Vista Oil & Gas SAB de CV

NYSE:VIST

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Vista's Full-Year 2019 and Fourth Quarter 2019 Results 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, Investor Relations Officer. Thank you. Please go ahead, sir.

[Alejandro Cherñacov, IR]

Thanks. Good morning, everyone. We are happy to welcome you to Vista's full-year 2019 and fourth quarter 2019 results call. I'm here with Miguel Galuccio, Vista's Chairman and CEO, and with Pablo Vera Pinto, Vista's CFO.

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. Reconciliations of these measures to the closest IFRS measure can be found in the earnings release that we issued yesterday. Please check our website for further information.

Our company, Vista Oil & Gas, is a Sociedad Anonima Bursatil de Capital Variable, organized under the laws of Mexico, registered in the Bolsa Mexicana de Valores and the New York Stock Exchange. The tickers of our common stock are VISTA in the Bolsa Mexicana de Valores and VIST in the New York Stock Exchange. The ticker of our warrant is VTW408A.

Miguel Galuccio will now present our full-year 2019 and fourth-quarter 2019 results.

[Miguel Galuccio, Chairman and CEO]

Good morning, everyone, and thank you for joining this earnings call.

The year 2019 was one of exceptional execution for Vista as we achieved our main strategic goals: Repaying our shale rig well in the Bajada del Palo Oeste, troughing the high quality of our Vaca Muerta acreage.

As I will show later during the presentation, our wells continued performing above our type curve and ranked among of the best wells of Vaca Muerta play and even the Permian. Productivity results in Bajada del Palo Oeste boosted our P1 reserves by adding 49.2 million barrels of oil equivalent and pushing our reserves replacement ratio above 500%.

The strong performance of our Bajada del Palo Oeste project was also the main driver of the 19% annual increase in total production which averaged 29,100 BOEs per day in 2019, exceeding 33,000 BOEs per day in the month of August. Shale oil and gas contributed more than 5,000 BOEs per day on average and peaked about 10,000 BOEs per day.

During 2019, we have also accomplished significant milestone in terms of efficiency gains, proving our operational model and reducing our lifting cost by 22% year on year to an average of $10.8 per BOE. Our drilling and completion activity in Vaca Muerta has shown progress as well with improvements of 20% in our drilling cost per lateral foot and 14% in completion cost per stage.

Finally, our operations have been supported by a strong balance sheet. We finished the year with $240 million in cash and net leverage ratio of 1.2 times. This was mainly a reserve, our successful capital raise of $100 million in the dual listing in the New York Stock Exchange and another 100 million in two bonds in Argentina. This slide shows an update of our development in Bajada del Palo Oeste.

Our first eight wells continue to show outstanding performance, beating our type curve by 28% on average for the first 880 days of the cumulative production. On the back of this strong performance and the recovery of oil prices after the expiration of the Presidential Decree 566, we resume our growth plan by restarting our drilling and completion operations.

We have now completed untying our serviced four-well pad, with a total of 177 frac stages. This equates to 47 stages per well and city wells and a four-well with 36 frac stages where we will test high-density completion of 40-meter spacing between stages.

We are currently drilling Pad 4 and 5 which are also four-well each with two working rigs. The third well of the Pad No. 4 is the third Vista well to be landed in the lower-carbonate zone. We now move to the one of the most exciting section of this presentation which is the comparison of our wells against Permian and Vaca Muerta wells.

The first graph shows the 180-day cumulative oil production of Vista property wells against 900-plus wells drilled in the Permian Basin, by certain public companies between 2017 and 2019. As shown, all our wells are top quartile whereas our best five wells are top this year.

The bottom graph shows a comparison of the same eight wells against the horizontal oil wells in Vaca Muerta's history, also measured by the cumulative production of the first 180 days. In this case, all our wells fall within the top 20% whereas our best four wells are top decile.

This well performance proves the quality of our Vaca Muerta acreage and Vista's operational capability to deliver outstanding results. We now deep dive into our production and reserve results for the year, which, as I mentioned earlier, were strongly driven by the higher Palo Oeste production.

During 2019, our P1 reserve additions were 54.8 million BOEs. This addition boosted our P1 reserves from 57.6 million BOEs at the year-end 2018 to 101.8 million BOEs at year-end 2019 with an implied reserves replacement ratio of 516%.

