Pampa Energía S.A. (NYSE:PAM) Q3 2023 Earnings Call Transcript

Pampa Energía S.A. (NYSE:PAM) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: We would like to welcome everyone to Pampa Energía’s Third quarter 2023 Results Video Conference. We 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 forward-looking statements are based on Pampa Energía’s management beliefs and assumptions and information currently available for 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 they are related to future events that make 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 Wang, Investor Relations and Sustainability Officer of Pampa Energía. Please go ahead.

Lida Wang: Thank you, Raquel. Hello, everyone, and thank you for joining our conference call. I will make a quick summary of Q3. You may find more details in our earnings release. Today, we are having a Q&A with our CFO, Nicolás Mindlin; and Horacio Turri, our Head of BNP; and our Head of Corporate Finance. Let’s start with the quarter’s figures highlighted by the ramp-up in gas production and set a new all-time high milestone, growing shell contribution, the incremental share of efficient and green PPAs, and we’ll keep enhancing our balance sheet by increasing our liquidity. The adjusted EBITDA amounted to $244 million in Q3, similar year-on-year. Thanks to the additional output coming for the Plan Gas and contribution from new PPAs, such as wind farms and Barragan CCGT, partially offset by a drop in commodity prices, affecting crude oil Brent and PEPE and peso depreciation impacting spot energy.

However, the EBITDA grew 10% quarter-on-quarter, mainly explained by the higher gas production. It is worth noting that more than 85% of the quarter’s EBITDA was dollar linked. And the share now is led by E&P, mainly due to natural gas. CapEx in Q3 was 40% higher year-on-year, mainly because of the ramp-up activity in E&P, which is concentrated in shale gas drilling and completion of wells, plus the construction of PEPE VI wind farm, offset by the commissioning of PEPE IV last quarter. Moving on to power generation. As seen on Slide 4, we posted an adjusted EBITDA of $91 million in Q3, which is 2% higher year-on-year, mainly explained by the new PPAs at our wind farms and Barragan’s — and Barragan and lower maintenance and material costs, offset by a decline in spot and Energía Plus prices, the divestment of Mario Cebreiro Wind Farm and partial outage in July, Loma de la Lata, plus higher labor costs.

Compared to last quarter, power was 7% below. This is explained by the divestment of Mario Cebreiro and higher costs — labor costs, offset by the increase in spot prices because we’ve been granted 23% increase in pesos. Another 28% update was clear from November onwards, accumulating a 150% increase year-to-date. The dispatch in Q3 rose 32% year-on-year, led by Barragan new CCGT and more hydro at Pichi Picún Leufú and new wind farms that we built and acquired, offset by less thermal dispatch due to the lower power demand, the outage at Loma de la Lata mentioned before and the exit of Mario Cebreiro. Take-or-pay capacity payment, especially from PPAs, display most of our EBITDA. It is driven by availability. And in Q3, we reached almost 94%, below last year’s 96%.

This is because of Loma, TG #5 and the overhaul that we did in Genelba programmed overhaul. However, this is way above the grid’s 73% availability rate. Moving on to PEPE VI expansion. The project’s progress is 94%. We are working on the facilities and works with the high voltage station and testing the main transformer bank. Also the main components for the 31 wind mills arrived in and the construction of the towers is underway in Argentina. The estimated COD for the first phase of 95 megawatts is for the next year Q3 and the second phase of 45 megawatts will be by next year’s Q4. It is worth highlighting that PEPE IV energy will be sold under B2B PPA. Now moving to the E&P business. We posted adjusted EBITDA of $132 million in Q3. This is way above last quarter’s figures and 12% higher year-on-year.

The increase was driven by higher gas deliveries committed under the new Plan Gas.Ar linked to the new pipeline. This was offset by a drop in Brent prices and in oil production, plus some mild winter and pipeline delay impacted gas output. In Q3, our total production averaged above 80,000 barrels of oil equivalent per day. This is 17% higher than last year and 19% up quarter-on-quarter. In August, we reached a new all-time high production record of 16.4 million m3 per day. This is a remarkable growth of 44% from our 2022 record. Our lifting costs grew by 9% year-on-year, 5% quarter-on-quarter. This is explained by the activity ramp up. However, if you put it on a productivity perspective that comes from the new wells, this possibly impacted the lifting cost per barrel of oil equivalent, which decreased 7% year-on-year and 13% quarter-on-quarter, recorded $5.6 per barrel equivalent.

