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YPF Sociedad Anonima (YPF) Q2 2019 Earnings Call Transcript

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YPF Sociedad Anónima (NYSE: YPF)
Q2 2019 Earnings Call
Aug. 9, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Second Quarter 2019 YPF Sociedad Anónima Earnings Conference Call. My name is Sylvia and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press *1 on your touchtone phone. I will now turn the call over to Sergio Giorgi. Mr. Giorgi, you may begin.

Sergio Giorgi -- Vice President Strategy and Business Development

Great. Thank you, Sylvia. Good morning ladies and gentlemen. My name is Sergio Giorgi, Vice President of Strategy, Business Development and Investor Relations of YPF. I would like to thank you for joining us today. On this occasion, we will present YPF's 2019 second-quarter results.

The presentation will be conducted by Ignacio Rostagno, head of Investor Relations, and myself. During the presentation we will go through the main aspects and events that explain our second results and finally, we will open up the call for questions.


We will be making forward-looking statements, so I ask you to carefully review the cautionary statement on Slide 2. Also, our financial statement figures are stated in Argentine pesos, based on international financial reporting standards. In addition, certain financial figures have been adjusted to reflect additional information to let you better understand our key financial and operating results. Ignacio will present the financial results for this quarter, but before I would like to provide just a few elements of context to put things in perspective and better understand our performance on the next slides.

In recent earnings calls we have explained the overall natural gas market situation and how our focus has shifted to increasing our shale oil production. We currently have 18 rigs located in the crude oil window. We continuing achieving important results in productivity and development costs and are also focusing in increasing the size of the current shale oil development cluster and the recent two additional new clusters, one in the North and one in the South in order to prepare the final of new developments that will be the backbone our production growth or the next years to come.

We will be showing later on some of the very encouraging results we are having there. We continue actively managing our portfolio including divestment of non-core mature assets by closing the sale of two mature conventional blocks in Neuquén Province and signing the sale of two mature fields in Chubut province. On the investment side, we have taken advantage of two business opportunities. We acquired Aguada del Chanar block increasing the size of our main shale oil cluster, adding 14,000 acres of premium shale oil position. And we also acquire 50% of Ensenada de Barragán thermal power generation plant in order to secure this plant as a taker of our natural gas.

We keep on implementing technology to improve the safety and performance of our operations. During this quarter, we started a strategic alliance with Microsoft to collaborate on a number of projects and initiatives in order to support YPF digital transformation journey. Those of you who participated in our recent Vaca Muerta field trip would see the real uses of these technologies in our central control rooms for drilling, completing and producing wells. For example, the use of artificial intelligence to navigate the Vaca Muerta horizontal drills. Finally, we launched YPF ventures, our corporate venture funds to invest in companies that are innovating with breakthrough technologies.

On the macros side, in the second quarter of 2019, the cooling down of Argentina saw a level of activity deepen while inflation kept on in high figures. Having said this, by the end of the quarter we saw some stability on these variables with the peso appreciating and an inflation rate decreasing. In addition, the average exchange rate in the quarter was 12% higher than in the first quarter. The gas market continues experiencing an excess of supply due to an increase in production after the incentive price programs.

This effect plus mild weather and weaker demand, have affected our natural gas production as we kept on curtailing volumes and also affected the gas production prices. On the positive side, this curtailment is lower than in the last quarter. Additionally, we keep on applying all the short, medium, and long-term levers to increase gas demand and I will be mentioning them later on. It is worth highlighting that an external event affected oil production volumes and refining activity in the quarter.

On June 16th, almost the entire Argentine electric system grid suffered a massive failure. In addition, our [inaudible] production was negatively affected by a post-blackout incident at Dow Petro Chemical complex in Bahia Blanca. We will provide further details on the impact of this event when we walk through our production figures. Before moving to our financial results, as on every quarterly call, we would like to share with you our safety and energy metrics and action plan.

As you can see in the chart of the left side, we tracked the injury frequency rate, an indicator of the measure of the number of people injured every million hours worked. The chart shows that despite the small increase of this number for the first half of the year, we are still achieving numbers that are among the lowest of the last decade.

We, therefore, need to remain vigilant in this period of high activity, as we are reminded from time to time that we work in an industry with flammable liquids, high pressure, and subject to the environment. ESG is growing in importance globally, and we, in YPF, have always been committed to sustain our practices. On this subject, we are well aligned to achieve our 2023 objectives concerning low-carbon emissions.

Our 2018 sustainability report will be available by the end of August and we will continue tracking our ESG scoring under the Dow Jones sustainability index to benchmark our progress. Renewable energies represent now 70% of our total energy consumed. We are analyzing new energy solutions through our R and D subsidiary ETech. And as mentioned before, we launch [inaudible] our corporate ventures capital to focusing on new energy and [inaudible] solutions. Now, Ignacio will walk you through our financial results. Then I will follow with our operational metrics and conclusions. I will open the Q and A session.

