Pampa Energía S.A. (NYSE:PAM) Q1 2024 Earnings Call Transcript

Pampa Energía S.A. (NYSE:PAM) Q1 2024 Earnings Call Transcript May 9, 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 Energia’s First Quarter 2024 Results Video Conference. We would like to inform you that this event is being recorded. All participants will be in listen-only mode, during the presentation. After the company’s remarks, there will be a Q&A session. Questions can only be submitted in writing through Zoom. [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 Energia’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 Energia 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: Thank you, Raquel. Hello everyone and thank you for joining our conference call. I’ll make a quick summary of Q1, you may find more details in our earnings release and financial statements. Today, we are having a Q&A with our CEO, Mr. Gustavo Mariani; our CFO, Mr. Nicolas Mindlin, Mr. Horacio Turri, our Head of E&P and also Adolfo Zuberbuhler, our Finance Director. Let’s start with the quarter figures. After a soft Q4, gas and power demand recovered. Pampa delivered 31% higher gas production year-on-year and 32% quarter-on-quarter, thanks to the new gas pipeline online in August of last year. Remember that Pampa was awarded 4.9 million cubic meters per day out of 11 of the pipeline’s capacity. This is very important as this late summer bloom prevented the country from importing gas and firing alternative fuels.

Therefore, there is more local gas output, lesser FX outflow, a friendlier carbon footprint, and more power efficiency. Also, we kept boosting shale gas production, representing 40% of our total output of this quarter, a significant increase compared to last year’s 14%. In contrast, we’ve been experiencing significant delays in collecting CAMMESA payments, burying higher working capital. We learned that the Secretariat of Energy instructed CAMMESA to pay December 2023 and January 2024’s transactions in face value dollar bonds, so we booked a $34 million impairment loss on trade receivables. We are awaiting the final resolution and analyzing the course of action. The adjusted EBITDA for the quarter amounted to $189 million. This is a decrease of 8% compared to last year’s amount because of the payment haircut on CAMMESA’s January receivables and lower gas exports, in addition to the drop of petrochemicals and energy spot prices, this the latter affected by the sharp peso depreciation in December.

Higher domestic gas demand and lower net operating costs partially offset these effects. However, the EBITDA grew 70% quarter-on-quarter, mainly due to this recovery in gas and power demand. Notice that the Q4 ’23 EBITDA is also affected by CAMMESA haircut because of December’s transaction. CapEx in Q1 slowed down, being 36% lower year-on-year, mainly because of the strong shale gas activity and PEPE 4 was developed in 2023, plus in Q1 we carried out the last divestments of PEPE 6, our last wind farm, which is estimated to be fully commissioned by October of this year. This was partially offset by the beginning of the pilot plan for shale oil in Rincon de Aranda. Moving on to power generation, as seen on slide four, we posted an adjusted EBITDA of $85 million in Q1, 22% lower year-on-year, mainly explained by the $17 million impairment of CAMMESA’s January 2024 invoice explained before.

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Q&A Session

It also impacted by the peso devaluation on the spot prices and Mario Cebreiro’s divestment, partially offset by lower operating costs and the commissioning of PEPE 4 in June last year. Q4 dispatch increased 3% year-on-year, this is mainly due to Barragan’s new CCGT, higher water levels at Mendoza hydros and PEPE 4’s contribution, partially offset by lower fuel oil fired generation and Loma’s gas turbine number five that, after being out of service for six months, resumed dispatch on January. Take or pay capacity payment, especially from PPAs, explains most of the EBITDA in this sector. It is driven by availability, and in Q1, we reached 96%, this is higher than last year’s 93% because last year there was a lot of thermal outages. Let’s do a quick review on PEPE 6 expansion, the project’s progress is 89% advanced.

