Welcome to the Q1 2017 YPF Sociedad Anonima Earnings Conference Call. My name is Richard, and I'll be your operator for today's call. [Operator Instructions] I will now turn the call over to Mr. Diego Celaa. Mr. Celaa, you may begin.

Thank you, Richard. 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 First Quarter 2017 Earnings Webcast. The presentation will be conducted by our CFO, Mr. Daniel Gonzalez. During the presentation, we will go through the main aspects and event that explain our first quarter results and finally, we will open up the call for questions. We will be making forward-looking statements so we ask you to carefully review the cautionary statement on Slide 2. Our agenda today will include a review of the first quarter results including update of our shale and tight development projects with the inclusion of our financial situation and a brief summary to conclude. Also, our financial statements figures are stated in Argentine Pesos and in accordance with International Financial Reporting Standard, ARS. In addition, certain financial figures have been attested to reflect additional information to let you better understand our key financial and operating results. Please Daniel, go ahead.

Thank you, Diego. Good morning, everybody. Thank you very much for joining us this morning for the review of our first quarter 2017 results. In line with our expectations, this was really a strong quarter. Revenues were up by 21% when compared with the same period of 2016 and our EBITDA reached ARS16.8 billion, which represent a 35% increase. Net income of slightly below ARS200 million was affected by an accounting loss resulting from the appreciation of the peso during the quarter as the functional currency of the company is the dollar. We also had a strong operating cash flow of ARS24.7 billion which represent an increase of 127%. Total CapEx was down in this first quarter by 19% in pesos, reaching a total of ARS12 billion, mostly as a result of a reduction in drilling activity that we had budgeted for the year. The reduction activity which started a year ago derived in a total hydrocarbon production decrease of 1.5%, this will be a year ago with a 6% decrease in crude oil production and the 2.8% increase in natural gas production. From an operational perspective, we continue to make progress and structural changes in all of our upstream operations especially in shale developments as we will see in a few moment. In this Slide, we show our main financial figures mentioned in U.S. dollars. Before getting to this figure, it is important to mention that in contrast to what we went through in recent years, in this first quarter of 2017, the local currency actually experienced a nominal appreciation. These are the FX at the beginning of the period, but when you compare this with the previous year, the recent evaluation on peso were up of 8%. Revenues were up by 12% in dollars as diesel and gasoline…

Thank you. [Operator Instructions] And our first question in line comes from Mr. Frank McGann from Bank of America, Merrill Lynch. Please go ahead.

Hello. Good morning. Two questions if I might. One, just in terms of volume expectations in upstream with the decline you had this quarter and you indicated that the next quarter might be fairly soft, how are you thinking both this year and as you look out over the next two, or three, four years with the increased JV activity which clearly will take some time to have results? But how are you thinking now about the ability to expand volumes over the next several years? And then secondly just in terms of the downstream environment from a competitive and pricing standpoint, Shell has reported trying to sell their assets and there is some thoughts certainly expressed by different market participants and that potentially could change the competitive dynamics. Just wondering how you're seeing that and you think prices will trend going forward relative to international prices as you move into this more open environment?

Well, thank you, Frank. In terms of volumes, as said and as posted in your question, clearly 2017 is not going to be a strong year in terms of higher government production. We are envisioning with some of the conflicts that we went through with the unions that have to do with these structural changes which again I think this is a great thing for a long term. But also with the negative weather that affected the province of Chubut recently. At this point, we are targeting a 3% decline in hydrocarbon production for the year. Now the reason why we have signed these JVs and that we might sign new ones is precisely that we want to accelerate our total production going forward. You have heard me many times saying that I believe that 3% to 5% per year should be a run rate of growth of hydrocarbon production. The only way to do that is to accelerate the development of the shale and the tight and we're going to be doing that with partners. We are not there yet to provide any kind of guidance for 2018. I think for the medium term, again, 3% to 5% per year and a good part of the growth will come from these JVs that we have been announcing clearly. In terms of the question regarding the downstream. The downstream sector in Argentina, although we command a pretty high market share, north of 55%, continues to be a competitive market. Shell could be going through changes, the same thing regarding what used to be Petrogas. It has been rumored that something similar could happen with the oil network. The reality is that we haven't experienced any changes in the competitive dynamic so far. We are prepared to continue to compete. We do not think that any changes here will make things easier to us. So nothing has changed. We are really happy that in the last few years, we have really closed the pricing gap with the competition, and preserved market share in this specific quarter actually increased market share. I think we're looking really good in terms of competitive position there and not envisioning any change in the competitive landscape in the short term regardless of potential changes in the shareholdings of some of our competitors.

