Vista Oil & Gas SAB de CV

NYSE:VIST

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to Vista's Second Quarter 2023 Earnings Webcast Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Alejandro Cherñacov, Strategic Planning and IRO. Please go ahead.

[Alejandro Cherñacov, executive]

Thanks. Good morning, everyone. We are happy to welcome you to Vista's Second Quarter 2023 Results Conference Call. I am here with Miguel Galuccio, Vista's Chairman and CEO; Pablo Vera Pinto, Vista's CFO; and Juan Garoby, Vista's COO.

Before we begin, I would like to draw your attention to our cautionary statement on Slide 2. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from expectations contemplated by these remarks.

Our financial figures are stated in U.S. dollars and in accordance with International Financial Reporting Standards, IFRS. However, during this conference call, we may discuss certain non-IFRS financial measures such as adjusted EBITDA and adjusted net income. Reconciliations of these measures to the closest IFRS measures can be found in the earnings release that we issued yesterday. Please check our website for further information.

Our company, Vista is a sociedad anónima bursátil de capital variable organized under the laws of Mexico, registered in the Bolsa Mexicana de Valores and the New York Stock Exchange. Our tickers are VISTA in the Bolsa Mexicana de Valores and VIST in the New York Stock Exchange.

I will now turn the call over to Miguel.

[Miguel Galuccio, executive]

Thanks, Ale. Good morning, everyone, and welcome to this earnings call. I am pleased to share with you our results for the second quarter of 2023, during which we have made substantial progress in the delivery of our strategic pillars.

We significantly increased our well inventory, secured enough evacuation capacity to deliver on our 2026 strategic plan and strengthened our balance sheet. This leaves us well prepared for a strong profitable growth in the second half of the year and in the coming years.

During the first half of 2023, we focused our drilling and completion effort in finalizing the pilot in Bajada Del Palo Este and Aguila Mora, leading to fewer tie-ins during the Q2. Still, total production increased 4% year-over-year for a total of 46,600 BOE per day during the quarter. Oil production was up 6% on interannual basis and 22% above pro forma basis, adjusting from the divestiture of the conventional assets.

Total revenues in Q2 2023 were $231 million, a 22% decrease year-over-year driven by oil inventory buildup, which we'll explain in the following slide, and softer oil realization prices.

Lifting cost was $4.8 per BOE for the quarter, reflecting our successful strategy to fully focus on our higher-margin shale oil assets. Capital expenditure was $179 million, including the drilling of 10 wells and the completion of 5 wells during the quarter as well as the execution of our key facilities project.

In Q2 2023, adjusted EBITDA was $152 million. We recorded negative free cash flow of $85 million, driven by the acceleration of CapEx and lower cash from operating activities. The leverage ratio at the quarter end was a solid 0.5x adjusted EBITDA. Adjusted net income was $57 million, implying a quarterly adjusted EPS of $0.6 per share.

We will now deep dive into our main operational and financial metrics. Total production during Q2 2023 was 46,600 BOE per day, up 4% interannually, driven by strong production from our shale assets. Oil production was 39,200 barrels of oil per day, up 6% year-over-year. On a pro forma basis, adjusting from the transfer of conventional assets, total production grew 20% year-over-year, and oil production grew 22% year-over-year.

Sequentially, we recorded a slight decrease in production driven by three factors. Firstly, the transfer of conventional asset means a loss of 5,500 barrels of oil equivalent per day. Secondly, evacuation capacity limited our production growth, although this has been unlocked since June as we started exporting oil via pipeline to Chile. Thirdly, as we focus on our pilot in Aguila Mora and Bajada del Palo Este, we tied in less wells than on our average quarter. The three drivers we factored into 2023 plan and guidance, so we'll expect to meet our production guidance of 55,000 barrels of oil per day for the year.

