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VIST Vista Oil & Gas, S.A.B. de C.V.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 20-F

 

 

 

    

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

Commission File Number:001- 39000

 

 

Vista Oil & Gas, S.A.B. de C.V.

(Exact name of registrant as specified in its charter)

 

 

N.A.

(Translation of registrant’s name into English)

United Mexican States

(Jurisdiction of incorporation or organization)

Calle Volcán 150, Floor 5

Colonia Lomas de Chapultepec, Alcaldía Miguel Hidalgo

Mexico City, 11000

Mexico

(Address of principal executive offices)

Alejandro Cherñacov

Calle Volcán 150, Floor 5

Colonia Lomas de Chapultepec, Alcaldía Miguel Hidalgo

Mexico City, 11000

Mexico

Tel.: + 52 55 4163-9205

(Name, telephone,e-mail and/or facsimile number and address of company contact person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Series A Shares VISTA New York Stock Exchange*

American Depositary Shares, each representing

1 Series A share, with no par value

 VIST New York Stock Exchange

 

*   Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

87,303,462 outstanding Series A shares, with no par value.

2 outstanding Series C shares, with no par value.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

☐  Yes

  ☒  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

☐  Yes

  ☒  No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

☒  Yes

  ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

☒  Yes

  ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large Accelerated Filer    ☐                  Accelerated Filer    ☐  Non-Accelerated Filer    ☒
    Emerging Growth Company    ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐         International Financial Reporting Standards as issued     Other  ☐
         by the International Accounting Standards Board     

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

☐  Item 17  ☐  Item 18

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

 

☐  Yes  ☒  No

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (§ 15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

 

 

 

 


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PRESENTATION OF INFORMATION

This document comprises the annual report on Form20-F for the year ended December 31, 2019 of Vista Oil & Gas, S.A.B. de C.V. (“Vista”).

References

Unless otherwise indicated or the context otherwise requires, (i) the terms “Vista,” “Company,” “we,” “us,” and “our,” when used in the context of (a) following the Initial Business Combination (as defined herein), refer to Vista Oil & Gas, S.A.B. de C.V., a corporation (sociedad anónima bursátil de capital variable) organized under the laws of Mexico, and its consolidated subsidiaries, and (b) prior to the Initial Business Combination, refer to the Predecessor Company (as defined herein), (ii) the term “Issuer” refers to Vista exclusive of its subsidiaries, (iii) the term “Vista Argentina” refers to Vista Oil & Gas Argentina S.A.U. (formerly known as Vista Oil & Gas Argentina S.A. and prior thereto, as Petrolera Entre Lomas S.A.); (iv) the term “PELSA” refers to Petrolera Entre Lomas S.A. (or following the change of its corporate name, Vista Argentina); (v) the term “Vista Holding I” refers to Vista Oil & Gas Holding I, S.A. de C.V.; (vi) the term “Vista Holding II” refers to Vista Oil & Gas Holding II, S.A. de C.V.; (vii) the term “APCO International” refers to APCO Oil & Gas S.A.U. (formerly known as APCO Oil and Gas International, Inc. before itsre-domiciliation to Argentina, which was merged into Vista Argentina pursuant to the Argentine Reorganization (as defined herein) and is no longer in existence as of the date of this annual report; see “Item 4—Information on the Company—History and Development of the Company—Significant Events of 2019—Corporate Reorganization”; (viii) the term “APCO Argentina” refers to APCO International’s subsidiary APCO Argentina S.A. (which was merged into Vista Argentina pursuant to the Argentina Reorganization and is no longer in existence as of the date of this annual report; see “Item 4—Information on the Company—History and Development of the Company—Significant Events of 2019—Corporate Reorganization”); (ix) the term “APCO Argentina Branch” refers to APCO Oil & Gas S.A.U. (formerly known as APCO Oil and Gas International, Inc. (Argentina Branch)) (together with APCO International and APCO Argentina, the “APCO Entities”); and (x) the term “Predecessor Company” or “Predecessor” refers to PELSA and its subsidiaries, prior to the Initial Business Combination. See “Item 4—Information on the Company—History and Development of the Company.”

References to “series A shares” refer to shares of our series A common stock, no par value, and references to “ADSs” are to American Depositary Shares, each representing one series A share, except where the context requires otherwise.

In addition, the term “Mexico” refers to the United Mexican States, the term “United States” refers to the United States of America, and the term “Argentina” refers to the Argentine Republic. Moreover, the phrase “Mexican government” refers to the federal government of Mexico, the phrase “U.S. government” refers to the federal government of the United States, and the phrase “Argentine government” refers to the federal government of Argentina.

Accounting terms have the definitions set forth under International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS”).

Financial Statements and Information

The financial statements included in this annual report have been prepared on a historical basis in accordance with IFRS, as described herein.

We were incorporated on March 22, 2017 and commenced our upstream operations with the Initial Business Combination on April 4, 2018. Accordingly, our operating history is limited. We maintain our books and records in U.S. Dollars, which is the presentation currency for our financial statements and also the functional currency of our operations.

PELSA was determined to be the Company’s predecessor, and as a result, PELSA’s historical operations have been presented for the fiscal year ended December 31, 2017 and for the period from January 1, 2018 to April 3, 2018.

 

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PELSA, as the Company’s predecessor, has applied IFRS for the first time as of and for the year ended December 31, 2017 with a transition date as of January 1, 2017. In the preparation of the predecessor financial statements, PELSA has applied all the IFRS that are mandatorily effective in the fiscal year beginning January 1, 2018, in all the periods presented.

The financial information contained, or referred to, in this annual report includes:

 

 (i)

the audited consolidated financial statements for the year ended December 31, 2017, of PELSA, as the Company’s predecessor (the “Predecessor 2017 Audited Financial Statements”);

 

 (ii)

the audited consolidated financial statements for the period from January 1, 2018 to April 3, 2018, of PELSA, as the Company’s predecessor (the “Predecessor 2018 Audited Financial Statements”); and

 

 (iii)

the audited consolidated financial statements as of December 31, 2019 and December 31, 2018, and for the year ended December 31, 2019 and the period from April 4, 2018 to December 31, 2018 of the Company (the “Successor Financial Statements” and together with the Predecessor 2017 Audited Financial Statements and the Predecessor 2018 Audited Financial Statements, the “Audited Financial Statements”).

The Audited Financial Statements have been prepared in accordance with IFRS as issued by the IASB and are presented in U.S. Dollars.

The Audited Financial Statements for the predecessor period from January 1 to December 31, 2017 have been audited by PWC, while the Audited Financial Statements for the periods starting on or after January 1, 2018 have been audited by Pistrelli, Henry Martin y Asociados, S.R.L. and Mancera S.C., respectively (members of Ernst & Young Global Limited).

As a result of the Initial Business Combination, the financial reporting periods in respect of fiscal year 2018 are presented herein as follows:

 

  

the “2018 Predecessor Period,” which refers to the period from January 1, 2018 to April 3, 2018 and includes the consolidated results of operations of the Predecessor Company; and

 

  

the “2018 Successor Period,” which refers to the period from April 4, 2018 to December 31, 2018 and includes the consolidated results of operations of Vista, as the successor company.

The comparability of our results of operations is affected by the consummation of the Initial Business Combination and purchase accounting. As a result of the predecessor treatment given to PELSA, our results of operations for periods prior to the Initial Business Combination do not include the results of the APCO Entities, JDM and 25 de Mayo-Medanito, and therefore are not comparable to our results for periods after the consummation of the Initial Business Combination.

Presentation of Currencies and Rounding

All references to “$,” “US$,” “U.S. Dollars” and “Dollars” are to U.S. dollars, the lawful currency of the United States of America, references to “Mexican Pesos” and “Ps.” are to Mexican pesos, the lawful currency of Mexico and “ARS,” “Argentine Pesos” and “AR$” are to Argentine pesos, the lawful currency of Argentina. The Audited Financial Statements are presented in U.S. Dollars.

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

 

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The Initial Business Combination

On April 4, 2018, Vista consummated the Initial Business Combination. The term “Initial Business Combination” refers to the following transactions:

 

 (i)

The PELSA Acquisitions. The acquisition from Pampa Energía S.A. (“Pampa”) of:

 

 (a)

58.88% of the capital stock of PELSA, an Argentine corporation that holds a 73.15% direct operating interest in each of the Entre Lomas, Agua Amarga and Bajada del Palo oil exploitation concessions located in the Neuquina Basin in the provinces of Neuquén and Río Negro, Argentina (the“EL-AA-BP Concessions”);

 

 (b)

a 3.85% direct interest in theEL-AA-BP Concessions; and

 

 (c)

a 100% direct interest in the 25 de Mayo-Medanito SE (“25 de Mayo-Medanito”) and Jagüel de los Machos (“JDM”) oil exploitation concessions located in the Neuquina Basin in the Province of Río Negro, Argentina, which were acquired by PELSA on the same day.

 

 (ii)

The APCO Acquisitions. The acquisition from Pluspetrol Resources Corporation (“Pluspetrol”) of:

 

 (a)

100% of the capital stock of APCO International; and

 

 (b)

5% of the capital stock of APCO Argentina.

At the time of the Initial Business Combination (i.e., April 4, 2018), APCO International held (a) 39.22% of the capital stock of PELSA; (b) 95% of the capital stock of APCO Argentina; and (c) through APCO Argentina Branch, the following interests:

 

 (1)

a 23% interest in each of theEL-AA-BP Concessions operated by PELSA;

 

 (2)

a 45%non-operating interest in an assessment block in the Neuquina Basin in the Province of Neuquén, Argentina, denominated “Coirón Amargo Sur Oeste”;

 

 (3)

a 55% operating interest in an exploitation concession in the Neuquina Basin in the Province of Neuquén, Argentina, denominated “Coirón Amargo Norte”;

 

 (4)

a 1.5%non-operating interest in an exploitation concession in the Noroeste Basin in the Province of Salta, Argentina, denominated “Acambuco”;

 

 (5)

a 16.95%non-operating interest in an exploitation concession in the Golfo San Jorge Basin in the Province of Santa Cruz, Argentina, denominated “Sur Río Deseado Este”; and

 

 (6)

a 44%non-operating interest in an exploration agreement relating to Sur Río Deseado Este.

At the time of the Initial Business Combination, APCO Argentina held a 1.58% equity interest in PELSA, which, together with (a) the 39.22% equity interest in PELSA held through APCO International, (b) the 58.88% equity interest held directly by the Company as described in (i)(a) above, and (c) the 0.32% equity interest directly acquired on April 25, 2018 by Vista Holding I from PELSA’s minority shareholders, accounted for 100% of the capital stock of PELSA that we hold as of the date of this annual report.

Emerging Growth Company Status

We qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth Company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth Company’s internal

 

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control over financial reporting. The JOBS Act also provides that an emerging growth Company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. However, we have elected to “opt out” of this provision that would have allowed us to take advantage of an extended transition period and, as a result, we will comply with new or revised accounting standards as required. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We have elected to adopt certain of the reduced disclosure requirements available to emerging growth companies. For a description of the qualifications and other requirements applicable to emerging growth companies and certain elections that we have made due to our status as an emerging growth Company, see “Item 3—Key Information—Risk Factors—Risks Related to our Series A shares and the ADSs—As a foreign private issuer and an “emerging growth company, we have different disclosure and other requirements than U.S. domestic registrants andnon-emerging growth companies.”

Public Company in Mexico

Because we are a public company in Mexico, investors can access our historical financial statements published in Spanish on the Mexican Stock Exchange’s (Bolsa Mexicana de Valores, S.A.B. de C.V.), the CNBV’s (Comisión Nacional Bancaria y de Valores) and our websites at www.bmv.com.mx, www.gob.mx/cnbv and www.vistaoilandgas.com, respectively. The information found on the Mexican Stock Exchange’s, the CNBV’s and our websites is not a part of this annual report. Pursuant to the General Regulations Applicable to Issuers and Other Market Participants (Disposiciones de Carácter General Aplicables a las Emisoras de Valores y a otros Participantes del Mercado de Valores), as amended, issued by the CNBV, we are not required to treat PELSA as our predecessor company in the preparation of our historical financial statements. The historical financial statements and other financial information filed with the CNBV and the Mexican Stock Exchange are not prepared and presented with the financial information of PELSA as predecessor.

Our financial statements and other financial information for periods ending after January 1, 2019 to be made available on the Mexican Stock Exchange’s and the CNBV’s websites will be prepared and presented substantially in the same manner as the financial information included in this annual report for the 2018 Successor Period.

Non-IFRS Financial Measures

In this annual report, we present Net Debt, Adjusted EBITDA and Adjusted EBITDA Margin, which arenon-IFRS financial measures. Anon-IFRS financial measure is generally defined as a numerical measure of a registrant’s historical or future financial performance, financial position or cash flows that: (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with IFRS in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

We define Adjusted EBITDA as (loss) / profit for the year / period plus income tax expense, financial results, net, depreciation, depletion and amortization, transaction costs related to business combinations, restructuring expenses and impairment (recovery) of property, plant and equipment. We believe that the nature of the restructuring costs was such that they are not reasonably likely to recur within two years as they are mainly related to permanent reductions in our workforce derived from our business combinations, and that restructuring costs and transaction expenses are not normal, recurring operating expenses. We believe that by excluding restructuring costs and transaction costs related to business combinations, supplemental information is provided for our management and investors to analyze our core operating performance on a consistent basis from period to period. In addition, the impairment (recovery) of property, plant and equipment was excluded from the determination of our Adjusted EBITDA because it corresponds to an adjustment to the valuation of our fixed assets which charge is similar in nature to the depreciation of property, plant and equipment. This metric allows management and investors to analyze our operating performance on a consistent basis from period to period. In this regard, we note that the elimination of these costs and expenses does not result in a reduction of operating expenses necessary to conduct our business. In light of the foregoing factors, our management excludes restructuring expenses, transaction costs from business combinations and impairment (recovery) of property, plant and equipment from our Adjusted EBITDA to facilitate reviews of operational performance and as a basis for strategic planning. Our management believes that excluding such items will allow investors to supplement their understanding of our short-term and long-term financial trends.

 

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We define Net Debt as current andnon-current borrowings minus cash, bank balances and other short-term investments. We define Adjusted EBITDA Margin as the ratio of Adjusted EBITDA to revenue from contracts with customers.

We present Adjusted EBITDA, Adjusted EBITDA Margin and Net Debt because we believe they provide investors with supplemental measures of the financial condition and performance of our core operations that facilitate period to period comparisons on a consistent basis. Our management uses Net Debt, Adjusted EBITDA and Adjusted EBITDA Margin, among other measures, for internal planning and performance measurement purposes. Net debt, Adjusted EBITDA and Adjusted EBITDA Margin are not measures of liquidity or operating performance under IFRS and should not be construed as alternatives to net profit, operating profit, or cash flow provided by operating activities (in each case, as determined in accordance with IFRS). Net Debt, Adjusted EBITDA and Adjusted EBITDA Margin, as calculated by us, may not be comparable to similarly titled measures reported by other companies. For a reconciliation of Net Debt, Adjusted EBITDA and Adjusted EBITDA Margin to the most directly comparable IFRS financial measure, see “Item 3—Key Information—Consolidated Selected Financial Data.”

Market and Industry Data

This annual report includes market share, ranking, industry data and forecasts that we obtained from industry publications and surveys, public filings, and internal company sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, including Wood Mackenzie Ltd. (“Wood Mackenzie”), but there can be no assurance as to the accuracy or completeness of included information.

We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. We believe data regarding the size of our markets and market share are inherently imprecise, but generally indicate size and position and market share within our markets. While we are not aware of any misstatements regarding our industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed in the section titled “Risk Factors.”

Presentation of Oil and Gas Information

The Company’s Oil and Gas Reserves Information

The information included in this annual report regarding estimated quantities of proved reserves is derived from estimates of the proved reserves as of December 31, 2019. The proved reserves estimates are derived from the report dated February 6, 2020 prepared by DeGolyer and MacNaughton (“D&M”), for our blocks located in Argentina, and the report dated February 18, 2020 prepared by Netherland, Sewell International, S. de R.L. de C.V. (“NSI”) for our blocks located in Mexico (collectively, the “2019 Reserves Reports”). The 2019 Reserves Reports are included as exhibits 99.1 and 99.2 to this annual report. D&M and NSI are independent reserves engineering consultants. The 2019 Reserves Report prepared by D&M is based on information provided by us and presents an appraisal as of December 31, 2019 of oil and gas reserves located in the Entre Lomas Río Negro, Entre Lomas Neuquén, Bajada del Palo Oeste, Bajada del Palo Este, Charcho del Palenque, Jarilla Quemada, Coirón Amargo Norte, Coirón Amargo Sur Oeste, Acambuco, Jagüel de los Machos, 25 de Mayo-Medanito blocks in Argentina. The 2019 Reserves Report prepared by NSI is based on information provided by us and presents an appraisal as of December 31, 2019 of our oil and gas reserves located in theCS-01 andA-10 blocks in Mexico.

Argentina and Mexico Oil and Gas Reserves Information

The information included in the “Industry and Regulatory Overview” section of this annual report regarding Argentina’s and Mexico’s proved reserves has been prepared based on official and publicly available information of the Argentine Secretariat of Energy and Mexico’s National Hydrocarbon Commission. References to the “proved reserves” of Argentina and Mexico follow the definition of “proved reserves” as set forth in the guidelines published by the Argentine Secretariat of Energy and Mexico’s National Hydrocarbon Commission, as applicable. However, the

 

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information regarding Vista’s proved reserves included elsewhere in this annual report has been prepared according to the definitions of Rule4-10(a) of RegulationS-X or the Society of Petroleum Engineers’ Petroleum Resources Management System, which may differ from the relevant guidelines published by the Argentine and Mexican authorities. For more information, see “Item 4—Information on the Company—History and Development of the Company—Industry and Regulatory Overview—Oil and Gas Regulatory Framework in Argentina—Reserves and Resources Certification in Argentina” and “Item 4—Information on the Company—History and Development of the Company—Industry and Regulatory Overview—Oil and Gas Regulatory Framework in Mexico—Reserves and Resources Certification in Mexico.”

Certain Definitions

Argentine Secretariat of Energy” or “SdE” means the current ArgentineSecretaría de Energíaunder the supervision of the Ministry of Productive Development (the ArgentineMinisterio de Desarrollo Productivo), and/or any of its predecessors (the Argentine Ministry of Energy and the Argentine Ministry of Energy and Mining), and/or any other Argentine federal governmental agency that is in charge of enforcing the Hydrocarbons Law in the future, as applicable.

Adjusted Badlar base rate” means the rate per annum equal to the weighted average of the rates on fixed deposits exceeding AR$1 million at private banks for 30/35 days as published by the BCRA.

BCRA” means the Argentine Central Bank (Banco Central de la República Argentina).

CNH” means the Mexican National Hydrocarbon Commission (Comisión Nacional de Hidrocarburos).

CNG” means compressed natural gas.

EIA” means the U.S. Energy Information Administration.

IEA” means the International Energy Agency.

LNG” means liquefied natural gas.

LPG” means liquefied petroleum gas (includes butane and propane).

Management Team” means the Company’s management team that is comprised of Miguel Galuccio, Pablo Vera Pinto, Juan Garoby, Alejandro Cherñacov and, from April 4, 2018 to March 31, 2020, Gaston Remy. As such term is used in this annual report, our Management Team does not include our General Counsel, Javier Rodríguez Galli.

MMBtu” means million British thermal units.

NGL” means natural gas liquids.

OPEC” means Organization of Petroleum Exporting Countries

production” when used with respect to (i) our gas production, it excludes flared gas, injected gas and gas consumed in our operations and (ii) our NGL production, consists only of LPG.

Proved developed reserves” means those proved reserves that can be expected to be recovered through existing wells and facilities and by existing operating methods.

Proved reserves” means those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. For a complete definition of “proved oil and natural gas reserves,” refer to the SEC’s RegulationS-X, Rule 4, 10(a)(22).

 

 

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Proved undeveloped reserves” means those proved reserves that are expected to be recovered from future wells and facilities, including future improved recovery projects which are anticipated with a high degree of certainty in reservoirs which have previously shown favorable response to improved recovery projects. For a complete definition of “proved undeveloped oil and natural gas reserves,” refer to the SEC’s RegulationS-X, Rule 4, 10(a)(31).

TM20 adjusted base rate” means the rate per annum equal to the weighted average of the rates on fixed deposits exceeding AR$20 million at private banks for 30/35 days as published by the BCRA.

UTs” or “Unidades de Trabajo” means the base unit used as reference to state and evaluate the fulfillment of the activities provided under (i) a minimum work commitment program assumed by a contractor under a hydrocarbons exploration and production contract, (ii) the increase in the activities of such program, as well as (iii) any other additional work commitments undertaken for any given phase of the exploration and production contract not included in the commitment program.

Measurements, Oil and Natural Gas Terms and Other Data

In this annual report, we use the following measurements:

 

  

“m” or “meter” means one meter, which equals approximately 3.28084 feet;

 

  

“km” means one kilometer, which equals approximately 0.621371 miles;

 

  

“km2” means one square kilometer, which equals approximately 247.1 acres;

 

  

“m3” means one cubic meter;

 

  

“bbl” “bo,” or “barrel of oil” means one stock tank barrel, which is equivalent to approximately 0.15898 cubic meters;

 

  

“boe” means one barrel of oil equivalent, which equals approximately 160.2167 cubic meters, determined using the ratio of 5,615 cubic feet of natural gas to one barrel of oil;

 

  

“cf” means one cubic foot;

 

  

“M,” when used before bbl, bo, boe or cf, means one thousand bbl, bo, boe or cf, respectively;

 

  

“MM,” when used before bbl, bo, boe or cf, means one million bbl, bo, boe or cf, respectively;

 

  

“Bn,” when used before bbl, bo, boe or cf, means one billion bbl, bo, boe or cf, respectively;

 

  

“T,” when used before bbl, bo, boe or cf, means one trillion bbl, bo, boe or cf, respectively;

 

  

“/d,” or “pd” when used after bbl, bo, boe or cf, means per day; and

 

  

“sxs” means sand bags of 100 pounds.