Ignacio Rostagno -- Investor Relations Manager

Thank you, Sergio, and good morning, everybody. Now, let me start with our second-quarter results highlights. Revenues were up by 72% in pesos and our adjusted EBITDA amounted to 41.6 billion pesos, reaching a margin of 26%. Please remember that as of the effective date of January 1, 2019, the group has applied the guidelines of IFRS 16, which effects are not included in our adjusted EBITDA and financial debt. Total CAPEX of 48.8 billion pesos resulted in an increase of 15% compared to Q2 2018, exceeding our cash flow operations which was $40.7 billion in pesos in the second quarter of this year. It is worth mentioning that these CAPEX figures include acquisitions of [inaudible] assets Sergio mentioned before. Excluding those one-off transactions, our CAPEX before acquisition was in line with our cash flow operations.

Total hydrocarbon production was 5.3% below Q2 2018. Net shale oil production went up by 57.5% reaching 32.1 thousand bars of oil per day. We will explain all these numbers in detail as we go throughout presentation. Now, moving into our main financial figures measure din US dollar. In the second quarter, the local average exchange rate variation was almost 87% when compared with the same quarter of 2018. Total revenues show a reduction of 7.3% mainly driven by lower demand and lower prices in dollars for our main products, gasoline, and diesel. In addition, revenues were also impacted a 33% decline on our natural gas revenues as a result of lower volumes and a 14% reduction in prices. On the contrary, total exports showed a slight increase on higher exported volumes, partially offsetting these decreased.

Regarding operating costs, listing our refining costs in dollars, increased by 3.4% and 6.5% in absolute terms respectively as we had more activity both in conventional and unconventional. Royalties, which is the only cost component fully denominated in dollars, were down by 23.5% driven by lower natural gas and crude oil prices in dollars coupled with the lower production of the period. in turn, crude oil purchases were down 6.5% in dollars as we as we process in our refineries lower levels of crude than a year ago, while our own crude oil production remained fairly stable As a result, adjusted EBITDA was down by 10% in dollars, maintaining EBITDA margins close to the 30% level. Finally, total CAPEX for the company amounted to $1.1 billion when included the M&A activity mentioned before. [Inaudible] in our operations were $900 million, 11% higher than compared to the second quarter of 2018 mainly boosted by more activity in Vaca Muerta. Upstream CAPEX in 2019 second quarter amounted to $726 million, 5.9% higher than the 2018 second quarter. Drilling and workover represented 68% of the upstream CAPEX followed by buildup of facilities with 24% and exploration and other activities 8%. During the quarter, we drilled and put into production a total of 111 new wells, including 39 new shale wells and another 8 wells in tight formations, out of which 22 are not operated by us.

In downstream, capital amounted $136 million, 19.7% higher than Q2 2018, of which 66% was in refining, followed by logistics which had 20%. Marketing representing 9%. And finally, chemicals with 5%.

Now, let's switch back to Argentine pesos to go over the more detailed analysis of the quarter. As we did in previous quarters, we are focusing the analysis in adjusted EBITDA of our business segments to provide a better understanding on how each business segment contributes with the cash generation of the company. Putting aside the FX impact on depreciation and amortization, which are, in fact, a non-cash effect.

Moving on to adjusted EBITDA, it has come up by 68% compared to the second quarter of 2018. This was mainly driven by the better operating results obtaining our upstream segment, which showed an increase in 10 billion pesos in adjusted EBITDA with an increase of 60% in revenues driven by higher crude oil and natural gas prices in pesos while cash cost of this business segment increased by 66% above revenue increase despite the market erosion. The long-term business segment showed an increase of 3 billion pesos compared to year ago. Revenues of this segment increased by 78% driven by higher gasoline and diesel sales and higher prices in pesos, although lower in dollars.

Partially offset by a slight decreased in demand. Higher sales of jet fuel, LPG, fertilizers, lubricants, and petrochemical products and higher exports with both higher volumes and prices in pesos. In turn, most of this business segment reported an increase of 75%, mainly explained by higher crude oil and biofuel purchases, which are denominated in dollars and a 99% increase in refining costs.

The gas and power segments show an increase of 1 billion pesos mainly due to higher average prices in local currency and better-commercialized volumes to our LDC, [inaudible]. The cash generation in the second quarter of the year reached a total of 40.7 billion pesos, a 48% increase over the operating cash flow of a year ago. This increase of 13.6 billion pesos was mainly due to an increase in EBITDA of 19.4 billion pesos, partially offset by higher working capital needs. During the quarter, our investment reached 48.5 billion pesos, including 4.3 billion pesos and 4.1 billion pesos in acquisitions of Ensenada de Barragán and Aguada del Chañar respectively. Nevertheless, our cash position remains strong including short and medium-term liquid cash investments at 67.2 billion pesos at the end of June 2019.