This boost in reserve is a result of the strong performance of ourself in wells which support the type curve used by the third-party auditors in our 2018 reserve report. The curves accumulate between 0.9 million and 1.1 million BOE of production in 30 years, assuming a lateral length of 2,450 meters and 40 frac stages per well.

And in 2019, both our reserves and production mix became more oilier as a result of incremental volume from Bajada del Palo Oeste. Last year, 60% of our P1 reserves were oil with an achievement of 633% oil reserves replacement ratio, while our old reserves - so now, almost 70% of our reserves are oil.

In terms of production, the aforementioned 19% annual increase in total production is composed by the solid 24% increase in oil production and a 30% increase in gas production. During 2019, we have also achieved significant reduction in lifting, drilling and completion costs.

Our total operating expenditure was reduced by 8% year on year. Part of these savings were enabled by applying our novel one team contracting model to our pulling unit which allowed us to optimize pulling activity by using less rigs.

We have also changed our field operational model and sourcing O&M crews as eliminating mark-up from third-party services providers and maximizing end-to-end control in our field operations.

And the devaluation of the Argentinian peso had a positive impact on contracts denominated in local currency. On a per unit basis, the operating expenditure reduction looks even better with a 20% growth vis-à-vis 2018. This is the result of the addition of Vaca Muerta production volume at a marginal incremental cost, thus, diluting the fixed cost base.

In terms of new well costs, we have made significant improvements from our first pad to our third pad, reducing total drilling and completion cost by 50% on a normalized basis and our frac cost per station by 14%.

This is a result of the constant effort done by our operating team which translate into concrete cost-saving initiatives which I would like to highlight three. First, one team contracting novel that improve productivity. Second, the use of the spudder rig to drill surface and intermediate sections.

And last but not least, the use of flat hoses to source water which reduced cost and warranties on availability during well completions. This slide here shows the key metric of 2019. As I mentioned earlier, we made very good progress in terms of production and costs with a 19% production increase year on year and a lifting cost reduction of 22% from $13.9 to $10.8 per BOE. Revenues have decreased 5% year on year to a total of $460 million due to the softer oil and gas realized prices which were 21% and 20% below 2018 average, effectively.

This has also impacted our adjusted EBITDA which was $171 million for the year. Oil prices, in particular, were impacted by Decree 566 from mid-August to mid-November 2019. CapEx was $224 million for the year, 25% less than the original plan, and we decided to stop drilling and completion activity due to lower prices. This has an impact on Q4 production and adjusted EBITDA as we will see later.

During 2019, we significantly strengthened our cash position, increasing our end-of-the-period cash by 196% to $240 million. Finally, P1 reserves almost doubled from 57.6 million BOEs in 2018 to 101.8 million BOEs at the end of 2019. We now move on to the results of the fourth quarter of 2019. Our daily production averaged 30,000 BOE per day, recording a 21% increase year on year.

Lifting cost was $9.3 per BOE, 26% below Q4 2018. Revenues were $96 million and our adjusted EBITDA was $36 million, both affected by lower realized prices of oil and natural gas. In this pricing context, we prioritized cash preservation with a strong focus on containing capital expenditure, aggressive working capital management and focus on the renegotiation of rates with contractors. As a result, cash flow from operations for the quarter reached $50 million, a significant achievement in this time of lower prices.

Cash at the end of the period stood at $240 million, and net leverage ratio at 1.2 times adjusted EBITDA. As shown in previous slide, our total production for the quarter increased 21% vis-à-vis the fourth quarter of 2018, mainly as a result of the addition of the volumes from our project in Bajada del Palo Oeste which contributed 7,000 BOEs per day in Q4.

Due to the oil and gas mix of our shale production, this increase has more impact on our oil volumes where the year-on-year increase was 29%. Gas production increased 11% vis-à-vis the fourth quarter of 2018.

Our fourth-quarter revenues totaled $96.4 million, 7% below Q4 2018, mainly driven by lower realized crude oil and natural gas prices. Crude oil realization prices were $48.1 per barrel, 27% below Q4 2018. During the first half of the quarter, realization prices was $4.2 per barrel as a consequence of the Presidential Decree 566. After the decree expired on November 14, the crude oil start to normalize.