 

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FORWARD-LOOKING STATEMENTS

This annual report contains estimates and forward-looking statements, principally in “Item 3. Risk Factors,” “Item 4. Our Business” and “Item 5. Operating and Financial Review and Prospects.” Some of the matters discussed herein concerning our business operations and financial performance include estimates and forward-looking statements within the meaning of the U.S. Securities Act of 1933, as amended (the “Securities Act”) and the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The words such as “believes,” “expects,” “anticipates,” “intends,” “should,” “seeks,” “estimates,” “future” or similar expressions are included with the intention of identifying statements about the future. We have based these forward-looking statements on numerous assumptions, including our current beliefs, expectations and projections about present and future events and financial trends affecting our business. These expectations and projections are subject to significant known and unknown risks and uncertainties which may cause our actual results, performance or achievements, or industry results, to be materially different from any expected or projected results, performance or achievements expressed or implied by such forward-looking statements. Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results, performance or achievements to differ materially from those expressed or implied in our forward-looking statements, including, among other things:

 

  

uncertainties relating to future government concessions and exploration permits;

 

  

adverse outcomes in litigation that may arise in the future;

 

  

general political, economic, social, demographic and business conditions in Argentina, Mexico, in other countries in which we operate;

 

  

uncertainties relating to future election results in Argentina and Mexico;

 

  

changes in law, rules, regulations and interpretations and enforcements thereto applicable to the Argentine and Mexican energy sectors, including changes to the regulatory environment in which we operate and changes to programs established to promote investments in the energy industry;

 

  

any unexpected increases in financing costs or an inability to obtain financing and/or additional capital pursuant to attractive terms;

 

  

any changes in the capital markets in general that may affect the policies or attitude in Argentina and/or Mexico, and/or Argentine and Mexican companies with respect to financings extended to or investments made in Argentina and Mexico or Argentine and Mexican companies;

 

  

fines or other penalties and claims by the authorities and/or customers;

 

  

any future restrictions on the ability to exchange Mexican or Argentine Pesos into foreign currencies or to transfer funds abroad;

 

  

the revocation or amendment of our respective concession agreements by the granting authority;

 

  

our ability to implement our capital expenditures plans or business strategy, including our ability to obtain financing when necessary and on reasonable terms;

 

  

government intervention, including measures that result in changes to the Argentine and Mexican, labor markets, exchange markets or tax systems;

 

  

continued and/or higher rates of inflation and fluctuations in exchange rates, including the devaluation of the Mexican Peso or Argentine Peso;

 

  

any force majeure events, or fluctuations or reductions in the value of Argentine public debt;

 

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changes to the demand for energy;

 

  

uncertainties relating to the effects of theCovid-19 outbreak;

 

  

environmental, health and safety regulations and industry standards that are becoming more stringent;

 

  

energy markets, including the timing and extent of changes and volatility in commodity prices, and the impact of any protracted or material reduction in oil prices from historical averages;

 

  

changes in the regulation of the energy and oil and gas sector in Argentina and Mexico, and throughout Latin America;

 

  

our relationship with our employees and our ability to retain key members of our senior management and key technical employees;

 

  

the ability of our directors and officers to identify an adequate number of potential acquisition opportunities;

 

  

our expectations with respect to the performance of our recently acquired businesses;

 

  

our expectations for future production, costs and crude oil prices used in our projections;

 

  

increased market competition in the energy sectors in Argentina and Mexico;

 

  

potential changes in regulation and free trade agreements as a result of U.S., Mexican or other Latin American political conditions; and

 

  

additional matters identified in “Risk Factors.”

Forward-looking statements speak only as of the date on which they were made, and we undertake no obligation to release publicly any updates or revisions to any forward-looking statements contained herein after we distribute this annual report because of new information, future events or other factors. In light of these limitations, undue reliance should not be placed on forward-looking statements contained in this annual report.

 

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ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.

KEY INFORMATION

CONSOLIDATED SELECTED FINANCIAL DATA

The following table presents our selected financial data as of and for each of the years in the three-year period ended December 31, 2019. Our historical results for any prior period do not necessarily indicate results to be expected for any future period.

The selected consolidated statement of comprehensive income for the years ended December 31, 2019, 2018 and 2017 and the selected consolidated statement of financial position as of December 31, 2019, 2018 and 2017, have been prepared in accordance with IFRS as issued by the IASB and have been derived from our Audited Financial Statements included elsewhere in this annual report.

The summary consolidated financial data for our Predecessor as of December 31, 2017 has been derived from the 2017 audited consolidated financial statements of PELSA.

Our results of operations for the fiscal year 2019 and for the 2018 Successor Period are not directly comparable to our results of operations for the 2018 Predecessor Period and for the year ended December 31, 2017, due to the effects of the Initial Business Combination. For further information, see “Item 5—Operating and Financial Review and Prospects—Operating results—Note Regarding Comparability of Our Results of Operations.”

In addition, effective January 1, 2019, we adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application on January 1, 2019. Under this method, the standard is applied with the cumulative effect of initially applying the standard recognized at the date of initial application. Accordingly, certain comparisons for the above mentioned new accounting standard may be affected.

We qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. We have elected to adopt certain of the reduced disclosure requirements available to emerging growth companies.

All of the summary financial information included in the following tables is denominated in U.S. Dollars. The financial data that has been derived from our Audited Financial Statements was prepared in accordance with IFRS. For further information, see “Presentation of Information—Financial Statements and Information.”

You should read the information below in conjunction with our Audited Financial Statements, including the notes thereto, as well as the sections “Presentation of Financial Information” and “Item 5. Operating and Financial Review and Prospects.”

 

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   Successor   Predecessor 
   For the year
ended
December 31,
2019
   For the period
from
April 4, 2018
through
December 31,
2018
   For the period
from January 1,
2018 through
April 3,
2018
   For the year
ended

December 31,
2017
 
  (in thousands of US$, exceptper-share data and margins) 

Revenue from contract with customers

   415,976    331,336    44,463    198,075 

Cost of sales:

        

Operating expenses

   (114,431   (86,245   (18,367   (77,461

Crude oil stock fluctuation

   310    (1,241   733    (7,566

Depreciation, depletion and amortization

   (153,001   (74,772   (14,194   (61,211

Royalties

   (61,008   (50,323   (6,795   (28,163
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   87,846    118,755    5,840    23,674 
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling expenses

   (27,138   (21,341   (3,091   (13,264

General and administrative expenses

   (42,400   (24,202   (1,466   (6,774

Exploration expenses

   (676   (637   (134   (1,049

Other operating income

   3,165    2,699    1,240    17,802 

Other operating expenses

   (6,180   (18,097   (135   (5,125

Impairment recovery of property, plant and equipment

               5,290 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

   14,617    57,177    2,254    20,554 
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

   3,770    2,532    239    166 

Interest expense

   (34,163   (15,746   (23   (18

Other financial results

   (715   (22,920   (1,159   (436
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial results, net

   (31,108   (36,134   (943   (288
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/Profit before income tax

   (16,491   21,043    1,311    20,266 
  

 

 

   

 

 

   

 

 

   

 

 

 

Current income tax (expense)

   (1,886   (35,450   (4,615   (15,956

Deferred income tax (expense) / benefit

   (14,346   (11,975   (3,345   9,595 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (expense)

   (16,232   (47,425   (7,960   (6,361
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) / profit for the year/period

   (32,723   (26,382   (6,649   13,905 
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss)

        

Other comprehensive (loss) that will not be reclassified to profit or loss in subsequent periods

        

- Remeasurements (loss) related to defined benefits plans

   (1,577   (3,565   (89   (355

- Deferred income tax benefit

   394    891    22    124 
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) that will not be reclassified to profit or loss in subsequent periods

   (1,183   (2,674   (67   (231
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) for the year/period, net of tax

   (1,183   (2,674   (67   (231
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss)/profit for the year/period

   (33,906   (29,056   (6,716   13,674 
  

 

 

   

 

 

   

 

 

   

 

 

 

(Losses)/Earnings per share attributable to equity holders of the parent

        

Basic and Diluted (In U.S. dollars per share):

   (0.409   (0.375   (0.070   0.146 

Other financial information

        

Adjusted EBITDA(1)

   170,862    146,347    16,966    78,541 

Adjusted EBITDA margin(2)

   0.41    0.44    0.38    0.40 

 

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(1) 

We calculate Adjusted EBITDA as profit (loss) for the period / year plus income tax expense, financial results, net, depreciation, depletion and amortization, transaction costs related to business combinations, restructuring expenses and impairment recovery of property, plant and equipment. We present Adjusted EBITDA because we believe it provides investors with a supplemental measure of the financial performance of our core operations that facilitates period to period comparisons on a consistent basis. Our management uses Adjusted EBITDA, among other measures, for internal planning and performance measurement purposes. Adjusted EBITDA is not a measure of liquidity or operating performance under IFRS and should not be construed as an alternative to net profit, operating profit, or cash flow provided by operating activities (in each case, as determined in accordance with IFRS). Adjusted EBITDA, as calculated by us, may not be comparable to similarly titled measures reported by other companies.

(2) 

We calculate Adjusted EBITDA margin by dividing Adjusted EBITDA by revenues from contracts with customers.

The following table sets forth the reconciliation of Adjusted EBITDA, Adjusted EBITDA Margin and Net Debt:

 

   Successor   Predecessor 
   For the year
ended
December 31,

2019
   For the period from
April 4, 2018 to
December 31, 2018
   For the period from
January 1, 2018 to
April 3, 2018
   For the year ended
December 31,
2017
 
   (in thousands of US$, except margins) 

Net (Loss) Profit for the period/year

   (32,723   (26,382   (6,649   13,905 

Income tax expense

   16,232    47,425    7,960    6,361 

Financial results, net

   31,108    36,134    943    288 

Depreciation, depletion and amortization

   153,001    74,772    14,712    63,277 

Transaction costs related to business combinations

   —      2,380    —      —   

Restructuring expenses

   3,244    12,018    —      —   

Impairment recovery of property, plant and equipment

   —      —      —      (5,290
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   170,862    146,347    16,966    78,541 

Revenue from contracts with customers

   415,976    331,336    44,463    198,075 
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin

   0.41    0.44    0.38    0.40 

 

   As of
December 31, 2019
   As of
December 31, 2018
 
   (in thousands of US$) 

Current andnon-current borrowings

   451,413    304,767 

Cash, bank balances and other short term investments

   260,028    80,908 
  

 

 

   

 

 

 

Net Debt

   191,385    223,859 

 

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Selected Consolidated Statement of Financial Position

 

   Successor   Predecessor 
   As of December 31,
2019
   As of December 31,
2018
   As of December 31,
2017
 

Assets

      

Non-current assets

      

Property, plant and equipment

   917,066    820,722    259,229 

Goodwill

   28,484    28,484    —   

Other intangible assets

   34,029    31,600    1,021 

Right-of-use-assets

   16,624    —      —   

Trade and other receivables

   15,883    20,191    297 

Deferred income tax

   476    —      —   
  

 

 

   

 

 

   

 

 

 

Totalnon-current assets

   1,012,562    900,997    260,547 
  

 

 

   

 

 

   

 

 

 

Current assets

      

Inventories

   19,106    18,187    8,215 

Trade and other receivables

   93,437    86,050    56,274 

Cash, bank balances and other short-term investments

   260,028    80,908    36,835 
  

 

 

   

 

 

   

 

 

 

Total current assets

   372,571    185,145    101,324 
  

 

 

   

 

 

   

 

 

 

Total assets

   1,385,133    1,086,142    361,871 
  

 

 

   

 

 

   

 

 

 

Shareholders’ equity and liabilities

      

Shareholders’ equity

      

Share capital

   659,399    513,255    39,239 

Share-based payment reserve

   15,842    4,021    —   

  Legal Reserve

   —      —      7,523 

Voluntary reserve

   —      —      385,033 

Accumulated other comprehensive loss

   (3,857   (2,674   (2,800

Accumulated loss

   (67,668   (34,945   (148,694
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

   603,716    479,657    280,301 
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Non-current liabilities

      

Deferred income tax liabilities

   147,019    133,757    28,840 

Leases liabilities

   9,372    —      —   

Provisions

   21,146    16,186    15,902 

Borrowings

   389,096    294,415    —   

Warrants

   16,860    23,700    —   

Employee defined benefit plans obligation

   4,469    3,302    4,683 

Other taxes and royalties payable

   —      —      2 

Accounts payable and accrued liabilities

   419    1,007    —   
  

 

 

   

 

 

   

 

 

 

Totalnon-current liabilities

   588,381    472,367    49,427 
  

 

 

   

 

 

   

 

 

 

Current liabilities

      

Provisions

   3,423    4,140    925 

Leases liabilities

   7,395    —      —   

Borrowings

   62,317    10,352    —   

Salaries and social security payable

   12,553    6,348    2,540 

Income tax payable

   3,039    22,429    1,401 

Other taxes and royalties payable

   6,040    6,515    6,287 

Accounts payable and accrued liabilities

   98,269    84,334    20,990 
  

 

 

   

 

 

   

 

 

 

Total current liabilities

   193,036    134,118    32,143 
  

 

 

   

 

 

   

 

 

 

Total liabilities

   781,417    606,485    81,570 
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity and liabilities

   1,385,133    1,086,142    361,871 
  

 

 

   

 

 

   

 

 

 

Dividends and Shares

      

Number of shares

   87,133,506    70,409,317    95,443,572(1) 

Dividends declared

   —      —      6,733(2) 

Dividends declaredper-share

   —      —      0.07(2) 

 

(1) 

Refers to shares of PELSA, as the Company’s predecessor.

(2) 

Refers to dividends declared by PELSA, as the Company’s predecessor.

 

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Exchange Rates

The following tables show, for the periods indicated, certain information regarding the exchange rates for U.S. dollars, expressed in nominal Argentine pesos per dollar (ask price published by Banco de la Nación Argentina). See “Item 10—Additional Information—Exchange Controls.”

 

   Average (1)   End of Period 

Year Ended December 31, 2016

   14.99    15.89 

Year Ended December 31, 2017

  ��16.73    18.65 

Year Ended December 31, 2018

   29.26    37.70 

Year Ended December 31, 2019

   51.05    63.00 

Month Ended September 31, 2019

   57.87    59.00 

Month Ended October 31, 2019

   60.82    63.50 

Month Ended November 30, 2019

   62.72    62.25 

Month Ended December 31, 2019

   62.74    63.00 

Month Ended January 31, 2020

   63.00    63.00 

Month Ended February 31, 2020

   63.25    64.00 

Month Ended March 31, 2020

   64.57    65.75 

 

(1) 

Yearly data reflect average ofmonth-end rates. Monthly data reflect average ofday-end rates.

Sources:Banco de la Nación Argentina

The following tables show, for the periods indicated, certain information regarding the exchange rates for U.S. dollars, expressed in nominal Mexican pesos per dollar (price to settle obligations published by Banco de México).

 

   Average (1)   End of Period 

Year Ended December 31, 2016

   18.66    20.66 

Year Ended December 31, 2017

   18.93    19.74 

Year Ended December 31, 2018

   19.24    19.68 

Year Ended December 31, 2019

   19.26    18.85 

Month Ended September 31, 2019

   19.61    19.64 

Month Ended October 31, 2019

   19.37    19.12 

Month Ended November 30, 2019

   19.31    19.61 

Month Ended December 31, 2019

   19.17    18.85 

Month Ended January 31, 2020

   18.81    18.71 

Month Ended February 31, 2020

   18.78    19.40 

Month Ended March 31, 2020

   21.97    23.51 

 

(1) 

Reflects average ofday-end rates.

Sources:Banco de la Nación Argentina

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

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RISK FACTORS

You should carefully consider the following risk factors in evaluating us and our business before investing in Vista. In particular, you should consider the risks related to an investment in companies operating in Argentina, Mexico and Latin America generally, for which we have included information in these risk factors to the extent that information is publicly available. In general, investing in the securities of issuers whose operations are located in emerging market countries such as Argentina and Mexico involve a higher degree of risk than investing in the securities of issuers whose operations are located in the United States or other more developed countries. If any of the risks discussed in this annual report actually occur, alone or together with additional risks and uncertainties not currently known to us, or that we do not presently consider material, our business, financial condition, results of operations and prospects may be materially adversely affected. If this were to occur, the value of our series A shares or ADSs may decline and you may lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this annual report, including the Audited Financial Statements and the related notes thereto. Our actual results could differ materially and adversely from those anticipated in this annual report.

Risks Related to our Business and Industry

The oil and gas industry is subject to particular operational and economic risks.

Oil and gas E&P activities are subject to particular economic and industry-specific operational risks, some of which are beyond our control, such as production, equipment and transportation risks, as well as natural hazards and other uncertainties, including those relating to the physical characteristics of onshore and offshore oil or natural gas fields. Our operations may be curtailed, delayed or canceled due to bad weather conditions, mechanical difficulties, shortages or delays in the delivery of equipment, compliance with governmental requirements, fire, explosions, blow-outs, pipe failure, abnormally pressured formations, and environmental hazards, such as oil spills, gas leaks, ruptures or discharges of toxic gases. In addition, we operate in politically sensitive areas where the local population or other stakeholders have interests that from time to time may conflict with our production or development objectives. If these risks materialize, we may suffer substantial operational losses, disruptions to our operations and harm to our reputation. Additionally, if any operational incident occurs that affects local communities and ethnic communities in nearby areas, we will need to incur additional costs and expenses in order to remediate affected areas and to compensate for any damages we may cause. These additional costs may have a negative impact on the profitability of the projects we may decide to undertake. Drilling may be unprofitable, not only with respect to dry wells, but also with respect to wells that are productive but do not produce sufficient revenues to return a profit after drilling, operating and other costs are considered.

We are exposed to the effects of fluctuations in the international prices of oil and gas.

International oil and gas prices have fluctuated significantly in past years and they will most likely continue fluctuating in the future. For example, during 2015, 2016, 2017, 2018 and 2019 the reference price of the Brent benchmark has fluctuated significantly, with average prices of US$53.50/bbl, US$45.13/bbl, US$54.75/bbl, US$71.69/bbl, and US$64.16/bbl for each of those years, respectively.

During the first week of March 2020, OPEC and certainnon-OPEC producers (referred to as OPEC+) met in Vienna, Austria, to discuss the prospect of extending or increasing oil production cuts, in light of a decrease in demand due toCovid-19. No consensus was reached among the 24 participating countries, effectively eliminating quotas and reduction targets as of April 1, 2020. As a consequence, Saudi Arabia, the world’s largest oil exporter, through its state-owned Company Saudi Aramco, decided to lower the OSP (Official Selling Price) of its Arab light crude by around US$8 per barrel, the largest monthly decrease in 20 years. Concurrently, it announced plans to increase production to at least 10 million barrels per day as of April. On March 8, 2020, Brent crude slid US$10.91 (or 24.1%) to US$34.36 in the worst day since 1991. From March 16 to April 2, 2020, Brent price was below US$30/bbl, with a minimum price of US$22.72/bbl on March 30, 2020. Although, OPEC and OPEC+ agreed a curtailment of 9.7 MMBbl/d on April 9, 2020, pushing Brent above the US$30/bbl mark, Brent dropped below US$20/bbl on April 21, 2020.

 

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The sustained impact of theCovid-19 pandemic across the world has led to a sharp drop in demand since most countries continue to announce containment measures (border closures, flight cancellations, self-isolation and quarantine, large gathering restrictions and bar and restaurant closures, among others). The full extent and duration of such containment measures, and their impact on the world economy are yet uncertain.

Factors affecting international prices for crude oil and related oil products include: political developments in crude oil producing regions, particularly the Middle East; the ability of the Organization of Petroleum Exporting Countries (“OPEC”) and other crude oil producing nations to set and maintain crude oil production levels and prices; global and regional supply and demand for crude oil, gas and related products; competition from other energy sources; domestic and foreign government regulations; weather conditions and global and local conflicts or acts of terrorism. We cannot predict how these factors will influence oil and related oil products prices and we have no control over them. Price volatility curtails the ability of industry participants to adopt long-term investment decisions given that returns on investments become unpredictable.

Furthermore, our realized crude oil price depends on several factors such as international crude oil prices, international refining spreads, processing and distribution costs, biofuel prices, exchange currencies, local demand and supply, domestic refining margins, competition, stocks, local taxation, local regulations and domestic margins for our products, among others.

A substantial or extended downturn in the international prices of crude oil and its derivatives could have a material adverse effect on our business, operating results, and financial condition, as well as the value of our reserves and the market value of our series A shares or ADSs.

Oil and gas price volatility could harm our investment projects and development plans.

In terms of investments, we budget capital expenditures related to exploration and development by considering, among others, current and expected local and international market prices for our hydrocarbon products.

Substantial or extended declines in international crude oil and gas prices, and their derivatives, may have an impact on our investment plans. Also, any drop in the domestic crude oil and gas prices for an extended period (or if prices for certain products do not match cost increases) could cause a decline in the economic viability of our drilling projects.

Additionally, significant downturns in the prices of crude oil and gas, and their derivatives, could force us to incur future impairment expenses, reduce or alter the term of our capital investments, and this could affect our production forecasts in the medium term and our estimate of reserves towards the future.

These factors could also lead to changes to our development plans, which could lead to the loss of proved developed reserves and proved undeveloped reserves and could also adversely affect our ability to improve our hydrocarbon recovery rates, find new reserves, develop unconventional resources and carry out our other capital expenditure plans. In turn, such change in conditions could have an adverse effect on our financial condition and results of operations. Additionally, it could also have an impact on our operating assumptions and estimates and, as a result, affect the recovery value of certain assets.

We are exposed to contractions in the demand of crude oil and natural gas and contractions in the demand of any of theirby-products.

The demand of our crude oil and gas products is largely influenced by the economic activity and growth in Argentina, Mexico and globally. Although demand increased in the past, it has recently contracted significantly (in part, due to theCovid-19 outbreak) and is subject to volatility in the future. On March 20, 2020, we decided to stop our drilling and completion activity in Argentina, and were also forced toshut-in certain wells, including our 12 unconventional wells in Bajada del Palo Oeste, in response to lower crude oil demand. Demand for crude oilby-products, such as gasoline, may also contract under certain conditions, particularly during economic slowdowns.

Latest estimates from the IEA, EIA and OPEC forecast that global crude oil demand will decline by between 12 MMbbl/d and 23 MMBbl/d during the second quarter of 2020 compared to the second quarter of 2019 (a decline of 12% and 23%, respectively), and by between 5.3 MMbbl/d and 9.3 MMBbl/d for the full year 2020 compared to the year 2019 (in which total demand was 100.5 MMbbl). For the year ended December 31, 2019, 81% of our revenues were derived from crude oil; because we expect that our production mix will continue to be weighted towards crude oil, our financial results are more sensitive to movements in oil prices.