In April, we started collecting the installments of the bond issues by the government for the 2017 Plan Gas accruals. During the quarter we have received approximately 150 million out of $760 million improving our working capital. We collect an additional $150 million along the rest of the year 2019. Additionally, in June we accessed the international bonds market. As we can see in the graph on the right, we are planning our CAPEX program reaching 1 billion pesos of free cash flow during the quarter; however, if we include the aforementioned acquisitions of the quarter our free cash flow was negative.

The previously explained cash position is enough to cover our short-term debt maturities of this year. As said, in late-June we decided to take advantage of the momentum from the recent Argentine rally and announced a new [inaudible]. This transaction reopened the market for Argentinian issuers after over a yearlong supply drop during a period of market volatility for the country and brought us back to the markets after our last issuance in December 2017. We showed $500 million at 10-year bonds 8 3/4% per year. Proceeds will be used to cover 2019 funding needs.

As we mentioned in our previous earnings calls, significant amount of 2019 debt maturities are related to trade facilities which we have been rolling over and expect to continue doing so. In addition, this year, the relevant maturity in the capital market are the 300 million Suisse franks coming, due in September.

Forward-looking in 2020 with our [inaudible] portion of debt maturities denominated in pesos. Our next significant maturity in the capital market is a $1 billion bond due in March 2021. Having enough time to work on a liability management as we have done in the past. Our leverage ratio stood at 1.9-times net debt to adjusted EBITDA, within our 2-times target for the year, while the average life of the debt remains in the 6-year area. The average interest rate in pesos decreased to 44.76%, while the average cost of our debt in dollars remained stable at 7.54%. With this, I'd like to turn the presentation back to Sergio, who will be explaining our operational results. Thank you.

Sergio Giorgi -- Vice President Strategy and Business Development

Thanks, Ignacio. During the second quarter of the year, total hydrocarbon production dropped 5.3% vis-à-vis a year ago to 515.7 thousand bars of oil equivalent per day; however, compared to the first quarter of the year our total production increased 6%. Let's look at this with much more detail. Crude oil production in the quarter showed a slight decrease compared to last year's second quarter at 224 thousand bars of oil per day. It is worth mentioning that due to mature fields divestment performed by the end of 2018, we are now considering 2.1 thousand bars of oil per day. In addition, oil production in the quarter was affected by a massive blackout in Argentina. So, if we correct for that our oil production would have been slightly up. The good news here is that our shale oil production gross continues to upset the conventional production decline. And we expect this trend to continue along the year and beyond as our unconventional production will continue increasing.

In the gas market, we continue seeing in this quarter the effect of the significant increase in the local gas supply. Therefore, curtailments in natural gas production kept on occurring averaging 3.2 million cubic meters per day during the quarter. This effect, combined with the milder weather, weaker demand, and the country's blackout resulted in an 8.8 decrease in our natural gas production compared to the second quarter of 2018, reaching 40 cubic meters per day. Now, if we hadn't had to curtain our natural gas production and excluding the impact of the blackout and the sale of mature assets gas production would have been 3% below the second quarter of last year's figures.

It is worth highlighting that on a quarter over quarter basis our natural gas production increased 15.5% and we expect production to further increase in the third quarter of the year, even the winter previous, which increases internal demand. In July we were producing 44 million cubic meters per day. As mentioned in the previous quarter, we are taking a series of measures to mitigate this new reality for the gas market. These measures are focused on the short, medium, and long term. We continue to limit investment in natural gas just to those molecules that we are confident we will be able to sell in the market. During the second quarter, we exported an average of 1.2 million cubic meters per day to Chile at an average price of $4.02 per million BTU. We have secured one take-or-pay contract with [inaudible] for the whole year with differential volumes.

The remaining contracts are interruptible, and we expect to resume these exports in the third quarter of the year. Moreover, we will be exporting LNG in September this year representing an additional 2.5 million cubic meters per day. Last month, we reached a preliminary agreement until May 2020 with Accelerate Energy for the charter of an LNG carrier. This will be one of the two ships that we will use to export LNG. We have also launched the construction of a new underground gas storage to reduce the big wind between winter and summer production. We will start injecting gas on the fourth quarter of this year having a first production in 2020 winter and working at fully capacity by 2021.