So it’s pretty advanced. We mounted the 8th wind turbine on Monday, as seen in the installation status report that you see here. Meanwhile, the towers components are keep arriving at the site. The four power transformers have already been commissioned, tested and cleared by CAMMESA and Transener, but they are still awaiting for China’s approval. Finally, to avoid power transmission curtailments, we connected the wind farm to a new 500 kV high-voltage grid, the first three points line protection system is already online and the second has begun the process for commissioning. The estimated full COD will be in October of this year. PEPE 6 energy will be sold under B2B PPAs in matter. Moving on to E&P, I wanted to quickly comment on the gas deliveries, which recovered after Q4’s soft demand, thanks to the late summer bloom.

As you can see here, domestic sales are way above take or pay, although exports to Chile are still struggling but better off than last Q4. The winter season began this May and we are hitting peak production soon. Commenting on the segment’s performance, on slide seven, our E&P business posted an adjusted EBITDA of $70 million in Q1. This is 14% higher year-on-year. This increase was driven by higher domestic gas demand, unlocked by the commissioning of this new pipeline and hot weather. Lower gas exports, which I mentioned before, and crude oil sales were lower offset this variations. In Q1, our total production averaged above 73,000 barrels of oil equivalent per day. This is 27% higher than last year. Zooming in oil represented 6% of our E&P output, but 16% of the segment’s revenue.

Gas keeps taking the lead, representing 94% of the total production. Higher maintenance, treatment and transportation costs in El Mangrullo and Sierra Chata due to increased activity explained that our total lifting cost slightly grew by 4% year-on-year. Still, this is very important, the rising output mostly positively impacted the lifting cost per boe, which decreased 19% year-on-year, recording $5.8 per boe. Also, this quarter, we started our activities in Rincon de Aranda, which yielded promising results. We completed one DUC well targeting Vaca Muerta with initial production of over 1,300 barrels and currently producing practically at the same rate. Once the well testing is done and Duplicar is partially commissioned, that is due in this year, a stage of it.

We plan to resume production in the well tied-in back in 2018. Focusing on gas, our production in Q1 increased by 31% year-on-year and 32% quarter-on-quarter, averaging almost 12 million cubic meters per day again because of the local demand. 64% of the quarter’s production came from El Mangrullo and 20% from Sierra Chata, both our flagship shale gas fields. Regarding the campaign, we drilled one well and completed another three, shale gas wells in Sierra Chata. The productivity was outstanding. So we almost doubled our gas production there. On the other hand, El Mangrullo experienced a 29% increase compared to last year, without drilled new drilled or tie-in wells. In non-operated areas, Rio Neuquen tied-in five wells this quarter, maintaining production levels.

The average gas price for the quarter stood at $3.2 per million BTU, this is 18% down due to lower exports in volume and price to Chile as we explained before. We can see right below, the higher deliveries of local gas were destined for thermal power generation. The petrochemicals business posted $11 million of EBITDA in Q1, this is a 58% growth year-on-year mainly because of higher sales in the reformer and lower costs because of the FX, offset by soft domestic sales due to the economic activity and lower international prices. Quarter-on-quarter, the EBITDA decreased by 45%. This is mainly because the export dollar income was lower. The Reformer led the output mostly, offset by the reduced demand for Styrenics. Well, in Q1, moving to cash flow.

We recorded a free cash outflow of $187 million. Besides the 17 million haircut on CAMMESA’s January invoice that is impacted in EBITDA. This outflow is purely explained by the sharp increase in working capital due to the payment delays from CAMMESA, which rose from 73 to 89 days in the quarter. Now it is over 120 days if all three due bills are paid today. May 10 is the due of March invoice, so the debt will pile four bills if nothing changes. The higher working capital is offset by lower debt service mainly due to reduced peso stock, debt stock. However, we took advantage of the local market conditions and issued new debt to cover the increased working capital. Also, it is worth highlighting that we collected 45 million in dividends from OCP, a co-controlled oil pipeline company.

This is the second largest and only private pipeline in Ecuador. In summary, we increased $11 million of net cash in the quarter, despite the high working capital, achieving an 845 million cash position by the end of March. Moving on to slide 12, we show our consolidated financial position, including our affiliates at ownership. But let’s just focus on the restricted group that reflects the bond perimeter. We posted a gross debt of almost $1.6 billion, a 6% lower year-on-year and 10% growth in cash. We kept diversifying the currency and source of our debt and, as a result, 73% of the gross debt is in US dollars. The net debt recorded $718 million. It’s 21% lower year-on-year, and 1.1 times leverage. The average life was 2.8 years. Until 2027, we do not face any relevant debt maturities.

