Vista Energy, S.A.B. de C.V. (NYSE:VIST) Q4 2022 Earnings Call Transcript

Vista Energy, S.A.B. de C.V. (NYSE:VIST) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Good day, and thank you for standing by. Welcome to the Vista’s Fourth Quarter 2022 Earnings and Full Year Webcast Conference Call. 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. Please go ahead.

Alejandro Chernacov: Thanks. Good morning, everyone. We are happy to welcome you to Vista’s Fourth Quarter and Full Year 2022 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 statements 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. Reconciliation of these measures to the closest IFRS measure can be found in our earnings release that was issued yesterday. Please check our website for further information. Our company, Vista is a capital variable organized under the laws of Mexico, registered in Bolsa Mexicana de Valores and the New York Stock change. The ticker of our common stock are VISTAA in the Bolsa Mexicana de Valores, VIST in the New York Stock Exchange. And the ticker of our warrant is VTW408A. I will now turn the call over to Miguel.

Miguel Galuccio: Thanks, Ale. Good morning, everyone. Today, I will share with you the fourth quarter and full year results of 2022 in which we have continued to deliver a strong operational and financial performance. First, I will present the fourth quarter results and then we later move on to full year results and 2023 guidance, and I will also comment on the transaction we closed and announced yesterday. During Q4, 2022, total production averaged BOE per day, a 33% increase year-over-year. Oil production was up 41% year-over-year driven by the tie-in of 1 4-well pad in Bajada del Palo Oeste and another in Aguada Federal. Total revenues were $308 million for the quarter, an interannual increase of 57% driven by higher production and stronger realized oil price.

Lifting costs per BOE was $7.2 for the quarter, reflecting our success in containing cost pressure through a number of efficiency measures as well as dilution in the fixed costs through incremental production volumes. Capital expenditure was $145 million including the drilling of 8 wells and the completion of 7 wells during the quarter. Adjusted EBITDA during Q4 2022 was $202 million, a 73% increase year-over-year, driven by higher production and realization prices and lower lifting costs per BOE. During Q4 2022, we record positive free cash flow of $57 million, driven by robust adjusted EBITDA generation. Net leverage ratio at quarter end was 0.4x adjusted EBITDA. Adjusted net income was a solid $171 million including and not recurring positive adjusted of $98 million of income tax, implying a quarterly adjusted EPS of $2 per share.

We will now deep dive into our main operation and financial metrics for the quarter. Total production during Q4 2022 was 54,700 BOEs per day, up 33% interannually and 8% sequentially. Oil production was up 41% year-over-year, mainly driven by the tie-in of pads Bajada del Palo Oeste-14 and Aguada Federal-3. Total shale oil production, which also includes Bajada del Palo Oeste increased to 36,200 barrels of oil per day, representing 79% of oil production. Moving to Slide 5. I will share some details on our projects in Vaca Muerta. In Bajada del Palo Oeste, we continued to report robust oil productivity. We have tie-in 60 wells today, from which 40 have exceeded 360 days of production and are producing on average 3% above our Bajada del Palo Oeste type curve.

During Q4, we completed pad Bajada del Palo Oeste-15, which was tie-in late in the year. These pads has 5 wells, of which 3 were landed in La Cocina and 2 in the Organico. We are seeing very good productivity regions in these wells, which are performing above our type curve after 40 days on production. Also, we recently started to drill 4-well pad Bajada del Palo Oeste-16, which we plan to tie-in during Q2. In our Federal production increased to 5,800 BOE per day during Q4, 2022. The block contributed 14% of our total shale production boosted by pads Aguada Federal-2 and Aguada Federal-3. We have recently finished drilling 4-well pad Aguada Federal-4, landing 2 wells in La Cocina, 1 well in the Organico and 1 well in Middle Carbonate, which we have not tested in Aguada Federal so far.

We plan to complete and tie-in this pad by the end of Q1. During Q4 2022, we made good progress in our pilot in Bajada del Palo Este. We drilled, complete and tie-in 1 well in Bajada del Palo Este-3, landed in La Cocina and eastern part of the block. We are currently drilling pad Bajada del Palo Este-2, which contains 2 wells La Cocina. We plan to tie-in these wells during April, after which we will have fulfilled our investment commitment in this block. In Aguila Mora, we completed our first 2-well pad in January. We landed 1 well in La Cocina and 1 well in Middle Carbonate. We are currently working on the temporary production facilities for the block, which is scheduled for completion in April. Our plan is to tie-in the wells after that event.

