Pampa Energía S.A. (NYSE:PAM) Q4 2023 Earnings Call Transcript March 7, 2024
Pampa Energía S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Raquel Cardasz: Good morning everyone and thank you for waiting. I’m Raquel Cardasz from IR, and we would like to welcome everyone to Pampa Energía’s Fourth Quarter 2023 Results Video Conference. We would like to inform you that this event is being recorded. All participants will be in a 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 form. [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 to the company. They involve risks, uncertainties and assumptions, because they are related to future events that may or may not occur.
Investors should understand that general economic and industry conditions and other operating factors could also affect the future results of Pampa Energía and could cause results to differ materially from those expressed in such forward-looking statements. Now I’ll turn the video conference over to Lida. Please go ahead.
Lida Wang: Hello everybody. Thank you for joining us to this another new quarter. I will make a quick summary of Q4. You may find more details – in our earnings release, or financial statements. Today we have for the Q&A our CEO, Gustavo Mariani; our CFO, Nicolás Mindlin; our Head of E&P, Horacio Turri; our Head of Finance, [Pito Zulegoulas], so full team here. Well, so let’s quickly review 2023. This is another challenging year, but it did not prevent us from growing and delivering milestone. In 2023 we will reach again a new peak in gas production exceeding 16 million cubic meters per day. This is a remarkable 44% increase, compared to the 2022 record. Thanks to the new pipeline facilitating additional eastbound evacuation and our active campaign Vaca Muerta.
However, average production did not take off as expected, due to soft demand from mild weather and poor thermal dispatch. For the first time in nine years, we deliver below the take or pay. Pampa E&P is mostly gas production, but for now on we aim to diversify with shallow oil from Rincon de Aranda. Power generation did not stay quiet either. In 2023, we commissioned Ensenada Barragan’s CCGT, PEPE number IV wind farm, adding 360 megawatts of efficient energy. We also will be inaugurated this year PEPE VI, which is total install capacity of 140 megawatts. So with all online we will be reaching 5.5 gigawatts, by the end of this year. EBITDA fell 12% year-on-year. This is mainly because of reduced gas sales mentioned before and the impact of the steep peso depreciation over our affiliates.
This is Transener and TGS. We will address this issue later. Our way of management helped us to gain efficiencies and be savvy over business and balance sheet. We used our robust cash flow, to enhance our portfolio, without neglecting our financial position, strengthening our liquidity and substantially reducing our leverage, by paying down debt or taking advantage of the local market. Overall 2023 was another remarkable year in PEPE’s history. We look forward to delivering outstanding results going on. So we are in the quarter. We must highlight again, this net leverage reduction, which reached the lowest level in years, $613 million of net debt. The situation was coupled with a soft demand for gas and thermal energy. This is our main product.
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Q&A Session
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This was expected, because of seasonality, Q4 is an off-peak y season. But this was worsened by mild weather with a warm spring and cold start of the summer. A linear effect generating high levels of hydro and therefore ranking senior to thermal dispatch. And as well as high nuclear availability. So that also kind of lagged behind thermal generation. And I’ll highlight that, we are harvesting our drilling campaign in Q4, shale gas represented 47% of our total gas production. This is a significant increase, compared to last year, just nearly 3% of total gas production. The adjusted EBITDA for the quarter amounted to $129 million. This is 30% less year-on-year, because of soft demand. Peso the devaluation also impacted for our affiliates, Transener and TGS.
And therefore, because their income, in real terms got hit by the steep jump in the FX. The new PPA’s at our wind farms and Barragáns, CCGT, plus the additional income from the export dollar offset this variation. Therefore, power took most of the total EBITDA share in Q4. CapEx in Q4, was 50% higher year-on-year this is because mainly, because of the ramp up in E&P, which is concentrated in shale gas drilling and completion of wells, plus the construction of the PEPE VI wind farm. So, let me give you a quick, simplified explanation how peso depreciation affects Pampa. There’s very important things that in the Q4, we accrued $250 million of income tax. This is an accrual, not cash accrual, which is 150% higher than the last year’s period. This is because of this temporary lag between IFRS valuation of PPE and its tax appraisals.
So tax reporting in Argentina follows the functional currency in pesos and pesos is adjusted by inflation. But the steep devaluation that happened in December 13, why didn’t this gap between both valuations. So, we generated a temporary non-cash deferred income tax, which if the peso recovers, right, both valuations will be similar. And the tax, the set tax should be zero, should reduce to zero. Another effect is on the affiliates. So the affiliates, they also follow financial, the financial reporting follows peso currency, and their figures are also adjusted by inflation. So inflation was unnumbered, by the grand devaluation that happened in December last year. Should we all follow functional currency in dollars, TGS and Transener actually posted a higher EBITDA, making Pampa’s 2023 EBITDA of $831 million instead of $802 million.
Taking the side affiliates, the only segment we invoiced in pesos today is just legacy. And actually, not the whole legacy, it’s just the conventional thermal and the hydros, which accounts less than 10% of our total Q4 sales. So let’s move on to power generation as seen on Slide 6. We posted an adjusted EBITDA of $94 million in Q4. This is 10% higher year-on-year, mainly explained by lower operating costs and new PPAs, offset by soft thermal dispatch overhauls, maintenances in some GTs, and peso evaluation that impacted the spot energy, plus the divestment of Mario Cebreiro. Despite seasonality, EBITDA remains similar to last quarter. This is explained by the increase in the spot energy of 28% happened in November. There is another 74% clear from February this year.
However, as you can see there, spot prices are still behind inflation and evaluation. Q4 dispatch decreased 3% year-on-year. This is mainly due to the lower demand and outages mentioned before, partially offset by Barragan’s new CCGT, the hydros, and the new wind farms. Take or pay capacity is very important, especially for PPAs. It is driven by availability, and in Q4 we reached 93% below last year’s 97%, this is because of Loma de la Lata’s outage that affected the whole quarter. Moving onto PEPE VI expansion, the project progress is 69%. We keep working on facilities and civil works and power transformers that have already arrived from China, as most of the main components. They are stored in the Bahia Blanca port. The tower’s components are being constructed.
On Tuesday of this week we mounted the first wind turbine. There’s 30 more to come, right? So, total 31 wind turbines. The estimated COD, it ranges between Q3 July of this year until October of this year we estimate to finalize, the whole wind farm. It is worth highlighting that this wind farm PEPE VI will be sold under B2B PPAs. Well, moving on to E&P, as you can see here, gas deliveries are recovering after Q4’s weak demand. The late summer boom and the return to normal hydro levels are helping domestic sales and exports to Chile. It is noteworthy, to mention the importance of take or pay a kind of insurance for our investment, because for the first time in 2021, we delivered volumes under the take or pay contract. On Slide 9, our E&P business posted an adjusted EBITDA of $50 million in Q4.