Okay, thank you very much.

Thank you. Our next question in line comes from Bruno Montanari from Morgan Stanley. Please go ahead.

Good morning, everyone. Just had a few quick questions. First, how does being the acceptance of the new fuel pricing policy across the chain and the inflation seems not to be included. What happens is there is a spike in inflation. So is there a provision for price hikes outside the quarterly schedule? And, Daniel, following up on the question about the JVs in Vaca Muerta. What we've seen in terms of announcement so far, had those been in line with management expectation? Have they exceeded expectations and should we see the same level of intensity in new JVs for the remainder of the year? Thank you very much.

Thank you, Bruno. Well, in terms of the price formula or the price agreement, I think there is a general acceptance among all parties to go forward with this. Prices continue to be free from a former perspective, but I think all participants in the industry have decided to adhere to the pricing mechanism negotiated earlier in the year. It is true what you're saying that the formula does not include any effects of inflation. This year, this could be headwind to all of the refiners. Given that, it looks like inflation is outpacing the devaluation and probably will continue to do so for the remainder of the year. Long term, we think ourselves in dollar term, so the fact that we have prices that we are keeping them essentially flat with a slight increase in dollar terms for the year, the quarter, you should not take into account. The quarter was really strong in terms of pricing in dollars, but because we are comparing vis-à-vis quarter which had been affected by the deval. But the fact that we are keeping prices essentially flat and with a small increase in dollar terms for the year, I think should be a good sign for the medium turn. Although I acknowledge the fact that it could be somehow of a challenge this year where we do have inflation in dollar terms. In terms of the second question regarding JVs, as I told Frank earlier, we've always seen this as an important factor of growth because we don't have the necessary capital to develop all of the shale by ourselves. Now the same time, we have been disciplined in not forming out areas that are not ready to conduct a meaningful final project or to start development really soon. We have been trying to protect our asset base and not [indiscernible] early on. That has not changed. What we have seen is a significant increase in the interest of different third parties regarding Vaca Muerta. If the question is do you have more aligned parties willing to team up with us for Vaca Muerta? The answer is definitely yes. If the questions is are you going to be announcing a few JVs per quarter as we did this quarter? The answer is probably no. We are going to be careful in terms of teaming up with the right partner at the right evaluation and only when we are really needing to develop an area. Should you expect more JVs to come this year? Probably yes, but not as same pace.

That makes sense. Thanks a lot, Daniel.

Thank you. Our next question on line comes from Luiz Carvalho from UBS. Please go ahead.

Thank you, Daniel. How are you? Just three questions here. The first one is regarding the prediction drop that you mentioned about here today around 3% this year. But at the same time, you kept in that guidance [indiscernible]. I just want to have a bit more color how this would be possible? So that's the first one. The second, it's mainly when see the share prediction, you basically added 14 wells on a quarter-over-quarter basis and when I see a prediction, it basically increases on the graph, we don't have the map [ph] but only by 2.3 thousand barrels a day. So I just want to see how do you see the activity of these new wells versus the decline rates from the legacy wells if I can put this way. And the third question, it's about the fracing ban; I talked with Diego yesterday and there were some news on the press talking that [indiscernible] which is not relevant province, then the frac. We try to find some data about this and there are, I don't know, 50 cities which already went to the same direction and there was one process in Neuquén and the Supreme Court and we didn't have the final decision yet. I just want to have more color, what are the rules and with this process, how am I going to say is a political one just to have your view on that. Thank you.