Crude oil sales stood at 4,600 barrels per day, representing 80% of the production, but 19% of the segment’s revenue, getting a realized price of $63 per barrel. 15% of the output was destined to exports. Focusing on gas, our sales in Q3 grew by 20% yearly. This is averaging almost 13 million cubic m3 per day in the quarter, mainly explained, again, by the higher volumes sold in the local market through Plan Gas. Regarding the campaign, the new shell wells performance is in line with our expectations. In Sierra Chata, the output grew more than 5x year-on-year, thanks to the 11 shell wells this year, another 3 are scheduled to start completion this month. In Mangrullo, PEPE VI has been completed and tested and results exceeded our expectations like we talked about in the last quarter.

We also drilled Pad #5, which completion is nearly finished and began drilling Pad 7, scheduled to be completed by next year Q1. Each pad has 3 wells. The average gas price for the quarter stood at $4.7 per MMBtu, similar year-on-year and quarter-on-quarter. As you can see below, the retail share downside because of the incremental deliveries under Plan Gas testing to power plants. Other plants remain very similar to last year. So as you can see here, gas deliveries were above take-or-pay during the winter season, despite the pipeline delayed or warmer winter. However, going into Q4, the gas line is relenting as the warmer spring is the warmest spring in years and highest hydro in the last 15 years this is happening. So this weather phenomenon impacting the domestic sales, impacting the Plan Gas, impacting the exports to Chile because also Chile is happening the same thing and thermal power generation indirectly reducing the grid’s electricity costs.

We expect the gas demand to normalize by December. It is noteworthy to mention the importance of take or pay. This is a kind of assurance for our investment. So we move on to Petrochemical business that posted $60 million of EBITDA in Q3. This is 16% lower year-on-year because of the drop in the international prices that last year was all time high and lower reforming sales in the local market. However, EBITDA was 60% up quarter-on-quarter due to the higher domestic sales of styrene and exports of polystyrene and rubber, plus higher reforming prices. In Q3, 42% of the total sales volume was exported, up from the last year’s 38%. Well, we move on to the financial side. In Q3, we recorded a free cash flow of — free cash outflow of $90 million.

This is mainly explained by the expansion of CapEx that we are undergoing in gas and higher debt service because of the peso dep, though we benefit from the past devaluation because it dilutes our principle amount. Working capital deteriorated due to increased collection base and rates from CAMMESA since last year — last quarter, sorry. Additionally, we raised $68 million net from the local market, mostly in domestic dollars. In summary, we generated $92 million in the quarter. This is achieving $964 million cash position by the end of the period. Moving on to the Slide 11. We show our consolidated financial position, including our affiliates at ownership, but just let’s focus on the restricted group, okay, the parent company that reflects the bond perimeter.

We posted a gross debt of $1.6 billion, similar to the last quarter. However, thanks to our strong liquidity position mentioned before, the cash flow generation from the businesses. The net debt and leverage ratio decreased significantly, recording $677 million and 1x leverage. The average life was also reduced to 3.1 years until 2027. As you see in the debt profile, we don’t face any relevant debt maturity. So this concludes our presentation. Now I will turn to Raquel. So she will poll for questions. Thank you so much.

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Q&A Session

Operator: [Operator Instructions]. So the first question comes from Alejandro Demichelis from Jefferies. The first one is how do you see the evolution of production of Mangrullo going forward? And how do you see this impact in lifting costs?

Horacio Turri: Okay. Good. Well, it’s worth noting that Mangrullo started in 2017 with 2.2 million cubic meters per day. We were capable of boosting that up to 10.2 million cubic meters per day as of this year. And probably point forward, the field will be delivering around 7 to 7.5 million cubic meters a day. This has to do with the increase of production in Sierra Chata. Sierra Chata will more than counterbalance the decrease in We are observing that the wells that we drill and complete in Sierra Chata have much better productivity. And therefore, we are shifting a little bit of our production from Mangrullo to Sierra Chata. Sierra Chata started back in around 0.5 million cubic meters per day back in 2017. And we expect 2024 to reach a production of around 6 million cubic meters per day on our share of the field.

