Pampa Energía S.A. (NYSE:PAM) Q4 2022 Earnings Call Transcript

Pampa Energía S.A. (NYSE:PAM) Q4 2022 Earnings Call Transcript March 13, 2023

Margarita Chun: And we would like to welcome everyone to company Pampa Energía’s Fourth Quarter 2022 Results Video Conference. We inform you that this event is being recorded and all participants will be a in listen-only mode during the presentation. Before proceeding, please read the disclaimer that is located in the — 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 forward-looking statements.

Now, I’ll turn your conference over to Lida Wang, Investor Relations and Sustainability Officer of Pampa Energía. Please go ahead.

Lida Wang: Thank you, Marrie. Hello, everyone and thank you for joining our conference call. I will try to make it short and skip some parts already explained in the earnings release. So we have plenty of time for Q&A with our CEO, Mr. Gustavo Mariani; and our CFO, Mr. Nicolás Mindlin here. This quarter marks the end of 2022 and it’s always helpful to look back and review what’s been going on with Pampa in the last 5 years since we have Petrobras Argentina. The challenges posed in this period did not prevent us from growing and delivering milestones. Our core businesses, Gas & Power grew significantly in the last 5 years. In 2022, we raised our peak gas production to more than 11 million per day and currently working to ramp it up to 60 million in 2023, thanks to the plan as last tender.

More than doubling our 2017 watermark and proudly becoming the company that grew the most its gas output since the pandemic. Power generation did not stay quite either. We became the largest independent power producer by investing in every tender or B2B whether efficient thermal or green energy, adding more than 1.3 gigawatts in full capacity to reach 5.1 gigawatts by 2022. In 2023, 323 megawatts more are coming online as we are inaugurating PEPE IV and we commissioned 2 weeks ago, with YPF more than 12 years after the CCGT project started. Our way of managing help us to gain efficiencies and be savvy over CapEx. So we invested in accretive assets that increase our EBITDA and made it resilient. We made good use of our robust cash flow by enhancing our power portfolio, strengthening our liquidity, substantially reducing our leverage and returning value to shareholders with share buybacks.

2022 was a great year in Pampa’s history. We look forward to delivering outstanding results to become a leading, efficient energy producer. So now let’s focus on the quarters figures in which gas made it to the headlines again as expected. The adjusted EBITDA amount to $183 million, 7% less year-on-year, mainly because of lower PPA income and some contracts mature in Loma in late 2021 and Varadan in April last year as well as Loma gas line number 5 outage, higher payroll in dollar terms and lack regulated tariffs affecting . However, the off gas exports to Chile, the higher export power and reforming outstanding results offset these decreases. 83% of our EBITDA was dollar linked. Quarter-on-quarter, the drop is explained by seasonality in gas and power demand and prices.

As you see in the right below, the gas prices helped oil and gas to lead the consolidated adjusted EBITDA which took 56% of our EBITDA. CapEx in Q4 was 13% higher year-on-year, just mainly because CMP drilling and completing activity searches in attic season to achieve planned gas commitments. However, this variation was partially offset by the advance progress in PEPE IV wind farm which implies lesser CapEx divestment. Moving on to power generation. As seen on Slide 5, we posted an adjusted EBITDA of $86 million in Q4, down 19% year-on-year and 4% quarter-on-quarter, mainly due to the end of some PPAs, the outages at Loma number 5 unit and higher pace expenses offset by better spot prices, higher dispatch and lower maintenance costs. Q4 dispatch rose 11% year-on-year, while the National Power Grid dropped 1%.

This is mainly due to the last year’s overhauls at Loma and , more gas for Central Piquirenda; outstanding water import in PCP Corfu and capacity factor at wind farms, partially offset by Lomas number 5 unit outage and West liquids and Bolivian gas. Availability is essential to collect take-or-pay capacity payment, especially total PPAs contributed most of the EBITDA. In Q4, we reached an outstanding rate close to 97%, just above the 95.5% recorded last year. Again, this is way above the grid’s recorded 69% ability rate. It will have been higher as on Loma number 5 outage. Regarding our expansion at the closing to combined cycle was commissioned just 2 weeks ago, essentially improving the power plant efficiency and therefore, it’s low factor.

In addition, CAMMESA granted clearance to this team to run up to 260 megawatts priced with a 10-year PPA with the update from CAMMESA. With the existing gas 2 gas turbines, the total installed capacity claims to 827 megawatts becoming one of the country’s most efficient and biggest thermal plants. Moving on to wind farm expansions. We acquired Arauco 100 megawatts we farm located in the province of in mid-December, building a 20-year PPA. The total price was $170 million and doesn’t have leveraged the asset. The transition was an excellent opportunity to keep boosting our wind portfolio and invest in resilient assets. Regarding PEPE IV, the project is now 86% advanced. We completed the cable installation, transformation and testing. All the wind turbine components are right now in the facilities and we have commissioned already 36 megawatts.

