YPF Sociedad Anónima (NYSE:YPF) Q4 2022 Earnings Call Transcript March 13, 2023
Unidentified Company Representative: Good afternoon, ladies and gentlemen. Welcome, and thank you for joining us in this special day. Today, we celebrate the 30th Anniversary of YPF on New York Stock Exchange. Before we start, I would like to point that you have some paper and pens on your table in case that you have any question, we will collect it at the end. YPF is an integrating Argentinian energy company, which generate energy efficiently and reliably through the development and production of conventional and nonconventional gas and oil and renewable source, such as wind, sun, land and water. With the development of VacaMuerta geological formation, YPF is a leader in the production of unconventional hydrocarbons in Latin America.
And through 3 industrial complexes located in La Plata, Lujan de Cuyo and Plaza Huincul, it generates fuel, petrochemicals and lubricants, offering a full range of products with a strong commercial presence in retail, agriculture, industry and LPG. YPF has as well a logistic network to supply more than 1,500 service stations across the country. And because of that, it has become the network with the largest coverage in Argentina. YPF is a leader in the fuel market. Its products ensure performance, adequate protection for each engine design, sustainability and environment, . It provides electric power to Argentina, with thermal generation plants and renewable energy source as well as fertilizers and special products to the entire Argentinian country side.
In addition, starting this year, YPF has embarked on the search and exploitation of lithium in the country together with CONICET, The National Scientific and Technical Research Council. They formed Y-TEC, a technological innovation and development company for energy production. And now yes, it’s the moment to hear from the Director and Chairman of the Board of the Directors, Pablo Gonzalez, and later on, the CFO, Alejandro Lew, along with the CEO, Pablo Iuliano, are going to share with us the annual results for 2022. Thank you.
Pablo Gonzalez:
Alejandro Lew: Thank you all for coming. Those of you listening on live streaming, thank you for joining us, and all of you here coming to downtown Manhattan on a Friday afternoon. I know it’s a lot of effort. So thank you very much for being here with us today. In terms of the financial release for the 2022 fiscal year and also the fourth quarter, we decided to spare you from the trouble of listening to us for like 30 or 40 minutes. So we decided to modernize ourselves and put it together in a 10-minute video, which we believe is going to be much more comfortable than listening to us. And after the video, Pablo and myself will go through the strategic outlook presentation, which we believe it’s going to be also even more relevant for you to listen to us on that and, of course, then into Q&A. So if you can please go ahead with the video.
Pablo Iuliano: Hello, everyone. Thank you very much for joining us today, those of you are physically here with us as well as the many of you that connected to the live streaming. It’s very important for us to know that we count with all of you on the very special day for YPF. It’s been a while since YPF management presented a strategic plan beyond the bits and pieces that we have been commenting on certain events. And we understood that this occasion of celebrating the 30th anniversary of our stock being listed in this institution. The New York Stock Exchange was the right one to share with you our strategic outlook focused on addressing the unique opportunities that we have in front of us. Our company celebrated its 100th anniversary last year.
it will be very strange to imagine such a long trajectory being smooth or linear. Many things have happened along the way. Some very positive and others not at all, but together, they have set the grounds for building into the future. And at this very juncture, we find ourself facing unique opportunity to grow our company in a way with a very focused approach on what we know, how to divest, which is generating value by providing affordable and reliable energy that also contributes to the global decarbonization process. Since we initiated our journey in VacaMuerta over 10 years ago, we understood we have a tremendous opportunity in front of us, but the challenges and fears abounded. 10 years later, after going through a remarkable learning cue, where we have invested over $10 billion on a net basis, we are proud to say that we have managed to make the dream come true, having proven the quality of the resources and having achieved level of competitiveness that prevail those top of the class within the U.S. shale industry.
And achieving these levels of competitiveness in VacaMuerta makes the cornerstone of our focused strategic path going forward, particularly within the global geopolitical context that put energy back at the center of economic and social debate. Piggybacking on the global trends, we have immersed ourselves into the task of accelerating the monetization of VacaMuerta, with the first stage priorities in the crude oil opportunity targeting to become once again a net exporter of crude oil to then overlap in coming years with the massive monetization of our shale gas resources through the development of LNG capabilities. And even though we expect that the crude and natural gas opportunities have many years to be played out, particularly natural gas.