Thank you, Louis. Good morning. Regarding your first question on production decline and how is that consistent with sticking to our guidance for cash flow CapEx and EBITDA - the answer is we will have to make further adjustments to those that were already contemplated in the budget in order to keep our cash flows in line with what we had estimated and what we have guided the market although production will come lower. Of course there always was the easy way out which is to lower guidance for EBITDA, in-line with a guidance for production decline. We are not doing that. We know the challenge is much bigger than it was before, but we are sticking with our guidance and we think we have the elements trying to come up with that level of cash flow that we have expected and again, being free cash flow neutral for the year. That is the main driver for us for the year. In terms of shale production, you're absolutely right. The first quarter was somehow slow in terms of our completed and connected wells and that is why the production growth, vis-a-vis the fourth quarter 2016 was not really relevant. I think we are going to see a nice improvement in the second quarter because there were a lot of wells that have been drilled but were not completed or were not connected. Okay? That actually happened during April and it's actually happening as we speak. I would not look at that as a red flag or as an early sign of production growth flattening in the shale at all. Regarding your last question regarding the fracking ban in Entre Rios. Well, it's always easy for a province that doesn't have a single barrel of oil production to ban fracking. Right?…

Perfect. Thank you very much.

[Operator Instructions] Our next question on the line comes from Ricardo Cavanagh from Itau. Please go ahead.

Hi, Daniel. How are you? Diego, and all? My question is in this - well first of all, congratulations on the cash flow because I know that this is a priority and it shows and it has already started to show on the last quarter. So I want to say that. Secondly in a context where CapEx is falling and where drilling activity is falling, how do you foresee or how are you able to manage the tension that that involves particularly on the south of the country with the unions and then also how are you perceiving the agreement that you have signed in Vaca Muerta and Neuquén with the unions? What are the benefits or how do you see that foregoing? Thank you.

Well, thank you, Ricardo. Let me say first that on the cash flow, this was not just a one-off quarter. Actually, April was really strong in terms of operating cash flow as well. We are really happy and pleased with how operating cash flow is evolving and I think this will only improve during the course of the year. Regarding tensions with the unions, every time of course that structural changes like those that are part of the new collective agreement sign for the unconventionals and also, the changes to the collective agreement also signed for the province of Chubut last week, they always come with tensions. These are things that we need to deal with on a daily basis. It's probably the most important focus of a good part of our management team. And I think at the end of the day, these agreements, what they reflect is that the society in general, the workers, the union leaders and the politicians understand that over the long term, the only way to have more investment and more production is if we're really sustainable with reality. And reality is the price of oil is not $100 per barrel, it's $50 per barrel and that we need to be competitive at those levels. I think this as a very good sign of maturity of understanding all of us that we want to grow and that the good news is we can grow, we have plenty of resources and how in order to grow, we need to make sure that we are competitive and this is a step in the right direction in terms of competitiveness. As I said during the presentation, we are not assuming that this year is going to be free of tension - quite the opposite but we are willing to deal with it and I think it's for a good cause. It's for the long term survival of the industry.

Okay, Daniel. Thank you. Thank you very much.

Thank you. Our next question on the line comes from Anish Kapadia from TPH. Please go ahead.

Hi, Daniel. I have a question on your Vaca Muerta acreage. Previously, YPF have talked about three million acres that's perspective to Vaca Muerta, about two-thirds in the liquids when they're about a third in the gas window. I was wondering, given some changes in your acreage and some of the deals that you've done, can you give an updated net acreage position and then maybe split that into how much of the acreage you see as core for the Vaca Muerta liquids, how much for the Vaca Muerta gas and how much for the tight gas? And then kind of related to that, I was wondering how much more acreage do you see there being available for you to farm down? One of the other things, given the number of transactions you've announced and potential further transactions, the CapEx guidance, I think you talked about for this year was about $4.4 billion originally. Is that likely to be lower, given you're also seeing higher efficiencies on the drilling costs? Thank you.

Thank you, Anish. The question of the acreage, there's not an easy straightforward answer because it all depends on what is the core acreage that we're really targeting. What has not changed is that the liquids window is over 60% and the gas window is more like at 40%. What we are envisioning today as the core areas of Vaca Muerta that we hold acreage and that we're willing to develop with what we know today is probably more around the 2 billion acre number than the 3 million acre number. But again, a good part of this are things that we're going to be developing in the real long term. We are not really fixated in here in terms of number of acres. You know very well that two acres do not necessarily mean the same. Right? What we are more focused is in the quality and determining what is the right acreage that we want to develop over short term and that is why suppose to the previous years in which we were basically focusing on a capital of very large pilot projects this year, we have significantly increased the number of pilots, but with limited number of wells per pilot. I said that we are going to be running around 10 pilot projects this year, but these are pilot projects, most of them with two or three wells per pilot. Okay? This will give us a much better understanding of what it is the acreage that we really want to develop going forward. I think that there's still plenty of acreage for us to farm out. We as I said earlier, we do not intend to farm out all of our acreage right now because the strategy behind the farm outs is to find someone that can…

Thanks. Just a follow-up. Judging by those comments, if you have a similar activity level next year, you'd probably expect to have lower CapEx given that you've got a significant amount funded by your partners.