In the following slide, we will deep dive into our shale oil developments and we'll explain how we have shifted back to Bajada del Palo Este and how that will drive growth in the coming quarters. I will start with some details on our successful result in Aguila Mora and Bajada del Palo Este pilot. In Aguila Mora, we tied in 2 wells in pad Aguila Mora-1, landing one well in La Cocina and one well in Middle Carbonate. Cumulative production of the pad was performing 4% about our Bajada del Palo Este type curve after 60 days of production. These are the first 2 wells we drilled in this block located in the north of Vaca Muerta. Based on these successful results, we added up to 100 wells to our inventory.

In Bajada del Palo Este, we tied in one well in the pad Bajada del Palo Este-2, which is currently showing robust production, with cumulative production performing 72% above our Bajada del Palo Este type curve after 80 days on production. This is the 4 wells we drilled in this block and reconfirmed our 150-well inventory in Bajada del Palo Este. The 2 wells in pad 1 on the western side of the block and the single well in pad 3 on the eastern part of the block continued delivering solid production performance, as shown on the chart on the right.

Successful result in Bajada del Palo Este pilot enabled us to extend our model into Coirón Amargo Norte, the neighboring block to the south. This is a concession where we hold 85% working interest, with the remaining 15% held by Gas y Petroleo de Neuquén, the oil and gas company owned by the Neuquén province. We estimate an inventory of up to 50 wells in this block.

The successful activity in Bajada del Palo Este and Aguila Mora pilot lead to the addition of 300 wells to our inventory for a total of 1,150 wells across all Vaca Muerta assets. As I will explain later during the presentation, this is just one of the key factors that leave us well prepared for a profitable growth acceleration beyond our current strategic plan.

After concluding the pilot, we moved back to Bajada del Palo Oeste, where we have made solid progress in new well drilling. During Q2 2023, we finished drilling and completed pad Bajada del Palo Oeste-16 and also drilled Bajada del Palo Oeste-17, which is currently under completion. The 2 pads consists of 4 wells each, are being developed as a cube in a pilot we are running, seeking to optimize well productivity. This means we will tie in both pads simultaneously during the coming week, which also resulted in lower production in Q2 2023.

We are currently drilling 4 well pads in Bajada del Palo Oeste-18 and Bajada del Palo Oeste-19. Bajada del Palo Oeste-18 is expected to be completed and tied in by the end of Q3, and Bajada del Palo Oeste-19 in Q4, leaving us well on track to tie in 20 wells in the second semester of 2023 as per guidance. We are on track to upgrade our oil treatment plant by the end of Q3 2023. This will increase our treatment capacity to 70,000 barrels of oil per day, in line with the requirements of our production plan through 2026.

During Q2, we secured enough midstream and evacuation capacity to meet our production targets through 2026. At the end of May, we started exporting oil to Chile through the OTASA-OTC pipeline that started operating after more than a decade being shut. To do this, we reverted the pipeline flow from La Escondida Northwest through the Oldelval system. Current flow to Chile is 4,700 barrels oil per day and could increase up to 5,700 barrels of oil per day over the following months. In Q2, we secured our participation in the Vaca Muerta Norte pipeline, with an 8% working interest. This will give us access to increase evacuation capacity to Chile to 12,500 barrels of oil per day, including the current flow. We expect the Vaca Muerta Norte pipeline to be operational in Q4 2023. At that time, we plan to revert the existing Oldelval pipeline from La Escondida back to the original direction of flow.

Adding to our existing capacity in Oldelval, the new Vaca Muerta Norte capacity means that by year-end 2023, we forecast to have 57,000 of oil per day of pipeline capacity. This can be complemented by up to 11,000 barrels of oil per day of trucking capacity. If we consider the capacity already contracted in Oldelval expansion to Puerto Rosales, we forecast to have 89,000 barrels of oil per day by year-end 2025 or 100,000 barrels of oil per day if trucking is included. This means we have already secured the necessary evacuation capacity to deliver on our 2026 production target with room for further acceleration. I cannot stress enough the importance of this significant milestone and its contribution to support our growth plans.

