Welcome to the Third Quarter 2016 YPF Sociedad Anonima Earnings Conference Call. My name is Sylvia, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Diego Celaa. Mr. Celaa, you may begin.

Great. Thank you, Sylvia. Good morning, ladies and gentlemen. My name is Diego Celaa, head of Investor Relations at YPF. I would like to thank you for joining the YPF third quarter 2016 earnings webcast. The presentation will be conducted by our CFO, Mr. Daniel Gonzalez. During the presentation, we will go through the main aspects and events that explain our third quarter results, and finally, we will open up the call for questions. We will be making forward-looking statements. So, I ask you to carefully review the cautionary statement on slide 2. Our agenda today will include a review of the third quarter results, including an update of our shale and tight development projects; a brief description of our financial situation; and a brief summary, to conclude. Please, Daniel, go ahead.

Thank you, Diego, and thanks, everybody, for joining us this morning for a review of our third quarter 2016 results. I had mentioned the last few quarters that we were facing a challenging environment. But this quarter was especially difficult, as the slow economy resulted in lower volumes of fuels sold in the local market and, therefore, made it impossible for us to increase prices. But at the same time, our cost structure is fully loaded with a combined effect of a 60% plus devaluation which happened a year ago and the wage increases that kicked in the second half of this year. Consequently, revenues were up by 39% in the quarter when compared to the same period of 2015, and adjusted EBITDA reached ARS14.6 billion, which represents only a 9% increase. In line with what the rest of the industry has been doing during the last several quarters, we recorded an impairment charge of ARS36.2 billion to our fixed assets, as we will explain in more detail in a few minutes. Without considering that effect, operating income would have reached ARS1.6 billion, showing a 71.4% decrease vis-a-vis the third quarter of 2015. Total CapEx was down in this third quarter by 4.7% in pesos, reaching a total of ARS15 billion, mostly as a result of our scheduled reduction in drilling activity. However, despite this reduction of activity, total hydrocarbon production showed an increase of 1.3% vis-a-vis a year ago due to an increase of 14.8% in NGL production, with 0.9% decrease in crude, and 1.1% increase in natural gas production. Similarly to what we went through in the first half of the year, the local currency devaluation of December 2015 had a negative impact in our most relevant income statement figures when expressed in U.S. dollars. Revenues were down…

[Operator Instructions] And our first question comes from Bruno Montanari from Morgan Stanley.

I have a few questions. First question is about impairment. I just want to explore some details. What level of oil prices did you use in this flatter curve you mentioned? And then can you share with us how much of the charge was driven by the vertical wells at Vaca Muerta? Still on the impairment theme, with the current cost of the horizontals today and the spot oil price, is it safe to assume that those horizontals were not affected by this impairment test? My second question is on costs. If we assume a stable FX rate, what can we expect for lifting and refining costs in the coming few quarters? In other words, is there still much impact from the new labor contract to flow through the cost line in the P&L? And if I can ask a final one, just to confirm it seems you received the $645 million past due from the government in a dollar-denominated bond. Is that correct? So the FX risk that was discussed last quarter was mitigated? Just wanted to check if my interpretation is correct.

Let's start out the impairment charge for a second. In terms of prices, we considered different scenarios and awarded different probabilities to each of those scenarios for 2017. Those scenarios go from going straight to import parity to keeping prices pretty much where they are, and a middle ground scenario in which prices evolve in a sort of soft landing. In average, we are talking for 2017 prices of $52, $53 for our products. For 2018 and onwards, we're using the consensus of analysts from Bloomberg, which is what we have traditionally used for our ceiling tests. And those actually result in prices which are in the low 60s for the next few years I mean 2018 and beyond, and only reach $70, I think, in eight years from today. So, I believe very conservative prices for the long end of the curve, difficult to say for next year, but clearly adapting our prices to what we are hearing in the local market. On the one hand, prices have already come down by 6%. On the other hand, what we are hearing from different government officials is that eventually, which we always expected it would occur eventually we will end up in convergence. In terms of the verticals and the horizontals and the composition of this impairment charge, this impairment charge is performed on the full oil E&P unit. So, it's a combination of I think, over 70 different fields. There is a portion that comes from Loma Campana, and there is a portion that comes from other fields, very mature fields that we have been operating, in some cases, for almost 100 years. So, it's a combination of different factors. Yes, it is true that the very positive results that we are seeing from the horizontals and the costs…

Our following question comes from Frank McGann with Bank of America.