Given it’s now well-accepted role as a transition well, we also envision further opportunities in the long run that should further expand the company’s portfolio of energy solutions towards clean energies. We are, therefore, already positioned ourselves to take advantage for our unique stance within Argentina to participate in the development of alternative clean energies, given that our countries also listed with other unique natural resources, beyond VacaMuerta, including particularly renewables as a key factor for green hydrogen or lithium. We are convinced that this renewed strategy has a tremendous opportunity to generate value for all our stakeholders, while contributing to the global decarbonization process. In that sense, developing and exporting crude oil and shale gas from VacaMuerta will contribute to replace carbon inefficient energy source, such as coal, the most carbon emitter of the 3 main fossil fuels, which still represents over 25 of the global energy metrics.
Furthermore, when looking at sustainability in this full conception and not just a pure environmental approach, the monetization of our hydrocarbon resources generate an extraordinary transformation of the country’s energy balance of payment. The country’s energy — sorry, providing the international monetary reserves that are so critical to unlock economic growth and, in turn, improve living standards for the Argentine society. Let me now walk you through the main pillars of our strategic outlook. When looking to our key short-term opportunity concentrate in the monetization of oil, we clearly focus on our activity in our VacaMuerta blocks, including not only our key core hub assets , but also expanding in other areas confirming the North and South hub.
. A short interruption and continue. And to that end, we have already devised and implemented a detailed program of midstream debottlenecking, including the expansion of existing pipelines, the construction of a new pipeline expanding the connection between VacaMuerta and the Pacific, while putting back in operation, the trans-Andean oil pipeline and engineer an initial delineation of a completely new system connecting VacaMuerta to the Atlantic, expected to be up there running by 2026 and that should serve as a key enabler for future growth from 2026 onwards. Beyond VacaMuerta, we also have the opportunity to establish our conventional production. Even though our material conventional blocks have been in constant decline for many years, the successful introduction of EOR in Manantiales Behr field has transformed that reality.
On the back of that experience, we are finalizing the pilot stage in 3 other areas in the provinces of Santa Cruz, Chubut and Mendoza, that are so far rendering very encouraging results, provide providing the possibility to increase recovery rate from those reservoirs and expecting them to serve as the main contributors to the stabilization of crude oil conventional production in coming years. We also expect to move forward with multiple exploration opportunities in coming years. For instance, during 2023, we expect to drill the Argerich well, the first ultra-deepwater exploratory well in Argentina to be drilled at 1,500 meters below sea level in the , we — where we partnered with Equinor, the operator and Shell. Should this project render positive results, we could be entering an appraisal phase in the upcoming years and then a capital intensive developing phase not before 2028.
Moving to our second strategic growth vector, natural gas, we expect that only moderate growth in the new — in the next few years, with opportunities concentrated in the local markets and limited to supplying our renewed and increased commitment under the recent planned gas auction. But even with moderate growth, we shall be tackling in myriad midstream debottlenecking needs, particularly involving the expansion of our subsidiaries, MEGA, natural gas system to separate and monitors the richer gas out of VacaMuerta as well as local gathering and overground facilities. But to truly unlock our shale gas potential, we will continue to move forward in coming months. Together with our partner, Petronas, with the technical and economic analysis of large-scale LNG project.
As previously announced, the full project targets total processing capacity of 25 million tonnes per year and should represent the key way to place VacaMuerta shale gas in the global markets, YPF and Argentina into a world-class LNG exporter. Finally, as we take comprehensive look at the global energy markets and the transition towards clean energy solutions, we believe there is also a very relevant role for us to play given Argentina’s world-class resources in lithium and renewables. In that sense, in the next few years, we shall continue expanding our footprint and renewables through YPF Luz by developing about wind and solar capacity per year, reinforcing the penetration of renewables within the local power mix and over time becoming the basis for an attractive green hydrogen opportunity.