However, due to the climate condition and among other factors, we estimate to complete the COD by the end of Q2 this year. Also, last month, we announced a new project, PEPE VI which kicked off already. We aim to add 300 megawatts investing more than $500 million. The first phase will add 95 megawatts by the third quarter of 2024 with investment of almost $180 million. Keep in mind that debt expansions are sold all under B2B PPA. So on Slide 8, let me briefly comment on the MP figures. We posted an adjusted EBITDA of $72 million in the quarter. 57% higher year-on-year because of the plan gas deliveries, gas export prices and higher oil and gas — oil demand and prices, offset by lesser gas export volume and increased costs related to the growing activity and payroll.

However, quarter-on-quarter, EBITDA is down 39%. This is primarily due to the seasonality. Our lift and costs likely grew yearly but was down quarter-on-quarter due to seasonality. Efficiency-wise, the lifting cost per BOE performed in the opposite way. Recording $7 per BOE in the quarter, 3% down compared to last year. In Q4, our total production averaged almost 62,000 barrels per day — so mining, crude oil represented 9% of our output, still it reached 22% of the segment’s revenue, mostly because of export prices linked to Brent and export volumes which tripled compared to last year. Last summer, we successfully extended the Plan Gas contract until December 2028. Furthermore, regarding the tender tapping the first stage of the new gas pipeline to be online on July 23, Pampa got awarded 4.8 million out of the 11 million cubic meters per day at a similar price previous tenders until 2028.

It is an excellent news as it contributes significant organic growth and long-term visibility to our gas business. Therefore, by this winter, we will more than double the maximum record register in 2023 , then almost 16 million termites per day by investing 1.1 billion cumulative between 2020 and 2023. Besides the upcoming new capacity in the main pipeline, our shale gas campaign will support the significant ramp-up in production for the first time in our history. In Q4, we drilled 2 wells and completed 5 wells to at Cereceda confirming it’s great potential for shale development. Most of the $490 million CapEx in MB is testing to drill and complete 24 wells to and Sierra Chata Lokes. Still, currently, Taigas is our main primary production source.

So as we engage in shale gas campaign to increase our share, this year, we will connect 2 horizontal wells in keep drilling in Brionethat it’s not operated by us. Our gas production in Q4 was 6% up year-on-year but 11% down quarter-on-quarter due to seasonality, averaging 9.5 million cubic meters per day and outpacing the levels that only grew 2%. 72% of the quarter’s production came from Evangruco, where we commissioned the second gas treatment plan last November with a capacity of 4.8 million cubic meters per day replacing temporary facilities and covering subsequent winter ramp-up. Therefore, Ebangrusho can produce up to 4 million cubic meters per day. The average gas price of the quarter was $3.9 per mmBTU, 24% up year-on-year due to export prices but 20% down quarter-on-quarter because of seasonality.

Regarding the sales breakdown, Q4 is fairly distributed with retail in off-peak and lesser exports year-on-year but still represents 14% of our output with higher prices. Exports will remain under — until winter, even winter since we obtain permits that will last until June of this year. In 2022, thanks to the outstanding work of our technical team and the shale gas productivity at Sierra Chata block. We recorded a 14% increase in annual proved reserves amounting to 179 million barrels of oil equivalent. Although we held the production record in 2022, the replacement ratio was 2x and the average life was kept at 8 years. The additions reflect the excellent results of shale gas pilots to Bacamurta formation that we are — we did in Sierra Chata and Evanrucho, tripling shale reserves last year.

The Petrochemical business EBITDA grew by 68% year-on-year, posting $15 million in Q4, primarily contributed by domestic reforming and polystyrene sales plus a lower cost offset by reduced margin and demand of styrene and rubber. In Q4, 3% of the total sales volume was exported. As you can see left below, after we reorganized the production strategy in 2019, we could smoothly navigate the volatile commodity prices producing at maximum capacity close to historical . Despite of intensive CapEx, in Q4, we recorded a free cash flow of $101 million. This is driven by the outstanding operating performance of all the 3 businesses. Working capital reduced seasonality that CAMMESA pay at a higher frequency offset by that service and an income tax early paid of $50 million .

The increased debt considers the dollar link that we raise in the local market. In addition, in Q4, we acquired the Arauco wind farm that we previously talked about it. And we have to make a first installment of $128 million . So in summary, net of everything, we generated $50 million of net cash flow this quarter, achieving $700 million cash by the end of the year. Moving on to Slide 14, we show the consolidated figures of our financial position, including our affiliates at ownership, that’s based on the restricted group that reflects the bond parameter. We posted a gross debt of $1.6 billion, similar to last quarter. 84% is dollar denominated, bearing an average interest rate of 8.4%, taking advantage of the domestic liquidity, diversifying our leverage resources.

We issue a 5-year 0 coupon dollar link for an additional $50 million plus CHF 100 million peso bond at plus 2% . Net leverage and net debt kept going down, recording $913 million and 1.2x multiple. The average life also decreased to 3.6 years, Pampa does not face relevant debt maturities until 2027. So this is thanks to the successful bond exchange made in August of last year. So this concludes the presentation. Now I will turn the word to Margarita, who will poll for questions in the chat. Thank you so much.