 

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As of the date of this annual report, given the uncertainty of the lasting effect of theCovid-19 outbreak, its impact on our business cannot be determined. A further contraction of the demand of our products, or the maintenance of the current demand levels for significant periods of time, would adversely affect our revenues, causing economic losses to our Company. In addition, further contraction of demand and pricing of our products can impact the valuation of our reserves and, in periods of lower commodity prices, we may curtail production and capital spending or may defer or delay drilling wells because of lower cash generation. Lower oil and natural gas prices could also affect our growth, including future and pending acquisitions. A substantial or extended decline in oil or natural gas prices could adversely affect our business, financial condition and results of operations. Continuous poor economic performance could eventually lead to a deterioration in our financial coverage ratios, impairment charges and cause us to exceed the financial covenants agreed upon in the Syndicated Loan (as defined below). A contraction of crude oil demand could also affect us financially, including our ability to pay our suppliers for their services, which could, in turn, lead to further operational distress.

We are exposed to the effects of fluctuations and regulations in the domestic prices of oil and gas, which may limit our ability to increase the price of our oil and gas products.

Most of our revenue in Argentina and Mexico is derived from sales of crude oil and natural gas. The domestic price of crude oil has fluctuated in the past in such countries not only due to international prices, but also due to local taxation, price regulations, macroeconomic conditions and refining margins.

Oil prices in Argentina and Mexico have not perfectly reflected the upward or downward changes in the international price of oil. Such fluctuations have had an impact on the local prices for the commercialization of crude oil. In the event that local prices are reduced through regulation or other local factors, which we cannot control, it could affect the economic performance of our existing and future projects, generating a loss of reserves as a result of changes in our development plans, our assumptions and our estimates, and consequently affect the recovery value of certain assets.

In Argentina, as a result of economic, political, and regulatory developments, the prices of crude oil, diesel, and other fuels have differed significantly from the international and regional markets, and the ability to increase or maintain such prices to match international standards has been challenged.

On January 11, 2017, the Argentine Secretariat of Energy and Argentine producers and refineries signed the “Agreement for the Transition to International Prices of the Argentina Hydrocarbon Industry,” establishing a price schedule in order for the price of the barrel of oil produced in Argentina to track international prices during 2017. This agreement (under which a price determination and review system was established for 2017) was in force until December 31, 2017, but before this date, the aforementioned price convergence was achieved. Therefore, SdE notified the parties to the agreement that, pursuant to itssub-section 9, starting from October 1, 2017, commitments assumed through such agreement would be suspended.

However, through Decree No. 566/2019, the Argentine government determined that during a90-day period commencing on August 16, 2019 (i) deliveries of crude oil in the Argentine market had to be invoiced and paid at the agreed-upon price between the oil producers and refineries as of August 9, 2019, applying a reference exchange rate of AR$45.19 per US$1.00 and a Brent reference price of US$59.00 per barrel, and (ii) the maximum prices of gasoline and diesel oil in the Republic of Argentina sold by refineries, wholesale or retail companies (regardless of their quality), were the prices in force as of August 9, 2019. Oil producing and refining companies were also obliged to satisfy the total domestic demand of liquid fuels and crude oil during the90-day period. Through Decree No. 601/2019, the National Executive Branch modified the duration of the measures implemented by Decree No. 566/2019, establishing that they would be in force until November 13, 2019.

The reference exchange rate and maximum prices of gasoline and diesel indicated above were subsequently updated through a series of decrees and resolutions (including Decree No. 601/2019 and Resolution No. 688/2019 that increased the reference exchange rate to AR$46.69 and AR$51.77 per US$1.00, respectively, and Resolution No. 557/2019 that permitted gasoline and diesel prices to be increased by up to a 4% with respect to the prices in force as of August 9, 2019).

 

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As of the date of this annual report, the price measures implemented through Decree 566/2019 (as amended) are no longer in force, since the deadline set for November 13, 2019 was not extended. However, there is no assurance that the governments of the countries in which we operate will not adopt in the future new measures establishing prices freezes or otherwise affecting the prices of our oil and gas products. The macroeconomic instability faced by emerging markets and particularly Argentina have impacted the oil and gas sector as well. During 2019, the Argentine Peso slid from 38.6 to 63.0 Argentine Pesos per U.S. Dollar according to the U.S. Dollar ask rate published by Banco de la Nación Argentina. The fact that end user domestic prices are set in local currency and upstream companies were therefore to some extent unable to pass through the devaluation of Argentine currency downstream resulted in lower Dollar-denominated prices. Although the prices of natural gas in Argentina are denominated in U.S. Dollars, the rates paid by regulated end users are denominated in Argentine Pesos. Law of Solidarity and Productive Reactivation No. 27,541 (the “Solidarity Law”), in force since December 2019, sets forth that the Argentine Executive Branch is entitled to set export duties up to a maximum of 33% of the exported goods until December 31, 2021. The Solidarity Law also established a cap of 8% for the export duties for hydrocarbons and mining products. As of the date of this annual report, the Argentine government has not yet issued regulations to reduce duties for hydrocarbons and mining products from the current 12% to 8% or less, as established by the Solidarity Law. If the Argentine government does not provide for new export duties according to the 8% cap stated in the Solidarity Law, the 12% export duty stated in Decree 793/2019 would continue to be applied until December 31, 2020, which would entitle oil exporters to file a judicial claim requiring export duties to be calculated by customs at the 8% cap. As of the date of this annual report, there is already case law in connection with export duties levied on mining goods ruling that the 8% cap stated in the Solidarity Law shall be applied by Argentine customs. We cannot anticipate whether the Argentine government will reduce the duties for hydrocarbons and mining products to 8%, and if duties are not reduced, whether any litigation undertaken by Vista would have a favorable outcome.

Furthermore, in the past, the Mexican government has imposed price controls on the sales of natural gas, NGL, gasoline, diesel, gas oil intended for domestic use, fuel oil and other products. Although as of the date of this annual report, sales prices of gasoline and diesel are determined by the free market, the Mexican government could impose additional price controls on the domestic market in the future.

In the event that domestic prices for certain products decrease or do not increase at the same rate than international prices (either due to Argentine or Mexican regulations or otherwise) and export limitations remain in place or are imposed in Argentina, our ability to improve hydrocarbon recovery rates, find new reserves and carry out certain other capital expenditure plans may be adversely affected, which in turn might have an adverse effect on our results of operations, cash flows and/or expectations.

If domestic prices are substantially lower than the prices prevailing in international markets, our business, results of operations and financial condition would be adversely affected.

We cannot assure you that we will be able to maintain or increase the domestic price for our products, and our inability to do so could adversely affect our operations, cash flows and/or expectations.

Natural gas subsidies to natural gas producers may be limited or eliminated in the future.

We may benefit in the future from subsidies granted to natural gas producers of unconventional reservoirs in the Neuquina basin. We cannot assure you that any changes or adverse judicial or administrative interpretations of such regimes, will not adversely affect our results of operations. The Argentine government has announced that it will present a bill before the Argentine Congress which would seek to establish a promotional regime for the oil industry which would not only have effects on Vaca Muerta, but would extend along the Neuquina basin. The restriction or elimination of subsidies would negatively affect the selling price of our products and therefore result in a decrease of our revenues.

Our business requires significant capital investments and maintenance cost.

The oil and natural gas industry is capital-intensive as it requires heavy investments in capital goods. We make and expect to continue to make substantial capital expenditures related to development and acquisition projects and in order to maintain or increase the amount of our hydrocarbon reserves, incurring significant maintenance costs.

 

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We have funded, and we expect that we will continue to fund, our capital expenditures with cash generated by existing operations and our existing cash; however, our financing needs may require us to alter or increase our capitalization substantially through the issuance of debt or equity securities or the sale of assets. We cannot guarantee that we will be able to maintain our current production levels, generate sufficient cash flow or that we will have access to sufficient borrowing or other financing alternatives to continue our exploration, exploitation and production activities at current or higher levels.

Additionally, the incurrence of additional indebtedness would require that a portion of our cash flow from operations be used for the payment of interest and principal on our indebtedness, thereby reducing our ability to use cash flow from operations to fund working capital, capital expenditures and acquisitions. The actual amount and timing of our future capital expenditures may differ materially from our estimates as a result of various factors, including oil and natural gas prices; actual drilling results; the availability of drilling rigs and other services and equipment; and regulatory, technological and competitive developments. We may decrease our actual capital expenditures in response to lower commodity prices, which would negatively impact our ability to increase production.

If our revenues decrease as a result of lower oil and natural gas prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels. If additional capital is needed, we may not be able to obtain debt or equity financing on terms acceptable to us, if at all. If cash flow generated by our operations are not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a curtailment of our operations relating to development of our properties. This, in turn, could lead to a decline in production, and could materially and adversely affect our business, financial condition and results of operations, and the market value of our series A shares or ADSs may decline.

Unless we replace our existing oil and gas reserves, the volume of our reserves will decrease over time.

The production of oil and gas deposits decreases as reserves drain with the range of decrease depending on the characteristics of the reserves and the available amount of reserves decreases as reserves are produced and consumed. The future level of oil and gas reserves, as well as the level of production, and therefore of our revenues and cash flows depend on our ability to develop current reserves, and to find or acquire recoverable reserves to be developed. We may not be able to identify commercially exploitable deposits, complete or produce more oil and gas reserves, and the wells we plan to drill may not result in the discovery or production of oil or natural gas. If we are unable to replenish production, the value of our reserves will decline and our financial condition, results of operations, cash flow and market value of our series A shares and ADSs could be negatively affected.

The oil and gas reserves that we estimate are based on assumptions that could be inaccurate.

The information as of December 31, 2019 regarding our proved reserves, included in this document as estimated quantities of proved reserves is derived from estimates as of December 31, 2019 included in the 2019 Reserves Reports prepared by D&M and NSI, third-party experts. Although they are classified as “proved reserves,” the reserve estimates established in the 2019 Reserves Reports are based on certain assumptions that could be inaccurate. Assumptions used by D&M and NSI include oil and gas sale prices determined in accordance with the guidelines established by the SEC, as well as future expenditures and other economic assumptions (including interests, royalties and taxes) as provided by us, in each case as set forth in the 2019 Reserves Reports. For more information please refer to the 2019 Reserves Reports attached hereto as Exhibits 99.1 and 99.2.

The estimation process begins with an initial review of the assets by geophysicists, geologists and engineers. A reserve coordinator ensures the integrity and impartiality of the estimates through the supervision and support of the technical teams responsible for preparing the reserve estimates. We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with our independent reserves engineers to ensure the integrity, accuracy and timeliness of data furnished to our independent reserves engineers in their estimation process and who have knowledge of the specific properties under evaluation. Our Chief Operating Officer is primarily responsible for overseeing the preparation of our reserves estimates and for the internal control over our reserves estimation. Reserve engineering is an objective process to estimate the accumulations in the subsurface but entails a certain degree of uncertainty. Estimates of reserves depend on the quality of the engineering and geology data at the date of estimation and the manner in which it is interpreted.

 

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Many of the factors, assumptions and variables involved in estimating proved reserves are beyond our control and are subject to change over time. Consequently, measures of reserves are not precise and are subject to revision. Any downward revision in our estimated quantities of proved reserves could adversely impact our financial condition and results of operations, and ultimately have a material adverse effect on the market value of our series A shares or ADSs.

In addition, reserve engineering is a subjective process for estimating oil and gas accumulations that cannot be accurately measured, and the estimates of other engineers may differ materially. A number of assumptions and uncertainties are inherent in estimating the amounts that make up the proven reserves of oil and gas, including production forecasts, the time and amount of development expenditures, testing and production after the date of the estimates, the quality of available geological, technical and economic data and its interpretation and judgment, the production performance of reservoirs, developments such as acquisitions and dispositions, new discoveries and extensions of existing fields and the application of improved recovery techniques and the prices of oil and gas, many of which are beyond our control and are subject to change over time. Consequently, measures of reserves are not precise and are subject to revision. Also, the results of drilling, testing, and production after the estimate date may require revisions. The estimate of our oil and gas reserves would be affected if, for example, we were not able to sell the oil and natural gas that we produced. In addition, the estimation of “proved oil and natural gas reserves” based on Argentine Secretariat of Energy Resolution No. 324/2006 and Secretariat of Hydrocarbon Resources ResolutionNo. 69-E/2016 may differ from the standards required by SEC’s regulations. See “Item 4—Information on the Company—History and Development of the Company—Industry and Regulatory Overview—Oil and Gas Regulatory Framework in Argentina—Reserves and Resources Certification in Argentina.”

As a result, reserve estimates could be materially different from the amounts that are ultimately extracted, and if such amounts are significantly lower than the initial reserves estimates it could result in a material adverse effect on our financial performance, operating results and the market value of our series A shares and ADSs.

We may not be able to acquire, develop or exploit new reserves which could adversely affect our financial condition and our results of operations.

Our future success largely depends on our ability to produce oil and gas from existing reserves, to discover additional oil and gas reserves, and to economically exploit oil and gas from these reserves. Unless we are successful in our exploration of oil and gas reserves and their development or otherwise acquire additional reserves, our reserves would show a general decline in oil and gas as long as oil and gas production continue. The drilling activities are also subject to numerous risks and may involve unprofitable efforts, not only with respect to dry wells but also with respect to wells that are productive but do not produce enough net income to derive profit after covering drilling costs and other operating costs. The completion of a well does not assure a return on investment or recovery of the costs of excavation, completion and operating costs. Lower oil and natural gas prices could also affect our growth, including future and pending acquisitions.

There is no guarantee that our future exploration and development activities will be successful, or that we will be able to implement our capital investment program to acquire additional reserves or that we will be able to economically exploit these reserves. Such events would adversely affect our financial condition and results of operations and the market value of our series A shares and ADSs could decline.

The lack of availability of transport may limit our possibility of increasing hydrocarbon production and may adversely affect our financial condition and results of operations.

Our capacity to exploit our hydrocarbon reserves largely depends upon the availability of transport infrastructure on commercially acceptable terms to transport the produced hydrocarbons to the markets in which they are sold. Typically, oil is transported by pipelines and tankers to refineries, and gas is usually transported by pipeline to customers. The lack of storage infrastructure, or adequate or alternative charge, or available capacity on existing long-range hydrocarbons transportation systems may adversely affect our financial condition and results of operations.

 

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Developments in the oil and gas industry and other factors may result in substantial write-downs of the carrying amount of certain of our assets, which could adversely affect our financial condition and results of operations.

We evaluate on an annual basis, or more frequently where the circumstances require, the carrying amount of our assets for possible impairment. Our impairment tests are performed by a comparison of the carrying amount of an individual asset or a cash- generating unit with its recoverable amount. Whenever the recoverable amount of an individual asset or cash-generating unit is less than its carrying amount, an impairment loss is recognized to reduce the carrying amount to the recoverable amount.

Changes in the economic, regulatory, business or political environment in Argentina, Mexico or other markets where we operate, such as the liberalization of fuel prices and the significant decline in international crude oil and gas prices in recent years, among other factors, may result in the recognition of impairment charges in certain of our assets.

Exploration and development drilling may not result in commercially productive reserves.

Drilling involves numerous risks, including the risk that no commercially productive oil or gas reservoirs will be encountered. The cost of drilling, completing and operating wells is often uncertain and drilling operations may be curtailed, delayed or canceled, or become costlier, as a result of a variety of factors, including:

 

  

unexpected drilling conditions;

 

  

unexpected pressure or irregularities in formations;

 

  

equipment failures or accidents;

 

  

construction delays;

 

  

fracture stimulation accidents or failures;

 

  

adverse weather conditions;

 

  

restricted access to land for drilling or laying pipelines;

 

  

title defects;

 

  

lack of available gathering, transportation, processing, fractionation, storage, refining or export facilities;

 

  

lack of available capacity on interconnecting transmission pipelines;

 

  

access to, and the cost and availability of, the equipment, services, resources and personnel required to complete our drilling, completion and operating activities; and

 

  

delays imposed by or resulting from compliance with environmental and other governmental or regulatory requirements.

Our future drilling activities may not be successful and, if unsuccessful, our proved reserves and production would decline, which could have an adverse effect on our future results of operations and financial condition. While all drilling, whether developmental, extension or exploratory, involves these risks, exploratory and extension drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons. We expect that we will continue to record exploration and abandonment expenses during 2020.

Our operations are substantially dependent upon the availability of water and our ability to dispose of produced water gathered from drilling and production activities. Restrictions on our ability to obtain water or dispose of produced water may have a material adverse effect on our financial condition, results of operations and cash flows.

 

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Water is an essential component of both the drilling and hydraulic fracturing processes. Limitations or restrictions on our ability to secure sufficient amounts of water (including limitations resulting from natural causes such as drought), could materially and adversely impact our operations. Severe drought conditions can result in local water districts taking steps to restrict the use of water in their jurisdiction for drilling and hydraulic fracturing in order to protect the local water supply. If we are unable to obtain water to use in our operations from local sources, it may need to be obtained from new sources and transported to drilling sites, resulting in increased costs, which could have a material adverse effect on our financial condition, results of operations and cash flows.

Our business plan includes future drilling activities to obtain unconventional oil and gas and if we are not able to acquire and correctly use the necessary new technologies, as well as obtaining financing and/or partners, our business may be affected.

Our ability to execute and carry out our plan depends on our ability to obtain financing at a reasonable cost and in reasonable conditions. We have identified drilling opportunities and prospects for future drilling related to unconventional oil and gas reserves, such as shale oil and gas in the Vaca Muerta play. These drilling locations and prospects represent the most important part of our drilling plans for the future. Our ability to drill and develop these locations depend of several factors, including seasonal conditions, regulatory approvals, negotiations of agreements with third parties, commodity prices, costs, availability of equipment, services and personnel, and drilling results. Further, our identified potential drilling locations are in various stages of evaluation, ranging from locations that are ready to drill to locations that will require substantial additional analysis. We cannot predict in advance of drilling and testing whether any particular drilling location will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in sufficient quantities to be economically viable. Even if sufficient amounts of oil or natural gas exist, we may damage the potentially productive hydrocarbon bearing formation or experience mechanical difficulties while drilling or completing the well, possibly resulting in a reduction in production from the well or abandonment of the well. If we drill additional wells that we identify as dry holes in our current and future drilling locations, our drilling success rate may decline and materially harm our business. Further, initial production rates reported by us or other operators may not be indicative of future or long-term production rates. In addition, the drilling and exploitation of such oil and gas reserves depends on our ability to acquire the necessary technology and hire personnel or other means of support for the extraction, and on obtaining financing and partners to develop such activities. Due to these uncertainties, we cannot provide any guarantee as to the sustainability of these drilling activities, that such drilling activities will eventually result in proved reserves, or that we will be able to meet our expectations of success, which could adversely affect our production levels, financial condition and results of operations.

Climate change legislation or regulations restricting emissions of greenhouse gases (“GHGs”) and legal frameworks promoting an increase in the participation of energies from renewable sources could significantly impact our industry and result in increased operating costs and reduced demand for the oil and natural gas we produce.

In December 1993, Argentina approved the United Nations Framework Convention on Climate Change (“UNFCCC”) by Federal Law No. 24,295. The UNFCCC, which entered into force on March 21, 1994, deals with the stabilization of the GHGs concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.

On February 16, 2005, the Kyoto Protocol to the UNFCCC (“Protocol”) entered into force. This Protocol, which deals with the reduction of certain GHGs (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride) in the atmosphere, will be in force until 2020 as a consequence of the ratification of the Doha Amendment to the Protocol.

Argentina approved the Protocol by Federal Law No. 25,438 on June 20, 2001, and the Doha Amendment by Federal Law No. 27,137 on April 29, 2015.

 

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The 2015 United Nations Climate Change Conference adopted by consensus the Paris Agreement. The agreement deals with GHG emission reduction measures, targets to limit global temperature increases and requires countries to review and “represent a progression” in their intended nationally determined contributions, which set emissions reduction goals at least. On October 5, 2016, the threshold for entry into force of the Paris Agreement was achieved. International treaties together with increased public awareness related to climate change may result in increased regulation to reduce or mitigate GHG emissions. Under Federal Law No. 27,270, dated September 1, 2016, Argentina approved the Paris Agreement.

Furthermore, Argentine Law No. 26,190, as amended and complemented by Law No. 27,191 and its implementing decrees, established a legal framework which promotes an increase in the participation of energies from renewable resources in Argentina’s electrical consumption. All electricity users must contribute to this goal.

Under Law No. 27,191, by December 31, 2017, 8% of the electric energy consumed must come from renewable sources, reaching 20% by December 31, 2025. It sets five stages to achieve the final goal: (i) 8% by December 31, 2017; (ii) 12% by December 31, 2019; (iii) 16% by December 31, 2021; (iv) 18% by December 31, 2023; and (v) 20% by December 31, 2025. It is within this framework that the Argentine government launched the RenovAr programs. As of December 31, 2017, 2018 and 2019, electric energy originated from renewable sources represented 2.1%, 4.6% and 8.2% of the total demand, respectively.

The effects upon the oil industry relating to climate change and the resulting regulations and regimes promoting alternative energy sources may also include declining demand for our products in the long-term. Any long-term material adverse effect on the oil industry could adversely affect the financial and operational aspects of our business, which we cannot predict with certainty as of the date of this annual report.

Compliance with legal and regulatory changes relating to climate change, including those resulting from the implementation of international treaties, may in the future increase our costs to operate and maintain our facilities, install new emission controls on our facilities and administer and manage any GHG emissions program. Revenue generation and strategic growth opportunities may also be adversely affected.

The effects upon the oil industry relating to climate change and the resulting regulations may also include declining demand for our products in the long-term. In addition, increased regulation of GHG may create greater incentives for the use of alternative energy sources. Any long-term material adverse effect on the oil industry could adversely affect the financial and operational aspects of our business, which we cannot predict with certainty as of the date of this annual report.

Climate change could impact our operating results and strategy.

Climate change poses new challenges and opportunities for our business. More stringent environmental regulations can result in the imposition of costs associated with GHG emissions, either through environmental agency requirements relating to mitigation initiatives or through other regulatory measures such as GHG emissions taxation and market creation of limitations on GHG emissions that have the potential to increase our operating costs.

The risks associated with climate change could also manifest in difficulties accessing capital due to public image issues with investors; changes in the consumer profile, with reduced consumption of fossil fuels; and energy transitions in the world economy, such as the increased use of electric powered vehicles. These factors could have a negative impact on the demand for our products and services and may jeopardize or even impair the implementation and operation of our business, adversely impacting our operating and financial results and limiting our growth opportunities.

Our operations may pose risks to the environment, and any change in the applicable environmental laws could give rise to an increase in our operating costs.