Our realized oil prices was $50.9 per barrel during the second half of November 2019 and $52.5 per barrel in December. Average natural gas price was down 45% vis-à-vis the fourth quarter of 2018, mainly due to the current gas oversupply in the domestic market. We'll now move to OpEx. As shown on the first chart, the total operating expenses for the quarter were $25.7 million, 10% below Q4 2018.

The second chart shows OpEx per barrel of oil equivalent which was $9.3 per quarter. This is 26% below Q4 2018, mainly as a result of the increase of shale oil production volumes in our Bajada del Palo Oeste block and a minimum incremental cost.

Moving on to Slide 13. Our adjusted EBITDA for the quarter was $36 million, and our adjusted EBITDA margin was 37%. Vis-à-vis Q4 2018, our metrics were affected by softer realized prices, mainly affected by the aforementioned Presidential Decree 566. I would like to stress the importance of our solid improvement in terms of production and operating expenditures which allow us to partially offset the price impact.

As a response to softer prices during Q4 2019, we continued the cash preservation strategy that began in the previous quarter. In consequence and despite lower prices, cash flow from operating activities in the fourth quarter was a solid $50.9 million with the cash from investing activities at $33.7 million and cash from financing activities up $18.3 million.

Our cash position remained flat throughout the quarter, closing at $239.5 million. This left us in a solid cash position to face our drilling and completion activities for 2020. Our total financial debt stood at $451.4 million with a net leverage ratio 1.2 times. Before we move to the next slide, I would like to mention that last week, we raised $50 million in a four-year bullet bond with 3.5% interest rate, further strengthening our cash position.

Since we announced the creation of Aleph Midstream in June 2019, a number of changes took place. After detailed engineering studies, the technical team of Aleph Midstream and Vista revised a midstream plan, which: One, it's simpler in terms of treatment process for the high-quality oil we are producing at the moment in Vaca Muerta. Two, it's more efficient in terms of debottlenecking of existing facilities and with more production from less wells. And third, it's more modular in terms of setting design.

This results in a new CapEx plan which is 45% lower unless front-loaded than the original one as you can see in the graph on the right. In addition, we progressed discussions for debt-financing alternatives and particularly with DFC, former OPIC. The board approved a $150-million project finance for Aleph Midstream. If the said project financing is closed from which we can give no assurance today given that it's subject to certain condition present, it will significantly reduce the need of equity for Aleph Midstream.

In this respect, Vista and the financial sponsor, execute an agreement to unwind the transaction announced in June 2019. In March 2020, Vista will return 100% of the contributed capital equivalent to $37.5 million. As of now, Aleph hold $20 million of cash, therefore, the net cash impact for Vista will be $70.5 million. Upon closing, Aleph Midstream will become a wholly owned subsidiary of Vista.

Despite these changes, we are reconfirming the business model of Aleph as a multi-client approach to pursue the growing midstream business opportunity in Vaca Muerta play led by a dedicated and experienced management team.

I discussed earlier, we have resumed drilling and completion operation in Vaca Muerta in view of the tax recovery that follow the expiration of the Presidential Decree last year. At current realized oil prices, our investment in new wells generate solid IRRs. Our base plan with two drilling rigs and fully dedicated asset will deliver the tying of 16 wells in Bajada del Palo Oeste.

And with such assumptions, the CapEx of our upstream business is forecasted at $260 million. I should stress that our drilling and completion contracts have more flexibility to allow us to purchase activity unit and reduce the cash bank rate up to 85%. We expect production growth of 20%, comparing our exit rate of 2019 to our forecasted exchange rate of 2020. And expect total production for 2020 to range between 32 and 33,000 BOEs per day.

As we keep on growing Bajada del Palo production volumes, our mix will continue shifting toward oil, and we expect it to increase to 70% oil in 2020, representing more than 85% of our revenues.

During 2020, we'll continue focusing on efficiency. In this respect, we forecast an average lifting cost of around $10 per BOE. Our forecast reflects that domestic inflation will slightly be ahead of depreciation of the peso this year and partially offset cost savings.

Under our base plan, we expect adjusted EBITDA to grow between 200 and $220 million, assuming a realized oil price of around $55 per barrel. The last slide today is a recap of these timing accomplishments during 2019, a year marked by our operational achievements.

