than tight wells. But from an OpEx standpoint, as you are producing in high pressure rather than medium and low pressure, you don't need any compression. That significantly reduces the lifting cost in the shale fields, vis-a-vis the tight.
Thank you, Horacio. The next question is from Alejandro Demichelis from Nau Securities. He has two questions, but the first one is very related to the E&P business. How do you see inflation impacting on the drilling and completion, especially on the shale wells and the OpEx? I think it is covered, but if you want to add something more.
Okay. I think he is particularly asking about drilling and completion. In that sense, we have seen approximately a 10%-15% increase in D&C costs, always related to dollar link, when you compare to last year.
Thank you, Horacio. The second question of Alejandro is regarding power generation business. What is the appetite of the company to join the potential tender of thermal power plants that they are saying in the media right now?
Of course, we will be starting this project to see if we can participate at competitive prices. Since the beginning of Pampa, we have participated in every round to add power generation. Our main focus this year is in our very aggressive investment plan to ramp up gas production and to grow our renewables capacity.
Thank you, Nico. The next question is from Bruno Montanari from Morgan Stanley. He has three questions. The first one is regarding the E&P business once more. Can you comment on gas demand in the second quarter of the year? You mentioned on the release that retail demand was soft in Q1, and there were also bottlenecks with pipelines. We would like to get a sense of how much volume are performing right now. Do you see more space for Pampa to increase export to Chile on top of the additional 0.9 million cubic meters per day recently awarded?
All right. Well, demand is picking up. In the past week, we are starting to see some low temperatures, and we foresee that probably we will go to the 9 million cubic meters per day that was mentioned before, to around 11 million cubic meters per day during next week, and stabilizing in around 12 million cubic meters, which is what we had forecasted for this time of the year. We will keep on increasing our production, reaching 15.6 with the commissioning of the Néstor Kirchner pipeline. This is what we can say about our projected production for the coming months. Regarding exports to Chile, we have already been awarded additional 900,000 cubic meters a day, May and June, and an additional almost 900 more million cubic meters per day, July- September. I don't foresee any additional exports being granted to Pampa in that period, rather than that.
We will be exporting around 2.2 million May- June, and we will go to 900,000 July- September.
Thank you, Horacio. The second question of Bruno is regarding CapEx. How much of the 2023 and 2024 projects are already fully constructed in terms of equipment and also prices? Do you see any challenges with securing the necessary equipment, or are you seeing any inflationary pressure?
Okay, what we committed for 2023, which basically is the additional 4.8 million for the commissioning of the Néstor Kirchner Pipeline, is all of it drilled and already cemented and cased. We only are missing the completion of approximately 60% of the wells, which we think and are confident in delivering by the commissioning of the pipeline. I think that answers the first topic of the question. Second was if we have to secure equipment. We don't think that's going to be necessary until the beginning of next year. We already have contracts with drilling and completion companies that secure our campaign until September of this year. We will restart our negotiations for long-term ventures, particularly with completion companies to secure equipment for 2024 and 2025.
Thank you, Horacio. The last question of Bruno is regarding macro side. It sounds like Argentina could be getting closer to a material official currency devaluation. Can you help us understand how Pampa is preparing itself for the day after the potential devaluation?
Firstly, around 80% of our income is US dollar-linked, and the rest is adjusted by inflation, but is also affected by devaluation. I think the main negative impact for us would be regarding the outstanding debt of CAMMESA, that if it's already pending, it's adjusted also by an interest rate in pesos, but will be affected negatively if we have a discrete devaluation. On the other hand, as I mentioned before, we have a big amount of debt in pesos that we issue in the last month, taking advantage of the liquidity in the local markets, and that debt will also be diluted in case of a devaluation. As our debt in pesos is higher than our credit, I think the net impact should be positive for us. We are also hedging our credit with CAMMESA in the US dollar future market in ROFEX.
Also an important part of our liquidity is in dollar-linked corporate bonds. I think we are prepared for that scenario.
Thank you, Nico. The next question is from Matias Castagnino, from BCP. The first question is regarding spot energy combined cycle differential remuneration. This is Resolution 59. In which currency is being collected? If it's in pesos, what is the increase?