Some of our operations are subject to environmental risks which could materialize unexpectedly and could have a material adverse impact on our financial condition and results of operations. These include the risk of injury, death, environmental damages and remediation expenses, damages to our equipment, civil liability, and administrative action. There can be no assurance that future environmental issues will not result in cost increases which could lead to a material adverse effect on our financial condition and results of operations.

 

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In addition, we are subject to extensive environmental regulation in Argentina and Mexico. Local authorities in the countries in which we operate could impose new environmental laws and regulations, which could require us to incur increased costs to comply with the new standards. The imposition of more stringent regulatory measures and permit requirements the countries in which we operate could give rise to a material increase in our operating costs.

We cannot predict the overall impact that the enactment of new environmental laws or regulations could have on our financial results, results of operations, and cash flows.

Likewise, activities related to oil and gas are subject to significant economic, environmental and operational risks, some of which are beyond our control, such as risks in terms of production, equipment, and transportation, as well as natural disasters and other uncertainties, including those related to the characteristics of land or marine gas deposits. Our operations may be delayed or canceled as a result of poor climate conditions, mechanical difficulties, delays or lack of supplies in the delivery of equipment, compliance with government regulations, fires, explosions, faults in oil pipelines, abnormal formations, and environmental risks, such as oil spills, gas leaks, ruptures, or release of toxic gases. If these risks materialize, we may suffer from reputational harm, substantial operational losses or disruptions to our operations. Drilling may not be profitable, not only for dry wells, but also for wells that are productive but do not produce enough net returns after drilling.

Adverse climate conditions may adversely affect our results of operations and our ability to conduct drilling operations.

Adverse climate conditions may lead to, among others, cost increases, drilling delays, power outages, production stoppages and difficulties in transporting the oil and gas produced by us. Any decrease in our oil and gas production could have a material adverse effect on our business, financial condition or results of operations.

Conservation measures and technological advances may lead to a decline in the demand for oil.

Fuel conservation measures, the demand for alternative fuels, and advances in fuel-saving and power generation technologies may lead to a decline in the demand for oil. Any change in the demand for oil could have a material adverse effect on our financial condition, results of operations, or cash flows.

Shortages and increases in the cost of drilling rigs and oil andgas-related equipment, supplies, personnel, and services may adversely affect our ability to execute our business and development plans.

The demand for drilling rigs, pipelines and other equipment and supplies, and for qualified personnel with experience with the drilling and completion of wells and in field operations, including geologists, geophysicists, engineers and other professionals, tends to fluctuate significantly, typically along with oil prices, giving rise to temporary shortages.

Our business operations rely heavily on our production facilities.

A material portion of our revenues depends on our principalon-site oil and gas production facilities. While we believe that we maintain adequate insurance coverage and appropriate security measures in respect of such facilities, any material damage to or accident or other disruption at such production facilities could have a material adverse effect on our production capacity, financial condition and results of operations.

Our operations are subject to social risks.

Our activities are subject to social risks, including potential protests of local communities in the places where we operate. Although we are committed to operating in a socially responsible manner, we may face opposition from local communities regarding current and future projects in the jurisdictions in which we operate and may operate in the future, which could adversely affect our business, the results of operations and our financial performance.

 

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Our industry has become increasingly dependent on digital technologies to carry out daily operations.

As dependence on digital technologies has increased, cyber incidents, including deliberate attacks or unintentional events have also increased worldwide. The technologies, systems, and networks that we may implement in the future, and those of our service providers may be the object of cyberattacks or failures to the security of information systems, which could lead to interruptions in critical industrial systems, the unauthorized disclosure of confidential or protected information, data corruption, or other interruptions of our operations. In addition, certain cyber incidents, such as the advanced persistent threat, may not be detected for a prolonged period of time. We cannot assure that cyber incidents will not happen in the future and that our operations and/or our financial performance won’t be affected.

Information security risks have generally increased in recent years as a result of the proliferation of new technologies and the increased sophistication and activities of cyber-attacks. We depend on digital technology, including information systems to process financial and operating data, analyze seismic and drilling information and oil and gas reserves estimates. We have increasingly connected equipment and systems to the Internet. Because of the critical nature of their infrastructure and the increased accessibility enabled through connection to the Internet, they may face a heightened risk of cyber-attack. In the event of such an attack, they could have our business operations disrupted, property damaged and customer information stolen, experience substantial loss of revenues, response costs and other financial loss; and be subject to increased litigation and damage to their reputation. A cyber-attack could adversely affect our business, results of operations and financial condition.

Our relationship with federal, provincial and state authorities is important to our business.

Due to the nature of our businesses, we have an extensive relationship with federal, provincial and state authorities in places where we conduct our businesses. Although we believe that we have good relationships with the relevant authorities, these relationships could be adversely affected in the future, which could negatively affect our business and our results of operations. For example, the relevant authorities could reject or delay our future term-extensions requests or seek to impose unexpected or disproportionately high upfront fees or significant additional obligations upon us when negotiating our concessions or permits renewals or otherwise. Additionally, our relationship with the new Mexican and Argentine administrations may not be the same as with the prior administrations.

Risks Related to our Company

Our limited operating history as a consolidated company and recent acquisitions may make it difficult for investors to evaluate our business, financial condition, results of operations and prospects.

Our limited operating history as a consolidated company and recent acquisitions may make it difficult for investors to evaluate our business, financial condition, results of operations and prospects. We had no substantial operations prior to the consummation of the Initial Business Combination, and experienced rapid and significant expansion thereafter. Because the historical financial information included elsewhere in this annual report may not be representative of our results as a consolidated company, investors may have limited financial information on which to evaluate us and their investment decision. In addition, our results of operations for the 2018 Successor Period are not directly comparable to our results of operations for the 2018 Predecessor Period and for the year ended December 31, 2017, due to the effects of the Initial Business Combination. Similarly, our results of operations for the year ended December 31, 2019 are not directly comparable to our results of operations for the year ended December 31, 2018, due to the effects of the Initial Business Combination. Any statistical or operating data included in this annual report, as it relates to the Predecessor Company prior to the consummation of the Initial Business Combination, is based on data provided to us by the APCO Entities, Pampa Energía and PELSA. We believe it is reliable, but it does not form part of our consolidated operating history. For further information, see “Item 5—Operating and Financial Review and Prospects—Operating results—Note Regarding Comparability of Our Results of Operations.”

The historical financial information in this annual report may not be indicative of future results.

Our periodic operating results could fluctuate for many reasons, including many of the risks described in this section, which are beyond our control. Therefore, our past results of operations are not indicative of our future results of operations. Additionally, we believe that the experience of our Management Team constitutes a differentiated source of competitive strength for us. However, the experience of our Management Team in the past (whether in Vista or in other companies) may not be indicative of our future results of operations. For more information regarding our historical condensed consolidated financial information, see “Presentation of Information,” “Item 3—Key Information—Consolidated Selected Financial Data” and the Audited Financial Statements and the Supplemental Financial Statements included elsewhere in this annual report.

 

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The results of our planned development programs in new or emerging shale development areas and formations may be subject to more uncertainties than programs in more established areas and formations and may not meet our expectations for reserves or production.

The results of our horizontal drilling efforts in emerging areas and formations in Argentina such as in the Vaca Muerta formation in the Neuquina basin are generally more uncertain than drilling results in areas that are more developed and have more established production. Because emerging areas and associated target formations have limited or no production history, we are less able to rely on past drilling results in those areas as a basis to predict our future drilling results. In addition, horizontal wells drilled in shale formations, as distinguished from vertical wells, utilize multilateral wells and stacked laterals, which requirements could adversely impact our ability to maximize the efficiency of our horizontal wells related to reservoirs drainage over time. Further, access to adequate gathering systems or pipeline takeaway capacity and the availability of drilling rigs and other services may be more challenging in new or emerging areas. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, access to gathering systems and takeaway capacity or otherwise, and/or natural gas and oil prices decline, our investment in these areas may not be as economic as we anticipate, we could incur material write-downs of unevaluated properties and the value of our undeveloped acreage could decline in the future.

Part of our strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application.

Our operations involve utilizing some of the latest drilling and completion techniques as developed by it and its service providers. Risks that we face while drilling horizontal wells include, but are not limited to, the following:

 

  

landing the wellbore in the desired drilling zone;

 

  

staying in the desired drilling zone while drilling horizontally through the formation;

 

  

running casing the entire length of the wellbore; and

 

  

being able to run tools and other equipment consistently through the horizontal wellbore.

Risks that we face while completing wells include, but are not limited to, the following:

 

  

the ability to fracture-stimulate the planned number of stages;

 

  

the ability to run tools the entire length of the wellbore during completion operations; and

 

  

the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage.

Our operations and drilling activity are concentrated in areas of high industrial activity such as the Neuquina basin in Argentina, which may affect our ability to obtain the personnel, equipment, services, resources and facilities access needed to complete our development activities as planned or result in increased costs; such concentration also makes us vulnerable to risks associated with operating in a limited geographic area.

As of December 31, 2019, most of our producing properties and total estimated proved reserves were geographically concentrated in the Neuquina basin, located in Argentina. A substantial portion of our operations and drilling activity are concentrated in areas in such basins where industry activity is high. As a result, demand for personnel, equipment, power, services and resources may increase in the future, as well as the costs for these items. Any delay or inability to secure the personnel, equipment, power, services and resources could result in oil, NGL and gas production being below our forecasted volumes. In addition, any such negative effect on production volumes, or significant increases in costs, could have a material adverse effect on our results of operations, cash flow and profitability.

 

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As a result of this concentration, we may be disproportionately exposed to the impact of delays or interruptions of operations or production in this area caused by external factors such as governmental regulation, state politics, market limitations, water or sand shortages or extreme weather-related conditions.

We may be unable to successfully expand our operations.

We compete with the major independent and state-owned oil and gas companies engaged in the E&P sector, including state-owned E&P companies that possess substantially greater financial and other resources than we do for researching and developing E&P technologies and access to markets, equipment, labor and capital required to acquire, develop and operate our properties. We also compete for the acquisition of licenses and properties in the countries in which we operate.

The Argentine oil and gas industry is extremely competitive. When we bid for exploration or exploitation rights with respect to a hydrocarbon area, we face significant competition not only from private companies, but also from national or provincial public companies. In fact, the provinces of La Pampa, Neuquén and Chubut have formed companies to carry out oil and gas activities on behalf of their respective provincial governments. The state-owned energy companies Integración Energética Argentina S.A. (“IEASA,” formerly known as Energía Argentina S.A. or “ENARSA”), YPF and other provincial companies (such as Gas y Petróleo del Neuquén S.A. (“G&P”) and Empresa de Desarrollo Hidrocarburífero Provincial S.A. are also highly competitive in the Argentine oil and gas market. As a result, we cannot assure you that we will be able to acquire new exploratory acreage or oil and gas reserves in the future, which could negatively affect our financial condition and results of operations. There can be no assurance that the participation of IEASA or YPF (or any province-owned company) in the bidding processes for new oil and gas concessions will not influence market forces in such a manner that could have an adverse effect on our financial condition and results of operations.

Our competitors may be able to pay more for productive oil and natural gas properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. Our competitors may also be able to offer better compensation packages to attract and retain qualified personnel than we are able to offer. In addition, there is substantial competition for capital available for investment in the oil and natural gas industry. As a result of each of the foregoing, we may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel or raising additional capital, which could have a material adverse effect on our business, financial condition or results of operations. See “Item 4—Information on the Company—History and Development of the Company—Competition.”

Although the Argentine Reorganization may qualify as part of atax-free reorganization under Argentine law, we can provide no assurances as to the tax treatment of the Argentine Reorganization.

Although we expect that all requirements and conditions for the Argentine Reorganization to qualify as part of atax-free reorganization will be met and satisfied, no assurances can be given that we will continue to meet such requirements and satisfy such conditions in the future or that the Argentine tax authority will not challenge the reorganization based on its possible interpretation that such requirements or conditions were not properly met or satisfied. If the Argentine Reorganization does not qualify as part of atax-free reorganization, or the Argentine tax authority subsequently challenges the reorganization, we may be required to revise our tax return filings in order to reflect the fact that the proposed reorganization would not betax-free, which may have an adverse impact on our results and financial condition.

We may fail to fully identify problems with any properties we acquire, and as such, assets we acquire may prove to be worth less than we paid because of uncertainties in evaluating recoverable reserves and potential liabilities.

We are actively seeking to acquire additional acreage in Argentina and Mexico and more broadly in Latin America.Successful acquisitions require an assessment of a number of factors, including estimates of recoverable reserves, exploration potential, future oil and natural gas prices, adequacy of title, operating and capital costs and potential environmental and other liabilities. Although we conduct a review of properties we acquire which we believe is consistent with industry practices, we can give no assurance that we have identified or will identify all existing or potential problems associated with such properties or that we will be able to mitigate any problems we do

 

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identify. Such assessments are inexact, and their accuracy is inherently uncertain. In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. We do not inspect every well. Even when we inspect a well, we do not always discover structural, subsurface, title and environmental problems that may exist or arise. We are generally not entitled to contractual indemnification for preclosing liabilities, including environmental liabilities. We may acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties. As a result of these factors, we may not be able to acquire oil and natural gas properties that contain economically recoverable reserves or be able to complete such acquisitions on acceptable terms.

We may be unable to integrate successfully the operations of recent and future acquisitions with our operations, and we may not realize all the anticipated benefits of these acquisitions.

Our business has and may in the future include producing property acquisitions that include undeveloped acreage. We can offer no assurance that we will achieve the desired profitability from our recent acquisitions or from any acquisitions we may complete in the future. In addition, failure to assimilate recent and future acquisitions successfully could adversely affect our financial condition and results of operations. Our acquisitions may involve numerous risks, including:

 

  

operating a larger combined organization and adding operations;

 

  

difficulties in the assimilation of the assets and operations of the acquired business, especially if the assets acquired are in a new geographic area;

 

  

risk that oil and natural gas reserves acquired may not be of the anticipated magnitude or may not be developed as anticipated;

 

  

loss of significant key employees from the acquired business;

 

  

inability to obtain satisfactory title to the assets, concessions, or participation interests we acquire;

 

  

a decrease in our liquidity if we use a portion of our available cash to finance acquisitions;

 

  

a significant increase in our interest expense or financial leverage if we incur additional debt to finance acquisitions;

 

  

failure to realize expected profitability or growth;

 

  

failure to realize expected synergies and cost savings;

 

  

coordinating geographically disparate organizations, systems and facilities; and

 

  

coordinating or consolidating corporate and administrative functions.

Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition. If we complete any future acquisition, our capitalization and results of operation may change significantly, and you may not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in evaluating future acquisitions. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisition and current operations, which in turn, could negatively impact our results of operations.

We may be unable to successfully enter new markets outside Argentina and Mexico.

Part of our growth strategy is to increase our revenue and the market countries in which we operate through the acquisition of complementary operations. There can be no assurance that suitable candidates for acquisitions can be identified or, if suitable candidates are identified, that acquisitions can be completed on acceptable terms, if at all.

 

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Even if suitable candidates are identified, any future acquisitions may entail a number of risks that could adversely affect our business and the market price of our common stock and ADS, including the integration of the acquired operations, diversion of management’s attention, risks of entering new market regions in which we have limited experience, adverse short-term effects on our reported operating results, the potential loss of key employees of acquired businesses and risks associated with unanticipated liabilities.

We may be subject to unknown or contingent liabilities related to our recent and future acquisitions.

From time to time we undertake evaluations of opportunities to acquire additional oil and gas assets and businesses. Any resultant acquisitions may be significant in size, may change the scale of our business, and may expose us to new geographic, political, operating financial and geological risks. Our success in these acquisition activities depends on our ability to identify suitable acquisition candidates, to acquire them on acceptable terms, and integrate their operations successfully with ours. Any acquisition would be accompanied by risks, such as a significant decline in oil or gas prices; the difficulty of assimilating the operation and personnel; the potential disruption of our ongoing business; the inability of management to maximize our financial and strategic position through the successful integration of acquired assets and businesses; the maintenance of uniform standards, control, procedures and policies; the impairment of relationships with employees, customers and contractors as a result of any integration of new management personnel; and the potential unknown liabilities associated with acquired assets and business. In addition, we may need additional capital to finance an acquisition. Debt financing related to any acquisition will expose us to the risk of leverage, while equity financing may cause existing shareholders to suffer dilution. There can be no assurance that we would be successful in overcoming these risks or any other problems encountered in connection with such acquisitions.

We are exposed to foreign exchange risks relating to our operations in Argentina and Mexico.

Our results of operations are subject to foreign exchange risks of the Argentine or Mexican Peso against the U.S. Dollar or other currencies could adversely affect our business and results of operations. Both the value of the Mexican Peso and the value of the Argentine Peso have experienced significant fluctuations in the past. The main effects of the depreciation of the Argentine or Mexican Peso against the U.S. Dollar would be on our expenses that are mainly related to imported goods and services, but given several accounting rules it may negatively affect (i) deferred taxes associated with our fixed assets, (ii) current income taxes and (iii) foreign exchange differences associated with our Argentine or Mexican Peso exposure.

We cannot predict whether and to what extent the value of the Argentine or Mexican Peso will depreciate or appreciate against the U.S. Dollar nor the extent to which any such change may affect our business.

In the event of an accident or other occurrence which is not covered by our insurance policies, we may suffer significant losses which may have a material adverse effect on our business and results of operations.

Even though we consider that we have insurance coverages consistent with international standards, there is no assurance concerning the availability or sufficiency of insurance coverage with respect to a particular loss or risk. In the event of an accident or other occurrence in our business which is not covered by insurance under our policies, we may suffer significant losses or be forced to provide compensation in a substantial amount from our own resources, which could have a material adverse effect on our financial condition

We are not concessionaires or operating partners in all of our joint ventures and exploration agreements, and actions taken by the concessionaires and/or operators in these joint ventures and exploration agreements could have a material adverse effect on their success.

Both, we and our subsidiaries carry out hydrocarbon E&P activities through unincorporated joint ventures and exploration agreements entered into through agreements with third parties (joint operations for accounting purposes). In some cases, our joint venture or exploration partners, rather than us, hold the rights to the concession or the E&P license contracts. Pursuant to the terms and conditions of such agreements, one of the parties assumes the role of operator, and therefore assumes the responsibility of executing all activities pursuant to the agreement. However, in certain cases, neither we nor our subsidiaries may be able to assume the role of concessionaire and/or operator, and in such cases we would be subject to risks related to the performance of, and the measures taken by, the concessionaire and/or operator to carry out the activities. Such actions could adversely affect our financial condition and operating results. As of December 31, 2019, we were not the operator of Coirón Amargo Sur Oeste, Sur Río Deseado Este and Acambuco blocks in Argentina, andCS-01,TM-01 andA-10 blocks in Mexico.

 

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We face risks relating to certain legal proceedings.

We may be parties to labor, commercial, civil, tax, criminal, environmental and administrative proceedings that, either alone or in combination with other proceedings, could, if resolved in whole or in part adversely to us, result in the imposition of material costs, fines, judgments or other losses. While we believe that we have provisioned such risks appropriately based on the opinions and advice of our external legal advisors and in accordance with applicable accounting rules, certain loss contingencies, particularly those relating to environmental matters, are subject to change as new information develops and it is possible that losses resulting from such risks, if proceedings are decided in whole or in part adversely to us, could significantly exceed any accruals we have provided.

As of December 31, 2019, we employed third-party employees under contract, mostly with large international service providers. Although we have policies regarding compliance with labor and social security obligations for our contractors, we can provide no assurance that the contractors’ employees will not initiate legal actions against us seeking indemnification based upon a number of Argentine judicial labor court precedents that established that the ultimate beneficiary of employee services is joint and severally liable with the contractor, which is the employee’s formal employer.

In addition, we may be subject to undisclosed liabilities related to labor, commercial, civil, tax, criminal, environmental or other contingencies incurred by businesses we acquired pursuant to the Initial Business Combination or acquire in the future as part of our growth strategy, that we were not or may not be able to identify or that may not be adequately indemnified under our acquisition agreements with the sellers of such businesses, in which case our reputation, business, financial condition and results of operation may be materially and adversely affected.

Our debt obligations include operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions.

As of the date of this annual report, the majority of our indebtedness relates to Vista Argentina’s obligations under the Syndicated Loan, which obligations are guaranteed by us, Vista Holding I, APCO Argentina and Vista Holding II (together with certain other entities that become a guarantor under the Syndicated Loan from time to time, the “Guarantors”), and are denominated in U.S. Dollars. For a description of the Syndicated Loan, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.” The Syndicated Loan contains a number of restrictive covenants that imposes on us, on the other Guarantors and on Vista Argentina significant operating and financial restrictions. These restrictions may limit our ability to engage in acts that may be in our long-term best interest. This credit facility includes covenants restricting, among other things, Vista Argentina’s, the other Guarantors’ and our ability to:

 

  

create liens on assets to secure debt;

 

  

dispose of assets;

 

  

merge or consolidate with another person or sell or otherwise dispose of all or substantially all of its or our assets;

 

  

change its or our existing line of business;

 

  

declare or pay any dividends or return any capital, other than certain limited payments (in particular, during the eighteen month period (ending on January 19, 2020) following the date of the Syndicated Loan Agreement (as defined below), (i) Vista Holding I and certain of its subsidiaries are restricted in their ability to declare, pay or otherwise make any dividends to us and (ii) certain subsidiaries of Vista Holding I are restricted in their ability to declare, pay or otherwise make any dividends to any person other than Vista Holding I and certain subsidiaries of Vista Holding I);

 

  

make certain investments in bonds and capital stock, among others;

 

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enter into transactions with affiliates;

 

  

change our existing accounting practices (except if required or permitted by applicable law and accounting rules); and

 

  

modify or terminate the organizational documents of Vista Argentina or any Guarantor.

In addition, as further described in Note 17.1 to the Audited Financial Statements, the Syndicated Loan includes some financial covenants by which we are required to maintain, on a consolidated basis, certain financial ratios within specified limits. These ratios include:

 

 �� 

consolidated total debt / consolidated EBITDA; and

 

  

consolidated interest coverage ratio.

Moreover, our subsidiary Vista Holding I is required to maintain an adjusted consolidated net debt / adjusted consolidated EBITDA ratio.

These covenants could limit our ability to finance our future operations and capital needs and our ability to pursue business opportunities and activities that may in our interest.