Yes. I think what this is telling us is that for next year, we'll have more capital available to go after other areas because some of the areas that are already in our plans are now being funded by our partners. Yes.

Great. Thanks. Very helpful.

Thank you. Our next question comes from Andre Natal from Credit Suisse. Please go ahead.

Hi. Good morning, guys. Thank you for taking the question. This one would be in regards to the production from a conventional field. This production increased maturely in the quarter if you compare it with the previous one, at least. So with the addition of these 14 wells, we wanted to understand a little bit of the highlights behind these production numbers, mainly where it came from. Was it mainly tight gas that the main field is contributing? If there was an increase in productivity of particular wells? And if you could also comment on what we should expect of the phase of the addition of new wells and those unconventional fields going forward? That would be great. The second question would be in regards to the lifting cost. If you look to the numbers on the quarter-over-quarter basis, we can see that there were kind of under control, at least, even slightly better than the previous quarter. Even in an environment of no devaluation of the pesos, we wanted to understand from you how we should interpret this in regards to is there any result already we can see of the actions you're doing to reduce costs to gain efficiency. Is that already a reflection of any positive impact from the negotiations in Neuquén, with the unions and it's good to have also comment on the remaining negotiations in other regions, how they're going and what we should expect from there? It would be also great. In the end, if I still have one more question, I would ask in regards to the working capital reduction we could see this quarter, a good portion of your cash generation came from a reduction there, but there was no clear item responsible for those reduction. So we wanted to understand from you if possible, what are the main causes there and to what extent these number are recurring or not. Thank you very much.

Okay, Andre. Well, first let me make a clarification. I should have made it during the presentation regarding the production from unconventional specifically on the tight. The graph on the presentation includes areas that we are not operating and therefore had not been included in similar charge in previous presentations. I'm talking about two areas [indiscernible] and Aguana Pichana to tight gas areas where we hold a significant stake, but we do not operate. Also they include the acquisition that we made from Petrogas [ph] of Río Neuquén and [indiscernible]. When translated with this, if you are comparing the tight gas production of the graph with previous graphs, I think that there's change. Now where is the unconventional production growth coming from? There's no single source that explains all of it. I have to say that the most relevant one in terms of shale is actually El Orejano, shale gas and in tight, it's basically Rincón del Mangrullo and the Lajas formation in Loma la Lata. The good thing I believe about production growth in unconventinals is that it's not coming from one single source. Maybe we can follow up with you offline with a little bit more detail if needed. In terms of the lifting cost, yes, it is under control. It is a challenge for the year clearly. I have to say that the first quarter, the lifting cost is probably going to be below the next few quarters because we still do not have the impact of the wage increases in the first quarter. There's actually -- in the second quarter and continues to be outstanding for the remainder of the year depending on how the other macroviables behave -- the deval and the inflation that would give you the exact number - but you should assume that lifting cost will be somehow above those numbers of the first quarter. In terms of the working capital improvements, the most important contributor to that improvement is the collection of the gas plant subsidies. Remember that in the first half of last year, we have not collected a single month of subsidy. In this first quarter, we collected two months - months of May and June of the previous year and now in April which is not included in the first quarter of course, we collect another two months. That collection pace is improving and that is in itself the main contributor to improvement in working capital, but there are others including also a lower payment of taxes, of income taxes, more than anything else.

Thank you. Our next question comes from [indiscernible]. Please go ahead.

Thank you everyone, thank you for taking the question. So we'll just follow-up into forward-looking questions. First, we saw the ARS34,000 peso debit to Vaca Muerta reported in the first quarter. If you could possibly give us some sort of guidance for the next three or four years, so I think one at -- we have forecasting production growth. Within CapEx you have in mind for the next four years, where do you see the production from Vaca Muerta for the next three to four years? The second question is on regarding lifting cost Vaca Muerta as well. We saw first quarter reporting the impressive $8 million per well for payments. How do we model going forward? Where should we see this number because it seems to be already a pretty low number. But should we expect any further decrease for this number going forward? Thank you.