On this particular topic, we have recently led the formation of a consortium to participate in the German initiative, that will provide funding for a pilot project involving 30,000 tonnes a year of green ammonia to resource from outside of Europe. We also recently stepped into the lithium business by signing an exploratory in province of Catamarca with processing techniques to make lithium carbonate production more efficient and sustainably still under development. We decided to take the lithium opportunity in a conservative way. That is why we decided to take advantage of our geology and exploration expertise going for a greenfield project as opposite to validating elevated entry price for project that are a few years ahead in their development phase.
I will now dive a little deeper on 3 main growth vectors. Before concentrating in the outstanding opportunity that we have ahead of us in VacaMuerta with total recovery of about 16 billion barrels of oil, let me just briefly mention that there are other opportunities for further growing oil production in Argentina in the medium to long term. The 2 largest and most attractive of those opportunity are the scale formation — are the shale formation of Palermo Aike located in the Austral basis, particularly in the province of Santa Cruz, with total recovery resources in the order of 6.6 billion barrels. And the offshore block located out of the Coast of Buenos Aires with estimated recovery resource of about 7.5 billion barrels, where we have set ourselves on the path to explore the potential in coming years.
In that sense, we shall drill 1 or 2 horizontal wells in Palermo Aike before of the end of this year, while as previously mentioned also planning on drilling the Argerich ultra deep offshore well. But it is clear that our major opportunity for the next 5 years shall be the efficient development of our VacaMuerta acreage. So far, since we started with the delineation of VacaMuerta back in 2012, we have concentrated on the development of our core hub at 215,000 extension are composed of the Loma Campana, La Amarga Chica, Bandurria Sur and Aguada del Chañar blocks. The former 3 working and JVs with the international partners, Chevron, Petronas, Equinor and Shell and the latter being a more recent initiative, 100 by YPF. And even though we have tremendous progress in terms of operational performance, we are still at a very large stage of development.
In this regard, we estimate an aggregate portfolio of about 3,000 horizontal wells for full field development of the core hub assets. And so far, we have only drilled about 20% of that, expecting not to exceed 50% in the next 5 years, despite the acceleration of our development plan. And more recently, we have also moved forward with the delineating new blocks in the north and the south of our core hub, estimating total full field development potential of another 2,850 wells just considering the main blocks. We blocks during 2022, we drilled 6 new horizontal wells, 4 at Loma and 2 at Sur de Los Lagos blocks and completed in total of 8 wells, 2 driller in Sur de Los Lagos and another 6 driller in the previous year in Bajo del Toro, all of which complementing activity from previous years in those same blocks.
Moreover, we are also verifying the efficient limits of VacaMuerta by drilling 2 horizontal wells in South Mendoza and potentially drilling 1 or 2 horizontal exploratory wells in the province of Rio Negro next year. Finally, let me highlight the economics behind this development. Based on the experience accumulated so far in the main blocks within our VacaMuerta portfolio, in the next 5 years, we expect an average development cost of around $8 to $10 per barrel of oil equivalent and a lifting cost between $4 to $5, leading to breakeven at net price of around $55 to $40 per barrel in constant currency — $35 to $40 per barrel in constant currency, assuming a long-term cost of capital. Therefore, we expect our business model and key strategic focus on the monetization of VacaMuerta oil to remain resilient among changing global dynamics.
Now turning into our second pillar. Let me start by highlighting that given the vast estimated recoverable shale gas resources in Argentina , which could last for centuries at current level of local consumption. We are committed to development of LNG infrastructure to enable its rapid and efficient monetization. As is already very well know based on estimated from the International Energy Agency, Argentina holds the second largest shale gas reserves in the world, hosting recoverable shale gas resources of around 800 Tcf with VacaMuerta representing the lion’s share of those resources to about 300 Tcf. In addition, another interesting, but yet untapped formation in Palermo Aike in the observation is estimated to call another 130 this year. With this level of resources and having already proven the efficiency of VacaMuerta shale gas on the back of different initiatives put forward by the Argentine government.