A breach of any covenant contained in the Syndicated Loan could result in a default under this agreement. If any such default occurs, the administrative agent or the required lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable. If the Syndicated Loan were to be accelerated, the assets of Vista Argentina and those of each of the Guarantors, including us, may not be sufficient to repay in full that debt, or any other debt that may become due as a result of that acceleration, and consequently, it could materially and adversely affect our business, financial condition, results of operations and prospects. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources——Indebtedness” for more information.

We are subject to Mexican, Argentine and international anti-corruption, anti-bribery and anti-money laundering laws. Our failure to comply with these laws could result in penalties, which could harm our reputation and have an adverse effect on our reputation, business, financial condition and results of operations.

The United States Foreign Corrupt Practices Act of 1977, the United Kingdom Bribery Act 2010 (the “U.K. Bribery Act”), the Organization for EconomicCo-Operation and Development Anti-Bribery Convention, the Mexican Administrative Responsibilities Law (Ley General de Responsabilidades Administrativas), the Mexican Anti-Money Laundering Law (Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita), the Argentine Anti-Money Laundering Law (Ley de Prevención del Lavado de Activos), the Argentine Corporate Criminal Liability Law (Ley de Responsabilidad Penal Empresaria) and other applicable anti-corruption laws in other relevant jurisdictions prohibit companies and their intermediaries from offering or making improper payments (or giving anything of value) to government officials and/or persons in the private sector for the purpose of influencing them or obtaining or retaining business and require companies to keep accurate books and records and maintain appropriate internal controls. The U.K. Bribery Act also prohibits such payments or financial or other advantages being made, offered or promised to or from commercial parties and makes it a criminal offense for a commercial organization to fail to prevent bribery by an associated person (i.e., someone who provides services on behalf of the organization) intending to obtain or retain business or an advantage in the conduct of business on its behalf. In particular, the Argentine Corporate Criminal Liability Law provides for the criminal liability of corporate entities for criminal offences against public administration and transnational bribery committed by, among others, itsattorneys-in-fact, directors, managers, employees, or representatives. In this sense, a company may be held liable and subject to fines and/or suspension of its activities if such offences were committed, directly or indirectly, in its name, behalf or interest, the company obtained or may have obtained a benefit therefrom, and the offence resulted from a company’s ineffective control. In addition, we are subject to economic sanctions regulations that restrict our dealings with certain sanctioned countries, individuals and entities.

 

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It may be possible that, in the future, there may emerge in the press allegations of instances of misbehavior on the part of former agents, current or former employees or others acting on our behalf or on the part of public officials or other third parties doing or considering business with us. While we will endeavor to monitor such press reports and investigate matters which we believe warrant an investigation in keeping with the requirements of compliance programs, and, if necessary make disclosure and notify the relevant authorities, however, any adverse publicity which such allegations attract might have a negative impact on our reputation and lead to increased regulatory scrutiny of our business practices.

If we or individuals or entities that are or were related to us are found to be liable for violations of applicable anti-corruption laws or other similar laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we or other individuals or entities could suffer from civil and criminal penalties or other sanctions, which in turn could have a material adverse impact on our reputation, future business, financial condition and results of operations.

We rely on key third-party suppliers, vendors and service providers to provide us with parts, components, services and critical resources that we need to operate our business.

Companies operating in the energy industry, specifically the oil and gas sector, commonly rely upon various key third-party suppliers, vendors and service providers to provide them with parts, components, services and critical resources, needed to operate and expand their business. If these key suppliers, vendors and service providers fail to deliver, or are delayed in delivering, equipment, service or critical resources, we may not meet our operating targets in the expected time frame, which could have an adverse effect on our business, financial condition, results of operations, cash flows and/or prospects.

Our operations in the industry could be susceptible to the risks of performance, product quality and financial conditions of our key suppliers, vendors and service providers. For instance, their ability to adequately and timely provide us with parts, components, services and resources critical to our operations may be affected if they are facing financial constraints or times of general financial stress and economic downturn. There can be no assurance that we will not encounter supply disruptions in the future or that we will be able to timely replace such suppliers or service providers that are not able to meet our needs, which might adversely affect a successful execution of our operations, and consequently, our business, financial condition, results of operations, cash flows and/or prospects.

We employ a highly unionized workforce and could be subject to labor actions such as strikes, which could have a material adverse effect on our business.

The sectors in which we operate are highly unionized. We cannot assure that we or our subsidiaries will not experience labor disruptions or strikes in the future, which could result in a material adverse effect on our business and returns. We cannot assure that we will be able to negotiate new collective bargaining agreements in the same terms as those currently in force or that we will not be subject to strikes or labor interruptions before or during the negotiation process of said agreements. The collective bargaining agreement for the period April 2019 to March 2020 was signed on May 3, 2019. In the future, if we are unable to renegotiate the collective bargaining agreement in satisfactory terms or are subject to strikes or labor interruptions, our results of operations, financial condition and the market value of our shares could be materially affected.

Our performance is largely dependent on recruiting and retaining key personnel.

Our current and future performance and business operations depend on the contributions of our Management Team, our engineers, and other employees. We rely on our ability to attract, train, motivate, and retain qualified and experienced administrative staff and specialists. No assurance can be given that we will be able to attract and retain personnel for key positions, and replacing any of our key employees could prove difficult and time consuming. The loss of the services and experience of any of our key employees, or our inability to recruit a suitable replacement or additional staff, could have a material adverse effect on our operations, cash flows and/or expectations.

We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined, or by variations in interest rates.

As of the date of this annual report, our outstanding debt included loans indexed to the London Interbank Offered Rate (“LIBOR”). In an announcement on 27 July 2017, the U.K. Financial Conduct Authority (FCA), which is the competent authority for the regulation of benchmarks in the UK, advocated a transition away from reliance on

 

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LIBOR to alternative reference rates and stated that it would no longer persuade or compel banks to submit rates for the calculation of the LIBOR rates after 2021 (the “FCA Announcement”). The FCA Announcement formed part of ongoing global efforts to reform LIBOR and other major interest rate benchmarks. At this time, the nature and overall timeframe of the transition away from LIBOR is uncertain and no consensus exists as to what rate or rates may become accepted alternatives to LIBOR. On 25 March 2020, the FCA stated that although the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, there has been impact on the timing of some of the transition milestones due to the recentCovid-19 outbreak.

It is not possible to predict the further effect of the rules of the FCA, any changes in the methods by which LIBOR is determined, or any other reforms to LIBOR that may be enacted in the United Kingdom, the European Union or elsewhere. Any such developments may cause LIBOR to perform differently than in the past, or cease to exist. It is also not possible to predict whether the globalCovid-19 crisis will have further effects on the LIBOR transition plans. In addition, any other legal or regulatory changes made by the FCA, ICE Benchmark Administration Limited, the European Money Markets Institute (formerlyEuribor-EBF), the European Commission or any other successor governance or oversight body, or future changes adopted by such body, in the method by which LIBOR is determined or the transition from LIBOR to a successor benchmark may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and changes in the rules or methodologies in LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s determination, and, in certain situations, could result in LIBOR no longer being determined and published. If a published U.S. Dollar LIBOR rate is unavailable after 2021, the interest rates on our debt which is indexed to LIBOR will be determined using various alternative methods, any of which may result in interest obligations which are more than or do not otherwise correlate over time with the payments that would have been made on such debt if U.S. Dollar LIBOR was available in its current form. Further, the same costs and risks that may lead to the discontinuation or unavailability of U.S. Dollar LIBOR may make one or more of the alternative methods impossible or impracticable to determine. Any of these proposals or consequences could have a material adverse effect on our financing costs.

Additionally, we are exposed to the fluctuations of the variable interest rates applicable to our indebtedness. We may also incur additional variable-rate debt in the future. Increases in interest rates on variable-rate debt would increase our interest expense, which would negatively affect our financial costs.

Risks Related to the Argentine and Mexican Economies and Regulatory Environments

Our business is largely dependent upon economic conditions in Argentina.

Substantially all of our operations, properties and customers are located in Argentina, and, as a result, our business is largely dependent on economic conditions prevailing in Argentina. The changes in economic, political, and regulatory conditions in Argentina and measures taken by the Argentine government may have a significant impact on us. You should make your own assessment about Argentina and prevailing conditions in the country before making an investment decision.

The Argentine economy has experienced significant volatility in past decades, including numerous periods of low or negative growth and high and variable levels of inflation and currency devaluation. We cannot assure that the growth rate experienced over past years will be maintained in subsequent years or that the national economy will not suffer a recession. If economic conditions in Argentina were to deteriorate, if inflation were to accelerate further, or if the Argentine government’s measures to attract or retain foreign investment and international financing in the future are unsuccessful, such developments could adversely affect Argentina’s economic growth and in turn affect our financial health and results of operations.

Argentine economic conditions are dependent on a variety of factors, including (but not limited to) the following:

 

  

international demand for Argentina’s principal exports;

 

  

international prices for Argentina’s principal commodity exports;

 

  

stability and competitiveness of the Argentine Peso with respect to foreign currencies;

 

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competitiveness and efficiency of domestic industries and services;

 

  

levels of domestic consumption and foreign and domestic investment and financing; and

 

  

the rate of inflation.

The Argentine economy is also particularly sensitive to local political developments. The election of a new federal government that took office on December 10, 2019 may cause significant political developments which may materially affect the environment in which we operate.

Additionally, Argentina’s economy is also vulnerable to adverse developments affecting its principal trading partners. A continued deterioration of economic conditions in Brazil, Argentina’s main trading partner, and a deterioration of the economies of Argentina’s other major trading partners, such as China or the United States, could have a material adverse impact on Argentina’s balance of trade and adversely affect Argentina’s economic growth and may consequently adversely affect our financial health and results of operations. Furthermore, a significant devaluation of the currencies of our trading partners or trade competitors may adversely affect the competitiveness of Argentina and consequently adversely affect Argentina’s economic and our financial health and results of operations.

Economic and political developments in Argentina may adversely and materially affect our business, results of operations and financial condition.

Presidential and federal congressional elections in Argentina were held in October 2019, where Alberto Fernandez of theFrente de Todos coalition was elected with approximately 48.24% of the votes. The new administration took office on December 10, 2019. The impact of the new administration on the future economic and political environment is uncertain, but likely to be material. On March 10, 2019 provincial Governor and Congressional elections took place in the Province of Neuquén where Governor Omar Gutierrez of local political partyMovimiento Popular Neuquino was reelected with approximately 39.92% of the votes.

The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high levels of inflation and currency devaluation. As a consequence, our business and operations could in the future be, affected from time to time to varying degrees by economic and political developments and other material events affecting the Argentine economy, such as: inflation; price controls; foreign exchange controls; fluctuations in foreign currency exchange rates and interest rates; governmental policies regarding spending and investment, national, provincial or municipal tax increases and other initiatives increasing government involvement with economic activity; civil unrest and local security concerns. You should make your own investigation into Argentina’s economy and its prevailing conditions before making an investment in us.

The Argentine economy remains vulnerable, as reflected by the following economic conditions:

 

  

inflation remains high and may continue at similar levels in the future: according to a report published by Argentine National Institute of Statistics (Instituto Nacional de Estadísticas y Censos, or “INDEC”), cumulative consumer price index (“CPI”) for the year 2019 was 53.8%, the highest rate since 1991;

 

  

according to the revised calculation published by the INDEC on March 25, 2020, gross domestic product (“GDP”) decreased by 2.2% in 2019 compared to 2018. For comparison purposes, it should be noted that GDP decreased by 2.5% in 2018, increased 2.9% in 2017 and decreased 2.3% in 2016. Argentina’s previous GDP performance has depended to some extent on high commodity prices that, despite having a favorable long-term trend, are volatile in the short-term and beyond the control of the Argentine government and private sector;

 

  

Argentina’s public debt as a percentage of GDP remains high;

 

  

the discretionary increase in public spending has resulted and continues to result in fiscal deficits;

 

  

a significant number of protests or strikes could take place, as they did in the past, which could adversely affect various sectors of the Argentine economy, including the oil extraction industry;

 

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energy or natural gas supply may not be sufficient to supply industrial activity (thereby limiting industrial development) and consumption;

 

  

unemployment and informal employment remain high: according to INDEC, unemployment rate was of 8.9% in the fourth quarter of 2019;

 

  

in the climate created by the above-mentioned conditions, demand for foreign currency could grow, generating a capital flight effect as in recent years;

 

  

on December 20, 2019, the Argentine Congress enacted the Solidarity Law (as defined below), declaring public emergency on the economic, financial, fiscal, administrative, social and energetic fronts, among others, thus delegating in the National Executive Branch the ability to ensure the sustainability of public indebtedness, regulate the energetic tariff restricting through an integral review of the current tariff regime and the intervention of supervisory entities, among others. The Solidarity Law established the restructuring of the energy tariff scheme and froze the natural gas and electricity tariffs. In addition, the Solidarity Law entitled the National Executive Branch to intervene the ENARGAS and the ENRE. This regulation may generate difficulties in the Argentine economy, and the compliance of its financial obligations, which might negatively affect our business, financial condition and results of operations; and

 

  

on June 7, 2018, the Argentine government and the International Monetary Fund (the “IMF”) announced that a technical agreement on a US$50 billion three-yearstand-by agreement was reached (the “SBA”), subject to approval by the IMF’s Executive Board, which will consider Argentina’s economic plan. On June 20, 2018, the IMF’s Executive Board approved the aforementioned agreement. The SBA was intended to provide support to the Macri administration’s economic program, helping build confidence, reduce uncertainties and strengthen Argentina’s economic prospects. Overall, Argentina has received disbursements under the agreement for approximately US$44 billion. The Fernández Administration that took office in December 2019 indicated its intention to pursue a sovereign debt restructuring designed to render Argentina’s debt sustainable. To that effect, legislation was enacted by Congress empowering the PEN to conduct such transactions. In addition, the Fernández administration also publicly announced that they will refrain from requesting additional disbursements under the SBA, and instead vowed to renegotiate its terms and conditions in good faith. On April 5, 2020, the Argentine government issued the Decree 346/2020, through which all principal and interest payments due on outstandingArgentine-law governed U.S. dollar-denominated treasury notes were deferred until December 31, 2020 or such earlier date as may be determined by the Argentine Ministry of Economy taking into account the status and outcome of the debt restructuring process announced by the Argentine government to restore the sustainability of public debt. The Argentine government’s decision excluded certain instruments from the deferral, such as (i) treasury notes issued to and held by the Argentine Central Bank, (ii) treasury notes issued pursuant to Decree No. 668/2019, (iii) theBonos Programa Gas Natural, and (iv) the guarantee notes issued pursuant to Resolution No. 147/17, among others. On April 21, 2020, Argentina commenced an offer to exchange bonds issued under Argentina’s indentures dated as of June 2, 2005 and April 22, 2016 for certain new bonds to be issued under the April 22, 2016 indenture with the aim of achieving a sustainable debt profile for the country. Additionally, the exchange offer contemplates the use of collective action clauses included in such indentures, whereby the decision by certain majorities will be conclusive and binding on those bondholders that do not enter into the exchange offer. The exchange offer is scheduled to expire on May 8, 2020. The eligible bonds under the exchange offer include 21 global notes denominated in U.S. Dollars, Euros and Swiss-Francs for approximately US$66.5 billion, most of which were issued in the last 4 years. The exchange offer, if successful, would result in (i) the extension of maturity dates, with a three year grace period on the payment of interests, and (ii) a reduction of principal and interest (of approximately 5.4% and 62% of the original amounts, respectively). As of the date of this annual report, the outcome of the exchange offer is still uncertain.

As in the recent past, Argentina’s economy may be adversely affected if political and social pressures inhibit the implementation of certain policies designed to control inflation, generate growth and enhance consumer and investor confidence, or if policies implemented by the Argentine government that are designed to achieve these goals are not successful. These events could materially adversely affect our financial condition and results of operations.

 

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Any decline in economic growth, increased economic instability or an expansion of economic policies and measures taken by the Argentine government to control inflation or address other macroeconomic developments that affect private sector entities such as us, all developments over which we have no control, could have an adverse effect on our business, financial condition or results of operations.

In the event of any economic, social or political crisis, the Argentine government’s ability to obtain additional international or multilateral private financing or direct foreign investment may also be limited, which may in turn impair its ability to implement reforms and public policies to foster economic growth, as well as impair its ability to service its outstanding debt obligations, all of which could have an adverse effect on our business, financial condition or results of operations. In such scenario, companies operating in Argentina may also face the risk of strikes, expropriation, nationalization, forced modification of existing contracts, and changes in taxation policies including tax increases and retroactive tax claims. In addition, Argentine courts have issued rulings changing the existing case law on labor matters and requiring companies to assume greater responsibility for, and assumption of costs and risks associated with,sub-contracted labor and the calculation of salaries, severance payments and social security contributions. Since we operate in a context in which the governing law and applicable regulations change frequently, it is difficult to predict if and how our activities will be affected by such changes.

Our operations are subject to extensive and changing regulation in the countries in which we operate.

The oil and gas industry is subject to extensive regulation and control by governments in which companies like ours conduct operations, including laws, regulations and rules enacted by federal, state, provincial and local governments. These regulations relate to the award of exploration and development areas, production and export controls, investment requirements, taxation, price controls and environmental aspects, among others. As a result, our business is to a large extent dependent upon regulatory and political conditions prevailing in the countries in which we operate, as described below, and our results of operations may be materially and adversely affected by regulatory and political changes in these countries.

We cannot assure you that changes in applicable laws and regulations, or adverse judicial or administrative interpretations of such laws and regulations, will not adversely affect our results of operations. Similarly, we cannot assure you that future government policies will not adversely affect the oil and gas industry.

We also cannot provide assurances that concessions will be extended in the future as a result of the review by the controlling entities regarding the investment plans presented for analysis or that additional requirements to obtain extensions of permits and concessions will not be imposed.

Furthermore, there can be no assurance that regulations or taxes (including royalties) enacted by the provinces or states in which we operate will not conflict with federal law and regulations, and that such taxes or regulations will not adversely affect our results of operations or financial condition.

Argentina

The Argentine hydrocarbons industry is extensively regulated by federal, provincial, and municipal regulations in matters including the award of exploration permits and exploitation concessions, investment, royalty, price controls, export restrictions and domestic market supply obligations. The Argentine government is further empowered to design and implement federal energy policy, and has used these powers before to establish export restrictions on the free disposition of hydrocarbons and export proceeds and to impose duties on exports, to induce private companies to enter into pricing agreements with the government or, more recently, to impose price agreements among producers and refiners or create fiscal incentive programs to promote increased production. Additionally, given that it cannot be guaranteed that regulations or taxes sanctioned or administered by the provinces will not conflict with national laws, jurisdictional controversies among the federal government and the provinces are not uncommon.

 

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For example, the Solidarity Law sets forth that the Argentine Executive Branch is entitled to set export duties up to a maximum of 33% of the exported goods until December 31, 2021. The Solidarity Law also established a cap of 8% for the export duties for hydrocarbons and mining products. As of the date of this annual report, the Argentine government has not yet issued regulations to reduce duties for hydrocarbons and mining products from the current 12% to 8% or less, as established by the Solidarity Law.

Any such controversies, limitations or export restrictions or any other measures imposed by Argentine authorities could have a material adverse effect on our future business, financial condition, results of operations, cash flows and/or prospects and as a consequence, the market value of our series A shares or ADSs may decline.

Mexico

Mexico has developed a new legal framework for the regulation of the energy sector based on a number of constitutional amendments approved by the Mexican Congress in December 2013 and implementing legislation enacted in 2014, including the amendment of certain existing laws in August 2014 and the issuance of new regulations in October 2014. Given the recent creation of this legal framework and the lack of judicial precedents, it is uncertain how it could be interpreted by a court or governmental authority in practice. We therefore cannot predict the manner in which this new legal framework will affect our ability to complete additional acquisitions in Mexico and/or our future business, financial condition, results of operations, cash flows and/or prospects. For example, since the publication of the constitutional amendments relating to the Mexican energy sector in December 2013, a number of Mexican authorities and government-related entities have enacted more than 100 laws, regulations, resolutions, rules, notices and other provisions relating to hydrocarbons, the vast majority of which are intended to regulate the activities of participants in the Mexican energy sector. Additionally, a new president was elected in Mexico, taking office on December 1, 2018. As of the date of this annual report, the new president’s political party holds an absolute majority in the Chamber of Deputies and in the Mexican senate. We cannot provide any assurances that the Mexican government will construe or enforce these new laws, rules and regulations in the same manner than the former administration and legislative power or that there will not be any material change to the oil and gas legal framework, which could adversely affect our business and prospects in Mexico.

The Mexican Federal Economic Competition Commission (“COFECE”) is the antitrust authority in Mexico with jurisdiction over a number of sectors of the Mexican economy, including the oil and gas sector, and as such, has jurisdiction over the activities conducted by Vista.

The Mexican government has granted COFECE broad powers to investigate and prosecute absolute monopolistic practices (cartel activity), relative monopolistic practices (abuse of dominance) and illegal concentrations, as well as to prevent concentrations which could have anticompetitive effects. Additionally, COFECE can determine the existence of essential facilities and regulate their access and identify barriers to entry and issue recommendations to federal, local and municipal authorities to eliminate such barriers and encourage competition. Therefore, many of our activities may be reviewed by COFECE and, in the particular case of equity transactions involving certain monetary and ownership thresholds, we may be required to notify COFECE of our intent to enter into such transactions and the consummation of such transactions may be subject to COFECE’s authorization in accordance with applicable Mexican laws. As a result, the closing of pending or future acquisitions of assets or common shares in the Mexican market may be subject to the satisfaction or waiver of customary closing conditions, including, among others, the authorization of COFECE. Completion of such transactions is not assured, and they will be subject to risks and uncertainties, including the risk that the necessary regulatory approvals are not obtained or that other closing conditions are not satisfied. If such transactions are not completed, or if they are otherwise subject to significant delays, it could negatively affect the trading prices of our common shares and our future business and financial results.

Further, COFECE might decide to impose penalties or establish conditions on our business if we are unable to request or receive, or are delayed in requesting or receiving, the aforesaid authorizations and, if these were to materialize, such claims could have a material adverse effect on our results and financial condition. Similarly, it cannot be guaranteed that the authorizations that have not been obtained can be obtained or can be obtained without conditions. Failure to obtain those authorizations, or the conditions to which they may be subject, could have a material adverse effect on our results and financial condition.

 

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Certain risks are inherent in any investment in a company operating in an emerging market such as Argentina and Mexico.

