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Interview

Horaccio Turri – CEO, Pampa Energia, Argentina

31.10.2016 / Energyboardroom

The CEO of Pampa Energia Argentina elaborates on the strategy that led the company to become the country’s largest fully integrated energy company in less than seven years. Furthermore, he highlights the significance of the recent acquisition of Petrobras Argentina and how this will enable Pampa Energia to grow even further in the future.

Pampa Energia was founded in 2005 and reported a net profit of USD 256 million by the end of 2015. What is the business philosophy that led to this rapid growth?

“By 2011, we were producing approximately one million cubic meters per day of natural gas, the equivalent of one percent of Argentina’s total production.”

The main driver of Pampa Energia is its strong focus on investment and growth. The controlling shareholders are Argentinians committed to their country and committed to creating value and expanding their operations. Having started as small investment fund, they developed into the largest Argentinean integrated power company in less than seven years—the result of being the largest private investor focusing on power in the last 12 to 13 years. I personally joined Pampa Energia in 2008 with the goal of closing the combined cycle in lomo la mate, which was a project worth approximately USD 250 million aiming at adding approximately 200 megawatts to the system. In executing this project, it became clear that in a country such as Argentina, with a tightly regulated energy sector, it would be good to get our own natural gas assets. We moved on to develop our own E&P operations, mainly through joint ventures with the major players in Argentina as partners. Our initial steps were very successful, hence why we decided to even further invest into this segment. By 2011, we were producing approximately one million cubic meters per day of natural gas, the equivalent of one percent of Argentina’s total production. Through further investing into joint ventures with some of the largest oil and gas companies in Argentina, we reached a total production of 5.5. million cubic meter per day – or five percent of Argentina’s total production—just two years later. Throughout this development, we recognized the significance of this segment for the future of our company, hence why we founded Petrolera Pampa which today is 50 percent owned by Pampa and 50 percent by friends and family of the controlling shareholders as well as being traded on the Buenos Aires stock exchange; fully dedicated to Pampa Energia’s oil and gas business segment.

Entering the oil & gas exploration and production segment is similar to playing Russian roulette – what were the conditions that led you to enter this segment?

We did not go into exploration at all – we went for the development of proved reserves! Our main driver –and target— was to develop proved reserves which were simply in need of investment in order to start producing; this included transportation facilities, wells, surface treatment facilities and more. As company, we did not have any prior oil and gas experience, hence why we did not feel secure enough to go into the exploration segment straight away. Another reason why we focused on these assets was that, at that time, Argentina had a significant problem with its energy trade balance which eventually translated into a negative economic trade balance. Due to the decline of the gas production –which was a result of the pricing policy intervention of the previous government— the gas production declined significantly and Argentina had to start importing natural gas. These import activities led to one of the most significant problem of the Kirchner government; the lack of US dollar in the country due to its mandatory usage for importing energy, which could have been produced from Argentina’s extensive resources. As this problem grew exponentially, it was finally comprehended by the government which reacted by implementing several incentives to enhance domestic gas production, for instance, that gas produced from new wells are awarded with a differential price, which made gas production significantly more attractive. These regulatory developments where appealing to us as well, which is why we made the decision to move forward with the development of our gas assets. These assets were qualified as new gas wells, hence why we received a very handsome price for our natural gas. Overall we invested USD 400 million over the years, now producing around three million cubic meter of natural gas which an EBIDTA of USD 100 million last year and projected EBIDTA of USD 200 million this year. In 2014, we decided to go public and the IPO traded at ARS 1.7 and is currently trading in the range of ARS 55 to ARS 57 – quite a success story!

To what extent was utilizing the capital markets the right way of complementing Pampa’s strategy?

Petrolera Pampa was a leverage story, its total capital is around USD 20 million and all of the rest was completely financed through banks and through the capital market in Argentina. Initially we financed mostly through pesos, now, considering the current ARS for USD rate, we are working on switching the ARS debt into a USD debt.

Given the macroeconomic context of Argentina and that Pampa Energia is a 100 percent Argentinian company, was it a challenge to raise investor confidence?

This has definitely been a challenge, however, as aforementioned Argentina was desperate for natural gas and the fact that each little molecule had to be paid with USD, which the government did not have, balanced this challenge for us. Therefore, it was apparent that the market is very attractive and we were confident that they were going to be committed to pay the natural gas because the government could pay us in ARS – a significant opportunity which we realized.