We believe we should now embark in an ambitious journey to unlock its full potential. To that end, last year, we announced the signing of an MOU with Petronas, which has been a partner of YPF in La Amarga Chica block since 2015 to analyze technically and economically a large-scale integrated LNG project. The project under analysis considers a total liquefaction facility of 25 million tonnes per year to be developed in several stages, the first of which is being designed for a capacity of around 5 million tonnes per year. It is key for the project to consider a minimum scale to justify a dedicated pipeline connecting the upstream blocks in VacaMuerta with this facility. It was under a new regulatory firm work that is expected to be enacted in coming months.
The export-oriented projects should have no interference from local imbalances that could affect its normal operation. So far, we have been making steady progress in firming up technical considerations, and we expected FID for the first stage by the second half of next year. And also, there are alternatives under analysis that could accelerate the time to market at a smaller scale to as close as 2026, the bulk capacity of the first stage would probably not be ready for commercial operation before 2028. Once and only if the world capacity is built, we estimate this project could add total export revenues of about $20 billion annually to Argentina’s balance of payment, becoming a game changer in terms of international monetary reserves and still having plenty of room to growth even further.
Photo by Ronan Furuta on Unsplash
The last growth vector of our strategic part stands for clean energies, which despite not having a major value generating visibility in the short term and medium term, it does involve a tremendous opportunity in the long term. As mentioned before, Argentina has unique resource that can help it become a world-class player of the energy transition, with an estimate to over 100 million tonnes of lithium carbonate equivalent resource, our country stands as the second largest lithium reservoir in the world, representing more than 20% of worldwide lithium resources. And given the expectation for lithium-based energy storage to become mainstream in the not so distant future, we find ourselves extremely well positioned to advance on this opportunity.
To this end, as mentioned before, we have entered into an exploratory concession agreement in Catamarca province on a 20,000 hectares block to explore for economically viable lithium concentration. We have already finished work on surface exploration through seismic — systemic surface sampling and vertical electric sounding and now plan to drill our first exploratory well within the next 2 months. Subject to positive results, we shall continue with subsequent development phases, which within 5 years will require about $50 million in total investment. Finally, should the different exploratory positive results, we should enter a commercial phase involving the construction of industrial scale plants, plants and other facilities required, with an aggregate investment of about $300 million to $500 million to reach a production plateau of about 15,000 to 25,000 tonnes per year by 2030.
Separately, as I already commented, YPF has a unique opportunity in coming years to participate in the development of green hydrogen, taking advantage of Argentina’s competitive renewable energy resources. It is important to highlight that electricity costs represent a large portion of the electrolysis process to produce hydrogen, making efficient renewables our key factors to be competitive in green hydrogen generation. Therefore, the opportunity to build a large scale onshore wind farms in South Argentina with average capacity factors well exceeding the world average that could be convenient located near deep world ports on the Atlantic Ocean, provides for a unique competitive advantage for future green hydrogen development. This potential efficiency has been laid out in recent research piece released by Bloomberg New Energy Financing that shows Argentina as a potential top 3 green hydrogen producers based on a comparison of cost of production and adding the scalability of wind power generation in Patagonia.
We could consider a scalable green hydrogen project that could grow to be as large as 8.5 Mtpa in a single location if we limit it only to the maximum wind power capacity that could be gathered through an efficient isolated transmission system, aggregating about 100 gigawatts of installed capacity, equivalent to 2.5x the total installed capacity currently available in Argentina. Also, we are convinced of the opportunity of monetizing our vast hydrocarbon resources. We remain very conscious of the effort required to minimize our carbon footprint. We are well aware that global energy transition is not going to happen overnight and that the diversification of 80% fossil-based current energy metrics will require a decisive commitment and will definitely be not be cheap.
