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Argentina's YPF expects oil, gas output to hold steady or decline this year

Highlights

Focus is on cash preservation during coronavirus lockdown

Vaca Muerta production starts to recover

Asset sales on deck to refocus business on oil, gas

Buenos Aires — Argentina's YPF doesn't expect its oil and natural gas production to grow this year, as the state-backed energy company limits investment to focus on emerging from the coronavirus pandemic on a stronger financial footing to fund future output and export growth, executives said Aug. 11.

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"Oil and gas production should stay at current levels or have a slight decline this year," CEO Sergio Affronti said on a conference call with investors for its second-quarter financial results.

YPF, the country's biggest oil and gas producer, scaled back its upstream and downstream activities, including by closing a refinery for a month and shutting-in wells, after Argentina locked down the economy on March 20 to try to contain the spread of the novel coronavirus. The shutdown caused oil demand to fall to as low as 200,000 b/d in April from an average of 450,000-500,000 b/d, forcing companies across the sector to halt investment and cut production.

YPF shifted its focus to sustaining its cash reserves, a strategy that it will continue for the rest of the year, Affronti said.

The strategy, which includes efforts to cut spending by 30%, should allow YPF to emerge "much stronger" and with a "leaner and more efficient operation and healthier and more sustainable financial position," he said.

YPF has started to rebuild production, buoyed by a recovery in demand for refined products, its main source of cash flow for running the business. While the government has extended the lockdown several times to the latest proposed end date of Aug. 16, or maybe later, YPF has put wells back into operation in its most productive blocks, mostly in Vaca Muerta, a huge shale play in northern Patagonia.

This allowed its total output of oil, gas, and natural gas liquids to recover 1.3% to 473,000 barrels of oil equivalent a day in July from an average of 467,000 boe/d in Q2.

While that is down from 516,000 boe/d in Q2 2019, Affronti said he his optimistic. "Demand for refined products is starting to recover," he said, adding drilling and completion activities "should resume in the short term."

Targeting Vaca Muerta oil

The first focus for rebuilding production will be on oil, in particular in Vaca Muerta, Affronti said. The play, he said, has so much potential that it can make YPF and Argentina a net oil and gas exporter.

Indeed, despite the setbacks from the lockdown, YPF's net shale production rose 21% to 98,900 boe/d in Q2 from 81,900 boe/d a year earlier. While Q2 fell 14% from 114,600 boe/d in Q1, YPF expects it can recover quickly.

Loma Campana, YPF's biggest shale block that it is developing with Chevron, is almost back in full production, CFO Alejandro Lew said on the call. YPF closed 41 wells during the lockdown, of which three have yet to be reopened, he said.

What's more, the company has another 81 shale wells across the play — 71 for oil and 10 for gas — that have been drilled but not completed because of the pandemic and cash restrictions.

"Some of them have already been fracked and just need to be connected," he said.

With an investment of $230 million, YPF can complete these wells, which at full capacity will be able to produce about 50,000 boe/d, Lew added.

Gas investments planned

While YPF is focusing on oil, the prospects for gas have improved with the Aug. 6 announcement of a new government program to pull gas production out of a slump over the past year caused mostly by low prices. The program will create a system of auctions for long-term supply contracts and stable prices that are higher than now.

"This will be key to increase cash flow generation to develop our vast natural gas reserves," Affronti said.

The government has said it wants to implement the program in September, which Lew said he expects will lead to higher gas prices from the fourth quarter.

Non-core assets to be sold

Affronti, who took the post in May, said he wants to return YPF to its roots in oil and gas with the view to selling assets outside this core business. The company has agriculture, chemical, and electricity businesses.

"Within the financial restrictions that we face, cash generation through divestment of non-core assets should alleviate our constraints and permit more rapid deployment of resources into oil and gas," he said.

While he did not specify what assets could be sold or when, Affronti said the company has a portfolio of marginal conventional blocks, some of which have been sold in previous years.

More will be sold, he said, so the company can put its focus "on those assets that create true value for the company."

In Q2, YPF closed deals for the sale of an 11% stake in a Vaca Muerta oil block for $90 million to Equinor and Shell and a 50% stake in a deep-water offshore exploration block for $20 million to Equinor.