In order to further increase gas demand, we have expanded in the gas valley chain acquiring Ensenada de Barragán thermal power generation plant, located near the center of [inaudible] in Buenos Aires together with Pampa Energia. Through this vehicle that was acquired on a project finance basis, we will ensure up to 3 million cubic meters per day of natural gas due to a preferred supplier contract.

We will continue working toward a long-term solution to increase gas demand, which is a sizable LNG terminal. Last month, we awarded a preferred contract to two engineering companies and we are working with international renowned companies that would like to join forces with us on this project that will be an industry project. We expect to provide more details by the end of this year.

Finally, we are also working toward [inaudible] for the expansion of the preferred [inaudible]. In line with the lower natural gas production, NGL production decreased 5.3% to a total of 39.4 thousand bars per day. During the quarter NGL production was also affecting by the June power outage.

In addition, following to the power outage, one of Dow's Petrochemical plants an important [inaudible] suffered an explosion in an exchanger decreasing their activity which in turn affected [inaudible] production, therefore, affecting our NGL production.

When we breakdown the sources of our total production, we can observe that shale contributed with 27,000 additional BOEs per day while tight production showed a decreased of 19,000 BOEs per day mainly related to a lower production of natural gas as explained before. In the conventional side, we remain focused on improving secondary recovery and expansion of EOR pilots to improve the recovery factor of our crude oil mature fields. Our plans include injecting more water than last year and having ten water injection plants working before year-end, and we are well-aligned to achieve this target. Moreover, we continue optimizing our mature field portfolios with some divestment of non-core assets in order to focus on the most profitable fields.

Moving now to unconventional. Net shale production in the second quarter of the year reach 82,000 BOE per day, showing an increase of 48% compared to a year ago and 16% quarter over quarter. But more important in the current environment net shale oil production showed an increase of 57.5% compared to the second quarter of 2019. Shale oil now represents 40% of our total crude oil production. During the quarter we connected a total of 39 new shale horizontal wells, almost doubling the connections of last quarter. The development costs in our Loma Campana shale oil development continues coming down being down in the $9 per BOE area, already in line with the target we set previously for this year.

While operating expenses are now around $5.50 per BOE. Additionally, we see a potential to continue this reduction trend and we are still having [inaudible] with development cost of $8 per BOE. We started drilling two horizontal wells with 4,000-meter drains, one in Manduria and one in Loma Campana. And we are bringing along another unit that will help increasing the speed of [inaudible]. On the fracking activities, we have already achieved performing 10 fracks on a few occasions. We are using our own sandboxes for the [inaudible] logistics. We are currently doing test of nearby sand and our propane plant will have a capacity to process 1,000,000 tons per year before year-end.

Let's go into more detail about what we are doing in Vaca Muerta, which is where our production growth will be coming from. As mentioned before, our shale portfolio contains acres in dry gas, in wet gas, and in oil in different stages of advancement. We own some of those acres at 100% and some are in JVs, either operated by us or by our partners. We own a portfolio full of functionality in terms of redirecting investments when necessarily.

We are currently developing three shale oil fields in what we call cluster oil number one. In Loma Campana, production was 40,000 thousand bars of oil per day during the first half of the year. We will be producing 50,000 bars of oil per day by the end of the year. And we achieve a production plateau of 100,000 bars per day in 2023 being able to sustain this plateau for at least 10 years. The [inaudible] are being upgrade and we will be ready this year. And the new 88-kilometer pipeline that connects our operation to the main operation route is already in operation. In June we had six rigs working in Loma Campana.

The La Amarga Chica field production was 12,000 bars of oil per day during the first half of the year. We will be producing 20,000 bars by year-end and will reach a plateau of 65,000 bars of oil per day in five years, being able to sustain that plateau for more than 10 years. We are currently building a new treatment facility for this field and in the meantime, the production is being treated in our Loma Campana facilities. In June, we had 8 rigs in the field. Bandurria Sur was 6,000 bars of oil per day during the first half of the year. We will be producing 10,000 bars per day by the year-end and will reach a production plateau of around 60,000 bars per day in five years. In June, we have 3 rigs working there.

We are also working on increasing the size of cluster number one. In June 2019 we were awarded, in a bid, 100% of Aguada del Chanar block, 14,000 acres located next to La Amarga Chica in the core of the Vaca Muerta oil window and including some existing facilities. We will start the pilot on this block early next year. Our efforts do not stop there as we are also preparing the next wave of shale oil developments.

In our cluster number two, we are working with our partner Equinor in the Vaca Muerta block. During the quarter, we put into production two horizontal wells that have been producing oil for four months by now and are showing [inaudible] activity potential when compared with Loma Campana wells. Indeed, we have identified four potential Vaca Muerta landing zones in this block and tight well with an IB60 of 180,000 barrels of crude oil per day and EOR of 953,000 BOE. Based on these good results that are somehow limited as we are using temporary facilities, we decided, with our partner, to drill another six horizontal wells and if we confirm these levels of productivity then we could launch a new development there. But that's not all.