In that sense, when considering sustainability in a broader way, the social impact of more expensive energy will crush with the average of climate change if we do not contribute with more affordable, more reliable and less carbon-intensive fossil, while transition to a cleaner metrics. To that end, given our growth projects and value generation proposition coming primarily out of our VacaMuerta development in coming years, we have identified the key opportunities to reduce our Scope 1 and 2 CO2 emissions even though our VacaMuerta operations already reached relatively low carbon intensity levels in 2022, averaging 16 kilograms of carbon dioxide by BOE. We have many initiatives that should allow us further reduce that metric to about 15 kilograms by 2023 and to less than 10 kilograms by 2030.
Let me give you some examples of these initiatives. With more often 50% of carbon dioxide equivalent, emissions in our VacaMuerta operations coming from flaring. We have already designed a plan that should continue to involve over time to invest in liquid separation, compression, reliability and gathering that should allow us to completely eliminate routing flaring and minimize total flaring by 2030. In addition, deploy leak detection and repair program and with vapor recovery units facilities now being our norm. We also expect a significant reduction in methane fugitive emissions well above the 30% commitment by Argentina during COP 26. And last but not least, incorporated technology to electrify our operations including a first electrical power rig and introducing dual fuel frac sets should also contribute to reduce our carbon footprint as early as this year.
And beyond that, we are challenging ourselves towards an even more ambitious objective, yet to be firmed up to commit to net 0 VacaMuerta operations by 2030. We shall continue in coming months to put together a comprehensive plan to reduce the carbon intensity of VacaMuerta operation and to identify different alternatives to manage residual emission, including natural-based solution, CCS — CCUS projects and our carbon that would allow us to determinate the real viability of such a commitment. And now let me turn to Alejandro to go through the main figures that relate to the strategic outlook.
Alejandro Lew: Thank you very much, Pablo. Well, let me — there’s couldn’t be in any other way, right, the CFO were talking about the numbers. So let me just start by commenting a little bit and tackling on what the platform from which we are going to start our plan for the next 5 years, which is what happened in the last 2, but very quickly, we went through the video already. But just to summarize it, we clearly managed to stabilize our production in 2021. That was the big challenge that we have ahead of us after 5 years of continuous decline, which was further accelerated in the pandemic, where we declined by 10% and in our hydrocarbon production. So 2021 was the year where we challenged ourselves to manage to stabilize the total oil and gas production, and we managed to do that through a very conscious approach and focusing on our CapEx plan since very early on that year, even though we were still in the middle of — or coming out of the worst ever crisis that the company has lived in its 100-year history.
And then after that, we managed to go into 2022, projecting or forecasting the largest organic growth in the company’s history — or sorry, in the last 25 years, actually, and we managed to achieve that, even though we were slightly behind our expectations where we started the year announcing a guidance of 8%, which then increased by almost 9%. Finally, the number came at 7.2% in oil and gas. But still, that was primarily the result of a decline in our gas production in the fourth quarter due to lack of demand. So at the end of the day, we still feel very comfortable with our achievement and particularly with how we managed to grow our oil production, which is, as we have mentioned already, our key priority. And when looking into that also VacaMuerta, our shale operations continue to be the main responsible for all of this growth.
In 2021, we managed to grow our oil — shale oil and gas operations by 36%. And in 2022, as mentioned in the video, it grew by 45% and 47% for oil and gas, respectively. So clearly, we feel very, very proud of those achievements and of the operating efficiencies that we managed to achieve in our VacaMuerta operations along these last few years. This clearly has allowed us to improve profitability, recover a healthy operating cash flow. And in that way, we went back to levels of EBITDA, which topped the best years that this company had. As we mentioned, 2022, we reached almost $5 billion. That was in line with our target, and that represents the third largest EBITDA mark in the company’s history. And while we did that, we clearly managed to accomplish our investment plans objectives, being able to not only tackle the initial investment plan that we announced at the beginning of the year, but further than that, we increased that by another 10%, and we deployed with an exceptional amount of activity in the fourth quarter of $1.4 billion invested, we accomplished our target of $4.2 billion of CapEx, which does not only accomplish, as I said, our aims at production growth, with the exception of, as I said, the natural gas decline in the fourth quarter because of lack of demand, but also positions us very well for taking or tackling the opportunity that we have ahead of us to continue the acceleration of the monetization of the VacaMuerta resources as we are going to comment in a minute.