Regarding lifting costs. It’s also worth noting that in Mangrullo, we are around $0.6 per million BTU. The reduction of the production for next year and some of the reduction of this year due to the mild winter and hot spring that Lida mentioned before led to the reduction of the contribution of PM 102, which is an evacuation and treatment facility we use from YPF, which is more expensive than our own facilities. So this is why we have a reduction in the lifting cost in Mangrullo.

Operator: Okay. Thank you, Horacio. Next question is from (inaudible) what is your for power sector?

Lida Wang: Well — so (inaudible) is not here and he is in vacation let me answer this. So far, we’ve been granted some peso increases to cope with the cost variations. We are working to keep receiving more so we can have a tied up with the cost variations, but not further than that.

Operator: Okay. Thank you, Lida. Next question comes from Paula from TPCG. Could you comment about the tender our prices? And if you were awarded the PPAs for Genelba and plants?

Lida Wang: Hi Paula, yes, indeed, the tender has been finished. The offers being revealed. We did — it’s So we think that we are qualified, the technical and the economic requirements of the auction. However, there’s no resolution from the Secretary of Energy, saying which projects being awarded. So we’re still waiting for that. We present with (inaudible) 300 megawatts. It’s a new gas turbine, we will be placing in the area. And in presented enhancing the combined cycle of 11 megawatts. Both projects have been qualified to this auction.

Operator: Next question comes from Santiago Wesenack from Latin Securities. He asks about legacy energy, which we already answered. And he asked about what scenarios are being considered in terms of regulatory changes, sorry? And how might this affect your strategy for thermal projects and overall margins?

Lida Wang: This is a variable question. So a little bit being answered before the question that Alejandro was asking. But so far, the question would said it’s about they want to make it to the spot market into a marginal system like we used to be in the ’90s. The question mark is how. And then the other — from the incumbent government, we don’t have much information about this. It’s just — it’s what it’s thing going on. The good finish that because of the availability rates that we’ve been witnessing, the drop in rates, that responds mainly of the — because of the poor remuneration, that’s why CCGTs got have been managed to get paid better than open cycle legacy units. But so far, this is where we stand right now. There’s no more information going forward legacy.

Remember, the legacy, it’s 70% of our installed capacity, but just less than 30% of our sales. So today, as a strategy for Pampa going forward, it’s keep adding PPAs, you’re seeing here, more wind farms that are B2B PPAs. More — well, participated in these auctions that Secretary of Energy is doing and trying to enhance our thermal portfolio into a better technology and more efficient. So in a dispatch wise, we are rank senior. For going forward, if everything is normalized, we witness is that, for example, the legacy units of and will be behind, but maybe they will play a role that they play in the ’90s being just being getting paid a proper fixed cost, proper remuneration that remunerates the fixed costs, and that’s it. But it’s not going to be a material contribution in the future for Pampa.

In the hydros, we still don’t know what’s going to happen with the concessions in Mendoza. That’s going to end next year. We’re still working normally, everything is normal here, but will be ending next year of June and October. And is way, it’s in 2029. So it’s way long time from here now. But the question mark is, so far, is that — it’s the contribution going forward for Pampa, it’s not coming from there. It’s going to come from E&P and PPAs that we are building.

Operator: We have another question from Santiago Wesenack from the Latin Securities team. This is Marina, can you provide an update on the progress of Pampa Energía’s crude oil projects? How are these initiatives ramping up in the current economic environment? And what expectations do you have for their contribution to result next year?

Horacio Turri: Okay. Our oil project for the coming years is the Rincón de Aranda field. So far, what we have is the completion of a well that’s already been drilled. That’s the Rincón de Aranda 2001. We will be completing that well in January 2024, and probably we’ll have the testing finished by March of next year. The next step would be the drilling of 2 pads or 3 pads of 3 wells each, that will be completed by the first quarter of 2025 in order to match with the new transportation capacity that we acquired from that will probably allow us to start pumping oil into the system by mid-2025, and that’s when we are going to be seeing a significant result in — or impact in Pampa’s result. The level of production of these wells is going to be capped by the transportation capacity that we acquired and will be in the range of 900 to 1,000 cubic meters per day.