Argentina and Mexico are emerging market economies and investing in emerging markets generally carries risks. These risks include political, social and economic instability that may affect Argentina’s and Mexico’s economic results which can stem from many factors, including the following:

 

  

high interest rates;

 

  

abrupt changes in currency values;

 

  

high levels of inflation;

 

  

exchange controls;

 

  

wage and price controls;

 

  

regulations to import equipment and other necessities relevant for operations;

 

  

changes in governmental economic, administrative or tax policies;

 

  

political and social tensions.

 

  

the impact of hostilities or political problems in other countries could affect international trade, the price of commodities and the global economy; and

 

  

ability to obtain financing from international markets.

Any of these factors, as well as volatility in the capital markets, may adversely affect our business, results of operations, financial condition, the value of our series A shares and ADSs, and our ability to meet our financial obligations.

We are or could be subject to direct and indirect restrictions on imports and exports under Argentine law.

The Hydrocarbons Law allows hydrocarbons exports, as long as such volumes are not required for the Argentine domestic market and as long as these are sold at reasonable prices. In the case of natural gas, Argentine Law No. 24.076 and the related regulations require that all domestic market needs be considered when authorizing long-term exports of natural gas. In this sense, the SdE may authorize export operations of natural gas surplus provided they are subject to interruption upon local supply shortages.

In recent years, Argentine authorities have adopted certain measures which resulted in restrictions on the exports of natural gas from Argentina. Because of these restrictions, oil and gas companies have been forced to sell part of their natural gas production in the local market that was originally intended for the export market and have been unable in certain cases to comply wholly or partially with their export commitments.

Crude oil and oilby-products exports operations currently require prior registration with the Registry of Export Operations Agreements (Registro de Contratos de Operaciones de Exportación) and authorization by the Argentine Secretariat of Energy (pursuant to the regime established under Resolution S.E.No. 241-E/2017 and its further amendments and supplements). Oil companies and oil refineries that intend to export crude oil, liquid petroleum gas or diesel, among others, must first demonstrate, prior to obtaining authorization, that the offer to sell that product has already been made to, and rejected by, local buyers.

On March 21, 2017, through Decree No. 192/2017, as amended by Decree No. 962/2017, the SdE created a temporary Registry for Import Operations of Crude Oil andBy-Products. Through this regulation, any company that wished to carry out import operations had the obligation to register the operation in this Registry and obtain the authorization from the SdE before the import takes place. The abovementioned Registry and the obligation to register and obtain authorization for import operations of crude oil and specificby-products was in force until December 31, 2017.

 

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The Solidarity Law sets forth that the Argentine Executive Branch is entitled to set export duties up to a maximum of 33% of the exported goods until December 31, 2021. The Solidarity Law also established a cap of 8% for the export duties for hydrocarbons and mining products. As of the date of this annual report, the Argentine government has not yet issued regulations to reduce duties for hydrocarbons and mining products from the current 12% to 8% or less, as established by the Solidarity Law.

Additionally, in accordance with Communication “A” 6844 of the BCRA (as amended and supplemented), exporters must repatriate and settle in Argentine pesos in the local exchange market, the proceeds of their exports of goods cleared through customs as from September 2, 2019. In the case of hydrocarbon exports, the applicable term is the earlier of 30 days from customs clearance or 5 business days from payment.

We cannot predict for how long these restrictions on exports will remain in force, or whether future measures will be taken that adversely affect our ability to export and import gas, crude oil, or other products and, consequently, affect our financial condition, results of operations, and cash flows.

Current Argentine exchange controls and the implementation of further exchange controls could adversely affect our results of operations.

As of September 2019, with the purpose of strengthening the normal functioning of the economy, fostering a prudent administration of the exchange market, reducing the volatility of financial variables and containing the impact of the variations of financial flows on the real economy, the Argentine government has reinstated foreign exchange restrictions. The new controls apply with respect to access to the foreign exchange market by residents for savings and investment purposes abroad, the payment of external financial debts, the payment of dividends in foreign currency abroad, payments of imports of goods and services, and the obligation to repatriate and settle for pesos the proceeds from exports of goods and services, among others.

As mentioned above, in accordance with Communication “A” 6844 (as amended and supplemented), exporters must repatriate, and settle in pesos in the local exchange market, the proceeds of their exports of goods cleared through customs as from September 2, 2019.

Amounts collected in foreign currency for insurance claims related to the exported goods must also be repatriated and settled in pesos through the local exchange market, up to the amount of the insured exported goods.

Moreover, through Communication “A” 6844 (as amended and supplemented), the BCRA reinstated the export proceeds monitoring system, setting forth rules governing such monitoring process and exceptions thereof. Exporters will need to appoint a financial entity in charge of monitoring compliance with the aforementioned obligations.

Decree No. 661/2019 clarified that the collection of the export benefits set forth under the Argentine Customs Code shall be subject to the exporter complying with the repatriation and settlement obligations imposed by the new foreign exchange regulations.

Also, the foreign exchange regulations authorize the application of export proceeds to the repayment of:(i) pre-export financings and export financings granted or guaranteed by local financial entities; (ii) foreignpre-export financings and export advances settled through the local exchange market as from September 2, 2019; (iii) disbursed but not settled export advances and pre export financings executed prior to August 31, 2019, subject to the compliance with certain conditions, (iv) export post-financings for discounts and/or assignments by external or local financial entities; (v) financings granted by local financial entities to foreign importers; and (vi) financial indebtedness under contracts executed prior to August 31, 2019 providing for cancellation thereof through the application abroad of export proceeds. The application of export proceeds to the repayment of other indebtedness shall be subject to BCRA approval.

 

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Finally, access to the foreign exchange market for the payment of dividends to itsnon-resident shareholders in foreign currency abroad is subject to prior BCRA approval, except if new capital contributions settled against Argentine pesos are made in Argentina, in which case local companies can access the foreign exchange market to pay such dividends to the extent: (i) the dividend results from closed and audited financial statements, (ii) the dividend does not exceed 30% of the new capital contributions made directly in Argentine companies bynon-residents, (iii) such new capital contributions have been duly settled through the foreign exchange market after January 17, 2020, and (iv) access to the foreign exchange market for such purpose is carried out at least 30 days after the settlement of the last capital contribution made by thenon-resident shareholder.

It is not possible to anticipate for how long these measures will be in force or even if additional restrictions will be imposed. The Argentine government could maintain or impose new exchange control regulations, restrictions and take other measures in response to capital flight or a significant depreciation of the peso, which could limit access to the international capital markets. Such measures could undermine the Argentine government’s public finances, which could adversely affect Argentina’s economy, which, in turn, could adversely affect our business, results of operations and financial condition.

We cannot assure you that the Mexican government would not impose exchange controls or other confiscatory measures.

The imposition of export duties and other taxes have adversely affected the oil and gas industry in Argentina and could adversely affect our results in the future.

In the past, the Argentine government imposed duties on exports, including exports of oil and liquid petroleum gas products. On December 31, 2017 the Economic Emergency Law (Ley de Emergencia Económica) expired, resulting in the elimination of discretionary ruling previously granted to the Argentine government, which were delegated and allowed it to enact foreign exchange regulations, the withholding percentage for hydrocarbon exports, and tariffs, as well as to renegotiate public services agreements, among others. On September 4, 2018, pursuant to Decree No. 793/2018, the Argentine government reestablished, until December 31, 2020, an export tax of 12% on commodities with a cap of Ps.4 for each U.S. Dollar for primary commodities with some exceptions. The Solidarity Law sets forth that the Argentine Executive Branch is entitled to set export duties up to a maximum of 33% of the exported goods until December 31, 2021. The Solidarity Law also established a cap of 8% for the export duties for hydrocarbons and mining products. As of the date of this annual report, the Argentine government has not yet issued regulations to reduce duties for hydrocarbons and mining products from the current 12% to 8% or less, as established by the Solidarity Law.

The Hydrocarbons Law empowers the National Executive Power to establish a national policy for the development of Argentina’s hydrocarbon reserves, with the principal purpose of satisfying domestic demand. The final purchaser of crude oil at the domestic market may be a refinery, a large producer, or a fuel marketer.

Additionally, recently the Argentine government has announced that it will present a bill before the Argentine Congress, which would seek to establish a promotional regime for the oil industry, which would not only have effects on Vaca Muerta, but would extend along the Neuquina basin. The impact that any change, of this nature, may have on our financial results, results of operations, and cash flows cannot be predicted.

Export duties and taxes may have a material adverse effect on Argentina’s oil and gas industry and our results of operations. We produce exportable goods and, therefore, an increase in export taxes is likely to result in a decrease in our products’ price, and, therefore, may result in a decrease of our sales. We cannot guarantee the impact of those or any other future measures that might be adopted by the Argentine government on demand and prices for hydrocarbon products and, consequently, our financial condition and result of operations.

The impact of inflation in Argentina on our costs could have a material adverse effect on our results of operations.

Historically, inflation has materially undermined the Argentine economy and the Argentine government’s ability to create conditions that permit growth. In recent years, Argentina has experienced high inflation rates.

The consumers price index published by the INDEC (theÍndice de Precios al Consumidor, or “IPC”) for the year 2017 registered an increase of 24.8% on a year-over-year comparison. For the period from January to December 2018, the IPC totaled 47.6% compared to the same period in 2017. The IPC variation for the period from January to December 2019 totaled 53.8%, the highest rate since 1991. Moreover, INDEC reported that the 2020 monthly IPC increased by 2.3% in January compared to December 2019 and 2.0% in February compared to January 2020.

 

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The Argentine government continued implementing measures to monitor and control prices for the most relevant goods and services. Despite such measures, the Argentine economy continues to experience high levels of inflation. If the value of the Argentine Peso cannot be stabilized through fiscal and monetary policies, an increase in inflation rates could be expected.

High inflation rates affect Argentina’s foreign competitiveness, social and economic inequality, negatively impact employment, consumption and the level of economic activity and undermines confidence in Argentina’s banking system, which could further limit the availability of and access to domestic and international credit by local companies and political stability.

Inflation remains a challenge for Argentina given its persistent nature. Argentina’s structural inflationary imbalances remain critical, which may cause the current levels of inflation to continue and have an adverse effect on Argentina’s economy and financial condition. Inflation can also lead to an increase in Argentina’s debt. Inflation in Argentina has contributed to a material increase in our operating costs, particularly labor costs, and has negatively impacted our results of operations, financial position and business.

Inflation rates could escalate in the future, and there is uncertainty regarding the effects that the measures adopted, or that may be adopted in the future, by the Argentine government to control inflation may have. See “Item 3—Key Information—Risk Factors—Risks Related to our Business and Industry—Government intervention may adversely affect the Argentine economy and, as a result, our business and results of operations in Argentina” below. Increased inflation could adversely affect the Argentine economy and, in turn, could adversely affect our business, financial condition and the market price of our series A shares and the ADSs.

Argentina’s ability to obtain financing from international markets is limited, which could affect its capacity to implement reforms and sustain economic growth.

After Argentina’s default on certain debt payments in 2001, the government successfully restructured 92% of the debt through two debt exchange offers in 2005 and 2010. Nevertheless, holdout creditors filed numerous lawsuits against Argentina in several jurisdictions, including the United States, Italy, Germany and Japan, asserting that Argentina failed to make timely payments of interest and/or principal on their bonds, and seeking judgments for the face value of and/or accrued interest on those bonds. Judgments were issued in numerous proceedings in the United States, Germany and Japan. Although creditors with favorable judgments did not succeed, with a few minor exceptions, in enforcing on those judgments, as a result of decisions adopted by the New York courts in support of those creditors in 2014, Argentina was enjoined from making payments on its bonds issued in the 2005 and 2010 exchange offers unless it satisfied amounts due to the holders of defaulted bonds. The Argentine government took a number of steps intended to continue servicing the bonds issued in the 2005 and 2010 exchange offers, which had limited success. Holdout creditors continued to litigate and succeeded in preventing the Argentine government from regaining market access.

Between February and April 2016, the Argentine government entered into agreements in principle with certain holders of defaulted debt and put forward a proposal to other holders of defaulted debt, including those with pending claims in U.S. courts, which resulted in the settlement of substantially all remaining disputes and closure to 15 years of litigation. On April 22, 2016, Argentina issued bonds for US$16.5 billion, and applied US$9.3 billion of the proceeds to satisfy payments under the settlement agreements reached with holders of defaulted debt. Since then, substantially all of the remaining claims under defaulted bonds have been settled.

As of the date of this Annual Report, although litigation initiated by bondholders that have not accepted Argentina’s settlement offer continues in several jurisdictions, the size of the claims involved has decreased significantly.

In addition, since 2001 foreign shareholders of some Argentine companies initiated claims for substantial amounts before the International Centre for Settlement of Investment Disputes (“ICSID”) against Argentina, pursuant to the arbitration rules of the United Nations Commission on International Trade Law. Claimants allege that certain measures of the Argentine government issued during the economic crisis of 2001 and 2002 were inconsistent with the norms or standards set forth in several bilateral investment treaties by which Argentina was bound at the time. To date, several of these disputes have been settled, and a significant number of cases are in process or have been temporarily suspended by the agreement of the parties.

 

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Between 2016 and early 2018, Argentina regained access to the market and incurred additional debt. However, as a result of various external and domestic factors, during the first half of 2018, access to the market became increasingly onerous. On May 8, 2018, the Macri administration announced that the Argentine government would initiate negotiations with the IMF with a view to entering into astand-by credit facility that would give Argentina access to financing by the IMF. On June 7, 2018, the Argentine government and the IMF staff reached an understanding on the terms of the SBA for disbursements totaling approximately US$50 billion, which was approved by the IMF’s Executive Board on June 20, 2018. The SBA was intended to provide support to the Macri administration’s economic program, helping build confidence, reduce uncertainties and strengthen Argentina’s economic prospects. On June 22, 2018 the Argentine government made a first drawing of approximately US$15 billion under the SBA. Argentina has received disbursements under the SBA for US$44 billion. Notwithstanding the foregoing, the current administration has publicly announced that they will refrain from requesting additional disbursements under the agreement, and instead vowed to renegotiate its terms and conditions in good faith.

Following the execution of the SBA, in August 2018, Argentina faced an unexpected bout of volatility affecting emerging markets generally. In September 2018, the Macri administration discussed with the IMF staff further measures of support in the face of renewed financial volatility and a challenging economic environment. On October 26, 2018, in light of the adjustments to fiscal and monetary policies announced by the Argentine government and the BCRA, the IMF’s Executive Board allowed the Argentine government to draw the equivalent of US$5.7 billion, bringing total disbursements since June 2018 to approximately US$20.6 billion, approved an augmentation of the SBA increasing total assets to approximately US$57.1 billion for the duration of the program through 2021 and the front loading of the disbursements. Under the revised SBA, IMF resources for Argentina in2018-19 increased by US$18.9 billion. IMF disbursements for the remainder of 2018 more than doubled compared to the originalIMF-supported program, to a total of US$13.4 billion (in addition to the US$15 billion disbursed in June 2018). Disbursements in 2019 were also nearly doubled, to US$22.8 billion, with US$5.9 billion planned for2020-21.

On August 28, 2019, the Macri administration issued a decree deferring the scheduled payment date for 85% of the amounts due on short-term notes maturing in the fourth quarter of 2019, governed by Argentine law and held by institutional investors. Of the deferred amounts, 30% would be repaid 90 days after the original payment date and the remaining 70% would be repaid 180 days after the original payment date, except for payments under Lecaps due 2020 held domestically, which would be repaid entirely 90 days after the original payment date. Amounts due on short-term notes held by individual investors would be paid as originally scheduled.

Moreover, in December 2019, the Fernández administration further extended by decree payments of a series of short termArgentine-law governed treasury notes denominated in U.S. dollars held by institutional investors through August 2020. Additionally, on February 11, 2020, the Argentine government decreed the extension of maturity to September 30, 2020 of a dollar-linked treasury note governed by Argentine law, which had been originally subscribed to a large extent with U.S. dollar remittances, to avoid a payment with Argentine pesos that would have required significant sterilization efforts by the monetary authority. On April 5, 2020, the Argentine government deferred all principal and interest payments due on outstandingArgentine-law governed U.S. dollar-denominated treasury notes until December 31, 2020 or such earlier date as may be determined by the Argentine Ministry of Economy taking into account the status and outcome of the debt restructuring process announced by the Argentine government to restore the sustainability of public debt. The Argentine government’s decision excluded certain instruments from the deferral, such as (i) treasury notes issued to and held by the Argentine Central Bank, (ii) treasury notes issued pursuant to Decree No. 668/2019, (iii) theBonos Programa Gas Natural, and (iv) the guarantee notes issued pursuant to Resolution No. 147/17, among others.

In February 2020, the Argentine Congress enacted a law enabling the government to take all necessary steps toward rendering the Argentine sovereign debt governed by foreign law sustainable. According to a timetable published by the Argentine government, a restructuring offer to private creditors would be launched during the second week of March 2020, which would expire by the end of March 2020. Due to the coronavirus crisis, this timetable was delayed. On April 21, 2020, Argentina commenced an offer to exchange bonds issued under Argentina’s indentures dated as of June 2, 2005 and April 22, 2016 for certain new bonds to be issued under the April 22, 2016 indenture with the aim of achieving a sustainable debt profile for the country. Additionally, the

 

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exchange offer contemplates the use of collective action clauses included in such indentures, whereby the decision by certain majorities will be conclusive and binding on those bondholders that do not enter into the exchange offer. The exchange offer is scheduled to expire on May 8, 2020. The eligible bonds under the exchange offer include 21 global notes denominated in U.S. Dollars, Euros and Swiss-Francs for approximately US$66.5 billion, most of which were issued in the last 4 years. The exchange offer, if successful, would result in (i) the extension of maturity dates, with a three year grace period on the payment of interests, and (ii) a reduction of principal and interest (of approximately 5.4% and 62% of the original amounts, respectively). As of the date of this annual report, the outcome of the exchange offer is still uncertain.

Without renewed access to the financial market the Argentine government may not have the financial resources to implement reforms and boost growth, which could have a significant adverse effect on the country’s economy and, consequently, on our activities. Likewise, Argentina’s inability to obtain credit in international markets could have a direct impact on our ability to access those markets to finance our operations and our growth, including the financing of capital investments, which would negatively affect our financial condition, results of operations and cash flows. In addition, we cannot predict the outcome of any future restructuring of Argentine sovereign debt. We have investments in Argentine sovereign bonds amounting to US$5.3 million as of December 31, 2019. Any new event of default by the Argentine government could negatively affect their valuation and repayment terms, as well as have a material adverse effect on the Argentine economy and, consequently, our business and results of operations.

Significant fluctuations in the value of the Argentine Peso could adversely affect the Argentine economy and our business and results of operations in Argentina.

Fluctuations in the value of the Argentine Peso may adversely affect the Argentine economy, our financial condition and results of operations. While most of our revenues are denominated in U.S. Dollars, upstream players could be limited by the ability of refiners to push cost increases to the pump prices, which are denominated in local currency. This can generate risk to our revenue stream in volatile macroeconomic environments. We are therefore exposed to the risks associated with the fluctuation of the Argentine Peso relative to the U.S. Dollar.

The devaluation of the Peso can have a negative impact on the ability of certain Argentine companies to pay their debts in foreign currency, and generate inflation, substantially reduce wages in real terms and jeopardize the stability of businesses. Compounded by the effects of foreign exchange controls and restrictions on foreign trade, highly distorted relative prices resulted in the loss of competitiveness of Argentine production, impeded investment and caused economic stagnation. In 2017, 2018 and 2019, the Argentine Peso depreciated 18.4%, 101.4% and 58.4%, respectively, with respect to the U.S. Dollar. On March 31, 2020, the exchange rate was AR$64.47 for each US$ 1.00, as published by the BCRA.

During August 2019, the peso lost almost 30% of its value against U.S. Dollar and the share price of Argentine listed companies collapsed almost 42% (according to the S&P Merval index). The “Country Risk” peaked to one of the highest levels in Argentine history, placing itself above 2,000 points on August 28, 2019. As of March 19, 2020, the Country Risk was 4,050. As a consequence of the aforementioned effects, in order to control the currency outflow and restrict exchange rate fluctuations, the BCRAre-implemented exchange controls, in hopes of strengthening the normal functioning of the economy, fostering a prudent administration of the exchange market, reducing the volatility of financial variables and containing the impact of the variations of financial flows on the real economy.

The ability of the Argentine government to stabilize the foreign exchange market and restore economic growth is uncertain. A significant appreciation of the Argentine Peso against the U.S. Dollar also presents risks for the Argentine economy, including the possibility of a reduction in exports (as a consequence of the loss of external competitiveness). Such an appreciation could also have a negative effect on the growth of the economy and employment and reduce tax collection in real terms.

The continued depreciation of the Argentine Peso and the failure to meet the terms of the SBA could have a material adverse effect on Argentina’s economy and, consequently, our cash flows, financial condition and results of operations.

 

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Our properties may be subject to expropriation by the Argentine and Mexican governments for public interest reasons.

Our assets, which are mainly located in Argentina and, to a lesser extent, in Mexico, may be subject to expropriation by the Argentine and Mexican governments (or the government of any political subdivision thereof), respectively. We are engaged in the business of oil extraction and, as such, our business or our assets may be considered by a government to be a public service or essential for the provision of a public service. Therefore, our business is subject to political uncertainties, including expropriation or nationalization of our business or assets, loss of concessions, renegotiation or annulment of existing contracts, and other similar risks.

In such an event, we may be entitled to receive compensation for the transfer of our assets under applicable law. However, the price received may not be sufficient, and we may need to take legal actions to claim appropriate compensation. Our business, financial condition and results of our operations could be adversely affected by the occurrence of any these events.

In the past, the Argentine government has required the repatriation of foreign currency from oil and gas export sales and other amounts applicable to the production of liquefied gas, which has affected producers of oil and gas in the country. In April 2012, the Argentine government enacted Law 26,741 which expropriated 51% of YPF’s shares owned by Repsol YPF. By virtue of the law, 51% of the expropriated shares were assigned to the Argentine government, while the remaining 49% was assigned to the Argentine provinces engaged in oil and gas production.

Additionally, Law 26,471 established that hydrocarbon related activities (including exploitation, industrialization, transport, and commercialization) in Argentina are considered to be part of the “national public interest.” The law “Hydrocarbon Sovereignty of Argentina” established that its primary objective is to achieve self-sufficiency in oil and gas supply for Argentina. We cannot assure that these or similar measures that may be adopted by the Argentine government will not have a material adverse effect on the Argentine economy and, as a consequence, adversely affect our financial condition, our results of operations. Additionally, we cannot assure that similar measures will not be adopted by the Mexican government in the future.