We tied in our first eight wells in Bajada del Palo Oeste, delivering in basin productivity and proving the quality of our Vaca Muerta acreage. This outstanding performance generate a 24% oil production growth year on year.

It also boosted P1 reserves by 76% to more than 100 million BOE which implies a reserves replacement ratio of about 500%. Our continuous focus on efficiency, delivering exceptional results in terms of drilling and completion costs, as well as operating expenditure, our OpEx per barrel fell to single digit during the second half of 2019, and we made significant progress in cost per well on our first to our third pad.

In terms of financial performance, we maintained a solid cash flow position despite a volatile pricing scenario, setting the stage for our 2020 growth plan. To conclude the first part of this call, I would like to thank our investors for their continued support and interest in our company.

And I would also like to thank the entire team at Vista for their hard work, commitment and continuous innovation. I will now open this call for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Henrique Simoes from Credit Suisse. Your line is now open.

[Henrique Simoes, Credit Suisse]

I have a question for you. Can you provide us an update on pricing of crude oil in Argentina since the price freeze from last year? And the second question is, how's the discussions regarding pricing affect the Bajada del Palo Oeste development? Are you holding back investments?

[Miguel Galuccio, Chairman and CEO]

Henrique, I was trying to understand exactly what you - your question because we couldn't listen very well, but I think I have it here. So, look at - starting with the pricing. First of all, I would like to recap on pricing. The start of drilling operation last year when the government basically freed the price of oil and testified as well with a Decree 566.

We decide to restart the operation middle of November when the prices went from the period of $40 to $42 per barrel in mid-November to $51. December, we saw $53. And in January, we have realized prices of around $55. And that was basically was the main driver of us to restart operations.

I believe now we are basically looking to a new scenario where, clearly, we have proved the potential that we have in Vaca Muerta. I do believe that for Argentina, this has not gone unnoticed. And besides the renegotiation of the debt, that today, probably is the country's best priority. In order to minimize the economy, there's probably one button in the control room that they have to push, and that is the development of Vaca Muerta.

For that, we will require - of course, prices. We will require for me incentives to export or get to export market. And I think we will also require - or most of the company would require some kind of way of getting access to the proceeds of exportation. And I do believe, and I'm cautiously positive, that the government have that in mind, and I should be working on that.

So that's still related to pricing. The other question was related to Bajada del Palo Oeste and the development. Can you repeat the second part of the question, please?

[Henrique Simoes, Credit Suisse]

The second question is, how are the discussions regarding pricing affect the Bajada del Palo Oeste development, and are you holding back investments?

[Miguel Galuccio, Chairman and CEO]

Yes. So, look at - we, first of all, we have built a plan. We have built a development plan based on one clear for us - a clear feature that is flexibility. Our contract with drilling contractors, our contract with the provider of the frac fleet are contracts that has embedded somehow the possibility for us to accelerate and also to stop.

Therefore, we believe that with the pricing scenario that we have today, we will have very good IRRs. And of course, this is due to the production results that we are seeing in Bajada del Palo Oeste, so I think we feel comfortable in the range that we are today. And also, we want to take advantage, as you know, of the scale. For us having two drilling rigs is a way of also having economy with scale that impacts our costs.

So I don't believe there is a massive number where we can stop and then accelerate. And as you can see, our CapEx costs continue in a trend of reduction. And also, we are in a trend where our production of type curve has been improving. So, I don't want to give you a massive number.

I think we feel comfortable on the range, and we believe one of the key things that we have to build in, in our plan is the possibility to accelerate and to stop. We proved that last quarter in a very successful way because we managed to stop the operation and moved to cash preservation mode. We're starting this year with two rigs, but we will take the actions that we need to take if the pricing scenario change.

[Operator]

Our next question comes from the line of Bruno Montanari from Morgan Stanley. Your line is now open.

[Bruno Montanari, Morgan Stanley]

First one is about access to exports and FX. So, we've been reading a lot about this potential new hydrocarbon law being discussed in Argentina. So, just wanted to pick your brain on what the company thinks the timing should be on this. When should we get an approval on this potential law and what you imagine the structure could be? So would it be on a company-by-company basis, establishing volumes that you can export or not? So just curious on what the potential structure could be. A second question on the reserves. I understand that you use your - pretty much your type curve for the certification of the reserves.