Total revenues in Q2 2023 were $231 million, which is 22% below the same period last year. This decrease was a result of two factors: Firstly, the normalization of our crude oil stock from lows in previous quarter, which, combined with the production being rerouted to Chile, led to less volumes available in the terminal for exports through the Atlantic. This delayed our last cargo of the quarter from late June to the first week of July. And therefore, we supported 3 cargos during the quarter instead of 4 we originally expected. Secondly, oil realization prices softened during the quarter. Realized oil price for the quarter averaged $64.3 per barrel, down 18% year-over-year and 3% sequentially. The average realized domestic price was $63.1 per barrel while the realized price of the export market was $68.6 per barrel.

Sales to export market accounted for 48% of the oil volumes and 51% of oil revenues. We exported 1.6 million barrels of oil composed by 3 cargoes through the Atlantic and 152,000 barrels by pipeline to Chile. We remain focused on our export-driven strategy by 55% of last 12 months of revenue coming from the international markets. We expect to increase this to about 60% in Q3 2023.

Realized gas prices decreased 16% sequentially to $3.9 per million BTU, mainly driven by lower export volumes to Chile, accounting for 10% of our total gas volume at a price of $7.60 per million BTU.

We have very good news on the cost side. After a quarter of operating only our shale oil assets, [ lifting ] cost dropped to $4.8 per BOE, a reduction of 38% on interannual basis and 25% on sequential basis. This reflects the cost benefit of the transaction we announced in the previous quarter. We remain well on track to deliver on our $5.5 per BOE guidance for the full year.

Adjusted EBITDA for the quarter was $151.8 million. Adjusted EBITDA margin was a robust 66% during the quarter. On an interannual basis, this is a drop of only 3 percentage points despite an 18% decrease in realized oil prices, which was possible given our rebased cost structure following the transaction to fully focus on shale assets. The decrease in adjusted EBITDA reflects softer prices, the focus on drilling pilot during the first semester and the inventory buildup I just mentioned. Additionally, in this quarter, we have no tie-ins under the JV with Trafigura, which generated $10 million of other income in Q2 2022.

We expect strong results in the second semester. The drilling and the completion pace have already picked up and will allow us to tie in 12 Bajada del Palo Este wells in Q3, boosting oil production and revenues. Having normalized inventories and flow to Chile, we plan to explore volumes equivalent to 5 cargos, including export to Chile in Q3.

Finally, we plan to tie in 3 pads under the Trafigura JV, which will generate $90 million of other income in Q3 2023.

During Q2 2023, cash from operating activities was $89.3 million, reflecting the payment of annual income tax of $36 million, a change in working capital of $17 million and advanced payments for transport infrastructure of $5 million. Cash flow used in investing activities was $174 million in line with CapEx of $179 million for the quarter. This acceleration in capital deployment sets the stage for growth in the coming quarters.

During Q2 2023, we recorded negative free cash flow of $85 million. We issued a bond for $13.5 million and repaid $22.5 million corresponding to an installment of our syndicated loan. We also refinanced $40.8 million maturity in 2024 to 2026. In Q3, we plan to repay the last installment of our syndicated loan on July 20. After this event, we will have no remaining debt maturities in 2023.

Cash at the end of the period was $223 million. The reduction vis-a-vis the end of the previous quarter reflects our tactical decision to prefinance our investment plan with liquidity available at a very competitive cost in the local bond market.

During Q2 2023, we have continued to strengthen our balance sheet. Gross debt currently stands at $651 million. Over the past quarters, we have tactically accessed the local debt market in Argentina at a very competitive interest rate. This has not only allowed us to prefinance our CapEx acceleration, but it has also reduced our average cost of debt, which as at quarter end was 3%. Our financing strategy is focused on reducing cross-border debt, which we have successfully reduced from 54% of our total debt in 2020 to 22% of our total debt at quarter end. The average life of our debt is 3 years. Our gross leverage ratio is a very healthy 0.8x adjusted EBITDA. Our solid financial status leave us in a good position for an acceleration in growth going forward.

To conclude this call, I will recap on today's key messages and announce our upcoming Investor Day, where we will provide an update to our strategic plan. During Q2 2023, we made robust progress in Bajada del Palo Oeste. Considering our progress in drilling and completion activity, we are on schedule to tie in 12 wells during Q3. This will boost production and drive an increase in adjusted EBITDA in the second semester, in line with our annual work program. We are well on track to meet 2023 production and cost guidance.