In [inaudible] our joint venture with Chevron, just north of Vaca Muerta, we plan to build 4 wells this year. And in [inaudible] we have already drilled 4 wells, and we have already put them into production before the end of the year. We have also started exploration activity in [inaudible]. So, even if it's still early the production results we have seen in cluster number two are compelling and if confirmed then we will convert this cluster into a new development hub.

Finally, we are also performing new exploration in the south, potentially expanding, even more, the boundaries in what we call cluster number three. We are performing a shale oil pilot in Loma La Lata Oeste, where we drill three wells for which we will have production results soon. In addition, we put into production a well in Sierra Barrosa, while in Al Norte de la Dorsal we drill one well and we plan to drill another one. With all this expected production growth, and even if we don't foresee any major bottleneck in our oil production on the short term, we are currently performing a meticulous study of the [inaudible] to ensure that we will be able to evacuate any drop of oil in the years to come either to our refineries or to export routes. These studies include reverting some existing pipelines, increasing the pumping capacity of the oil level system, a [inaudible] and activating the export route to the pacific.

Moving now to our downstream business segment. During the second quarter of 2019, the utilization rate of our refineries decreased 4.4% versus the second quarter of 2018 reaching a total of 263,000 bars of crude oil processed per day. this decrease was mainly driven by Argentina's power outage on June 16th and to a lesser extent to planned stoppages. Regarding sales, total volumes were 3.5% below the same period a year ago. Total volumes in the local market decreased by 4.1% driven by lower demand for our main products, diesel, and gasoline, which both dropped 2% compared to last year as a result of lower economic activity. This was partially offset by higher exported volumes of jet fuel that drove total exports up by 3.1%.

Now to provide more detail about fuel demands on this slide. We can see on the left-hand side how gasoline sales evolve every month compared with the previous two years and on the right-hand side the same for diesel oil. In the second quarter of 2019, the sales shows some deterioration in response to the contraction of the economy and the slowdown in construction. In this scenario, gasoline and diesel demand in the overall market declined by 5.3% and 3.2% respectively, while our fuel sales just 2% compared to same quarter last year. Therefore, our aggregate market share during the quarter remains strong at 57%. In particular, market share for our premium products, Infinia gasoline, and Infinia diesel remain above 60%. Going deeper in the analysis. Gasoline sales reported a decrease of 2.1% driven by a lower demand for our premium gasoline with a decline of 24% in volumes, partially offset by higher volumes of regular gasoline. Diesel sales also decreased 2.1% compared to the second quarter of 2018 driven by lower demand of both regular and premium products with the latter dropping 5.9% compared to last year.

As we have been explaining over the last quarters, and as we will see in the next slide, devaluation combined with higher crude oil prices put an increasing pressure to our downstream margins as prices for gasoline and diesel were reduced in dollar terms. This, plus the [inaudible] and the blackout affected our downstream adjusted EBITDA per refined barrel with loss of $7.02 per barrel, similar to the second quarter of last year. We expect margins to recover in the second half [inaudible] normalized refining volumes. We use import parity as a reference where local prices should converge. The dotted line shows the evolution of the import parity and the full line represent evolution of the blended price of our fuels in pesos since the beginning of the year 2018. The graph shows that on the second quarter, even if we continually increase prices, the combined scenario of high crude price, devaluation, and weaker demand resulted in our blended price being below import parity. The graph also shows that just last month we have been able to reduce the gap with import parity. We will continue doing [inaudible] price adjustment when necessarily as we have been doing.

In summary, sustainability and safety are core values for the company. This quarter we continued achieving good safety track record and we invite you to read the 2018 sustainability report that will be issued by end of August. In terms of production, we remain focused on accelerating our shale oil developments while at the same time we keep on reducing the development and operation costs. Shale oil production is now offsetting conventional oil decline and we are confident that we can achieve the oil production targets we set for our three main shale oil development located in cluster one for this year.

Furthermore, we increased the size of our core Vaca Muerta shale oil position in this cluster by acquiring 14,000 acres that will start the [inaudible] early next year. We also have very compelling results in the shale oil cluster number two with productivities in the top quartile and we keep preparing this cluster for future development. We also keep on expanding Vaca Muerta boundaries and we are continuously analyzing the mainstream capacities to ensure we can keep on with potential production growth.