Total revenues in Q4 2022 were $308.1 million, a 57% increase year-over-year driven by production growth and stronger registration prices. During the quarter we normalized our inventory with a buildup of 238,000 barrels. Realized oil price for the quarter averaged $68.9 per barrel and interannual increase of 14%. The average realized domestic price was $67.2 per barrel. This figure does not include trucking transportation cost from sales point to refinery, including such cost, the domestic realized oil prices was $63.3 per barrel. The average realized price of the export market was $74.1 per barrel, reflecting softer brands and higher shipping costs. For the second straight quarter more than 50% of our total revenue came from the export market.

Sales to international market accounted for 52% of oil volumes and 56% of oil revenues. We exported 4.5 cargoes during the quarter or 2.2 million barrels of oil in total. We expect to maintain this level of export during the coming quarter as well. Realized gas prices were $4.5 per million BTU, an increase of 65% year-over-year, mainly boosted by sales to our industrial customers at $3 per million BTU applicable to 44% of our sales volumes, and export to Chile at $8.8 per million BTU applicable to 26% of our sales volumes. Total lifting cost for the quarter was $36.1 million. We have successfully implemented cost saving initiatives mainly the pipeline from Aguada Federal to Bajada del Palo Oeste, which reduced oil transportation costs. Additionally, the boost in production volume continues to dilute fixed costs, leading to an 11% reduction in lifting cost per BOE year-over-year.

Adjusted EBITDA in Q4 2022 was $201.7 million, implying a 73% growth year-over-year. This reflects strong revenue growth and the reduction in lifting costs, I mentioned previously. Adjusted EBITDA margin was 65% during the quarter, an interannual improvement of 6 percentage points. Netback was $40.1 per BOE, a 30% increase year-over-year, driven by higher oil prices and lower lifting cost per BOE. During Q4 2022, we continue to generate positive free cash flow for a total of $57.2 million. Cash from operation activities during the quarter increased 55% interannually to $215.4 million. Cash flow used in investment activities was $158.2 million. Capital expenditure was $145.2 million on actual accrual basis, of which $98 million were invested in new wells in our Vaca Muerta project, USD31 million in facilities and USD16 million in other minor projects.

Cash flow generated by financing activities stood at $8.8 million during the quarter. We successfully refinanced $108.5 million of 2023 maturity, of which USD45 million are now due in 2025 and USD63.5 million in 2026. We also refinanced $40.5 million of 2024 maturities, which due in 2025. This extended the average life of our debt from 2.4 years to 2.8 years and reduce average debt cost from 6% to 4.4%. Gross debt stood at $549.3 million at the end of Q4 2022. The slight increase compared with Q3 2022 was driven by debt issuance to repay $22.5 million installment of our term loan in January. After this payment, gross debt has stood at $526.8 million. After this debt repayment and due to our successful refinancing effort at the end of the last year, we only have $45 million debt maturities remaining in 2023.

Net leverage ratio stood at a very healthy 0.4x adjusted EBITDA at quarter end. I will now move to our full year results. During 2022, we have continued to deliver on our superior shareholder return proposition. We also achieved robust performance vis-a-vis our 2022 guidance. We further expanded our external reserve base. Our P1 reserves increased to 251.6 million BOE year-end, implying reserve replacement ratio of 495%. The acquisition of Aguada Federal and Bandurria Norte led to the addition of 300 new wells to our inventory. Also our successful results in the first 2 wells in Bajada del Palo Este, led to an addition of 50 new wells, increasing our inventory in Vaca Muerta to 900 wells in total. In 2022, we delivered solid operational performance.

Production for the year was 48,600 BOE per day, a 25% increase year-over-year and well above our 47,000 BOE per day guidance. Oil increased 32% year-over-year, driven by higher oil content in our shale oil. We exported 44% of our oil sales volumes, which generate 52% of total oil sales, driven by higher realization prices in the export market. We reduced lifting costs from $7.6 to $7.5 per BOE year-over-year, reflecting our export to control costs in a challenging FX environment and delivering on our guidance. During 2022, we also made good progress in our sustainability program. We continue to invest in decarbonizing our operations. This has led to a 2% drop in absolute emissions in the year during which production increased 25%, therefore, reducing emissions intensity from 24 to 18 kilos of CO2 equivalent per BOE.