So this concludes our presentation. Now, I will turn the word to Raquel. She will poll for questions. Thank you very much.

Raquel Cardasz: Thank you very much, Lida. The floor is now open for questions. [Operator Instructions] So the first question comes from Ann Mill from Bank of America. The first question is, how do you see the evolution of the power generation sector on such things as spot energy pricing and price adjustments, construction on future generation facilities, future PPA contracts and what are the implications for the profitability of Argentine generators.

Gustavo Mariani: Hi, Ann. Good morning. Thank you for your question. Unfortunately, this discussion that is public with the Secretary of Energy and with the Ministry of Economy regarding the CAMMESA payments have put on hold all the conversations regarding regulatory changes going forward. I hope that we are a few weeks away from being able to start those conversations again or that the Secretary of Energy could focus on this issue. Certainly, the spot energy pricing needs an adjustment. Desperately needs an adjustment very soon. So we hope that the secretary will have time to focus on this issue in the next few weeks, but we don’t have any visibility on that matter. Regarding construction of future generation facilities, as you know the auction that was awarded at the very end of the last administration has been put on hold or more than put on hold all the signals are that it will be canceled.

So there is no visibility there. And you also asked about future PPAs, but I don’t believe that this administration is thinking about PPAs at least not in a way that we have seen in the last decade. It’s not PPAs where the counterparty. It’s basically CAMMESA or the Secretary of Energy. But probably the scheme that this new administration will propose will be PPAs where the counterparty of the power generation will be the distribution companies directly. But that is the regulatory change that has been mentioned and likely discussed with the authorities, but we haven’t seen that, again, we had those conversations during our summer. But since then, there’s not been further discussion on this topic.

Raquel Cardasz: Thank you very much, Gus. And second question is, can you provide an update on the construction of the various new pipelines that will help producers to evacuate production during off peak times or sales to neighbor countries such as Bolivia, Brazil and others.

Gustavo Mariani: There are currently a couple of things. One is the reversion of the North pipeline, the pipeline that currently brings gas from Bolivia and from the North Basin of Argentina to the Center of Argentina. That pipeline is in the process of reversing its flow of gas. Now it’s coming North to South. And once this reversion is completed, natural gas from the Neuquen Basin will be able to reach the north part of the country and eventually Bolivia. Unfortunately, we don’t see this infrastructure being completed by this winter. We hope it will be completed by the end of the year by next summer or early next year. So it will be online by then. Just to keep in mind that will not increase the amount of gas that the Neuquen Basin will be able to export, but rather gas that currently goes to literal to the east side of Argentina, we will be able to reach the north part of Argentina that because of the decrease in imports from Bolivia because of the decline of production there needs to be satisfied.

While the east side of the country could be supplied with LNG or eventually with liquid fuels. The other important infrastructure project is the completion of the gas compression plant in the Gasoducto Nestor Kirchner . So the first tranche of the Gasoducto Nestor Kirchner was put online at the middle of last winter. Now the two compression plants will be able to double the capacity of that first tranche of the Gasoducto Nestor Kirchner. The first of that compression plant will be ready, we hope, in the next month or so. Before the end of the winter, increasing the capacity of the pipe in 6 million cubic meters of natural gas per day. The other 5 million will be once the second compression plant is ready, which we expect we don’t have much visibility, but we expect will be by the end of the year or during the summer.

Raquel Cardasz: Thank you very much. The last question from Ann is, are there any other regulatory changes that are you monitoring closely.

Gustavo Mariani: No. As I said, all the attention has been, unfortunately, during the last couple of months has been on this issue of the payment. So we hope to be able to resume the Secretary of Energy can focus on these other regulatory changes in the next few weeks.

Raquel Cardasz: Thank you, Gus. Now Alejandro Demichelis from Jefferies has three questions. First one says, could you please provide an update on negotiations with CAMMESA regarding payments and a potential bond? Could you please confirm the outstanding balance with CAMMESA.