Successful results in our pilot in Bajada del Palo Este and Aguila Mora has led us to extend drilling inventory to 1,150 ready-to-drill wells. This provides significant upside potential through our existing strategic plan, which was designed at that time when our inventory was less than half of that site.

To grow beyond our current strategic plan, we need more evacuation capacity, which we have achieved this quarter. We have secured midstream and export evacuation capacity to deliver well above our 2026 production target. Based on our current capacity and the contract we have in place, we forecast to have 100,000 barrels of oil per day of prem evacuation capacity by the end of 2025. Finally, we have a solid balance sheet, with a very healthy leverage ratios, manageable debt maturities at a very competitive cost and relatively low share of cross-border debt.

On the basis of our strong position, I am extending an invitation to a virtual Investor Day hosted by myself and the rest of Vista's executive team. During this event, which will take place on September 26, we will provide an update on our strategic plan and set new targets for 2026. We will provide further information on the event through our usual Investor Relations channel.

To wrap up and before we open the call to questions, I want to thank our employees for their relentless work during the quarter and also thank our investors for their continued support. We will now move to Q&A. Operator, please open the line.

[Operator]

[Operator Instructions] Our first question comes from the line of Bruno Montanari from Morgan Stanley.

[Bruno Montanari, analyst]

So 2 questions on my end. One, just to confirm, so today, you have no more restrictions to export more to Chile. Is that correct, with the new evacuation capacity that was achieved? And wanted to know also if you have faced any problems with the rain. We have been reading that there has been some restrictions because of the rain. So just wondering if that affects your production and exports now at the beginning of the quarter.

And then my second question is about the acceleration. It's very clear, Miguel, based on the presentation that you are in a very good position to potentially accelerate the growth, especially in the coming few years. So two items there. One, is there anything you can do already in 2023 that would perhaps make you and above -- a little bit above the 55,000 barrels per day target? And two, would you say the acceleration would come more on adding new equipment or doing things more efficiently and being able to drill and complete and tie in the pads faster than what you were doing today?

[Miguel Galuccio, executive]

Bruno, thank you very much for the question. And starting with the first one, you're correct. I mean we don't have any restriction with the pipeline at Chile at the moment. The pipeline to Chile was shut down for 70 days. That pipeline passed below a river and the river bed moved, and the pipeline was a bit of surface that, therefore, they decided to have a check on the pipeline. And up at the moment, it's very -- I mean, it's very happy with the quality of the crude oil that we are sending. So I'm sure we will play some catch-up during the year, but that doesn't change the plan that we have for the year. And basically, we don't depend only from Chile. We have our exit through the Atlantic. So I don't see any issue with the slight problem that we have for Chile.

In terms of the acceleration for the CapEx of 2023, our current plan leave us with spare drilling and fracking capacity for Q4. We have done also our homework in terms of evacuation and streaming capacity. So we will have a fair treatment and evacuation capacity. But at the moment, we are not going to announce anything. So leave me the news to announce in September in the Investor Day. But thank you anyway for the question.

[Operator]

Our next question comes from the line of Rodrigo Nistor from Latin Securities.

[Rodrigo Nistor, analyst]

I got two questions for you. So the first one, given the strategic capital expenditures initiatives we have outlined, what are the expectations for cash flow generation over the upcoming quarters?

And then another one on Aguila Mora. I mean following the successful results from the pilot project, are you planning to invest in the necessary infrastructure to connect the block and if you have an estimate on the required CapEx for that?

[Miguel Galuccio, executive]

Rodrigo, thank you very much for your question. Regarding the free cash flow for the second half, first, cash at the end of Q2 was close to $233 million. We're still seeing CapEx above cash generation in Q3, basically to the high drilling and completion activity and also the investment on upgrading facilities. In Q4, under the current plan, free cash flow, it will be positive again, okay? So that's related with your first question.