Operator: Thank you, Horacio. Next question comes from She asks 23% and 28% hikes (inaudible) adjustments. And the second question — okay, expected further adjustments?

Lida Wang: So thank you, Florencia. As just I said before, it’s going to be — we don’t have more visibility than this. We’re just working very closely with CAMMESA Secretary of Energy. We’re just working to get more increases to pair it with the cost variations.

Operator: And the next question is from (inaudible) from Bank of America. He asked the same first question as Marina asked. The second question, it’s more for Horacio. What’s the outlook to sign a new gas contract with Chilean market exports with the Nestor Kirchner pipeline operational start and some gas surplus Neuquén region? Could you provide some color regarding the prices and amount?

Lida Wang: See, it’s — how is the outlook to sign new gas contracts with Chile regarding the prices — color, regarding the prices and amount?

Horacio Turri: The — it’s important to note is that the — so far, the contracts with Chile are renegotiated on a seasonal basis. We have contracts starting in April and finishing in 6 months from April, and then we have to start renegotiating again. So we just finished renegotiating the contracts for the spring and summer of 2023, 2024. And we will have to sit down with the Chileans and start negotiating contracts for the period starting in May. My understanding or my view is that there is enough gas in the Neuquina Basin in order to supply not only the internal market through the new pipelines. In this case, since we would have for the next winter, already installed the compression capacity both in and to supply the Chilean market during the winter with probably around 5 million cubic meters a day, which is the maximum capacity of during the winter season.

Operator: Thank you, Horacio. And the second question from regarding FX restrictions and resolution in the last year (inaudible) 30% (inaudible), how much dollars will calculate that?

Nicolás Mindlin: Okay. Hello, everyone. So in the last few months, having been able to apply to this new scheme and been able to export almost $50 million of crude and natural gas from October and November at a higher exchange rate of around 515 pesos per dollar versus 350 pesos per dollar. That is the official exchange rate. So I think the question you’re asking is the difference. The difference is around $20 million. And we are also expecting to export around $10 million from December through the scheme.

Operator: Thank you, Nicolás. Next question comes from Christian from (inaudible). The first one is with — more of a question capacity out of into the province of We may argue that exports could be lower during winter. But at the same time, gas producers might be tempt to increase production to keep exports at the same level or even higher, which may you think things will go for Pampa and the overall growth of gas producers?

Horacio Turri: As I mentioned before, there is enough gas in the Neuquina Basin in order to supply not only the internal market during the winter but also to surprise the Chilean market. So my guess is that producers will be more than willing to supply Chile during the winter as long as fulfilling their commitments with the (inaudible).

Operator: Thank you, Horacio. And the second question from Christian is with regard to the reversal of the PGN pipeline, when do you think the government could launch a new plan of auction for volumes to be send up? How big does that auction could be?

Horacio Turri: It is worth noting that the reversal of PGN in the first stage and without the second tranche of the main gas pipeline can only move gas during off season — I mean during the spring and summer. In that sense, if they were to replace imports, they could replace approximately 3 million to 4 million coming from Bolivia. On the other hand, it is also important to have in mind that it is necessarily first to renegotiate that contract with Bolivia because it’s pretty obvious that during the spring and the summer, the Bolivians will be having spare gas. So it’s difficult to say when that auction will be taking place and what’s going to be the amount. But again, the total imports from Bolivia during the summer will be around — at around 4 million cubic meters per day. The only way to increase the — really the output from Neuquén into the north region is with the construction of the second tranche of the (inaudible).

Operator: Thank you, Horacio. And the third question is considering that most of Pampa revenues are linked to the official effects vis-a-vis 70% high U.S. debt. Are you considering any head facility in case of dual FX regimes comes by 2024?

Nicolás Mindlin: Okay. So first of all, it’s important to clarify that we do not have significant U.S. dollar maturities until 2027. Secondly, we consider that a scenario where there is a dual exchange rate scheme where we have to pay our debt at a higher exchange rate than the one of our income and revenues is not sustainable for the country because in that case, the cost of financing for new process will get even more expensive than now. And currently, as Lida said before, we have very low pesos because of our very strong financial position. So we think we are already hedged through our liquid position and also the ability to refinance our debt in case of a short period of time where we could see that, that scenario is playing out. For example, a few weeks ago, we managed to issue a local bond in high dollars at below 5% rate.