Government intervention may adversely affect the Argentine economy and, as a result, our business and results of operations in Argentina.

In the past, the Argentine government has had direct intervention in the economy, through the implementation of expropriation and nationalization measures (including the abovementioned expropriation of the 51% of the shares of YPF by the Argentine government), price controls and exchange controls, among others.

In 2008, the Argentine government absorbed and replaced the former private pension system for a public “pay as you go” pension system. As a result, all resources administered by pension funds, including significant equity interests in a wide range of listed companies, were transferred to a separate Social Security Fund (Fondo de Garantía de Sustentabilidad) to be administered by the National Social Security Administration (Administración Nacional de la Seguridad Social, or the “ANSES”). With the nationalization of Argentina’s private pension funds, the Argentine government, through the ANSES, became a significant shareholder in many of the country’s public companies.

In addition, historically the Argentine government has adopted measures to directly or indirectly control the access of private companies and individuals to foreign trade and foreign exchange markets, such as restricting its free access and imposing the obligation to repatriate and sell within the local foreign exchange market all foreign currency revenues obtained from exports. These regulations prevented or limited us from offsetting the risk derived from our exposure to the U.S. Dollar. Our business and operations in Argentina may also be adversely affected by measures adopted by the Argentine government to address inflation and promote sustainable macroeconomic growth.

A low growth rate and high inflation scenario is likely going forward, as a result of the accumulation of macroeconomic imbalances over recent years, the actions of the Argentine government in regulatory matters and challenging conditions in the international economy. We can offer no assurance that policies implemented by the Argentine government will not adversely affect our business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations.

 

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Argentina is an emerging market economy that is highly sensitive to local political developments which have had an adverse impact on the level of investment in Argentina. Future developments may adversely affect Argentina’s economy and, in turn, our business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations.

Also, foreign exchange controls were implemented in the past, and have been recently reinstated, in Argentina.

Moreover, the Argentine government has enacted laws and regulations requiring private sector companies to maintain certain salary levels and provide their employees with additional benefits. Employers, both in the public and private sector, have also been experiencing intense pressures from their personnel, or from the labor unions representing them, demanding salary increases and certain benefits for the workers, given the high inflation rates. On December 13, 2019, the Alberto Fernandez administration published Decree No. 34/2019 (which was subsequently amended), by virtue of which labor emergency was declared for a180-day term. In this context, during the labor emergency period, payments for unjustified severances in the private sector shall be double the amount foreseen by the current applicable regulations.

On December 20, 2019, the Argentine congress enacted the Solidarity Law, declaring public emergency on the economic, financial, fiscal, administrative, social and energetic fronts, among others, thus delegating in the Executive Branch the ability to ensure the sustainability of public indebtedness, regulate the energetic tariff restricting through an integral review of the current tariff regime and the intervention of supervisory entities, among others.

The Solidarity Law establishes the restructuring of the energy tariff scheme and froze the natural gas and electricity tariffs. In addition, the Solidarity Law entitles the National Executive Branch to intervene the ENARGAS and the ENRE. We cannot foresee the impact that the Solidarity Law may have, nor the measures that could be adopted by the current administration regarding the Argentine economy in order to meet its financial obligations, which might negatively affect our business, financial condition and results of operations.

In the future, the Argentine government impose further exchange controls and restrictions on transfers abroad, restrictions on the movement of capital or take other measures in response to capital flight or a significant depreciation of the Argentine Peso, which could limit our ability to access the international capital markets. Such measures could lead to political and social tensions and undermine the Argentine government’s public finances, as has occurred in the past, which could have an adverse effect on economic activity in Argentina and, consequently, adversely affect our business and results of operations and cause the market value of our series A shares or ADSs to decline.

Oil and gas exploitation concessions, exploration permits and production and exploration contracts in Argentina and Mexico are subject to certain conditions and may be revoked or not renewed.

Argentina

Law No. 17,319 (as amended, the “Hydrocarbons Law) is the main regulatory framework of the hydrocarbons industry, as it created a system of exploration permits and production concessions awarded by the state (federal or provincial, depending on the location of the resources), through which companies hold exclusive rights to explore, develop, exploit and take title of the production at the wellhead, in exchange for a royalty payment and adherence to the general taxation regime. The Hydrocarbons Law also provides state-owned oil companies (whether federal or provincial) with the possibility of granting rights through production sharing agreements.

The Hydrocarbons Law also permits surface reconnaissance of territory not covered by exploration permits or production concessions upon authorization of the Argentine Secretariat of Energy and/or competent provincial authorities, as established by Law No. 26,197, and with permission of the private property owner. Information obtained as a result of surface reconnaissance must be provided to the Argentine Secretariat of Energy and/or competent provincial authorities, which may not disclose this information for two years without permission of the party who conducted the reconnaissance, except in connection with the grant of exploration permits or production concessions.

 

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Pursuant to the Hydrocarbons Law, oil and gas concessions or permits awarded by the Argentine government are valid for25-,30- or35-year periods depending on the type of concession and may be renewed for additional10-year periods. Furthermore, the Hydrocarbons Law establishes that the duration of exploration permits shall be individually determined by the regulatory entity, but under no circumstances may it exceed (i) two (2) periods of up to three (3) years each, and (ii) an optional extension of up to five (5) years.

The power and authority to extend the term of existing and future concessions, permits, and agreements lies with the government of the province where the relevant asset is located (or with the Argentine government in the case of assets located beyond 12 miles from the coast). In order for a concession or permit to be eligible for the extension, its holder must (i) be in compliance with its obligations under the Hydrocarbons Law and with the terms of such concession or permit, including those relating to the payment of taxes and royalties, the contribution of the requisite technology, equipment, and personnel, and the satisfaction of various environmental, investment, and development commitments; (ii) produce hydrocarbons in the area for which the concession was granted; and (iii) submit an investment plan for the development of the relevant areas as requested by the competent authorities at least one year prior to the expiration of the original term of the concession. In addition, holders of concessions who apply for extensions under Law No. 27,007 may be required to pay additional royalties ranging from 3% to 18%. Under the Hydrocarbons Law, failure to meet the aforementioned standards and obligations may result in the imposition of fines, and material violations which remain uncured upon expiration of the relevant cure period may result in the revocation of the concession or permit.

On July 24, 2019 the Secretariat of Energy issued Resolution No. 417/2019 which (i) replaced the procedures for obtaining gas export permits established by Resolution No. 104/2018, with a new procedure provided in such Resolution; (ii) entrusted the Undersecretariat of Hydrocarbons and Fuels with: (a) the regulation of energy substitution mechanisms to be used also for exports of natural gas under firm conditions, (b) the development and approval of a natural gas export operating procedure, applicable to natural gas exporters, to be used if domestic supply security is at risk; and (c) grant export permits by issuing the relevant certificate.

No assurance can be given that our concessions will be renewed in the future by the competent authorities based on the investments plans submitted to that effect, or that such authorities will not impose additional requirements for the renewal of such concessions or permits. Additionally, three of our concessions under Law No. 27,007 were granted for a35-year period and with royalties of 12%, i.e., for longer periods than conventional ones. We cannot assure you that any future legislation the Argentine government may enact from time to time may not affect such concessions.

Mexico

Our E&P license contracts are valid for 30 years and may be renewed for up to two additional periods of up to 5 years each, subject to the terms and conditions set out in the respective contracts. The power and authority to extend the term of existing and future contracts lies with the CNH. Under the existing contracts, in order for an E&P license contract to be eligible for an extension, the developer must (i) be in compliance with the terms of such contracts, (ii) submit an amendment proposal to the development plan and (iii) commit to maintain ‘sustained regular production’ throughout each extension.

No assurance can be given that our contracts will be renewed in the future by the CNH based on the investments plans submitted to that effect, that such authority will not impose additional requirements for the renewal of such contracts, or that we will continue to have a good business relationship with the new and future administrations.

A global or regional financial crisis and unfavorable credit and market conditions may negatively affect our liquidity, customers, business, and results of operations.

The effects of a global or regional financial crisis and related turmoil in the global financial system may have a negative impact on our business, financial condition and results of operations, which is likely to be more severe on emerging market economies, such as Argentina and Mexico. This was the case in 2008, when the global economic crisis led to a sudden economic decline in Argentina in 2009, accompanied by inflationary pressures, depreciation of the Argentine Peso and a drop in consumer and investor confidence.

 

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The effects of an economic crisis on our customers and on us cannot be predicted. Weak global and local economic conditions could lead to reduced demand or lower prices for energy, hydrocarbons and related oil products and petrochemicals, which could have a negative effect on our revenues. Economic factors such as unemployment, inflation and the unavailability of credit could also have a material adverse effect on the demand for energy and, therefore, on our business financial condition and results of operations. The financial and economic situation in Argentina, Mexico or in other countries in Latin America, such as Brazil, may also have a negative impact on us and third parties with whom we do, or may do, business. See “Item 3—Key Information—Risk Factors—Risks Related to the Argentine and Mexican Economies and Regulatory Environments—The Argentine economy can be adversely affected by economic developments in other markets and by more general “contagion” effects, which could have a material adverse effect on Argentina’s economic growth” below.

The global economic crisis that began in the fourth quarter of 2008, triggering an international stock market crash and the insolvency of major financial institutions, limited the ability of Argentine companies to access international financial markets as they had in the past or made such access significantly more costly. A similar global or regional financial crisis in the future could limit our ability to access the credit or capital markets at a time when we require financing, thereby impairing our flexibility to react to changing economic and business conditions. See “Item 3—Key Information—Risk Factors—Risks Related to the Argentine and Mexican Economies and Regulatory Environments—Argentina’s ability to obtain financing from international markets is limited, which could affect its capacity to implement reforms and sustain economic growth.” For these reasons, any of the foregoing factors could together or independently have an adverse effect on our results of operations and financial condition and cause the market value of the ADSs to decline.

In addition, the crisis affecting emerging markets that began in the second quarter of 2018 as a result of the rise in interest rates by the U.S. Federal Reserve and the trade dispute between the United States and China, among other factors, had a material impact on the Argentine economy. between May 2, 2018 and October 1, 2018, the Argentine Peso slid from 20.9 to 38.7 Argentine Pesos per U.S. Dollar according to the U.S. dollar buying rate published byBanco de la Nación Argentina.

The Argentine economy can be adversely affected by economic developments in the global financial markets, and by more general “contagion” effects from other financial markets, which could have a material adverse effect on Argentina’s economic growth.

Argentine financial and securities markets are influenced, to varying degrees, by economic and financial conditions in other markets and Argentina’s economy is vulnerable to external shocks, including those related or similar to the global economic crisis that began in 2008 and economic and financial conditions in Argentina’s major trading partners, in particular, Brazil. For example, the current devaluation of the Brazilian currency and the slowdown of its economy may negatively affect the Argentine economy, and in turn, our business and results of operations. Although economic conditions can vary from country to country, investors’ perception of the events occurring in other countries have substantially affected in the past, and may continue to substantially affect capital flows to other countries and the value of securities in other countries, including Argentina. The Argentine economy was adversely impacted by the political and economic events that occurred in several emerging economies in the 1990s, including those in Mexico in 1994, the collapse of several Asian economies between 1997 and 1998, the economic crisis in Russia in 1998 and the Brazilian devaluation of its currency in January 1999.

The Argentine economy is also influenced by economic developments occurring in the markets to which it has close financial and political ties, including the MERCOSUR. In July 2019, the MERCOSUR and the European Union entered into a free trade agreement (the“EU-MERCOSUR Agreement”), which is expected create market of goods and services of approximately 800 million consumers and almost a quarter of the global GDP. TheEU-MERCOSUR Agreement contemplates, among other issues, tariff reductions for certain goods, temporary safeguard mechanisms that can be temporarily applied to prevent injuries to domestic industries, the opening of public procurement by the MERCOSUR countries to European companies, the establishment of general rules on electronic commerce and a dispute resolution mechanism. The effect theEU-MERCOSUR Agreement could have on the Argentine economy, and the policies implemented by the Argentine government, is uncertain. Negative economic or financial developments arising out of theEU-MERCOSUR Agreement, may have a material adverse effect on the Argentine economy and, indirectly, on our business, financial condition and results of operations

 

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In addition, international investors’ reactions to events occurring in one market sometimes demonstrate a “contagion” effect in which an entire region or class of investment is disfavored by international investors, Argentina could be adversely affected by negative economic or financial developments in other countries, which in turn may have a material adverse effect on the Argentine economy and, indirectly, on our business, financial condition and results of operations, and the market value of our series A shares or ADSs.

Restrictions on the supply of energy could negatively impact the Argentine economy.

As a result of prolonged recession and the forced conversion of energy tariffs into Argentine Pesos and subsequent freeze of natural gas and electricity tariffs in Argentina, there has been a lack of investment in natural gas and electricity supply and transport capacity in Argentina in recent years. At the same time, demand for natural gas and electricity has increased substantially, driven by a recovery in economic conditions and price constraints, which prompted the Argentine government to adopt a series of measures that have resulted in industry shortages and/or higher costs. In particular, Argentina has been importing natural gas to compensate for shortages in local production. In order to pay for natural gas imports the Argentine government has frequently used the BCRA reserves given the absence of foreign direct investment. If the Argentine government is unable to pay for imports of natural gas, economic activity, business and industries may be adversely affected.

The Argentine government has taken a number of measures to alleviate the short-term impact of energy shortages on residential and industrial users. If these measures prove to be insufficient, or if the investment required to increase natural gas production and electric energy transportation capacity and generation over the medium- and long-term is not available, economic activity in Argentina could be curtailed, and with it our operations. As a first step of these measures, a series of tariff increases and subsidy reductions (primarily applicable to industries and high-income consumers) were implemented. On December 17, 2015, and after publication of Decree No. 134/2015, the Argentine government declared the National Electricity System Emergency until December 31, 2017 and ordered the Argentine Secretariat of Energy to propose measures and guarantee the electrical supply. The Argentine Secretariat of Energy Resolution No. 06/2016 of January 2016 set new seasonal reference prices for power and energy on the Mercado Eléctrico Mayorista (MEM) for the period from February 1, 2016 to April 30, 2016 and set an objective to adjust the quality and security of electricity supply.

In February 2016, the Argentine government reviewed the schedule of electricity and gas tariffs and reduced the demand subsidies of these services, increasing over 500% energy costs, excepting forlow-income consumers from the subsidies reduction. Byre-stablishing tariff levels, modifying the regulatory framework and reducing the Argentine government’s participation in the energy sector, the Argentine government sought to correct distortions in the energy sector and make the necessary investments. In July 2016, a federal court in the city of La Plata suspended the increase in the gas tariff throughout the Province of Buenos Aires. On August 3, 2016, a federal court in San Martín suspended the increase in gas tariffs throughout the country until a public hearing was held to discuss the rate increase. The judgment was appealed to the Supreme Court, and on August 18, 2016, the Supreme Court ruled that the increase in the gas tariff of residential users could not be imposed without a public hearing. On September 16, 2016, the public hearing was held where it was agreed that the gas tariff would be adjusted by approximately 200% in October 2016, withbi-annual price adjustments in 2019. In this sense, through resolutionsNo. 205-207/2019, dated April 5, 2019, ENARGAS established the new gas tariff scheme for gas transportation and distributions companies to be applicable for the semester April-October 2019.

In connection with the framework determining the value of the rates for the public service in gas distribution for 2017, the Argentine Secretariat of Energy issued Resolution No. 74/2017 on March 30, 2017, which adopted the gas values at the point of entry into the transport system, applicable as of April 1, 2017. Additionally, on November 30, 2017, the Argentine Secretariat of Energy issued (i) ResolutionNo. 474-E/2017 which adopted the gas values at the point of entry into the transport system, applicable as of December 1, 2017, and also (ii) issued Resolution No. 133/2017 approving the tariffs to be applied to the gas consumption as of December 1, 2017.

As for other services, including electricity, a public hearing was held on October 28, 2016 to consider a proposed 31% tariff increase sought by energy distributors. Subsequently, the Argentine government announced increases in electricity rates of between 60% and 148%. On March 31, 2017, the Argentine Secretariat of Energy published a new tariff schedule with increases of approximately 24% for supply of natural gas by networks that had been partially regulated since April 1, 2017. In addition, on November 17, 2017, a public hearing convened by the former Minister of Energy and Mining was held to update the tariff schedule for natural gas and electricity. The new

 

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tariff schedule foresees a gradual reduction of subsidies, resulting in an increase, between December 2017 and February 2018, between 34% and 57% (depending on the province) for natural gas and 34% for electricity. In addition, on May 31, 2018, the Argentine Congress approved a law seeking to limit the increase in energy tariffs, which was subsequently vetoed by the Argentine Executive Branch. On August 1, 2018, pursuant Resolution No. 208/2018 of the National Electricity Regulatory Board (ENRE), the Argentine Secretariat of Energy published a new tariff schedule with increases in electricity rates.

Additionally, through Resolution No. 46/2018, the former Ministry of Energy instructed the former Secretariat of Energy to carry out the necessary measures to ensure that CAMMESA implemented the relevant mechanisms to secure gas availability for the purpose of electricity generation within the Argentine Interconnection System (“AIS”), pursuant to maximum reference prices approved by such Resolution. Such reference prices, set at the point of entry into the transportation system, (i) varied depending on the basin in which the gas was produced, and (ii) pursuant to Resolution No. 25/2018, were not applicable if the seller wasIntegración Energética Argentina (“IEASA”, formerly ENARSA).

The issuance of Resolution No. 46/2018 (as amended by Resolution No. 25/2018), meant a reduction of the prices previously set forth by the Argentine Secretariat of Energy by means of Resolution No.41/2016 of April 7, 2016.

The Solidarity Law recently enacted provides that natural gas tariffs (transportation and distribution) under federal jurisdiction will remain unchanged for one hundred eighty (180) days from the effective date of such law, which took place on December 23, 2019, and invites the provinces to adhere to this policy. Likewise, it empowers the Argentine Executive Branch to renegotiate the tariffs under federal jurisdiction, either within the framework of the current comprehensive tariff reviews or through an extraordinary revision, in accordance with Law No. 24,076.

Changes in the energy regulatory framework and the establishment of increased tariffs for the supply of gas and electricity could affect our cost structure and increase operating and public service costs. Moreover, the significant increase in the cost of energy in Argentina, could have an adverse effect on the Argentine economy, and therefore, on our business, financial condition and results of operations.

There is uncertainty about what other measures the Argentine government may adopt related to tariffs, and the impact they may have on the economy of the country. If the federal Argentine government does not resolve the negative effects on the exploitation, transportation and distribution of energy in Argentina with respect to both the residential and industrial supply, this could reduce confidence and adversely affect Argentina’s economy and financial situation and cause political instability. On the other hand, if the necessary investment to increase the production ofnon-liquefied natural gas and the transportation and distribution of energy is not specified in a timely manner, the economic activity in Argentina could be negatively affected and our business, financial condition and results of operations could be negatively affected.

Federal and provincial elections in Argentina may generate uncertainty in the Argentine economy and, consequently, on our businesses.

Argentina’s presidential elections took place on August and October 2019 (primaries and first round, respectively), with Alberto Fernandez from theFrente de Todoscoalition being elected with 48.24% of the votes. The Alberto Fernandez´s administration took office on December 10, 2019. Other relevant local and federal elections also took place during 2019. Changes in the local and federal administrations may also imply alterations of programs and policies that apply to the oil and gas sector. Argentina’s president and its Congress each have considerable power to determine governmental policies and actions that relate to the Argentine economy. Therefore, we cannot foresee measures that might be adopted by any future federal administration, or by any future administration at the provincial level, and the effect any such measures might have on the Argentine economy and the ability of Argentina to comply with its financial obligations, which could negatively affect our business, financial condition and results of operations. In addition, we cannot assure you that economic, regulatory, social and political developments in Argentina will not impair our business, financial condition or results of operations, or cause the market value of our shares or ADSs to decline.

 

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Failure to adequately address actual and perceived risks of institutional deterioration and corruption may adversely affect Argentina’s economy and financial condition and, consequently, our business.

A lack of a solid and transparent institutional framework for contracts with the Argentine government and its agencies and corruption allegations have affected and continue to affect Argentina. In Transparency International’s 2019 Corruption Perceptions Index survey of 180 countries, Argentina was ranked 64, improving from the previous survey in 2018. In the World Bank’s Doing Business 2019 report, Argentina ranked 126 out of 190 countries, down from its 117th position in 2018.

As of the date of this annual report, there are various ongoing investigations into allegations of money laundering and corruption being conducted, which have negatively impacted the Argentine economy and political environment. Depending on how long it takes to close said investigations and their results, companies involved in the investigations may be subject to, among other consequences, a decrease in their credit ratings, claims filed by their investors, and may further experience restrictions in their access to financing through the capital markets, together with a decrease in their income. The potential outcome of these and other ongoing corruption-related investigations is uncertain, but they have already had an adverse impact on the image and reputation of those companies that have been implicated, as well as on the general market perception of the economy, political environment and the capital markets in Argentina. We have no control over and cannot predict whether such investigations or allegations will lead to further political and economic instability. In addition, we cannot predict the outcome of any such allegations nor their effect on the Argentine economy, nor the can we predict the adverse effect on our commercial activities and results of operations.

Recognizing that the failure to address these issues could increase the risk of political instability, distort decision-making processes and adversely affect Argentina’s international reputation and ability to attract foreign investment, the Argentine government has announced several measures aimed at strengthening Argentina’s institutions and reducing corruption. These measures include the reduction of criminal sentences in exchange for cooperation with the government in corruption investigations, increased access to public information, the seizing of assets from corrupt officials, increasing the powers of the Anticorruption Office (Oficina Anticorrupción), submitting a project for a new public ethic law, among others. The Argentine government’s ability to implement these initiatives is uncertain as it would be subject to independent review by the judicial branch, as well as legislative support from opposition parties.

We cannot give any assurance that the implementation of these measures by the Argentine government will be successful in stopping institutional deterioration and corruption.

Economic conditions and government policies in Mexico and elsewhere may have a material impact on our operations.

A deterioration in Mexico’s economic condition, social instability, political unrest, changes in governmental policies, or other adverse social developments in Mexico could adversely affect our business and financial condition. Those events could also lead to increased volatility in the foreign exchange and financial markets, thereby affecting our ability to obtain financing. Additionally, the Mexican government announced budget cuts in November 2015, February 2016 and September 2016 in response to declines in international crude oil prices. Any new budget cuts could adversely affect the Mexican economy and, consequently, our business, financial condition, operating results and prospects.

