Operator Series: Pampa Energía focuses on power generation and natural gas

By
Wednesday, January 24, 2018

In just over a decade, Pampa Energía has become Argentina's largest private energy company, with operations throughout the electric power and oil & gas streams.

ELECTRIC POWER

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As the owner of power plants with capacity to generate 3.72GW, or some 10% of the country's total installed capacity, Pampa Energía has become a dominant player in the local energy sector and last year alone it added 420MW of power generation.

The company currently runs six thermal plants, three hydroelectric facilities and one cogeneration plant. The thermoelectric facilities include the 825MW Genelba plant in Buenos Aires Province, the 760MW Loma de la Lata plant in Neuquén, the 620MW Piedra Buena facility in Buenos Aires province, the Güemes 361MW power station in Salta, the 285MW Pichi Picun Leufu power station in Nuequén and the 100MW Pilar plant in Buenos Aires province, while its hydroelectric portfolio includes the 388MW Diamante and 265MW Los Nihuiles plants in Mendoza province.

The Pilar plant was opened last year and a new turbine was added to the Loma de la Lata power plant, adding an extra 220MW to the grid. Another 100MW thermal power plant is under construction in Bahía Blanca and work is underway to expand the Piedra Buena plant by 100MW with six multi-fuel engines, as well as converting the Genelba power station into a combined-cycle plant. The expansion there will increase the plant's gas turbine capacity from 168MW to an estimated 364MW, with work scheduled to be completed by mid-2019.

Pampa Energía has also begun to invest in NCREs, with its 100MW Corti wind farm in Bahía Blanca, Buenos Aires province, due to be ready for operation in Q2 this year. The US$135mn project was awarded in the first round of Argentina's renewable power generation auctions, known as RenovAr 1, and received financing from the Inter-American Investment Corporation (IIC) with a US$104mn package.

TRANSMISSION

In the transmission segment, Pampa co-controls Transener, the operator of the largest network of high voltage transmission lines in Argentina, and its subsidiary Transba, which between them operate over 16,000km of high voltage lines. For electricity distribution, Pampa Energía owns Edenor, the largest electricity distributor in Argentina. A former state enterprise privatized in 1992, Edenor serves more than 2,900,000 customers in a concession area covering the north of Greater Buenos Aires.

UPSTREAM

The firm focuses much of its activity on exploration and production of gas and oil in 24 areas located in the NeuquénSan Jorge and Noroeste basins. It has a production of 8mnm3/d of gas and 23,000b/d of oil and NGL.

Natural gas production is focused on low permeability formations in the El Mangrullo, Sierra Chata, Río Neuquén and Rincón del Mangrullo areas, as well as exploratory projects in the Parva Negra and the recently acquired Las Tacanas Norte blocks, among others. In addition, Pampa Energía maintains partnerships in important productive projects with YPFYsur (formerly Apache) and Petrobras Brasil.

MIDSTREAM

In the midstream sector, Pampa subsidiary Transportadora de Gas del Sur (TGS) operates the largest pipeline system in Latin America, transporting 60% of the gas produced in Argentina through a pipeline network measuring 9,184km with 32 compressor plants. TGS also produces NGLs for both the local and export markets from its General Cerri plant in Buenos Aires province.

FINANCIAL

In its 3Q17 report, Pampa Energía reported consolidated net revenues of 17.4bn pesos (US$916mn), compared to the 9.9bn reported in 3Q16, thanks to an increase of 1.34bn pesos in power generation revenue, 3bn pesos in electricity distribution, 1.16bn pesos in oil & gas, 1.38bn pesos in refining and distribution and 998mn pesos in petrochemicals. Its consolidated adjusted EBITDA was 5.09bn pesos.

In December, Moody's upgraded Pampa's ratings to 'B2' with a stable outlook based on "solid cash flow, particularly in power generation and distribution, and better cash flow visibility in the next two to three years." However, the ratings agency did warn that "deterioration of the company's liquidity profile could lead to a rating downgrade." 

At the beginning of 2017, Pampa Energía received its first 'B3' rating from Moody's on the back of its acquisition of Petrobras Argentina. At the time, Moody's said that Pampa's free cash flow "will be negative for the foreseeable future, given high expansionary capital expenditures, which are little flexible, compared to operating cash generation."  Also, in January 2017, S&P upgraded Pampa to a stable 'B-' corporate credit rating, but said the credit quality is limited given "the dependence of the energy sector on the regularity framework and government support" and the company's near-total "geographical dependency on Argentina."