Gustavo Mariani: Yes. Thank you, Alejandro, for the question. I think you all know it was released yesterday published in the official gazette this morning, Resolution 58. Basically, Resolution 58, what says is in Capsula it puts into brackets the payments of the transactions of December, January and February of this year and the proposal is to pay December and January transactions with bonds that currently trade at around 50%. And the transaction of February will be paid in cash. This is assuming that the generator reached an set of this agreement with CAMMESA. In terms of numbers, the December and January transaction for Pampa is ARS85 billion. That is what the Ministry of Economy is proposing to pay with bonds. And the February transaction is ARS53 billion.

This is — what it means we need further clarifications on the resolution that has been published. It implies a significant haircut. And as Lida explained, we have already accounted for that on our balance sheet. What is, I think, is already public as well is that AGEERA, which is the association of all the power generators of the country, have formally rejected the proposal in the name of all its private members. I mentioned private because AGEERA is composed both of private generators and state-owned generators. We believe this is an ongoing negotiation. We are very optimistic that an agreement could be reached with the government with minor improvements and taking into account the restrictions that the Secretary of Energy the treasury is facing.

Obviously, as we and all the power generators have — that all the creditors of CAMMESA have mentioned that is crucial to this negotiation is the fact that we have going forward, the visibility that payments will begin to be current and on time from now onwards. So that the stock of that, the one that we are taking a haircut on is limited and will not continue increasing. So again there’s not much that I can tell you, but we are optimistic that an agreement will be reached, but we then not accepting this current proposal.

Raquel Cardasz: Thank you, Gus. Next question from Alejandra. He wants to know how do you see upstream volumes evolving during rest of 2024?

Horacio Turri: Okay. Good morning to everybody. Going to your question, Alejandro, we have to separate between gas and oil. In terms of gas, as Lida mentioned before, the demand is picking up. So currently, we are delivering a bit more than 14 million cubic meters a day. Our commitment, total delivery is in the range of 15.7% for the winter, which we think is going to be achievable. And then this includes approximately 600,000 cubic meters of exports to Chile during the winter season. And then we will probably go back to the 13.8% that we also have committed for the off-peak season, including around nearly 1 million cubic meters per day exports to Chile. So that’s regarding natural gas. In terms of oil, we will see a significant decrease in Pampa’s production.

We are currently in the range of 4,500 barrels per day with the Rincon de Aranda 2001, delivering 1,300 barrels a day plus the tying in of the Rincon de Aranda 2000 is approximately are more than 400 barrels a day. We will be adding up like 1,800 barrels a day of crude oil, which represents a little bit less than 50% of our contraction.

Raquel Cardasz: Thank you. And Alejandra also wants to know an update on the performance of the Rincon de Aranda block.

Horacio Turri: Okay. Going to Rincon de Aranda 2001 well, we have very good news. The well was extremely successful. We reached almost 1,400 barrels per day of initial production, which gives you an EUR of around 1.3 million barrels to 1.4 million barrels. This is particularly good. If you compare this well with the average of wells that had been drilled with 2,000 meters of lateral leg in the area. You can see there in the slide that we rank among the top three when we compare with La Amarga Chica, Baja del Palo and Aguada Canepa, which approximately accounts for around 300 wells. We see that the behavior of the Rincon de Aranda 2001 is very promising. And as you can see also in the slide, we are way above the average wells that have been drilled with 2,000 meters of lateral legs by far.

They accounted for initial production of 150. We are in more than 200 and also the EURs are particularly above that. In terms of future development, we foresee the drilling and completion of two parts during 2024, 2025, which have the basically the objective of derisking the area and also adding up production. If we are successful with these two pads, we will be adding up approximately 2,000 cubic meters per day to the current production. And the only constraint we will be facing is the transportation capacity to evacuate this oil into the Bahia Blanca Port. We already acquired 1,000 additional capacity from the older valve bid and we are optimistic that we will be able to find alternative ways of moving that oil into the export facilities in Bahia Blanca.