Vista Energy, S.A.B. de C.V. (NYSE:VIST) Q3 2023 Earnings Call Transcript

Vista Energy, S.A.B. de C.V. (NYSE:VIST) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Good day. And thank you for standing by. Welcome to the Vista’s Third Quarter 2023 Earnings Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Alejandro Chernacov, Strategic Planning and Investor Relations Officer. Please go ahead.

Alejandro Chernacov: Thanks. Good morning, everyone. We are happy to welcome you to Vista’s third quarter 2023 results conference call. I am here with Miguel Galuccio, Vista’s Chairman and CEO; Pablo Vera Pinto, Vista’s CFO; and Juan Garoby, Vista’s COO. Before we begin, I would like to draw your attention to our cautionary statement on slide 2. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from expectations contemplated by these remarks. Our financial figures are stated in U.S. dollars and in accordance with International Financial Reporting Standards, IFRS.

However, during this conference call, we may discuss certain non-IFRS financial measures such as adjusted EBITDA and adjusted net income. Reconciliations of these measures to the closest IFRS measures can be found in our earnings release that we issued yesterday. Please check our website for further information. Our company, Vista is a sociedad anonima bursatil de capital variable organized under the laws of Mexico, registered in Bolsa Mexicana de Valores and the New York Stock Exchange. Our tickers are VISTAA in the Bolsa Mexicana de Valores and VIST in the New York Stock Exchange. I will now turn the call over to Miguel.

Miguel Galuccio: Thanks, Ale. Good morning, everyone, and welcome to this earning call. Today, I’m pleased to present our results for the third quarter of 2023, during which we recorded strong growth on a sequential basis. During Q3 we focused on drilling and completion activity in Bajada del Palo Oeste. This led to a sequential growth in both, oil and total production that allowed us to largely replace the production from the conventional assets we transferred in Q1 2023. Total production reached 49,500 boes per day during the third quarter, which was 6% above Q2. Oil production was 41,500 barrels per day, 6% above Q2. Total revenues during the quarter were $290 million, 25% above the previous quarter. Lifting cost was $4.8 per boe, reflecting our successful strategy to fully focus on our higher margin, lower carbon and short cycle shale oil assets.

Capital expenditure was $181 million, mainly driven by 11 wells drilled and 12 wells completed during the quarter. In Q3 2023, adjusted EBITDA was $226 million, a sequential increase of 49% on the back of revenue growth and flat lifting costs. Adjusted net income was $123 million, implying a quarterly adjusted EPS of $1.3 per share. We recorded negative free cash flow of $43 million during the quarter. This was mainly driven by a temporary increase in working capital that impacted cash flow from operational activities. Finally, the net leverage ratio at quarter-end was a solid 0.7 times adjusted EBITDA. I will now deep dive into our main operational and financial metrics. Total production during Q3 2023 was 49,500 boes per day, down 2% on interannual basis.

This is explained by two factors: first, the transfer of the conventional assets reduced our production by almost 6,000 boes per day. On a pro form a basis, adjusting for the transferred assets, total production grew 12% year-over-year. Second, transportation capacity limited our production growth during the first semester. This has been unlocked since June as we started exporting oil via pipeline to Chile. Our development plan during 2023 was therefore back loaded in terms of new wells connections. The tie-in of 12 new wells in Bajada del Palo Oeste during the third quarter led to a sequential growth of 6% in total production. Moreover, the monthly breakdown reflects a solid ramp-up during the quarter with 53,000 boes per day of total production during September 2023.

Production ramp-up started in August as the tie-in of pad Bajada del Palo Oeste-16 and Bajada del Palo Oeste-17 corresponding to the cube development pilots we were running in Bajada del Palo Este was delayed to late July. During the third quarter of 2023, we made solid progress in Bajada del Palo Oeste where we focused the activity of our two drilling rigs after finalizing the pilots in Águila Mora and Bajada del Palo Este in Q2. This led to 12 new wells connected during the quarter, pads Bajada del Palo Oeste-16, -17 and -18. Additionally, four well pad Bajada del Palo Oeste-19, which was completed in September, was tie-in October and it’s showing very solid productivity. We also finished drilling Bajada del Palo Oeste-20, a three-well pad with all the wells targeting La Cocina.