Concurrently, we have initiated the first 4 projects on our nature-based solution portfolio. I will deep dive into this matter later during the presentation. Regarding shareholder returns, we have a record year. We adjusted EBITDA at $765 million exceeding our guidance. Return on capital average employee came very strong at 40% for the year and so was our bottom line with an EPS of $4.2 per share, a free cash flow of $197 million. We have applied part of this cash to reduce gross debt by $84 million during the year. We have also repurchased 3.2 million shares for a total of $29 million, driven by execution of our strategic plan and in a contracted context for international commodity prices, our share price during 2022. Proved reserves increased 39% vis-a-vis 2021 for a total of 251.6 million BOE estimated at the year-end 2022.

This implies a total reserves replacement ratio of 495% and 515% for oil. Proved reserve life increased to 14.2 years. This growth reflects the quality of our quarterback commodity acreage and our ability to generate organic and profitable growth. Net additions were 87.8 million BOE, driven by activity in Aguada Federal where we added 40 new wells locations. Bajada del Palo Oeste, where we added 32 new well locations and Bajada del Palo Este where we added 4 well locations. This resulted in a total of 210 booked well locations in our P1 reserves. The certified present value at 10% discount rate attributable to Vista’s interest in proved reserve of $3.2 billion, using a price assumption of $72 per barrel for oil and per million BTU for gas, according to SEC guidelines.

During 2022, we made significant achievements on the operational front. The execution of our led to the tie-in of 28 new shale oil wells during the year. Therefore, total wells and production increased from 40 to 68 wells, driven an increase of 25% in total production and 49% in shale oil production year-over-year. 20 of the new wells were in Bajada del Palo Oeste. In addition, with tie-in sequels in Aguada Federal, which we incorporated into our core development area by connecting through a pipeline to Bajada del Palo cluster. We also initiated a pilot in Bajada del Palo Oeste, where we tie-in the first 2 wells in Q1 2022, showing robust productivity results. In July, we started operating our own sand mine and sand washing plant, improving sand logistics and cost.

The plant is already supplying Vista wells and is designed to serve 100% of our sand needs at full capacity, which is forecasted to be reached by mid-year. We have also made good progress in expanding our oil treatment capacity. We finalized our upgrade of the oil treatment plant, where we flow they Bajada del Palo cluster production, increasing its capacity to 57,000 barrels per day. We are actively working on another upgrade, which will further increase the capacity of the plant to 69,000 barrels per day by the third quarter of this year. Finally, we achieved 2 major milestones related to oil evacuation projects. In OldelVal, the pipeline linking Vaca Muerta to Puerto Rosales we have been awarded 31,500 barrels of oil per day capacity in that expansion project.

In addition to 42,700, we already have in the existing pipeline. We were also awarded 37,400 barrels of oil per day of throughput capacity in OTE port expansion in Puerto Rosales. Our capacity in these 2 projects will give us increased access to exporting through the . We have agreed to prepay 100% of our capacity in OldelVal and 50% of our capacity in OTE, which means an estimated investment in the form of prepayment to suppliers of USD77 million in 2023 and USD60 million in 2024 and USD11 million in 2025. The agreements we have signed for these 2 projects, constitute a major milestone for our growth plan. We combined secured term potential capacity, including our current capacity in OldelVal, we leased 74,300 barrels of oil per day, which is more than is needed to deliver our 2026 production target and has further upside, due to other ongoing process.

We are currently working with other upstream player to develop an additional pipeline capacity from the core area of Vaca Muerta, where we can lean into our facilities to the north of the basin connecting with existing to Chile. We think this could also generate an evacuation route for . During 2022, we have made solid progress on all our ESG plants. As discussed earlier, the execution of our decarbonization projects drove a reduction of our carbon intensity from 24 to 18 kilos of CO2 equivalent per BOE year-over-year. Crucially, during Q4 2022, we have recorded an intensity of 14 kilos, as the impact of the project implemented during the year materializing full, leaving us at a very solid starting point for 2023. We also signed a long-term power purchase agreement with a leading provider of electricity from renewable sources.

We plan to cover approximately 20% of our power needs from renewables in 2023 and gradually increase this year in coming years. This will contribute significantly to reducing our Scope 2 emissions. During 2022, we made headway in the development of our nature-based solution portfolio. We set up Aike, a Vista subsidiary to design, manage and execute our carbon offset projects. Aike a set up with leading local expert and focus on the development of a mixed forestry, forest conservation and soil capture through sustainable agriculture and livestock practices in Argentina. In its first year of operation, Aike purchased land in the where we planted 1,080 hectares, singed a binding commitment to purchase 5,000 hectares for the forest conservation projects in the province of Salta and signed sustainable farming and livestock agreement covering a total of hectares in the Province of Cordoba, Santa Fe, Buenos Aires and Rio Negro.