Hi, Matias. Basically, in general, last year, the Secretary of Energy already scheduled increases, and they scheduled one of 25% in general for all the legacy units in pesos. There is another one upcoming in August, and that is it. It is accumulated in 2023 of 60%. Of course, devaluation is higher than that, so we expect further increases to match it up. Beyond that, CCGTs are the legacy scheme. They are granted a sort of a partial dollar pricing. It is a way to kind of hedge their costs in dollars. Dollar-wise, right now, they are a little bit ahead, but it is not that significant. Yes, for example, in a discrete devaluation, they will be better because partially they are in dollars. This partial remuneration dollars starts in March of this year. It started already in March of this year.
Thank you, Lida. Matias' second question is also regarding power generation. If in dollar terms, the legacy energy got increased and the PPAs are dollar linked, why the average price in dollar per MW term decreased?
Well, unfortunately, this quarter we experienced some outages in the thermal units in Loma, with the commissioning process of Ensenada Barragán , and so on. Availability is very important. As you know, it is 93% in this quarter, but it is already solved and in the Q2, it is back to close to 100% that we usually do. But the lower footprint on availability affected the take-or-pay side of the remuneration. That basically contributed to the EBITDA. Then also, for those contracts that are not under take-or-pay, that is MATER, Villa Plus, especially MATER, the wind farms did not perform very well. The wind side capacity factors as not as we expected. Basically, that is the two reasons behind why the average pricing was weaker this quarter.
Thank you, Lida. Matias' third question is regarding gas production. Considering the quarter decrease in gas production, the release refers to commercial issues. Does it affect the future expansion of Vaca Muerta? We thought that any additional surplus production could be destined to export if local demand is satisfied.
Okay. The nature of consumption in Argentina is highly seasonal. What we saw during the past summer was a reduction of the retail demand and an increase in CAMMESA's demand, particularly. Now, the problem is that CAMMESA did not retain enough firm transportation, so it was not able to acquire all the natural gas that it needed, and that this finally impacted in the need to burn liquid fuels during the summer season. So, the issue was that our reduction in sales was linked to an availability of transportation from CAMMESA. Now, for the future, we don't foresee that problem happening, partially at least, with the commissioning of the Néstor Kirchner pipeline and the future expansions of the transportation system. Now, regarding the question of exports to Chile, now we are exporting all of the transportation capacity that is available to Chile.
What we will see probably in the coming future is a possibility of exporting additional volumes to Chile through another pipelines that connect Argentina and Chile, in the central region and also in the north. But, with the restriction of first having to redirect the gas flows from the north to the south in the Noroeste pipeline, and turning it from Vaca Muerta into the north of Argentina and further into the north of Chile.
Thank you, Horacio. The next question is regarding petrochemical business. This is the fourth question of Matias from BCP. Considering the decrease in the sales benefit of pet chem business compare quarter-on-quarter, do you see any pressure on the prices or margins in this segment?
There are different factors affecting EBITDA this year in comparison to last year. First of all, during the first quarter, we have processed less virgin naphtha in the reformer. The situation has already normalized for the second quarter. Also, international spreads between virgin naphtha that we process on aromatic bases that we sell, and also between benzene and styrene have worsened this quarter. And our fixed costs in dollars have increased also because of the impact of inflation against devaluation. On the other hand, local premiums in prices in styrene and polystyrene have risen due on current local macro conditions.
Thank you, Nico. Matias' last question is regarding the debt market. Why are you executing debt in pesos at a variable rate and not dollar-linked? Yes, that is the question.
First of all, Badlar rate is lower than inflation. Secondly, we are also taking debt in pesos from local banks at fixed interest rates that are below inflation. Third, we also issue dollar-linked debt, almost $100 million this year. In the case of devaluation, it's much better to have debt in pesos than dollar-linked. If we take into account the current situation, we prefer now to have more debt in pesos, even at a floating rate that is below inflation, and that is negative in real terms, than in dollar-linked.
The first one was partially covered before.
No, it has not.
I think it was already covered.
Yes. Thank you. It was already covered. The second question is, could you please comment on the media report that mentioned that the government would not extend expiring hydro concessions?
Well, not much to comment on that. Basically, we've been asked for information. We have two hydropower plants that are due next year, June and October. The Mendoza area power plants, and the other one, Pichi Picún Leufú, the one that's in Neuquén, it matures in late 2029, I think. Basically, they're far away for now, but we've been asked for information, not more than that. We provision some expecting what happens with the concession, but the concession agreement says that if it ends, we part ways. We don't get anything, and we don't have to pay anything for the concession.
Thank you, Lida. The next question comes from Andres Cardona. Once more, for the E&P business. What have you learned so far from shale wells in terms of drilling cost per well completion, lifting potential EUR per well?