This pad is currently under completion and is scheduled to be tie-in during November. Finally, we are currently drilling four well pads in Bajada del Palo Oeste-21, which we plan to complete and connect before year-end. We expect to tie in a total of 23 new wells during the second semester, driving further production growth. We forecast total production of Q4 2023 at 60,000 boes per day with an exit rate of 65,000 boes per day. The tie-in of 23 new wells during the second semester is in line with our activity guidance for the year and two wells above the original guidance. On an annualized basis, this is an activity target we set for 2024 during our last Investor Day, reflecting our capability to deliver 46 new wells per year. During Q3, we also made solid progress to increase midstream capacity.

A large oil and natural gas drilling rig in operation, surrounded by a sprawling desert landscape. Editorial photo for a financial news article. 8k. –ar 16:9

We completed the upgrade of our crude oil treatment plant, leading to a total capacity of 70,000 barrels of oil per day. Stage 1 of Oldelval expansion is well advanced with 7,500 barrels of oil per day of trunk pipeline capacity already available for Vista, and another 5,000 barrels per day planned for mid-2024. The Vaca Muerta Norte pipeline is on track to be commissioned before year-end. This is expected to add another 12,500 barrels of oil per day of trunk pipeline capacity for Vista. Expansions to our oil treatment capacity and transportation capacity constitute key enablers to our updated strategic plan, which has a production target of 70,000 boes per day for 2024 and 100,000 boes per day for 2026. Total revenues in Q3, 2023 were $290 million, 13% down year-over-year and 25% above Q2 2023 on the back of higher export volumes and oil realization prices.

Realized oil price for the quarter averaged $67.6 per barrel, down 12% year-over-year and 5% above the previous quarter. The average realized domestic price was $61.7 per barrel, while the realized export price was $74.9 per barrel. Domestic crude oil prices were impacted by the drop in prices to $56 per barrel agreed following the devaluation of the Argentinean pesos from August 14th until the end of October. This led to approximately $5 million or lower adjusted EBITDA during Q3 2023. Sales to export market accounted for 55% of oil volume and 61% of oil revenues. We exported 2.2 million barrels of oil composed by 4 cargoes through the Atlantic including the cargo deferred from Q2 and 0.4 million barrels by pipeline to Chile. Realized gas prices decreased 24% interannually to $3.3 per million btu, mainly driven by lower price paid by clients in industrial segment.

The sequential decline in realized gas prices was driven by lower gas export volumes. Lifting cost was $21.9 million for the quarter, a 37% decreased vis-à-vis Q3 2022. Lifting cost per boe was $4.8, 35% below the same quarter of last year. These results continue to reflect the positive impact of our new operating model, fully focused on our shale oil asset following the transfer of the conventional assets in the first quarter of the year. We expect a similar lifting cost performance during Q4. On this basis, we are on track to outperform our full year lifting cost guidance by around 5% with a forecast of approximately $5.2 per boe for the year. Adjusted EBITDA for the quarter was $226 million, a slight decline of 3% year-over-year. The interannual decrease in revenues was almost fully offset by the lower lifting costs and $20 million of other income generated by the JV with Trafigura.

We connected the last 12 wells under the JV during the quarter. During Q3 2023, we recorded strong sequential expansions of margins. Adjusted EBITDA margin was 78%, an increase of 12 percentage points, vis-à-vis Q2. Additionally, we recorded a netback of $49.8 per boe, 39% above the previous quarter. These results were mainly driven by savings in lifting costs, additional sales volumes and other income from the JV with Trafigura. We expect adjusted EBITDA to be between $215 million and $230 million in Q4, noting that Q4 will not include income from the JV with Trafigura, also that there is uncertainty around the realized oil prices, both from the domestic Medanito and international Brent benchmark. During Q3 2023, cash from operating activities was $170 million, reflecting income tax payments of $22 million and a temporary increase in working capital of $66 million.