And finally, clearly, as a result of this, the positive free cash flow that we had in the last 3 years, 2020, for the bad reason, clearly, we had to cut back on the CapEx plan on an aggressive way because of the financial restrictions. But after that, clearly, 2021 and 2022 ended up being very positive years for cash flow generation. All in all, among these 3 years, we accumulated about $2 billion in net cash flow, even though in the fourth quarter of this year due to the acceleration of the CapEx plan, we had a negative free cash flow of a little bit over $150 million. But through that, we ended the year with a very healthy net leverage ratio of 1.2x, which clearly forms one of the pillars or the bases in terms of financial flexibility for tackling the opportunity that we have ahead of us.
So what — as mentioned in the video, what does this mean for our plans for 2023? We have established ourselves in an even more ambitious plan than in the last couple of years. we are targeting for 2023 to invest about $5 billion in — clearly, in all of our operations, but with a focus remaining in our upstream operations, where shale will remain clearly the largest — will gather the largest of our attention or our focus. On that regard, we are expecting about $2.3 billion to invest in our shale operations, Clearly, our focus, as mentioned before, will remain in oil. We believe that, as Pablo mentioned in the strategic path, we believe that the short term, the next 5 years is going to be mostly about monetizing or accelerating the monetization of our crude portfolio.
Clearly, with a slower growth in gas, but knowing that gas, we will have further room or further time to tackle that opportunity. And as we move into LNG and become an exporter of natural gas in the future. But then, clearly, our CapEx plan is aligned to that with about 2/3 of our upstream investments going to oil and 1/3 roughly going into natural gas. And when looking into the breakdown of shale, what we have is that, of course, we — the main focus is going to be on well construction, in drilling and completion activities. But still in this year, we are having a larger proportion of investment in facilities that is the norm for the long run. For this year, we are targeting slightly over 30% or roughly $700 million in facilities investment related to not only tackling the facilities that are needed in the short term, but also preparing ourselves for the outstanding opportunity that we have in the years to come.
So many of these infrastructure investments, it includes a portion of midstream, but mostly it has to do with gathering of natural gas and on ground facilities for oil treatment and gas treatment that will unlock and enable the opportunity, the growth opportunity that we see in front of us. So with this CapEx plan, we are targeting to grow our overall hydrocarbon production by about 5% this year, 2023, but clearly focusing on the oil growth, which we are expecting to achieve about 8% year-over-year growth in oil. Will — sorry, while we expect end of year, basically December or fourth quarter 2023 compared to the year before to be growing by about 10%. So closing on very low double-digit rates, but of course, very healthy and ambitious growth rates.
And on the other hand, as consistent with what I was and what Pablo mentioned before, given our low expectation for growth in natural gas in the coming years. We are targeting only a 3% growth in natural gas, mostly related to tackling or supplying our commitments or renewed commitments under the most recent Plan Gas auction. And here, one relevant thing. You probably recall, last year, we had announced we committed to a maximum net leverage of 2x for 2022. We clearly over accomplished that, finalizing or finishing the year at 1.2x. For next year, as we are expecting this ambitious plan to result in a negative free cash flow for the year, we would expect to take or we are planning to take on extra net new debt. And so we are committing to still a prudent financial policy but allowing ourselves to grow or enlarge our indebtedness given the very healthy level that we are starting with.
So for next year, we are basically committing to not exceed 1.3 quarters — 1.3x in terms of net debt to adjusted EBITDA along the year. And now into the longer run, I would say. These are clearly not a full-blown business plan, but at least some broad ideas in terms of the numbers that we are working on. As we said in the video, next year or this year 2023 is clearly going to be a challenging year. It’s — we expect volatility, both coming from international markets, as you will all know, and as well as in the local market. So it’s difficult to put together a comprehensive medium-term business plan with that volatility right in front of us, but we still believe that the levels of capital efficiency that we have already achieved in our VacaMuerta operations, we believe that provides us with enough resiliency, as Pablo was mentioning, — for the first time ever, we are announcing breakeven prices for our shale oil operations.