Hola, Felipe. Unfortunately, we do not provide guidance in terms of the production for Vaca Muerta going forward. Of course as you know, significantly all of our production growth comes from Vaca Muerta and also from tight gas. If you assume that we are expecting 3% to 5% production growth over the long term every year and that we are doing big efforts to keep our conventional production essentially flat fighting the natural decline rate. You can try to build the number with [indiscernible]. I'm sorry, not to be more precise, but frankly, we've never provided that kind of projection going forward. In terms of the CapEx per well on Vaca Muerta and the $8 million number, yes, we are expecting additional savings, but more importantly I think what we are doing is we are moving away from this 1,500 meter lateral wells which is the one that is actually costing us $8 billion [ph] or less and we actually tried to drill longer laterals with more frac stages. Evidently what we are trying is to improve the economics here, the costs of longer lateral wells have on more frac stages are obviously going to be higher, but the cumulative production should also be higher and hopefully that should result in a reduction of the breakeven prices for those wells had improvement of the IRRs. What I'm trying to say is we are not done yet in terms of efficiencies of CapEx, the stiffness of the curve is not the same. It's easier to go from $50 million to $8 million that it is going from $8 million to $6 million. But we are still not satisfied and we continue to identify ways to lower the cost per well.

Okay. Thank you very much and that would be it.

Thank you. And our last question comes from Pavel Molchanov from Raymond James. Please go ahead.

Thanks for taking the question. Can I just ask you to clarify a simple point? If the labor disagreements that you described did not exist hypothetically, would you be reaffirming 0% to 2% production decline for the year?

Thank you, Pavel. First, let me make a clarification. I have actually said minus 3% production for the year. It is a change in terms of guidance. And the answer to your question is no, we would clearly have a better production if we didn't have this disagreements as you said with the workers or with the unions. We have not broken down exactly what percentage of production is affected by these tensions and sometimes it's not easy to come up with a precise number. But clearly, production is being affected and in the absence of those tensions of those disagreements, production for the year would clearly be higher than the one that we are forecasting today.

Okay. So all of the change in production guidance from the original level, 0% to 2% to the new level of 3% decline, all of that change is attributable to labor. Is that right?

No. That is not right. Part of the change also has to do with some severe floodings that we had in the province of Chubut during the month of April and the 0% to minus 2% also was accounting for some labor disruptions during the year. We already knew when we put a budget that this will be difficulty in terms of changes that we want to affect that have to do with labor conditions. But I'd say the most important factor contributing to the additional decline has to do with these tensions, but it's not the only one - weather is also a factor.

Okay. Clear enough. Appreciate it.

My apologies. We have a question that just came in from Juan Vazquez from Puente. Please go ahead, your line is open.

Yes. Hello, Daniel, thank you. I wonder if you could give us some color on whether we should expect significant CapEx on the refineries in order to be in compliance with the sulfur labels or refined products that are required for the next years. The second question would be whether you're foreseeing in the short term a higher volume of bioethanol and biodiesel in the gasoline and diesel mix from the 12%, 10% currently in place? Thank you.

Good morning, Juan. Yes, over the medium term, we will have to adapt part of our refineries to new rules of lesser sulfur content in gasoline and diesel. That will clearly require CapEx. Various CapEx will be invested during the four or five-year period. We don't have an estimate yet, but should have a slight increase in terms of the annual maintenance CapEx if you want that the downstream actually needs. In terms of your second question, we are not expecting any increase in the blend of bios at all.

Okay, thank you. And one last question if I may, regarding the energy business, [indiscernible] interest in business for us and the question is whether you are playing to be an inactive player in both thermal and wind energy? Signing PPAs [ph] contract with Gamesa in addition to supplying your own energy?

Yes. We have participated in the auctions last year and we've been awarded few PPAs. We might decide to participate in new auctions this year. But again, remember what I have said, the ideas of YPF power will be standalone subseries, hopefully catalyzed with funds coming from new partners coming in and that company with its own management will make its own decisions regarding in which options to participate or not. But in general, we do like the idea of having a significant part of the capacity bringing in being supported with PPA from Gamesa.

Okay, perfect. Thank you so much.

At this time I see we have no further questions. I'd like to turn the call over to Diego for closing comments.

This is Daniel. Thank you very much, everybody for participating. As usual, myself, Diego, Pablo, we're all available for follow up questions. Have a great day.