Two questions. One, just in terms of CapEx plans for next year and your plans to achieve free cash flow, I was wondering if that was likely to come more as a result of reductions, I would assume, in both expected cash flow as well as lower CapEx? But how do you see the balance there over time with still some concerns on the pricing front? Secondly, with the write-off and with some expectation for lower prices nearer term, does that affect your production plans for 2017? I was wondering how you're seeing the potential for growth there? And then, lastly, if I might, just looking at the overall cost structure in terms of the well costs that you've brought down fairly significantly, you mentioned the labor union agreement that you're working on, I was wondering how you see the potential for further material cost reductions for non-conventional?

Well, it is a little bit early for me to give you precise guidance for 2017 CapEx. What I can tell you, Frank, is that we are working the budget of 2017 bottoms up; meaning, we are coming up with what we believe is the operating cash flow that we can actually generate next year, and that's the maximum that we will have available for CapEx. Because again, the objective is not to increase leverage beyond where we're going to be by the end of this year. That means that more likely than not there is going to be an additional reduction in CapEx vis-a-vis this year. I think this year we had a target of $4.5 billion. We're going to be short of that. I think we're going to be in the $4.2 billion to $4.3 billion range. And we expect a further reduction next year, not of the size of the reduction of this year that we went from $6 billion to $4.2 billion, but some additional reduction next year, for sure. Let me go to your second question regarding affecting production. I think that reduction in activity may have some effect on production. It might have a more meaningful effect in following years, not necessarily in 2017. It is likely that production next year is going to be slightly below this year. I don't think it's that related with the write off. I think the write off, if anything, has an effect on future CapEx and not necessarily in production, at least not in the short term. And as I mentioned in the presentation, we are using the same, in my opinion, conservative price assumptions that we used for the impairment test for all of our project evaluation for next year. So, the projects that we will…

Our following question comes from Ricardo Cavanagh from Itau.

My questions would be, the first one is if you see which would be the conditions that you would imagine would be able to take EBITDA of CapEx under the current oil price scenario? And related to this -- two separate questions -- if you see the government can launch additional investment incentives to upturn a trend that seems to be for the entire Argentine sector too tight in terms of economics to reverse the energy deficit of the country? That is the first one, fiscal incentives, if you see that Argentina might be able to attract partners that will commit money for YPF? Also pushing that EBITDA [floor above] CapEx under the existing oil price scenario, that's the first one. And the second one is if it might be disclosed how much CapEx has YPF deployed at Vaca Muerta and tight gas, in general, over the past few years? That will be it.

Well, regarding last part of your question, we have invested close to $5 billion. That's at our own working interest in Vaca Muerta plus tight, in the last several years. That's probably in the last four years -- four or five years, give or take. Regarding fiscal incentives, well, obviously, it's a question more for government officials than for ourselves. I think that the government is committed to making sure that the shale is developed and that, especially in the case of natural gas, that natural gas production continues to go up. And as you know, if that is an objective, that can only come from the shale and the tight. So, if as a consequence of these discussions that the government is a party of we all conclude that, in addition to the efforts that the companies are making and the provinces are making, that the unions are going to be making, the government needs to pitch in, I think that they will be open to hearing something like that. I cannot talk of specific measures because I don't know of any. But from our conversations with government officials, it is very clear that they know that the price of gas will continue to go up, with the current Gas Plan program being extended or with some other form of regulation, but that results in prices, which in the case of oil is a negative, the convergence with import parity. In the case of natural gas, it's a positive. So, prices will continue to go up. If there is a need for some kind of fiscal relief, I think that they will be open to considering. We are not discussing any specific measures as we speak now. In terms of your first part of the question, as I said, the objective is making sure that CapEx is not higher than -- I don't look it on an EBITDA basis. I look it on operating cash flow basis. So, cash on cash right. And we will continue to reduce costs. We will be increasing prices. Now, we are in a period in which we have not increased prices over the last six months. And the reason for that is basically because the economy is in the middle of a recession and we have still not seen significant growth that would allow us to increase prices again. When and if that occurs, of course we will increase prices as needed in order to cope with a cost structure and making sure that our margins do not contract. This is the first quarter in quite some time in which we have EBITDA margins below 30%, and I don't see any reason why we should not go back to the 30% plus area.

Okay. Thanks. And would you consider that, under the scenario that prices are extended for gas and you might even have some additional fiscal situations, that more partners might be attracted to the shale and tight in terms of geological potential of Argentina? Or, you would consider that under the current cash flow generation for companies around the world this is unlikely to escalate, in the near future at least?