As Pablo was saying, net breakeven at net prices of $35 to $40 per barrel for the next 5 years in constant prices. So clearly, that provides us with enough resiliency to be able to show or explain the views that we have for the next 5 years, right, which could be faster or slower, but we believe that in 5 years’ time, we should be definitely around the variables of the metrics that we are presenting here. So in summarizing it, we are expecting to double our total oil production when comparing 2027 to 2022 results. We are expecting to grow a more moderate 30%, roughly 30% our gas — total gas production. And we are planning on doing that by achieving to stabilize our conventional oil production, and this is mostly through the investing in EOR in tertiary production, where we expect total tertiary production to reach about 20% of our total conventional production by 2027.
That is part of investing about $800 million in tertiary production along the years. And through all of that, we expect to be able by the end of this 5-year period to be exporting about 35% to 40% of our total oil production. That is roughly in terms of numbers that will be about 150,000 barrels of oil per day. And if we manage to do that and based on, of course, some assumptions in terms of prices, that could potentially be representing about 1/3 of our EBITDA by 2027. So if we managed to do all this, we will be probably reaching the largest levels of oil and gas production in the company’s history by reaching about 800,000 barrels of oil equivalent by 2027 and reaching about 450,000 barrels of oil just in terms of oil. And as we also see in the second column there, in terms of — particularly in terms of shale, we are expecting to multiply by 4 our total oil production and doubling our shale gas production.
This would basically represent about 70% of our total hydrocarbon production by 2027. And in doing this, it’s not that we are projecting or assuming, I would say, let me say, lunatic levels of further operating efficiencies, but rather, we definitely believe that there are some — there is some room to further improve in terms of drilling, particularly in drilling and completion. But then given cost pressures, we are not projecting massive reductions in development cost, but rather assuming about the 10% door-to-door in this 5-year period, 10% reduction in our overall development cost. And going into numbers for this. If we manage to do all this, we will require an average of $5 billion to $6 billion in annual CapEx. So similar levels to the ones that we are putting in place for this year, probably slightly higher.
But within that range, we could accomplish given the combination of factors that we are putting in place, we believe that with the level of $5 billion to $6 billion in annual CapEx, we could accomplish these levels of growth opportunity. And as Pablo was saying before, and it was implied in the charts when he was talking about monetization of oil, we would be drilling in this plan about 1,200 wells or horizontal wells of oil and about 500 horizontal wells of gas in our shale operations. And that is consistent with this amount of CapEx, and that would be consistent with the production growth that we are showing here. And in doing that, as mentioned before, 2023 is likely to be a year of negative free cash flow and probably 2024 as well. But then we clearly see with the ramp-up in production that we expect to be accomplished through this focused CapEx plan, we expect to become a structural positive free cash flow generator from 2025 onwards.
And in that way, we are establishing an objective to top our net leverage ratio at 1.5x at the end of this 5-year period. So we expect to continue achieving further decline in our net leverage ratio. And even in doing that and capping it at 1.5x by the end of 2027, we are estimating to have a total of about $6 billion to $9 billion in remaining resources — cash resources to be deployed to long-term investments. So I know that many of you are wondering when we are talking about the massive or large LNG project, how we are assuming to finance that. Well, clearly, it’s part of the plan. And of course, we have to deliver on this ambitious plan. But we believe that the capital efficiency that was already — that has already been achieved in VacaMuerta allows us to think of this not as a dream, but as a palpable reality that we, of course, need to put in place in coming years.
And to finish up on these numbers, and let me take some time on this chart or on this slide, we are here putting sort of sources and uses comparing what was the period of the 2 years of ’21, ’22 with the next 2 years, ’23, ’24 and then the 3 years beyond that ’25 to ’27, clearly separating between a negative free cash flow period on ’23, ’24 and then a positive free cash flow period in the 3 years after that. And when looking at this, of course, in 2021, what we are seeing is that our cash flow of operations was more than enough to cover for our interest expenses. And our CapEx plan and that’s why we have excess cash that was deployed towards reducing our net leverage. And for the future, of course, we try to put some sensitivity analysis to different scenarios in terms of international oil prices.