Considering our solid progress in decarbonization and NBS projects, we are well on track to fulfill our Scope 1 & 2 Net Zero ambition by 2026. On the social front, we achieved total safety results recording a total recordable incident rate below 1 for the third year in a row. We have made good progress in our gender initiatives through hiring and developing female talent, issuing new policies and running workshops to increase employee awareness. We also set up a Social Management System, a framework to support and develop social projects with our local communities, externally audited and following IFC standards. Finally, we have continued to strengthen our governance, issuing new policies related to business ethics and implementing a public grievance mechanism on our website.

I believe this slide conveys how our stronger performance give way to a robust total shareholder return in 2022. Our strong profitable production cash generation and led to positive free cash flow, reaching almost $200 million in 2022. This has enabled us to further deleverage our company, reducing gross debt by $84 million. This translated in a very solid net leverage ratio of 0.4x EBITDA at year-end 2022. In terms of the quality of our results, return on average capital employee very quickly reached 40% and adjusted EPS increased by 4x year-over-year. We have also allocated $50 million to the first 2 stages of our share buyback program. These significant achievements were positively reflected by our share price performance was tripled in 2022.

Moving to Slide 15, yesterday, we announced a transaction that will allow us to become fully focused on Vaca Muerta shale oil development. The transaction is structured as an innovative 2-phased agreement with Petrolera Aconcagua, covered the conventional concession shows engaged in grey on the map. As of March 1, 2023, Aconcagua will become the operator and pay 100% of the OpEx, CapEx, royalties and taxes of such assets. Vista will remain concession title holder until final closing date, which will be no later on February 28, 2027. At this time, 100% ownership will be transferred to Aconcagua subject to provisional approval. Vista will receive the consideration composed of 3 items: First, a payment of $26.5 million in installments. Second 40% of oil and gas produced by the block for the next 4 years; and 100% of the LPG and condensate clear of full cost, tax and royalties.

The consideration payable in oil and gas volume has the minimum warranty volume of 4 million barrels of oil and 3 million cubic meters of gas. Third, the right to purchase Aconcagua’s 60% share of gas production at $1 per million MBTU. For such gas, we will be making a margin of around $3.5 per million BTU at current price. Importantly, the oil treatment plant geographically located in Entre Lomas with a capacity of 57,000 barrels of oil per day is not included in this transaction. Also Vista retain the right to develop the Vaca Muerta play in all the concessions. According to our estimated and realized prices of USD65 per barrel of oil and USD4.5 per million BTU of gas, the total value to Vista with the transaction could reach a nominal value of approximately $400 million.

This will allow Vista to fully focus on the development of Vaca Muerta, while streamlining our portfolio and boosting our financial and operating metrics. The transaction will have immediate benefit on our metrics. In 2023, we forecast reduction in lifting costs per BOE of 25% as well as an increase in adjusted EBITDA margin by 5 percentage points to 71%, despite the fact that we will be consolidating of the production from these conventional assets, estimated at 5,000 BOE per day. The EBITDA impact is neutralized by the operating expenses and royalties. When taking into consideration the CapEx carry and the working capital effect, these transactions generate $30 million in incremental free cash flow for Vista, which will be invested in expanding crude oil transport infrastructure to increase exports.

That will also improve our ability to deliver on our 2026 target through additional free cash flow. We’ve forecast an additional net cash generated of approximately $100 million between 2023 and 2026 as a result of the transaction. Our portfolio will be stronger with investments direct to higher IRR shale oil project, leading to higher corporate return on capital employee, and adjusted EBITDA margins. I will now present our 2023 guidance, reflecting double-digit growth in production and adjusted EBITDA. This plan coupled with our robust delivery during 2022, leave us well on track to deliver on our 2026 target. Our development strategy is to fully focus on developing our core areas and finalize the pilot in Aguila Mora and Palo Este to reach such blocks.

During 2023, we plan to tie-in 29 wells, 16 in Bajada del Palo Oeste, 8 in Aguada Federal, 3 in Bajada del Palo Este and 2 in Aguila Mora. These tie-ins are forecasted to deliver 55,000 BOE per day, a 13% increase year-over-year. Exit rate is forecast at around 60,000 BOE per day. This is planned to occur, even as we deconsolidate 50% of the production of our conventional assets as of March 1, which will remove approximately 5,000 BOE per day on our production base. Lifting cost is forecasted to drop 27% year-over-year to $5.5 per BOE, mainly driven by the deconsolidation of the conventional assets. Adjusted EBITDA is estimated in $850 million to $900 million range, based on a realization price between USD65 and USD68 per barrel. This implies an interannual growth of 11% to 18%.