Related to Aguila Mora, first, let me tell you that we are super happy with the path that we put to complete 2 wells that we're landing in La Cocina and the other one in Middle Carbonate. Both of them were average wells of 2,500 meters and 44 stages. And they were tie-in, and they're performing 4% above Bajada del Palo Este type curve, and they've been producing for 60 days. So super happy with the news.

Regarding evacuation, I think we are evacuating today through a neighbor operator. And it will be too early to give you an answer on what exactly we will do in terms of infrastructure for evacuation. But we are, at the moment, evaluating the result. We will continue monitoring those wells after the first 60 days, but it's very encouraging. I'm sure we will come with a plan soon.

[Operator]

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

[Walter Chiarvesio, analyst]

We are seeing qan encouraging improvement in productivity in oil production in Bajada del Palo Este. And I want -- I would like if you could develop a little bit more of that, what explains the improvement in productivity, just the geological characteristic of the block or change in techniques, drilling and completions, whatever, and if that implies that the productivity curve is changing the outlook for the whole company in terms of EUR per well and productivity looking forward. And linked to that, if the CapEx were focused on those other blocks rather than Bajada del Palo Este would be part of the acceleration program of the company in the near future. That's it for me.

[Miguel Galuccio, executive]

Thank you very much, Walter, for your question, and I love that question because probably Bajada del Palo Este results are the best news that we have during this year. I mean the result of Bajada del Palo Este compared with our original expectation.

Just to give you, first, recap for everybody in Bajada del Palo Este. As you remember in Bajada del Palo Este, we drilled our first 2 wells to La Cocina more or less a year ago. Those 2 wells are performing 30% above Bajada del Palo Oeste type curve. Then we drilled Bajada del Palo Este-3 pad 1 well on the very eastern side of the block, 1 single well that lands in La Cocina, really looking for the limit of that block and we end up having a well. A very good economical well today that is performing 7% below Bajada del Palo Oeste type curve after 90 days of production.

And probably the biggest and more important news related to this quarter is Bajada del Palo Este-2, 1 well on the center of Bajada del Palo Este block land in La Cocina, a length of 2,800 meters, only 47 stages was tied in April and is producing 70% about Bajada del Palo Oeste type curve after 80 days. This is a super well. It's producing 3,000 barrels oil per day of IP30. So I mean it will be probably ranked between the best wells that we have drilled in the area.

So back to your question, Bajada del Palo Este, Bajada del Palo Oeste and [ Oldelval ] for us, represents today one development block. So of course, anything that is related to acceleration naturally will be done in those 3 blocks. As you know, I mean, with the treatment capacity connections between these 2 blocks is seamless for us because it's just internal pipeline that we have to lay. So yes, the focus of any acceleration program will include Bajada del Palo Este on it. So that is the answer.

Walter, I don't know if I'm missing anything.

[Walter Chiarvesio, analyst]

No, it's just that the follow-up is -- would imply a lower lifting cost or -- sorry, drilling and transportation cost per barrel, taking this higher productivity curves in the future.

[Miguel Galuccio, executive]

We are not updating our type curve. I mean this is -- as you know, we have -- our places have a statistical nature. So therefore, we continue having the same type curve for all this block. So we are not planning to do any upgrade of the type curve for the moment. Even though, yes, I mean, there are a few good wells.

[Operator]

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

[Regis Cardoso, analyst]

A couple of topics I wanted to touch on. A quick one first is, how do you compare guidance with the actual production and EBITDA so far in the first half of this year? I mean it appears you're probably lagging behind that guidance. Most likely, your production and EBITDA will increase in the upcoming quarters. But is it still the case that you believe the guide is in place? That's the first question.

The second question would be going back to the previous one, you just answered, Miguel, about the order of the development of the assets. You said you're thinking about everything around the Bajada del Palo as one field, right, one cluster. But does it imply -- I mean, where are the better opportunities? Is it in any specific window, in any specific fields that you prioritize? I mean, say, start with La Cocina in Bajada del Palo Oeste and then going to the others? Or can you do different targets simultaneously? So that will be the second question.

And then maybe if I may, just a quick third one. How do you expect the share of exports to grow in your sales? And how do you think that will affect your realization price in the future? I mean do you think Vista would capture more of the oil price upside, say, if Brent prices were to go up again? And is exporting still a preferred route, say, if oil prices were to come down, just to understand how do you balance realization prices with the growing share of exports?