And there, we are playing with levels of Brent at $60, $80 and $100. We — I would say that we are, clearly — we are centering it around $80 because that’s sort of where we expect Brent prices to be, I would say, in a conservative way in the coming years. Clearly, forecast in the industry are all over the place, and it’s going to be extremely hard to pinpoint a specific number at this specific point in time. But that’s why we wanted to show an ample range of what our cash flow could be under these different scenarios. And so when we look into ’23, ’24, the range are the years for the average for ’23, ’24. We see that with the roughly average of our estimates, which would be the second part of the blue chart — the middle light or middle solid blue column in the middle of the chart.
We see that, that will be slightly short of cash to completely fund our interest expenses and our CapEx plan. And that’s why we are saying that we are likely to be a negative free cash flow generator during those 2 years. However, if Brent prices were to rally once again, of course, we would not — and let me tackle clearly local prices. We would probably not expect as was the case last year and probably is going to be remaining this year. We would not expect to fully track those international prices, although we are not expecting to be completely decoupled from the international reality either. So for as long as we see international prices going either running too fast or well beyond historical averages, we believe that there is a higher chance for the local market and YPF to have to absorb some distortion in terms of local prices to international parities, of course, both in the crude oil side and in the fuel side.
And that is just looking at reality, that has been the case in the history. And for as long as international prices go back to more or closer to historical levels, we assume that the local market tends to converge to international prices. So that’s how we are sensitizing also our numbers. So in this sensitivity analysis, it’s not that we are assuming that if brand goes to $100 that we are going to capture locally the full benefit of that. But of course, as we grow our export base, and clearly, as the rest of the market benefits from a larger export base. That will also allow the local market or the local prices to absorb some of that distortion. But in summary, so for ’23, ’24, and the scenario of rallying international prices, even though considering some further gap in local prices to international parities, we could become — it could be, again, cash flow positive.
Clearly, this is a combination of 20% — about 20% of our revenues that are priced at international prices. Those are products out of our refineries. We keep on saying this, probably we are boring you on this, but — we have about 20% of our revenues coming from products of our refineries other than fuels, that are sold either through exports or in the local market but priced at international parities. And then also, clearly, some correlation in local prices to international parities that also help us in benefiting from that . So that’s the sensitivity analysis. And let me just mention, it’s very small in there. There is a very light green portion of that bar in the ’23, ’24 period. We are considering the possibility of resuming an active dividend policy strategy.
And of course, that will depend on whether we manage during those first 2 years of our 5-year outlook, whether we manage to make sure that we can fund first of all, our opportunity in terms of capital investments, which we believe that, that’s the first priority to generate value for our shareholders. And for as long as we manage to do that within the levels of financial prudency that we mentioned, keeping at below 1.75x net leverage, we would expect to at least have some dividend being paid out. And that would also depend on the ability to access the FX market on the back of regulation that would provide that, but that still requires further implementation to be fully in place. So subject to those 2 variables, we would expect as early as this year and same for next year, which are similar years in terms of financial flexibility, to have at least a modest dividend to be paid out.
But again, depending on those 2 variables, right, prioritizing capital investments and also depending on the ability to access the official effects under the current regulation, which is basically decree 277. And then moving into the third range the years ’25 to ’27. Clearly, we there see that our plan becomes resilient even under much lower global prices. So what we see is that even with Brent prices at $60, we should be able to fully fund not only our interest expenses, but also our capital investment plan as well as more, I would say, more reasonable or more in line with — I’m not going to say, industry standards because there is no standardized, but clearly a larger dividend payout ratio. And of course, when we look into the range of expected prices closer to the $80.
That’s where we start to be cash flow — significantly cash flow positive, and that’s where we generate the resources that we were mentioning that could be generated and be freed up to invest in long-term capital plans or projects in the future. With that, I will turn to Pablo for some key takeaways. Pablo? Thank you all.
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