A – Margarita Chun: The first question comes from Frank McGann from Bank of America. He has six questions. The first one is, how do you see gas production quarter-by-quarter in 2023 with the startup of the new pipeline.

Gustavo Mariani: Frank, thank you for your question. This year, we’ve been producing during the summer, less than we expected, basically because lack of infrastructure to evacuate the gas from the Neuquina Basin. So although we were expecting to be producing above 10 million cubic meters of natural gas per day. We are currently being able to sell less than 9.5 million. We think this will continue first quarter and second quarter of year. So within this situation of lack of capacity from the Neuquina Basin, we will continue the remaining of the first quarter and the second quarter as well. Once the new pipeline is online by mid-winter, we expect to be able to jump our production to 16 million cubic meters of natural gas per day.

So that is our expected output during the third quarter. And in the fourth quarter during our spring and with the new pipeline working, we expect our production — our sales to be in the range of 12 million to 13 million cubic meters per day. So a significant increase from this current summer Okay.

Margarita Chun: Thank you, Gustavo. The second question from Frank McGann what is the latest you are hearing about the startup date for the..

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Q&A Session

Gustavo Mariani: It’s funny that we are talking about a pipeline of this size, such a huge infrastructure project. And then we are talking about days, not weeks, not months but days. But to answer the question, the latest that we are hearing is that everybody is working to be on time on the schedule. So to be — to have the pipeline ready by the end of June. That is so far I hope nothing unexpected that change that. But up to this moment, what we are hearing is that the pipeline might be on time. Something that I’d like to take the opportunity of this question to highlight some numbers that I’ve been looking at this weekend and they surprised me. As I said at the beginning, there is the capacity to produce gas from the Neuquina Basin is capped by infrastructure.

That is why we are selling less than we expected, while CAMMESA has been burning liquid fuels and we are burning gas importing from Bolivia all through the summer. So this — we cannot check how much natural gas has been. How much liquid that means fuel oil, gas oil, coal and imported gas from body in total, CAMMESA I’m counting October, November, December and January. Those are real months. And this situation will continue February, March, April and then in May, we’ll start the winter. But — so these months, so far, CAMMESA has burned liquids in an equivalent to almost 11.6 million cubic meters of natural gas per day. At what price, liquids are much more expensive than local natural gas. So CAMMESA has been burning liquids at an average of $21.5 per million of BTU.

So the gas — the summer price for natural gas is $3 and CAMMESA, it’s burning fuels. I’m doing the average of gas from Bolivia, fuel oil, gas oil and coal. That is — that makes an average of $21.5 per million of BTU. So what does this mean? 11.5 million cubic meters of natural gas per day at $21 per million of BTU for 7 months, that is — that amount to $1.9 billion. So that is how much the country is spending to import all these fuels. One and why we are doing this because we lack infrastructure capacity to have our own production coming from the Neuquina Basin. Once the new pipeline is ready, the country will be able to replace all these consumption of liquids with local natural gas that — thanks to the plan gas, Argentina is going to be able to buy from producers at $3 per million cubic meters per day — sorry.

So this quantity of gas at this price for 7 months, it’s $250 million. So instead of $1.9 billion, $250 million, with one other important difference. The $1.9 billion is currency real dollars that the country is spending, while the 250 are Argentine dollars. So really, it’s paid in pesos at the official exchange rate. So that is how much — that is the huge gap and there is a huge saving that the new pipeline will bring. That means that the total cost of the pipeline was around — I think it was around $1.8 billion. So, what I’m trying to summarize is that in less than one summer, the cost of the infrastructure of the new pipeline gets repaid for the country. That’s how important this new pipeline means for the country not only for us as producers but also for the macro numbers of Argentina.

Margarita Chun: Thank you, Gustavo. The third question about Frank is about what is the upside to output in 2024 next year.

Gustavo Mariani: Well, so far for 2024, we don’t have anything new, so a new jump in production. Maybe there is — it’s the second phase of the pipeline gets auctioned and the construction is ongoing. So then there’s going to be a new round of Plan Gas in order to fulfill that second tranche. Let’s hope that happens this year. Obviously, if that happens, we will participate as we have always been participating in the past round, maybe we will be able to increase further our production. But even though if there is no — if the construction of the second tranche is not done by — is not undertaken by the winter of 2024, our output will grow in 2024 despite that just because the first tranche will be online. So not during the winter, because during the winter, we will be selling the near 60 million cubic meters of natural gas per day.

But during the rest of — during the summer months, during our spring summer and early fall, CAMMESA will be able to replace all its consumption liquids with local natural gas. And so we — and together with the rest of the industry, we will be able to replace those liquids. So if there is no infrastructure in winter time, our production will be similar to ’23 but in the summer, our sales will be higher than the first and second quarter of 2023.

Margarita Chun: Thank you, Gustavo. The fourth question, Frank, is about how are you seeing cost pressures with high inflation and a slow devaluation of the Argentine peso.