Business Context and Reporting Period
Company: Transportadora de Gas del Sur S.A. (TGS)
Reporting Period: Second Quarter ended June 30, 2020 (2Q2020)
Filing Date: August 7, 2020
TGS is Argentina's leading natural gas transporter, moving approximately 59% of the country's gas consumption through over 5,700 miles of pipelines. The company also operates as a major natural gas processor and is expanding midstream infrastructure in the Vaca Muerta basin. Financial results are presented in constant Argentine pesos (Ps.) in accordance with IFRS.
Key Financial Metrics
| Metric | 2Q2020 (Ps. Million) | 2Q2019 (Ps. Million) |
|---|---|---|
| Total Revenues | 10,735 | 14,488 |
| Operating Profit | 4,513 | 6,767 |
| Total Income (Net) | 1,741 | 5,798 |
| Income Per Share | Ps. 2.28 | Ps. 7.47 |
| Cash and Cash Equivalents | 15,685 | N/A |
| Net Debt | 21,189 | 25,883 (Dec 31, 2019) |
| Operating Cash Flow | 6,148 | 1,891 |
| Free Cash Flow | 4,943 | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by Ps. 3,753 million (26%) compared to 2Q2019. This was driven by a Ps. 2,058 million drop in Natural Gas Transportation revenues and a Ps. 1,904 million drop in Liquids Production and Commercialization revenues.
- Operating Profit Reduction: Operating profit fell by Ps. 2,254 million. While operating costs and expenses decreased by Ps. 1,663 million due to cost optimization and lower natural gas costs, this was insufficient to offset revenue losses and a Ps. 223 million increase in depreciation.
- Financial Results: Financial results recorded a negative variation of Ps. 3,764 million, primarily due to foreign exchange differences from the depreciation of the Argentine peso and a higher net liability position in U.S. dollars.
- Segment Performance:
- Natural Gas Transportation: Operating profit before depreciation decreased by Ps. 1,733 million due to a lack of tariff adjustments to compensate for inflation (IAS 29 restatement effects).
- Liquids: Operating profit before depreciation decreased by Ps. 588 million (34%) due to lower volumes of ethane sold and price declines, partially offset by lower export taxes.
- Other Services: Operating profit before depreciation increased by Ps. 290 million (48%) driven by higher midstream services in Vaca Muerta.
Outlook, Risks, and Management Commentary
- Liquidity Position: Management estimates sufficient resources to meet working capital needs, finance capital expenditures, and pay off short-term debt without incurring additional debt.
- Regulatory Environment:
- Export tax rates on oil and gas products were set to 0% under Presidential Decree No. 488/2020.
- Natural gas transportation tariffs remain unadjusted under the extension of the "Solidarity Law" (Decree No. 543/2020) for an additional 180 days.
- COVID-19 Impact: Operations continued as an essential service. The company implemented cost optimization measures, suspended non-critical works, and managed cash flow daily. Collection delays from customers in March and April were partially regularized by the end of the quarter.
- Strategic Developments:
- Appointed Horacio Jorge Tomás Turri as Chairman of the Board.
- Entered an agreement with Shell Argentina to install and operate a gas dehydration plant in the Bajada de Añelo field.
- Risks: Uncertainty regarding the scale and duration of the health emergency and government measures could impact future results, cash flow, and financial condition.
Key Facts for Investor Verification
- Verify the impact of the 0% export tax rate on future Liquids segment margins.
- Monitor the timeline for potential tariff adjustments in the Natural Gas Transportation segment following the expiration of the "Solidarity Law" tariff freeze.
- Assess the sustainability of cost reduction measures and their effect on long-term operational integrity.
- Review the company's ability to maintain liquidity given the volatility of the Argentine peso and inflation rates.
- Confirm the progress and revenue contribution of the new Vaca Muerta midstream projects.