Would you be able to give us a hint on what would the reserves look like at the current well performance level which is much better than the type curve? And a quick one, with Aleph now back to the company in full, shouldn't costs decline more in 2020, or is the company being conservative on the $10 per BOE guidance?

[Miguel Galuccio, Chairman and CEO]

Thank you, Bruno, for your question. So, look at - I will say that starting with the export and the access to dollar, I think the first thing that has to happen in order to access to export is to have the local market completely supplied, okay? So as we see more production coming from Vaca Muerta, I think the ability to create an export market is becoming something more real. Of course, we will need a change in regulation. This is my personal point of view.

I think the countries have a great opportunity there, and therefore, the rules to export need to be put in place. I don't want to comment on the timing of the law because, first of all, we need a law or we could not be the law. I mean there are things that we can - that the government could basically address with a simple decree as has been done in the past. Nevertheless, I believe there are certain things that need to be regulated that have not been regulated yet.

I cannot comment on the timing. I know this is important for the economy. I know there's a clear understanding of the potential of Vaca Muerta. So, as I said before, I'm optimistically cautious that we should see some action on that front.

Of course, as I mentioned to you, actually, and as I mentioned before, access to proceeds for certain companies will be very important to really ramp up operation and to have an aggressive growth plan, but we are almost neutral in terms of what the local market require.

So, I think we are in a very good position compared where we were a few years ago to make this happen. In terms of reserves which was your second question. As you saw, our third-party auditors, they consider our reserve additions between 900,000 and 1.1 per well.

Our type curve are 20% above that, okay, today. Nevertheless, we feel very comfortable with the number that they basically allow us to book. I think it's a great result. And these kind of numbers, we have not seen much in Vaca Muerta so far.

In terms of Aleph, I think I want to explain the rationality of what we have done. And as you mentioned in your report, the unwind and wind of Aleph, we, as a management team, one of the things that we do is we are shy to adjust to whatever the condition the market give us. We are in a market that is very dynamic. So, I think this is one of the biggest strengths that we have in Vista today.

So, what we have done is the following and the rationality behind this is the following. One thing that happened to us - or two things changed. The first thing, and for me, an important wake-up call was the Decree 566. The Decree 566 show us that even though we went with a plan where scale was important, for Argentina, flexibility was more important.

So, that, coupled with the fact that when we start to do the detailed engineering with the type of production that we were getting from the eight wells of Bajada del Palo, the facilities that we need to treat our crude oil was much less complex than the one that we were planning to have in place. That basically changed the design of what we were planning to do to a design that is more scalable and a design that basically changed the profile of CapEx that was required.

So, that, coupled with the debottlenecking of our existing facilities and the fact that they said we moved to a plan where we will basically prioritize flexibility, may have things in a plan where at the beginning, we want to have more control of Aleph. Now saying that, we are fully supporting and we are not changing the business model of Aleph.

We believe there is value of having a dedicated team with dedicated people that specialize and have know-how in facilities. And also, we do believe that there's a very huge opportunity in terms of cost for us and for our neighbors is having on the midstream side, a multi-client approach. And I think that it will be proved sooner than later. So therefore, we continue with Aleph, just basically with a different structure.

As we have adjusted many times in our business plan, we did an adjustment in Aleph because we saw that that was in the best interest of Vista shareholders. In terms of costs for 2020, I don't think that changed much, okay? Clearly, less capital required. But in terms of lifting costs, I think what we have said, that it's going to be around $10 per barrel, I think, is a fair assumption. One thing we believe on the lifting dollar that could play against us this year is the devaluation of pesos.

If you take that rate - keep or they managed to keep that flat, I think we will have little inflation in US dollar there, and we have made most of the effort on the OpEx side so far. So I believe we will not see any more reduction in lifting costs. Of course, as we add unconventional oil, okay, and the effects of dilution of the lifting cost - it will be there. And of course, the pace when we add more unconventional cost, it could show us probably some good surprises. But $10, I think, is a fair number.

[Operator]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Miguel for closing remarks.

[Miguel Galuccio, Chairman and CEO]

Thank you very much for joining us in the call and for the continued support, questions and reports and the way that you treat Vista. Hopefully to see you soon in the next quarter call. Thank you very much. Have a good day.

[Operator]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.