What are some of the opportunities you identify for Pampa Energia in the near future?

Personally, I can only talk for the oil and gas segment; I am confident that there are numerous opportunities for Pampa Energia in the near future. The acquisition of Petrobras Argentina was key to unlocking these opportunities. Tight gas assets, for instance, are a huge opportunity in the oil and gas sector and former Petrobras had significant tight gas assets in the Neuquén basin, which we believe will be the main driver of our investment policy in the coming years. We have the experience within Petrolera Pampa, we have a successful past in this segment, the country still needs a lot of natural gas still relies on imports of diesel and gas which needs domestic substitution, hence why we will continue to focus our efforts on our gas assets.

What made Petrobras Argentina an attractive target for Pampa Energia?

We had been partnering with Petrobras prior to the acquisition, hence why we were very well acquainted with its structure and assets in Argentina. As buying company, however, Pampa Energia definitely was the right candidate as we were already operating in all the business segments of Petrobras, thus naturally positioning us as the right company to acquire Petrobras over pure oil and gas companies who do not have any operations in transmission, generation or electrical distribution—we have been there, we own it! The former was the major driver allowing us to succeed in this acquisition process. We paid USD 192 million for a 68 percent stake in the company, financed almost all through foreign and Argentinean banks. The offtake, however, will be in the capital markets with the issue of bonds.

Pampa Energia has acquired multiple other companies in recent years in addition to the key acquisition of Petrobras Argentina. What is the value Pampa Energia brings to the acquired companies?

There is no universal answer to this question as each acquired company and each individual acquisition process is unique. For Petrobras, as example, I believe that the company at large did not focus on their foreign assets for a significant time, hence why one of our main focus in this particular acquisition is to imminently enhance productivity in the acquired assets significantly. In return, the high quality gas assets of ex-Petrobras will bring a lot of added value to Pampa Energia in return!

Pampa Energia has assets in transmission, generation and distribution of electricity and significant assets in oil and gas. What are some of the synergies you identify in between these segments?

Frankly speaking, I do not identify any synergies in between the energy generation, transmission, distribution and the oil & gas industry segments. What we definitely will bring to Petrobras is a different way of management and a new company culture. We are a very flexible and dynamic company with a very lean management organization. The controlling shareholders of Pampa Energia are still involved in the daily operations; Pampa’s management style and structure will also be implemented in ex-Petrobras operations and furthermore lift its productivity to a new level.

Pampa Energia has a history of acquiring already established assets and then operating those. To what extend to you plan to grow through greenfield investments?

We will not go into aggressive exploration activities in the near future. There’s a lot of development left to do in our current oil and gas assets. Our oil assets –the cash cow— consists of mature wells which is why we will naturally focus on reducing our operational costs while maintaining high productivity there. Our tight gas assets, on the other hand, will need much more activity in the near future. We are confident that these will be the future of our oil and gas business, we are familiar with developing these reserves, hence why we feel comfortable with the further development of this segment. Another area are our shale assets in Vaca Muerta – we are very fortunate as our assets are located in what is called the ‘wet and dry gas window’ of shale, which is the most significant window within the whole formation! Obviously, we will commit significant efforts and money in this area; we are currently in the learning process of understanding the formation better. Together with our partner XTO, probably one of the best in world in understanding shale, we will be drilling a 2.5 km long horizontal tranche soon—the longest in the history of Argentina. XTO will operate it and we will learn from XTO as much as possible; we are confident that we will be successful in this endeavor and carry on these operations in the future.

Pampa Energia has declared to become the largest energy company in Argentina. In a country were prices are set and tariffs are considerably lower compared to international prices, why do you aspire to be the largest energy company in a country such as Argentina?

The oil and gas prices in Argentina are significantly higher than in the US! We get paid USD 7.5 per million BTU—pricing is not an issue at all. However, sustainability of the overall energy market is a concern to us as the future financing of the current energy market is still in the mist. In the long term, I am confident that the gas tariffs will increase and the government will bring an equilibrium into the current market situation. This, however, will take years not months. In our segment, however, the prices will remain attractive for the simple reason that importing energy, particularly natural gas, from abroad is more expensive and because it needs to be paid in USD.

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