On the GAAP side, we continue to limit our investments until we can increase the demand using all the short, medium, and long-term levers we already mentioned. Our EBITDA figure in USD for this quarter was impacted by the lower natural gas production and prices and also by lower downstream revenues. Despite the challenging local and global environment, we were able to top the global oil markets in June reopening the market for Argentine issuers. We continue monitoring the market to be able to respond as soon as necessary. Considering all the elements that we have already shared with you, [inaudible] 2019 guidance, which is CAPEX being in the lower end of $3.5 to $4 billion to remain in the minus-2, minus-3 production range we set for this year, and EBITDA target close to $4 billion.

...

With that, we would like to answer your questions. Thank you.

Questions and Answers:

Operator

Thank you. we will now begin the question and answer session. If you have a question, please press * then 1 on your touchtone phone. If you wish to be removed from the queue, please press the # sign or the # key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press *1 on your touchtone phone. And our first question comes from Bruno Montanari from Morgan Stanley.

Bruno Montanari -- Morgan Stanley -- Analyst

Good morning. Thanks for taking my questions. first, on the longer shale wells, I know you touched these on the presentation but any insight you could give us on how those wells are performing, how they can perhaps improve the current [inaudible] the company has been using on the tight curve. Second question would be on the LNG projects. I understand you alluded to the two initial ships that the company is going to work with to export LNG, but how should we think about the larger-scale project that could be done in Argentina and what would be YPF's financial commitment to it. And a third quick question, if I may. We saw a relevant pressure in working capital in the second quarter. So, I was wondering what should be the working capital trend for the second half of the year now, perhaps linking it to the receivables from the government. Thank you very much.

Sergio Giorgi -- Vice President Strategy and Business Development

Hi Bruno. Thanks for your question. So, today our [inaudible] is around 2,000 and 500,000 meters for [inaudible] with 36 fracks. This is what we are using in the majority of wells. Now, having said that we already drilled 3,200 meter horizontal well with good results with EORs that are higher of course than the previously mentioned wells, around 1.5 million BOE. Of course, we want to extend this. So, this is why we are now in the process of drilling two wells, one in Loma Campana, one in Bandurria Sur of 4,000 meters. So, this well could have up to 60 fracks, right. So, it is early to put EORs affected to those wells, but we are always trying new ways to improve our development costs. So, this is the way to do it and, in the end, we will continue drilling what is the most economic or profitable well. So, that's for the longer wells. In LNG, we have been saying this is part of one of the levers that we are activating to increase gas demand. As you mentioned, the sizable LNG terminal would be the one that would lock in more production for Argentina. We have been studying these for some time now, and we have hired two engineering companies to perform pre-field studies that we will have some results by the end of the year. We are also having conversations with different companies that would like to join forces with us because this is not going to be a YPF project; it's going to be an industry project. So, coming to your question, it is very early now to talk about what will be the financial commitment. So, having said that we don't want to dodge that question. And we will be giving more update as we have been saying by the end of the year when we do our webcast by the end of the year. So, this is what I can say about that.

Bruno Montanari -- Morgan Stanley -- Analyst

Let me interrupt you. sorry. But is the idea to have more or less than 50%, ideally?

Sergio Giorgi -- Vice President Strategy and Business Development

No, it's not yet decided, Bruno. So, we are having conversations with several potential partners. We need to integrate what we are doing in the upstream, what we are doing in the midstream, what we are going in the LNG. So, it is early days to say what will be the percentage that YPF will be taking along the chain. And it's early days to say that we will be takin the same percentage all along the chain. So, we will be giving more information for that by the end of the year.

Ignacio Rostagno -- Investor Relations Manager

Bruno, this is Ignacio. Concerning working capital, we will see an improvement. It's important to mention here [inaudible] due to distribution company payments and increases in those sales. There has been some difference in the working capital compared to the previous quarters. Having said this, this will improve. Also, to mention that is important in terms of we have mentioned that we are collecting the Plan Gas debt of 2017 and that is being paid in terms so that will help our working capital also.

Operator

Our next question comes from Frank McGann from Bank of America, Meryl Lynch.

Frank McGann -- Bank of America -- Analyst

Okay. good day. thank you very much. if I could just ask two questions. natural gas, when you list the number of projects that you have that could provide with additional demand going forward with the storage and with potential exports to Chile with the new Thermo plant that you have a stake in. You get to some pretty high potential increases in demand. I'm just wondering as you look forward, do you expect to see pretty sharp increased over the next 12 months in terms of your gas demand, even though we're still in a very difficult supply demand situation within Argentina. And then secondly, just quick, if you could remind us what the current decline rates are that you have in your base production and what you think that might trend over the next several years with efforts that you may have to contain those decline rates. Thank you.

Sergio Giorgi -- Vice President Strategy and Business Development

Okay, thanks, Frank. So, in terms of gas production, as we said, we have first to recover our historical production level over the next 12 months as we said in the presentation. We are already producing 44 now. and we will be adding all these chucks of gas that you have mentioned that we have been presenting. Not all of them are at the same time. So, we believe that once we reach our historical production, this production will be flat at some time. And we will increase later along with all the new projects that we have been mentioning that will be increasing demand.