Moody's expected Pampa to issue up to US$1bn in new notes during 2017, maintaining a high debt burden compared to retained cash flow. The company issued US$750mn in notes over 2017, the second largest private issuance in Argentina behind YPF. 

Following strong Q3 results, especially from subsidiary Edenor, Pampa ended 2017 with an upgrade from Moody's to a 'B2' rating "based on solid cash flow, particularly in power generation and distribution, and better cash flow visibility in the next two to three years." The ratings service said that Pampa had recovered a good liquidity position that "supports future capital spending in new projects without increasing debt." 

ASSET SALES

Following the 2016 purchase of Petrobras' 67.2% stake in Petrobras Argentina for US$892mn, Pampa began to offload certain assets in late 2017 in order to concentrate its efforts and resources on its core businesses, it said at the time. In December, the Argentine firm sold the newly acquired downstream assets to Trafigura Ventures and Trafigura Argentina, offloading the Ricardo Eliçabe refinery and a lubricants plant in Buenos Aires province, and the Caleta Paula reception and dispatch plant in Santa Cruz province.

Pampa retained the Dock Sud storage facility, as well as the company's stake in Refinería del Norte due to their "strategic and operative utility."

A few weeks later, in early 2018, Pampa Energía sold its 58.9% stake in oil firm Entre Lomas for US$360mn to Vista Oil & Gas. The deal included Entre Lomas' direct holdings in the Entre Lomas, Bajada del Palo, Agua Amarga and Medanito-Jagüel de los Machos deposits, all in the Neuquén basin.

EXPANDING GAS PRODUCTION

With the sale of these assets, the Argentine firm said that it would now focus its investments on the expansion of installed electric power generation capacity and the exploration and production of natural gas, with a special focus on the development and exploitation of its unconventional gas reserves (shale and tight gas) in the Vaca Muerta formation.

At the beginning of 2017, the firm issued a US$750mn bond that was more than five times oversubscribed following its announcement on ramping up development of tight and shale gas in the country.

A few months later, Pampa said it was focusing on easing natural gas production bottlenecks at its unconventional acreage. Once complete, the integrated energy firm plans to expand gas compression, treatment and transport capacity at the Rincón del Mangrullo and Sierra Chata fields in the Neuquén basin by 50%.

And later in 2017, Pampa Energía picked up more acreage in Neuquén province with the Las Tacanas Norte area, which covers 120km2 and is adjacent to its El Mangrullo area, where the work plan calls for drilling eight wells targeting the Vaca Muerta play, in addition to other studies through 2021.

Despite the financing and concession wins, Pampa Energía was hit by the Argentine government's tardiness in paying US$700mn of subsidies owed to natural gas producers. YPF and Pampa Energía were the hardest hit, recording uncollected payments of US$551mn and US$140mn, respectively, in the second quarter of 2017.

DIVERTING CAPITAL TO NCRE

Pampa Energía is among several oil and gas majors looking to divert capital from upstream hydrocarbons to wind and solar projects over the coming years. "Renewables could account for over one-fifth of total capital allocation for the most active [oil and gas] players post-2030," a Wood Mackenzie report read last year.

Wood Mackenzie forecasts average annual growth rates of 6% for wind and 11% for solar over the next 20 years. "Returns [on renewable projects] rank favorably with many of the majors' pre-sanction long-life developments, the most comparable upstream asset class," Wood Mackenzie said. "Offshore wind may be the most attractive route to organic growth in the near term. It offers scale and scalability on a par with upstream mega-projects."

Pampa Energía's 100MW Corti wind farm in Bahía Blanca, Buenos Aires province, is almost complete, and may be one of the first RenovAr wind projects to come online. The successful completion of financing and the project itself will be the ideal fillip to fuel the firm's bids for future renewable energy rounds to be announced soon.

As Argentina works towards its goal of 20% of power generation from renewable energy sources by 2020, and the shale and tight gas is unlocked from the Vaca Muerta formation to reopened markets such as neighboring Chile, companies like Pampa Energía look set to take full advantage of the shifting energy matrix in the region.