Cash flow used in investing activities was $161 million, in line with the capital expenditures of $181million for the quarter. During Q3 2023, we recorded negative free cash flow of $43 million. We issued a dollar linked bond for $70 million at a very competitive term, 5-year bullet maturity and 0.99% coupon. We also repaid $22.5 million corresponding to the final installment of our syndicated loan, further reducing the share of our cross-border U.S. dollar debt. Net leverage ratio stood at 0.7 times adjusted EBITDA at quarter end. Finally, cash at the end of the period was $174 million. To conclude this call, I will summarize today’s key messages. During Q3 2023, we made robust progress in Bajada del Palo Oeste. The tie-in of 12 new wells leave us well on track to deliver 31 tie-ins for the year.

This activity increase has led to a substantial production ramp-up during the quarter. Considering that another 11 well tie-ins are scheduled for Q4, we are forecasting 60,000 boes per day of total production during the quarter. This would leave us well placed to achieve our 70,000 boes per day target during 2024. We have made solid progress in increasing treatment and transportation capacity, which are key pillars of our growth plan. Our oil treatment plan has recently been upgraded to 70,000 barrels of oil per day. The Oldelval expansion has recently added 7,500 barrels of trunk pipeline capacity for Vista, which will be increased further by the Vaca Muerta Norte project and the completion of the second part of Stage 1 of Oldelval expansion.

Finally, we recorded strong financial metrics, reflected by earnings per share of $1.3 and an adjusted EBITDA margin of 78%. To wrap up and before we open the call for questions, I wish to thank our employees for their hard work and commitment during the quarter. I also thank our stockholders for their continued trust in our company. We will now move to Q&A. Operator, please open the line.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Rodrigo Nistor from Latin Securities.

Rodrigo Nistor: I have two questions. Given Argentina’s current political and macroeconomic landscape, how do you anticipate the trajectory of domestic prices? And then also what are your expectations regarding discounts on export prices and how you’re positioning to optimize profitability in these conditions? Thank you.

Miguel Galuccio: Hi Rodrigo, thank you for your question. Look, at pricing going forward, we are seeing first probably important — we are seeing export pricing with upside at least of $2 or $3 more than Q2 as consequence of higher Brent and also we believe the discount on export pricing will be probably for Q4, below probably $2 to $3. In terms of local prices, October, we are still selling at $56 per barrel. November and December, we are under negotiation with the refineries. The gap today between export parity and domestic prices is around 40%. Therefore the local market needs to start to normalize. Definitely the normalization, it will be very important to drive investment in Vaca Muerta and generate more volumes for the country. So, I expect that November and December, there should be a push for normalization in the local market.

Operator: Our next question comes from the line of Walter Chiarvesio from Santander.

Walter Chiarvesio: My question is regarding the differentiated FX [ph] scheme that the government just introduced for the oil and gas companies. What is the impact for the first quarter? And what do you think this could evolve? Well, actually for the fourth quarter because we have elections in the middle obviously. If you think that this could continue in the first quarter or second quarter next year, what is your view about it? Thank you.

Miguel Galuccio: Hi Walter, thank you for the question. Yes, this program that we call oil and gas dollar. We include in the program export for an equivalent of $135 million, which will liquidate 75% through the central bank and 25% through the blue chip swap. That will generate for us additional revenues of around $55 million and our calculation in financial income, we expect around a net income impact between $10 million and $30 million. Regarding the continuation of this program after elections, to be honest with you, I don’t know. It will all depend more on the macroeconomic program that the next President put in place.