Operator: Thank you, Nicolás. Next question comes from He says YPF reported a relatively large impairment charge in its gas portfolio mentioning lower long-term prices driven by higher competition and potential oversupply. Is Pampa seeing a similar scenario? And would be there a risk of impairment and gas reserves downward revision?

Horacio Turri: Until 2028, we already have our commitments for natural gas already sold. So I don’t see any problems in the coming 5 years. 5 years from now, our expectation is that the regional markets will be open. This is more gas going to Chile, more gas going to Brazil. And eventually, we will be having an LNG plant already in the process of being constructed. So our expectation is that the natural gas market 5 years from now is still going to be a place where we can have some opportunities to keep on pumping our resources.

Operator: Thank you, Horacio. Next question comes from She asks is it any mid, long-term plan related to offshore in proximities of the Basin?

Horacio Turri: So far, we don’t have any plans for investing in offshore.

Operator: Thank you, Horacio. Next question comes from is still under administration of Pampa or it’s under YPF’s administration in order of the exploration of contract of administration in June 2023?

Lida Wang: Thank you. This new investor, yes, this contract has been renewed. Now it’s continued operated by Pampa.

Operator: Thank you. And ask regarding renewable expansion, any update on transmission bottlenecks?

Lida Wang: So far, as — I think, a couple of months ago, the government disclosed in a resolution, the — what is called That’s outlined all the needed expansions in the transmission — with a high-voltage transmission grid. There is 3 tiers of priority. The first tier, I don’t have the slide right now. I can send it to you. But basically, it’s — if you see Argentina map, they have like enhancing the south of Argentina to gather the wind farms. It’s enhancing the west — Northwest of Argentina, enhancing the solar part and some other stuff. It’s around $2 billion — more than $2 billion of investment in the first year. That’s basically tackling the renewable search. And then it’s very comprehensive plan. But basically, it’s not meant to be done overnight.

The question mark, now that we know where are the priorities is, what’s the next move? Is it going to be a BOT? Is it going to be funded by the government, like the pipeline, first tranche? That’s something that we don’t have a clue yet, but the already identified where the expansion is needed. And that’s it. We’ll see what’s going to be the scheme to do it. I think there’s one question. It’s more comprehensive. We addressed it ask could you talk about future projects that we are planning to do. I will say is what Horacio said very well. It’s — right now, we are very excited about ramping up Rincón de Aranda. It’s our crude oil, shale oil block that is greenfield, and we are planning to make first oil next year and planning to reach a plateau of 20,000 barrels per day by 2027.

Then we are very active, again, as everybody knows in the gas side. We ramp up oil production this year. We are very proud of that. And then this is all under take-or-pay contracts for the next 5 years as Horacio said. So upcoming, it’s to see if there’s more pipelines around so we can keep replacing imports and then obviously, as the second generation thing to keep to Chile, to Brazil, to other countries. And then in power generation, I’m saying this later because today, we are restricted. We are curtailed by the high-voltage grid that is not something that we control. Today, what we are doing, it’s like what Raquel is putting on the slide, it’s PEPE VI. This is our current power generation expansion in the pipeline, but we’re not doing more further from this because there’s no power available.

We would love to do more, but that’s — today, we are restrained for that. But today’s data and today also, we are — as you know, we addressed in this call is the thermal auction that the government is doing. And again, we apply — 2 projects and both of them qualify the economic and the technical part. So we feel like very confident that we can have awarded that. So that’s it. It’s — basically, our main idea is to keep increasing our E&P footprint. I would say that the, as Horacio said very well, the upside potential there is way more exciting because infrastructure has been up and constructed. In the other side, power generation is also — it’s a core business of Pampa. The pain is that today we’re restricted by the power grid.

Operator: Thank you very much for all your questions. This concludes the question-and-answers section. And I will turn to Lida for the final remarks.

Lida Wang: I don’t know if you want to say anything, Horacio? No?

Horacio Turri: No?

Lida Wang: No. He done well. He has been quick and fast. But again, anything you may need, you forgot to ask, we are more available for you. You can reach us out. Thank you for joining our conference calls. We appreciate it until next quarter. Bye, bye.