Your second question was related to decline. So, let's say we have an overall decline around 10%.

Frank McGann -- Bank of America -- Analyst

Okay. thank you very much.

Operator

Our next question comes from Vicente Falanga from Bradesco.

Vicente Falanga -- Bradesco -- Analyst

Thank you. good morning, everyone. thank you, Sergio and Ignacio. I had a couple of questions. you mentioned in your press release a very detailed, all the projects that you're working on secondary and tertiary recovery. I was just wondering for Loma La Lata-Sierra Barrosa, which is probably one of your largest fields, we have seen some intense decline there. Are you working in secondary and tertiary there also? And what could the company do to slow down the decline in this field? My second question. We heard that the government of [inaudible] in Brazil is potentially talking to Argentina to import gas after this new pipeline is built. I'm just wondering if YPF can make any comment about this. And do you fear the potential development of gas markets in Brazil? The Brazilian government has launched a big program. Could this get in the way of exporting plans for Argentina? And then one last question if I may. Do you still think that YPF with the acquisition of [inaudible] will generate free cash flow and equity in 2019? Thank you.

Sergio Giorgi -- Vice President Strategy and Business Development

Hi, Vicente. Thanks. So, considering our secondary and tertiary recovery our focus has been over the last six months to increase focus in secondary and tertiary recovery. So, in secondary by injecting more water, better quality and with better selectivity than before. So, we are seeing good results. For instance, in Bella Vista field in Chubut, we managed to reverse the production decline and increase the production just by optimizing water injection.

Based on this we are looking to extend this to other fields. In particular, for the field you mentioned, Loma La Lata-Sierra Barrosa, we do have a secondary recovery project there with some water injection in the excess of 10,000 cubic meters per day. And it's producing around 2.3 thousand bars per day and we don't have tertiary recovery plans there. Concerning the Brazil gas policy, of course, every country will try to do the best they can to export more gas. So, we do have the capacity to export to Brazil as we have the capacity to export to Uruguay and to export to Chile. So, we will take any possibilities that will be available.

And in terms of competing for exporting gas, we are doing our gas LNG project, and we believe we can be competitive in the global market. So, we need to be competitive not only with Brazil but in international market. Concerning your question about free cash flow to equity. What we have been saying is that CAPEX is being funded by the free cash flow from operations. So far, this quarter with these two acquisitions, the ones we mentioned before, they were unique opportunities. So, when we see in our long-term strategy they weren't contemplated in our annual budget, but free cash flow after all the financial expenses will be negative. We are aiming to maintain our leverage ratio between our target.

Vicente Falanga -- Bradesco -- Analyst

Thank you, Sergio. Thank you, Ignacio.

Operator

Our next question comes from Luiz Carvalho from UBS.

Luiz Carvalho -- UBS -- Analyst

Hi Sergio. Hi Ignacio. Just two quick questions from my end. We saw the production drop in this quarter and [inaudible] average might be impacted up for the year the second quarter. So, and there's not much visibility of natural gas demand improvements. So, I just would like to understand, get a bit more color on how this might change your forecast in terms of prediction growth looking forward. And the second question it's more the downstream margins. You mentioned that you expect margin recovery on the second half of the year. I understand that third quarter might be a bit better because [inaudible]. So, I would just like to understand if it's just a commodity impact or if there's something internal that you're doing to try to follow closely the international prices. Thank you.

Sergio Giorgi -- Vice President Strategy and Business Development

Hi, Luiz. Thanks for your question. So, yes, we expect recovery in the production on the second half of the year compared with the first half of the year mainly by recovering the gas production as we already mentioned and also increasing the overall oil production, which is mainly coming from our shale oil operations. That's in terms of production for the second half of the year.

Luiz Carvalho -- UBS -- Analyst

You kept to guidance. But the point is that at least in our forecast the prediction for the first half was a bit lower than expected. So, I just would like to understand in the long term if there's something that you might review in terms of prediction growth for the next, let's say, five years or so considering a lower base.

Sergio Giorgi -- Vice President Strategy and Business Development

I mean, our plans for the next 5 years we will be unveiling them by the end of the year like we always do. Now, we need to consider that last year we also had some curtailments. So, we expect for the second half of the year with all the levers that we have activated that weren't there last year, we will be able to do the catchup

Luiz Carvalho -- UBS -- Analyst

In terms of refining margins, sorry.