Walter Chiarvesio: Thank you very much. And a follow-up question, if I may, is how this dynamic is impacting your production cost vis-à-vis higher revenues due to this differentiated currency? In terms of margin, looking forward, I mean, I guess, for the fourth quarter, the pressure on cost on dollars may be higher, I guess. Is that the case, or…?

Miguel Galuccio: No, Walter, I don’t think it will impact our margins, not at all. I think this will be more related to financial income, but not the margin per se.

Operator: Our next question comes from the line of Oriana Covault from Balanz.

Oriana Covault: I have three. If we could go one-by-one, that would be great. The first one is just a follow-up on the expected volumes for the fourth quarter. Recalling the guidance that you have set for 2023, 55,000 barrels per day, it seems that you might be running a tad behind with 60,000 barrels per day expected for the fourth quarter. So, I just wanted to understand if we should perhaps expect a lower production number for the full year. And what could additional drivers be there for increased volume?

Miguel Galuccio: So let me first start with the recap of Q3. So Q3 production in barrels of oil equivalent was 49,500 barrels of oil equivalent per day. It was pretty much flat with last year and quarter-on-quarter with 6% increase. In terms of oil production was 41,500, so that was driven by the tie-in of the two wells, as I explained in the call from Bajada del Palo Este. And we have the delay of the tie-in of the cube to late July. This cube is supposed to be tie-in early July, and that was basically the delay that we are having and the shortage that we’re having on production. On pro forma basis, and this is basically after the transfer of conventional assets, the production increased year-on-year 12%. And if you look at the monthly breakdown, in July, we were 45,600 barrels of oil per day, 49,900 barrels of oil per day in August and 53,000 barrels of oil per day in September.

So in Q4, we will connect additional 11 wells, where we expect to be more or less at 60,000 barrels of oil per day by Q4 average. So, our exit rate in order to be 60,000 average, you can assume that it will be probably around 65,000 barrels per day equivalent. This will leave us well on track to deliver our 70,000 barrels of oil equivalent per day average for next year 2024 as we have defined our target. So, I think this is pretty much we explain. And the only delay that we have in production was, as explained, coming from cube.

Oriana Covault: Just another one, and understanding the natural gas business is rather marginal to Vista. But just we noticed this decrease in prices for the industrial segment. So, if there’s any color that you can share on this with regard vis-à-vis the planned gas prices, they were very-differentiated?

Miguel Galuccio: Yes. No additional color as to everything that you know. I mean commercial gas prices were lower due to the Argentina current situation and devaluation and so on, no more to re-teach you.

Oriana Covault: And just one last one regarding the working capital for your free cash flow generation. Any impact in terms of this increase in receivables that we saw quarter-over-quarter? Is this normalizing already through early fourth quarter?

Miguel Galuccio: It normalized, as you know. I mean this is the effort that basically would delay the collection from September to October and is normalized.

Operator: Our next question comes from the line of [indiscernible] from Citi.

Unidentified Analyst: I’d just like to hear some of your thoughts regarding the devaluation after the peso. And how is that playing vis-à-vis your lifting costs? And how do you think that could move forward, especially after the elections, if there’s another devaluation too?

Miguel Galuccio: Look, a devaluation could help to reduce lifting costs marginally and we — always after devaluation we have an impact on expenditures, particularly lifting costs that of course in the different cycle of Argentina start to catch up again and I think you can assume that in a period of a year usually have a neutral effect. But the main impact on lifting cost reduction will come from production increase, as we have seen and demonstrated many times in the past. And we will start to see partially that impact in Q4. So, if you have to basically put an impact in lifting costs, you should look at production increase. That is what is going to drift the lifting cost down.

Operator: Thank you. I would now like to turn the call back over to Miguel Galuccio for closing remarks.

Miguel Galuccio: Thank you very much. It was a good quarter. I would like to continue thanking you for the support and your participation on this call. I’m looking forward to see you in Q4. Have a very good day.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.