Our planned CapEx is $600 million, driven by slightly higher drilling and completion activities and upfront investment in treatment facilities to increase capacity for the hardware growth. Greenhouse gas emission intensity is forecasted to reduce from 18 to less than 10 kilos of CO2 equivalent per BOE. This reduction captures the full year impact of the projects executed in 2022 as well as partial impact of the 2023 projects. Overall, we are very confident that Vista is well on track to deliver on the long-term target percentage at our Investor Day in December 2021. Moreover, we see potential for overdeliver in our production, efficiency metrics and free cash flow targets. We will now go through the key takeaways of today’s presentation. 2022 was a year of robust operational and financial performance.

We have delivered our positively revised 2022 guidance and made good progress towards our 2023 target. We also delivered on our superior total shareholder proposition. We reduced gross debt, repurchased 3.2 million shares and approved the warrants exchange last October. This led to a peer-leading stock performing during 2022. We signed an innovative deal that will transform Vista into fully focused Vaca Muerta company, with improved operational and financial metrics. Finally, we have issued guidance for 2023 portraying double-digit growth in production and adjusted EBITDA with higher margins. Before we move to Q&A, I would like to thank our investors for their continued support and all the team at Vista for their commitment and hard work, which were key in generating this on the standalone results.

And with that, operator, please open the line for Q&A.

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Q&A Session

Operator: Our first question comes from the line of Alejandro Demichelis from Nau Securities.

Alejandro Demichelis: Congratulations on the deal. Miguel, quick question. You just mentioned that you see potential to overdeliver on the 2026 target. So could you kind of walk us how you are seeing those targets now because you’re lowering your cash cost, you’re reducing your emissions significantly through the sale, you’re having more money in the bank, you’re having evacuation capacity. So how much more can you overdeliver? Or can you bring those targets forward rapidly?

Miguel Galuccio: Yes, I mean we — if you remember, for 2026, we basically guide that we were going to be around 80,000 barrel per day and USD1.1 billion of EBITDA, and we are well on track. And as I said in the presentation, we believe that we will surpass that objective that we put ourselves. When you look at 2023, our guidance already in term of EBITDA is between USD850 million and USD900 million. So with that, I think we will be well ahead. Other thing to consider on the plan that we present December 2021. We — our commodity price at that time was at and today we are running with higher commodity price. So that also will help. Regard activity, of course, I mean this year, our plan is to fully utilize the capacity that we have.

We will be running with with a CapEx of around $600 million, part of that CapEx. So important part of that CapEx is going to be dedicated to facilities. In 2024, of course, also we can shift some of that CapEx to having additional activity in term of more drilling. We could move from . You see the contact is still the 1 that we have today, that we believe that could be the case. So cutting the long story short, I think we are well ahead to deliver what we set for 2026, and you should expect that we will surpass our production and also the EBITDA target that we put in the investor call.

Alejandro Demichelis: That’s great. And as a small follow-up, how are you thinking about those cash returns that you mentioned to shareholders with a new setup?

Miguel Galuccio: The cash return still in place is something that we keep into mind. This year will be a particular year because we will invest in a lot in facilities for the future growth. Now 2024 from the cash point of view, it could be — I mean, by plan, it look to be a very good year. And returning cash to shareholder or returning to shareholder is something that we keep in mind. Remember, we have a buyback program that we are executing that was approved last December. We have $20 million to execute of that buyback program that for us is one of the way of returning to shareholders that continue in place and we will continue executing that.

Operator: Our next question comes from the line of Regis Cardoso from Credit Suisse.

Regis Cardoso: Miguel, Alejandro, congratulations on the deals on the very strong results. My question really is a discussion on, connects very well with the previous question. Now with the good results you’ve had, but still with the constrained capital flow restrictions in Argentina, I wanted to get a sense of what you think is necessary or what would be a good arrangement that Argentina could implement to foster the investments and to allow the oil companies to remunerate their shareholders? I mean, in the past, we’ve talked about retaining some of the dollar from exports, for example. So I’m asking this now, Miguel basically because you’ve now again, divested an asset looks at very attractive valuation, but it looks like you’re generating a lot of liquidity in the company, right? So the question really is what can be done with that liquidity?