Sergio Giorgi -- Vice President Strategy and Business Development

Concerning the refining margins. We expect those margins to have a better situation. We must say that in the first part of the year we had some stoppage that we weren't considering. So, this should help. Also, in addition concerning the impropriety, the international prices have been going down. So, in that sense it will help our margins over there and mainly [inaudible] ability at the end to keep on with this path through that we have been doing and with a more stable scenario then we have been seeing in the last month in Argentina. That would also help.

Luiz Carvalho -- UBS -- Analyst

Okay. Thank you.

Operator

Our next question comes from Pavel Molchanov from Raymond James.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question. Over the last several years, every quarter y-year-old provide an update on Loma Campana development costs and operating cost metrics, which is very useful. I'm curious, how long will it take before you're ready to provide this similar data for La Amarga Chica and Bandurria Sur.

Sergio Giorgi -- Vice President Strategy and Business Development

Okay. thanks for your question. So, yes, you are right when we are always showing the Loma Campana development costs. When we perform the field trip to Vaca Muerta, we showed some of the development cost we were having on the first phases of the development in La Amarga Chica, which were just very near to those of Loma Campana because of course we are using all the synergies and all the lessons learned that we have learned from there. We are passing them to the same field. So, the figure that we showed when we did that when we are having approximately $10 per BOE in Loma Campana we were having around $11 to $12 in La Amarga Chica but that was because we were counting some wells that were coming from the piloting phase. So, we are very confident that now that we are in the full development mode, I mean the well costs and the well productivities were very similar in all these fields. And this includes as well Bandurria.

Pavel Molchanov -- Raymond James -- Analyst

Let me also ask about the YPF ventures which I remember you announced about a month ago. Realistically, what percentage or portion of your total capital spending over the next 5 years do you think will be allocated to renewables and low carbon technology?

Sergio Giorgi -- Vice President Strategy and Business Development

Well, I would say we have to separate YPF ventures with renewals and low carbon technologies because as you know, we also have our branch of thermal power in [inaudible] which also invested in renewals. For instance, we have a wind farm. We are building a new one. we have projects of solar coming in the future. We need to separate in terms of how much of our percentage of CAPEX we got to renewable when we consider the aggregate. Now, your question coming to [inaudible] was established a couple of months ago. It's our new corporate venture fund focused on accelerating innovation and the CAPEX we're locating to that initiatives are that stay that 0.1% of the company CAPEX, right. so, this is let's say around $30 million per year globally if we find good opportunities. So, but this is -- I would say this investment is much less of the global investment that YPF is doing in renewables. As I mentioned before, we have already a wind farm working, a wind farm being constructed, and also, we are looking to increase that side of projects.

Pavel Molchanov -- Raymond James -- Analyst

Okay. Appreciate the clarification on that. thank you very much.

Operator

Our next question comes from [inaudible].

Analyst

Hi, good morning, guys. So, I have a couple of questions here. My first question is on reserves. And I was wondering if you could please share your thoughts on how likely it is you may have to book a potential negative revision or impairment on reserves considering lower realized gas prices in 2019. So, that's my first question. And my second question. I was just wondering if you could give us an update on the strategy on specifically if you're considering to divest additional acreage. Thanks

Sergio Giorgi -- Vice President Strategy and Business Development

Hi, Daniel. Thank you for your questions. Concerning the question about reserves. We do not expect them to be [inaudible] these changes that you are mentioning. It's not only prices but also cost and performance that you have to take into account. So, and also, it's important please remember that we use domestic prices and not international prices. So, therefore, changes are not that relevant in prices. But yet, we cannot anticipate anything. So far, we are not going -- or we are not seeing that revision

Ignacio Rostagno -- Investor Relations Manager

Considering our establishing Vaca Muerta and your question was specifically in terms of divestments. So, as you see that we mentioned we just bought a new acreage in [inaudible] which is just beside La Amarga Chica and has given a lot of synergies to us. and we could divest part of this block because there are some companies that are interested in joining forces with us to [inaudible] and develop that block. We are not actively looking to divest any of our oil acreage at this time. Once we are [inaudible] for instance a new development hub. Well, we would look at that time if we need to do some divestments or not, but it's not now in -- we are not actively pursuing that at this time.

Analyst

Thank you, guys.

Operator

We have no further questions at this time.

Sergio Giorgi -- Vice President Strategy and Business Development

Okay so thank you very much and as always if you have follow up questions, you can contact Ignacio and the team and thank you for participating goodbye.

...

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 56 minutes

Call participants:

Sergio Giorgi -- Vice President Strategy and Business Development

Ignacio Rostagno -- Investor Relations Manager

Frank McGann -- Bank of America -- Analyst

Bruno Montanari -- Morgan Stanley -- Analyst

Vicente Falanga -- Bradesco -- Analyst

Luiz Carvalho -- UBS -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Analyst

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