Well, so far, the experience with shale wells for Pampa was very successful, particularly in terms of productivity. We were able of finding sweet spots both in Mangrullo and Sierra Chata. We were surprised with the performance of the wells. As Lida showed before during the presentation, we had one of our flagship wells in Sierra Chata, with an output of more than 1 million cubic meters per day, which ranks top three in the Neuquén Basin. So from productivity standpoint, we feel pretty confident in going and proceeding with the development of Vaca Muerta. In terms of potential EUR, it depends on where you're looking at Mangrullo or Sierra Chata, but that would range from 20 to 27 BCF per well. So, also looks like very promising. Regarding cost per well and drilling, we are still in very early stages.
We are running the pilot programs right now, so probably we will see a significant decrease in our investment per well in the development phase.
Thank you, Horacio. The next question comes from Daniel Guardiola. This is regarding the Néstor Kirchner pipeline. Can you comment on the progress of the Néstor Kirchner pipeline, and what is the EBITDA generation expected for Q2 and Q3? Daniel Guardiola is from BTG.
Okay. Néstor Kirchner pipeline is doing pretty well. We probably see the pipeline being commissioned by the end of June, first days of July. So it will be on schedule. We are ready to deliver the gas that we committed for the Plan Gas, for this new demand, which is approximately 4.8 million cubic meters per day of additional gas. That will obviously have a significant impact in the EBITDA generation for the second and third quarter of 2023.
Thank you, Horacio. Alejandro Demichelis also asked regarding the Néstor Kirchner pipeline that we already covered. Daniel Guardiola has another question, but this one regarding power generation. Is there any other PPAs expiring this year or next? What is the expected effect in terms of EBITDA generation? In this question, we do not have PPAs expiring in the next four, few years. The next expiration is in 2026. Of course, most of the EBITDA is dollar-linked because PPAs are in dollars, and they generate roughly more than 75% of the power generation business.
Yeah. The next is just one PPA expiring in 2026. It is a small one, but a big chunk. It is 305 MW. It is in 2027. The next ones is in 2035, 2038, and 2040. We have plenty of time.
Thank you, Lida. The next question comes from Anne Milne from Bank of America. She has a question regarding new tariff schedule for legacy power plants. Which plants are benefiting, and how much additional revenues or cash flow will this generate on an annual basis? Is there any conditional or additional CapEx expenditure required?
Hi Anne, basically, again, the benefit is. This is intended to raise, as I mentioned before, the availability of the system is declining. Actually, we are one of the all-time lows in a few years. We are right now at 69%, so the government wants to keep it up, ramp up the availability rates. Especially, so there are no excuses for maintenances. They are partially converting in dollars for the CCGTs. We are including here Loma La Lata, Genelba, legacy plants, and Ensenada Barragán. This implies around $19 million of additional revenues for Pampa. However, with the devaluation curve that we are experiencing, and assuming that there is no further increases in general for legacy prices matching the inflation, that $19 million dilutes to merely $5 million for the year. Basically, it is very important that the legacy prices keep up with inflation.
Thank you, Lida. The next questions comes from Ludovic Casrouge from Autonomy. During which month or weeks, excuse me. During which months or weeks would you reach your gas production target of 15.6 or close to 16 million cubic meters per day?
Okay. As we mentioned before, this will happen with the commissioning of the pipeline, and we foresee that happening by the end of June or first week of July.
Thank you, Horacio. The next question comes from Jim Musel from McGinty Road. This is an E&P business question. What is the average IP, initial production rate, for wells in shale gas? What is the average lateral length? What is the break-even price to support lifting CapEx and provide a good IRR?
Okay. Well, this depends very much on which field we are talking about. If we look at Mangrullo, probably you're looking at initial IPs of around half a million cubic meters. If you go to Sierra Chata, that will probably raise up to 700,000, 800,000 cubic meters per day. The lateral length of our Vaca Muerta wells is 2,500 meters, and we've been drilling and completing wells only of that lateral length. We haven't explored any longer lateral wells yet. Regarding the price, I would say that we've been bidding at prices that are reasonable for us to have a reasonable rate of return.
Thank you, Horacio. Please wait while we call for more questions. Thank you for waiting. This concludes the question and answer section. We will turn to Lida for final remarks.
Okay. Thank you for all joining us in this quarter. Unfortunately, our CEO wasn't here, but our special guest, our head of E&P here. I hope all the questions that you have been answered. If anything it's outstanding, just contact us, Margarita and I, and all the other team are freely available for you. Thank you. Have a good day, have a good week, and see you next time.