[Miguel Galuccio, executive]

Regis, thank you for your question. Regarding the first part of your question, regarding guidance, we are coming in line with guidance on a realized price of $60 per barrel. And when you look at currently, our realized price also was around $65 per barrel. Of course, the cargo that we basically couldn't fit in, in Q2, it will be accounted in Q3 with higher Brent prices. So I mean for the whole year, that will have a positive impact in our P&L.

Regarding development, again, I mean, just restating what I said before Bajada del Palo Este, Bajada del Palo Oeste for us will be one development cluster and the main development cluster. As soon as we have -- I mean, with the new result of Bajada del Palo Este-2, I will say we should expect that Coirón Amargo Norte also will be coming part of that cluster as well. Bajada del Palo Este, we are developing La Cocina and Orgánico, when in Bajada del Palo Este, we are just focused in La Cocina for the moment. So this will be the main horizon that we will be developing in an acceleration plan.

You have other questions. The other question was related to exports and percent. So when you look at Q2, we have -- our export percentage of our production was around 49%, and the realized price of export was around $68 per barrel. You should expect that this 49% going up to 55% or 60% since the fact that we are going to have -- we are going to be moving 1 cargo from Q2 to Q3. As you know, the Brent is performing better, and our discounts are lower. I mean we moved from a discount of $6. We expect Q3 to be around $5. We already saw $5 in this quarter. So I mean we are planning with prices for export around the similar level that we have last quarter. But yes, if the Brent perform better, it could be better. It could be slightly better. So this is what we are seeing.

[Operator]

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

[Oriana Covault, analyst]

I have two questions. Maybe the first one has to do with lifting costs. You have been guiding lifting costs even below the current $5 per barrel for a time now, and it was great to see that happening this quarter. So just to understand if this acceleration over the last couple of quarters beyond the transfer of the assets to [ Petrocon Cagua ] if there something else that is explained in the accelerated reduction in lifting costs? That's the first question.

[Miguel Galuccio, executive]

Oriana, thank you for the question. Regarding lifting costs, yes, we come in from a running rate of $7.5 per barrel, and that was before this investment of our conventional assets. We saw $6.4 in Q1, and we are seeing $4.8 now. Of course, this $4.8 is taking full impact of the transfers of the conventional assets. As we continue increasing unconventional production, yes, we still see some potential and some upside that will be more related to the production growth that really reducing the OpEx side. But at the moment, we are keeping the guidance as it is. But yes, very encouraging result on the lifting cost side.

[Oriana Covault, analyst]

That's very clear. And one last one. I noticed in your presentation that you would be transferring some of the capacity that you're currently using through OldelVal, the OTASA for the exports to Chile to the Vaca Muerta Norte instead of keeping the 2 alternative routes. So just perhaps to understand the rationale, if there's -- do you see any upside potential for keeping the two route open? Or if there's any -- what is driving the decision of moving volumes from one area to the other? Is it pricing-wise in terms of contracts? Any additional color on that end would be very much appreciated.

[Miguel Galuccio, executive]

No, there's no competition between the two demands. The demand of Chile will be covered through Vaca Muerta Norte. One Vaca Muerta Norte is in line, and is recovering now through the rerouting that we did for La Escondida. So there's no competition between the two volumes. And basically, the outlined that we have -- the outlook that we have in terms of export is the one that we have mentioned. So no one of them is going to jeopardize the volume that we have one to other. And of course, I mean, importing to the pipeline is always more efficient. And we saw an impact in this quarter on Chile, reducing the trucking that we have towards the end of the quarter. That has also a positive impact.

[Oriana Covault, analyst]

Great. That's very clear. And congratulations for these key milestones in midstream capacity.

[Operator]

At this time, I would now like to turn the conference back over to Miguel Galuccio for closing remarks.

[Miguel Galuccio, executive]

Well, thank you very much, everybody, and looking forward to see you also on the 26th on the Investor call. Have a good day.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.