It's a great question. I think that we are starting to see a turnaround in the industry, globally. Actually, the earnings released by most of the industry players have been on a more positive tone than before. So, I think that from that end things are going to be changing for the better. We haven't sensed a lack of interest in Vaca Muerta, at all. We've seen and we are in conversations with different players, as we have been in the past. It is true though that with a reduction in prices, generally, and nothing going on, the prices at which we could have closed transactions are not closed, but at least engage in more meaningful discussions on potential transactions, were prices at which we were just not willing to dilute our asset base. So, for instance, in 2017 we are going to be investing probably close to $200 million in pilot programs in Vaca Muerta. And in most of those cases, as opposed of the previous years, we're going to be funding most of it because we have not closed partnerships. Now, that doesn't mean by any means that we are closed to doing more partnerships. Quite the opposite. What it means is that we will enter into those partnerships after those pilots have been completed or will advance, and therefore, we will be in a position to extract a better valuation out of those assets. So, nothing has changed in terms of our strategy of developing Vaca Muerta with partners. We are just looking for the best moment to bring those partners in.

Next following question comes from Walter Chiarvesio from South American.

Well, my questions were partially answered already, but if you could be more accurate in terms of numbers? For example, with the crude oil price that makes or assumptions in terms of rate of return that makes the shale projects profitable? I remember that in the past the number was around $80. Now, with these horizontal wells and higher productivity lower costs, clearly it could be much lower. Also, cost of risk could help. If you could give us some numbers around that? And also, in terms of the guidance for the next, I don't know, two, three years in terms of production? Because what I see is CapEx going down, probably, and a large part of that depends on the [outcome] of expenses reduction and available free cash flows, operating cash flow to invest. But assuming that CapEx will go down, probably production will go down or be stable, as well. Is it safe to assume that production, all in, will be stable for the next three years? So, this is the kind of questions that I want to have more accurate outlooks, if you will.

In terms of production guidance, as I said, I think next year production will be flat or a small reduction, with a very different behavior between natural gas, that I expect production to go up again, and crude oil, in which we expect production to come down. For the following years, I cannot give you a specific guidance. Clearly, the reduction in CapEx has some negative effect, but also the significant CapEx that we have been putting in the unconventional in the last few years will start kicking in, as well. So, we have always said that the run rate of our production growth should be between 3% and 5% per year. We are clearly not there this year and will not be there next year. But we are not changing our objective, going forward. In terms of crude oil prices for the shale, we've always stayed away from the concept of the breakeven price. We don't believe in that concept. What I can tell you is that with current prices in Argentina, including this scenario of reduction in prices for next year that has caused the impairment, all of our Vaca Muerta projects have, or throw out, IRRs above the 13% target. So, what I'm trying to say with this is it's not just about price. Clearly, price has been coming down. But costs have come down significantly, and productivity per well has come up significantly, as well. So, I don't know where you took the number of $80. Clearly, it didn't come from us. But I'm not saying it's not accurate. Maybe that was a number a few years ago. That number is clearly in the $50 range. I will not get into more detail on that, but I think that that should be accurate enough.

Okay. Perfect. Thank you very much. One more question is the impairment has any impact on cash tax payments in the future due to the tax loss carry forward, or so? I don't know if you mentioned that during the presentation.

It doesn't have any effect in current taxes for two reasons. First, the impairment is just an accounting impairment; it's not a fiscal impairment. And second, we already have a tax loss carryforward. So, we are not paying taxes this year, and likely we are not going to be paying taxes next year, either.

Our following question comes from Frank McGann of Bank of America.

Just a quick question. In terms of diesel demand, which was pretty weak, I was just wondering did you notice any difference in where that weakness was coming? Was it across the board? Or, was the agricultural and industrial sectors perhaps more affected than other retail customers?

Well, Frank, it's very diverse. Clearly, the borders and dollar demand coming from the borders is a place where we have lost we, the industry, not just we, YPF we have lost a lot of demand, basically, because prices locally were above prices in some of the bordering countries. The agri sector has behaved well. We don't see any weakness there, at all. We've seen some weakness in transportation. We've seen some weakness in some industries. For instance, the oil and gas industry, which is a heavy user of diesel oil, clearly has been reducing activity. So, there was a reduction of demand coming from that segment. So, it really varies. All in all, it has a pretty high correlation with economic activity, and I think economic activity has clearly not picked up in the third quarter. We continue to be optimistic regarding next year, but we have not seen that improvement as of today, not yet.

We have no further questions at this time.

Okay. Well, thank you very much, everybody, for the call. Diego and Pablo are available to follow up on any further questions. Have a great day.