In the past, Mexico has experienced several periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic problems. These problems may worsen or reemerge, as applicable, in the future and could adversely affect our business and ability to service our debt. A worsening of international financial or economic conditions, such as a slowdown in growth or recessionary conditions in Mexico’s trading partners, including the United States, or the emergence of a new financial crisis, could have adverse effects on the Mexican economy, our financial condition and our ability to service our debt.

Also, the Mexican government has had significant influence in the Mexican economy in the past and will likely continue to do so. Changes in the legal framework and policies may adversely affect our business and the value of our securities.

 

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Mexico has experienced a period of increasing criminal activity, which could affect our operations.

In recent years, Mexico has experienced a period of increasing criminal activity, primarily due to the activities of drug cartels and related criminal organizations. In addition, the development of the illicit market in fuels in Mexico has led to increases in theft and illegal trade in the fuels that we produce. In response, the Mexican government has implemented various security measures and has strengthened its military and police forces. Despite these efforts, criminal activity continues to exist in Mexico, some of which may target our facilities and products. These activities, their possible escalation and the violence associated with them, in an extreme case, may have a negative impact on our financial condition and results of operations. We are particularly exposed to this risk in blocks where we holdnon-operating interests and have more limited capacity to take actions against any criminal activity affecting our operations, such as BlockTM-01, located in Tampico-Misantla basin in Mexico.

Economic and political developments in Mexico may adversely affect Mexican economic policy and, in turn, our operations.

Political events in Mexico may significantly affect Mexican economic policy and, consequently, our operations. The Mexican presidential elections of 2018 resulted in an administration change effective as of December 1, 2018. The new Mexican Federal administration was elected by a significant majority of the electorate and the coalitionJuntos Haremos Historia gained control of both chambers of the Federal Congress, which givesMorena(the party of Andrés Manuel López Obrador) considerable power to enact, modify or terminate legislation, including constitutional amendments. Members of the new administration, including president Andrés Manuel López Obrador, have expressed, among other things, their desire to modify and/or terminate certain structural reforms. Some relevant changes in public policy and legislation sponsored by the new administration have already been enacted and/or implemented and some are under way. There cannot be any assurance in the predictions of how the new administration will be conducted and any measure adopted by such new administration could have uncertain results and negative impacts. Additionally, other events and changes, and any political and economic instability that may arise in Mexico, could have a material adverse effect on the economy of the country. The extent of such impact cannot be accurately predicted. We cannot provide any assurances that political developments in Mexico will not have an adverse effect on the Mexican economy or oil and gas industry and, in turn, our business, results of operations and financial condition, including our ability to repay our debt. There is no guarantee that the Mexican political environment will continue its relative stability in the future.

Economic conditions in Mexico are highly correlated with economic conditions in the United States due to the physical proximity and the high degree of economic activity between the two countries generally, including the trade facilitated by the North American Free Trade Agreement (“NAFTA”). As a result, political developments in the United States, including changes in the administration and governmental policies, can also have an impact on the exchange rate between the U.S. Dollar and the Mexican peso, economic conditions in Mexico and the global capital markets.

Since 2003, exports of petrochemical products from Mexico to the United States have enjoyed azero-tariff rate under NAFTA and, subject to limited exceptions, exports of crude oil and petroleum products have also been free or exempt from tariffs. In August 2017, Mexico, the United States and Canada commenced renegotiation of NAFTA. On November 30, 2018, Mexico, the United States and Canada signed the new United States-Mexico-Canada Agreement (the “USMCA”). As of the date of this annual report, the United States, Mexico and Canada have completed their domestic processes for the ratification and implementation of the USMCA, and the USMCA is expected to become effective in the following months. Any increase of import tariffs resulting from the USMCA or any other future arrangement could make it economically unsustainable for U.S. companies to import our oil and gas products if they are unable to transfer those additional costs onto consumers, which would increase our expenses and decrease our revenues, even if domestic and international prices for our products remain constant. Higher tariffs on products that we export to the United States could also require us to renegotiate our contracts or lose business, resulting in a material adverse impact on our business and results of operations.

Because the Mexican economy is heavily influenced by the U.S. economy, the implementation of the USMCA and/or other U.S. government policies that may be adopted by the U.S. administration may adversely affect economic conditions in Mexico. These developments could in turn have an adverse effect on our financial condition, results of operations and ability to repay our debt.

 

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Additionally, President Andrés Manuel López Obrador and his administration have recently taken actions for limiting new private investment in the hydrocarbons industry, including the cancellation of tender bids for the execution of E&P agreements. As of the date of this annual report, no other tender bids have been announced, and certain state officers have stated during press conferences that hydrocarbon tender rounds and farm-outs are not currently a part of the Federal Government’s plans to increase oil production.. These actions may adversely affect our ability to expand our operations in Mexico.

The Mexican nation owns the hydrocarbons reserves located in the subsoil in Mexico.

The Mexican Constitution provides that the Mexican nation, and not us, owns all petroleum and other hydrocarbon reserves located in the subsoil in Mexico. Article 27 of the Mexican Constitution provides that the Mexican government will carry out E&P activities through contracts with third parties or allocations awarded to State Productive Enterprises (empresas productivas del Estado). The Mexican Hydrocarbons Law allows us and other oil and gas companies to explore and extract the petroleum and other hydrocarbons reserves located in Mexico, subject to the entry into agreements pursuant to a competitive bidding process. See “Item 4—Information on the Company—Industry and Regulatory Overview—Mexico’s Oil and Gas Industry Overview—Oil and Gas Regulatory Framework in Mexico.”

The U.K.’s exit from the E.U. will have uncertain effects.

On June 23, 2016, the U.K. voted to exit from the E.U. (commonly referred to as “Brexit”). The U.K. exited the European Union on January 31, 2020, and is currently undergoing a transition period ending on December 31, 2020. Following its departure, the UK has commenced negotiations with the European Union to reach a trade agreement going forward. The outcome of such negotiations and the resulting U.K./E.U. relationship are uncertain for companies doing business both in the U.K. and the overall global economy. In addition, our business and operations may be impacted by any subsequent vote in Scotland to seek independence from the U.K. Risks related to Brexit that we may encounter include:

 

  

adverse impact on macroeconomic growth and oil and gas demand;

 

  

continued volatility in currencies including the British pound and U.S. Dollar that may impact our financial results;

 

  

volatile capital and debt markets, and access to other sources of capital;

 

  

business uncertainty resulting from prolonged political negotiations; and

 

  

uncertain stability of the E.U. and global economy if other countries exit the E.U.

Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the withdrawal of the U.K. from the E.U. will have and how such withdrawal will affect us. In addition, Brexit may lead other E.U. member countries to consider referendums regarding their E.U. membership. Adverse consequences concerning Brexit or the E.U. could include deterioration in global economic conditions, instability in global financial markets, political uncertainty, continued volatility in currency exchange rates, or adverse changes in the cross-border agreements currently in place, any of which could have an adverse impact on our financial results in the future.

The novel coronavirus could have an adverse effect on our business operations.

In late December 2019 a notice of pneumonia originating from Wuhan, Hubei province(Covid-19, caused by a novel coronavirus) was reported to the World Health Organization, with cases soon confirmed in multiple provinces in China, as well as in other countries. Several measures have been undertaken by the Argentine and Mexican governments and other governments around the globe, including the use of quarantine, screening at airports and other transport hubs, travel restrictions, suspension of visas, nation-wide lockdowns, closing of public and private institutions, suspension of sports events, restrictions to cultural sites and tourist attractions and extension of holidays, among many others. However, the virus continues to spread globally and, as of the date of this annual report, has affected almost every country around the world, including Argentina and Mexico. To date, the outbreak of the novel

 

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coronavirus has caused significant social and market disruption, including in the oil and gas market. The long-term effects to the global economy and the Company of epidemics and other public health crises, such as theon-going novel coronavirus, are difficult to assess or predict, and may include risks to employee health and safety, and reduced sales in geographic locations impacted. Any prolonged restrictive measures put in place in order to control an outbreak of a contagious disease or other adverse public health development in any of our targeted markets may have a material and adverse effect on our business operations. In addition, an actual or expected economic slowdown may adversely affect the demand and prices of our oil and gas products. We may also be affected by the need to implement policies limiting the efficiency and effectiveness of our operations, including the suspension of our operations in the blocks we operate or work from home policies in our administrative premises. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term.

On March 19, 2020, the Argentine President Alberto Fernández announced a nation-wide mandatory social isolation regime due to the coronavirus crisis through Decree of Necessity and Urgency No. 297/2020, which prohibits all citizens from leaving their homes, subject to certain exceptions for supply, hygiene and communication, until March 31, 2020 (which was further extended until May 10, 2020). Such Decree provides for the possibility of extending this period for as long as necessary in light of the epidemiological situation. The mandatory quarantine came into force on March 20, 2020 and as of today it is not possible to ensure the effect that these measures may have on the Argentine economy.

To date, the Argentine government has implemented certain measures in response to theCovid-19 outbreak in the country aimed at preventing mass contagion and the overcrowding of the Argentine health service, which include (in chronological order):

 

  

February 26—March 12, 2020: screening of passengers at airports; mandatory isolation for 14 days of persons with suspected or confirmed cases ofCovid-19, persons in close contact with suspected or confirmed cases ofCovid-19 and persons arriving or recently arrived from affected zones; closure of activities with high concentration of persons; prohibition of attendance of audience to sporting events;

 

  

March 13—March 15, 2020: stronger surveillance of Argentine borders; suspension of flights by various airlines and adoption of regulations for the coordination of repatriation flights for Argentine residents; closure of national parks and protected areas; school closures (except for food assistance and administrative purposes);

 

  

March 16—March 18, 2020: closure of Argentine borders; suspension of domestic flights and long-distance trains and buses operations; suspension of the national soccer league; temporary work leaves for pregnant women, people older than 60 years and other persons considered at special risk upon infection; authorization for federal public employees to work remotely (except for employees providing essential services); promotion of home office policies in the private sector and beginning of construction of eight modular hospitals

 

  

March 19, 2020: imposition of a nation-wide mandatory lockdown, whereby only exceptional and essential activities and domestic travel are allowed; deployment of security forces for the enforcement of lockdown;

 

  

March 20—April 2, 2020: assistance to Argentine residents abroad; tightening of rules relating to closure of Argentine borders, extension of nation-wide lockdown until April 12, 2020.

 

  

April 11, 2020: extension of nation-wide lockdown until April 26, 2020.

 

  

April 26, 2020: extension of nation-wide lockdown until May 10, 2020, each province governor having the possibility to decide on exceptions to compliance with the mandatory social isolation regime, in respect of certain activities and services, subject to the approval of the health authority and provided that certain epidemiological and health parameters are met.

Simultaneously, the Argentine government has announced and is implementing several stimulus measures to limit the effects of theCovid-19 outbreak on the economy, which include the following:

 

  

aone-time AR$3,100 cash payment to recipients of the universal child allowance;

 

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aone-time AR$3,000 cash payment to retirees receiving minimum benefits (currently AR$15,892) and those that receive above the minimum but less than Argentine pesos 18,892, which covers approximately 4.6 million retirees;

 

  

aone-time AR$3,000 cash payment to recipients of social plans, which targets approximately 556,000 persons;

 

  

aone-time AR$10,000 cash payment which will be granted to approximately 7,785,000 unemployed persons and persons employed informally, among other socially vulnerable persons;

 

  

a capital spending program on infrastructure, education and tourism for approximately AR$100 billion;

 

  

an exemption to companies in vulnerable industries from payments relating to employers’ pension contributions, an increase in unemployment insurance and payment by the federal government of a portion of wages for affected companies with a payroll of less than 100 employees; and

 

  

subsidized loans to small- andmedium-sized companies (PYMES) via the financial system of approximately AR$30 billion for working capital;

Other measures adopted by the Argentine government to mitigate the effects of theCovid-19 outbreak in the economy include the following:

 

  

the prohibition of the disconnection of electric energy, natural gas, running water, fixed telephony, mobile telephony, internet and cable television services due tonon-payment of less than three invoices commencing on March 1, 2020 and for a180-day period, which applies to certain vulnerable users;

 

  

the suspension of certain penalties and disqualifications applicable to checking accounts with insufficient funds until April 30, 2020, and the authorization for banks to grant loans to companies with outstanding debts with ANSES and AFIP;

 

  

the price freezes as of March 6, 2020, for certain essential goods such as food, personal care, medicines and medical products for a30-day period;

 

  

the imposition of maximum prices on goods and services acquired by the federal government to address the emergency;

 

  

the suspension of rent increases, extension of lease contract expiration dates and suspension of evictions due tonon-payment of leases until September 30, 2020;

 

  

the freezing of mortgage payments and certainUVA-indexed loans (purchasing value unit);

 

  

the adoption of a program to increase productivity (Programa de Recuperación Productiva, or “REPRO”) by which the federal government funds a portion of the monthly wages of private sector employees working for companies affected by the pandemic and whose revenues have declined;

 

  

the prohibition of unjustified dismissals and suspensions;

 

  

the reduction of pension and tax charges to health service providers aimed at strengthening the health sector and ensuring medical assistance;

 

  

the shortening of the term applicable to export reimbursements for industrial sector companies;

 

  

requirement that exports of medical inputs and equipment necessary to overcome the pandemic obtain prior governmental authorization;

 

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one-time AR$5,000 payment to public sector employees in the health, security and national defense areas;

 

  

elimination of import taxes applicable to certain essential goods such as alcohol, laboratory or pharmaceutical items, medical gloves, disinfectants and other health-related equipment and inputs;

 

  

suspension until April 30, 2020 of tax foreclosures by AFIP for PYMES;

 

  

assistance by the national government to the provinces in an aggregate amount of AR$120 billion.

Consistent with recommendations that the World Health Organization urged to be taken by all countries affected by theCovid-19 pandemic, the Mexican government through the Mexican General Health Council (Consejo de Salubridad General) and by means of decrees (acuerdos) dated March 24 and March 30, 2020, declared (among other things) the epidemic of the disease generated by theCovid-19 virus a “sanitary emergency for reasons of force majeure”. In response to the foregoing, the Mexican Federal Ministry of Health (Secretaría de Salud), issued a decree (acuerdo) that establishes as part of the measures to mitigate the spread and transmission of the virus, the immediate suspension ofnon-essential activities in the public, private and social sectors from March 30 to April 30, 2020. This decree, among other things:

 

  

provides a list of essential activities that can continue functioning, including gas as both a fundamental sector of the economy and an indispensable service, and petroleum as the latter, which includes any necessary activity for the conservation, maintenance and reparation of critical infrastructure that assures their production and distribution. It also considers the distribution and sale of energy as an essential activity.

 

  

obliges all companies engaged in essential activities to follow the sanitary measures dictated by the Mexican Federal Ministry of Health, including the following: no meetings or gatherings of more than 50 persons shall be allowed; frequent handwashing is required; sneezing shall be done covering both nose and mouth with either a handkerchief or forearm; no physical contact in greetings; and the following individuals shall stay home: all people over 60 years old, in pregnancy or immediate puerperium, with a diagnostic of arterial hypertension, diabetes mellitus, cardiac or pulmonary chronic diseases, immunosuppression (either acquired or provoked), and kidney or liver failure.

Authorities within the financial and energy sector—in tandem with other Ministries, the Legislative and the Judiciary Branches—have also enacted decrees suspending their own legal terms, considering asnon-business days all those necessary to combat the epidemic, with respect to both proceedings initiated by private persons and those conducted by said authorities. It is expected that these decrees will postpone their period of application in line with those of the sanitary authorities.

In a similar manner, the Government of Mexico City and the governments of states of the Mexican Republic have issued similar decrees ordering the suspension of certain activities considerednon-essential during the sanitary emergency. As the sanitary emergency continues to progress, Mexico’s federal, state, and municipal Governmental Authorities will continue to issue decrees, orders, and provisions restricting and limiting the activities that companies, businesses, and individuals may carry out, while the sanitary emergency is ongoing, as well as some other financial and economic measures to face the economic and financial impact of this event.

It is likely that the suspension period enacted by the Mexican authorities will be extended, from time to time, given the authorities powers granted by the Constitution to the Mexican General Health Council and Federal Ministry of Health, and as theCovid-19 pandemic situation worsens and further measures are adopted. In fact, certain communications announced in press conferences by the Mexican Presidency, state that these restrictions will last several weeks more.

 

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The demand of our crude oil and gas products is largely influenced by the economic activity and growth in Argentina, Mexico and globally. Although demand increased in the past, it has recently contracted significantly (in part, due to theCovid-19 outbreak) and is subject to volatility in the future. On March 20, 2020 we decided to stop our drilling and completion activity in Argentina, and were also forced to shut-in certain wells, including our 12 unconventional wells in Bajada del Palo Oeste, in response to lower crude oil demand. Demand for crude oilby-products, such as gasoline, may also contract under certain conditions, particularly during economic slowdowns.

Latest estimates from the IEA, EIA and OPEC forecast that global crude oil demand will decline by between 12 MMbbl/d and 23 MMBbl/d during the second quarter of 2020 compared to the second quarter of 2019 (a decline of 12% and 23%, respectively), and by between 5.3 MMbbl/d and 9.3 MMBbl/d for the full year 2020 compared to the year 2019 (in which total demand was 100.5 MMbbl). As of the date of this annual report, given the uncertainty of the lasting effect of theCovid-19 outbreak, its impact on our business cannot be determined. A further contraction of the demand of our products, or the maintenance of the current demand level for significant periods of time, would adversely affect our revenues, causing economic losses to our Company. Continuous poor economic performance could eventually lead to a deterioration in our financial coverage ratios and impairment charges arising from a decreased valued in our assets and cause us to exceed the financial covenants agreed upon in the Syndicated Loan (as defined below). A contraction of crude oil demand could also affect us financially, including our ability to pay our suppliers for their services, which could, in turn, lead to further operational distress.

Additionally, we cannot assure you how the disease will evolve in Argentina and Mexico, nor predict any further restrictions that the Argentine or Mexican governments may impose.

Risks Related to our series A shares and the ADSs

The series A shares and ADSs are traded on more than one market and this may result in price variations; in addition, investors may not be able to easily move securities for trading between such markets.

As of the date of this annual report, our series A shares are listed and traded on the Mexican Stock Exchange and ADSs are listed on the NYSE. Markets for our series A shares or for the ADSs may not have liquidity and the price at which the series A shares or the ADSs may be sold is uncertain.

Trading in the ADSs or our series A shares on these markets takes place in different currencies (U.S. Dollars on the NYSE and Mexican pesos on the Mexican Stock Exchange), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Mexico). The trading prices of the securities on these two markets may differ due to these and other factors. Any decrease in the price of our series A shares on the Mexican Stock Exchange could cause a decrease in the trading price of the ADSs on the NYSE. Investors could seek to sell or buy our shares to take advantage of any price differences between the markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the ADSs available for trading on the other exchange. In addition, holders of ADSs will not be immediately able to surrender their ADSs and withdraw the underlying series A shares for trading on the other market without effecting necessary procedures with the Depositary. This could result in time delays and additional cost for holders of the ADSs.

The trading prices for the series A shares and the ADSs may fluctuate significantly.

Volatility in the market price of our series A shares and the ADSs may prevent investors from selling their securities at or above the price that they paid for them. The market price and market liquidity of our series A shares and the ADSs may be adversely affected by a number of factors, including, but not limited to, the extent of investor interest in us, the attractiveness of our series A shares in comparison to other equity securities (for instance, shares issued by a company with larger operating history in our own industry), our financial performance and general market conditions. Certain additional factors that could negatively affect, or result in fluctuations in, the price of our series A shares and the ADSs include:

 

  

actual or anticipated variations in our operating results;

 

  

potential differences between our actual financial and operating results and those expected by investors;

 

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investors’ perceptions of our prospects and the prospects of our sector;

 

  

new laws or regulations or new interpretations of laws and regulations, including tax guidelines, applicable to the energy sector, our series A shares and/or the ADSs;

 

  

general economic trends and risks in the United States, Latin American or global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;

 

  

changes in our operations or earnings estimates or publication of research reports about us or the Latin American energy industry;

 

  

market conditions affecting the Latin American economy generally or borrowers in Latin America specifically;

 

  

significant volatility in the market price and trading volume of securities of companies in the energy sector, which are not necessarily related to the operating performance of these companies;

 

  

additions to or departures from our Management Team;

 

  

completing (or failing to complete) additional acquisitions or executing additional concession agreements;

 

  

speculation in the press or investment community;

 

  

changes in the credit ratings or outlook assigned to Latin American countries, particularly Mexico and Argentina, and entities of the energy sector;

 

  

political conditions or events in Argentina, Mexico, the United States and other countries; and

 

  

enactment of legislation or other regulatory developments that adversely affect us or our industry.

The stock markets in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies involved. We cannot assure you that trading prices and valuations will be sustained. These broad market and industry factors may materially adversely affect the market price of our series A shares and the ADSs, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions in the markets in which we operate, such as recession or currency exchange rate fluctuations, may also adversely affect the market price of our series A shares and ADSs. Following periods of volatility in the market price of a company’s securities, that company may often be subject to securities class-action litigation. This kind of litigation may result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, results of operations and financial condition.

The relatively low liquidity and high volatility of the Mexican securities market may cause trading prices and volumes of our series A shares and the ADSs to fluctuate significantly.

The Mexican Stock Exchange is one of Latin America’s largest exchanges in terms of aggregate market capitalization of the companies listed therein, but it remains relatively illiquid and volatile compared to other major foreign stock markets. Although the public participates in the trading of securities on the Mexican Stock Exchange, a substantial portion of trading activity on the Mexican Stock Exchange is conducted by or on behalf of large institutional investors. The trading volume for securities issued by emerging market companies, such as Mexican companies, tends to be lower than the trading volume of securities issued by companies in more developed countries. These market characteristics may limit the ability of a holder of our series A shares and may also adversely affect the market price of the series A shares and, as a result, the market price of the ADSs.

 

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If securities or industry analysts do not publish research reports about our business, or publish negative reports about our business, the price and trading volume of our series A shares and the ADS could decline.

The trading market for our series A shares and the ADSs will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. If no securities or industry analysts covers us, the trading price for our series A shares and the ADSs may be negatively impacted. If one or more of the analysts who covers us downgrades us or releases negative publicity about our series A shares and ADSs, our share price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our series A shares and the ADSs may decrease, which may cause our share price or trading volume to decline.

As a foreign private issuer and an “emerging growth company,” we have different disclosure and other requirements than U.S. domestic registrants andnon-emerging growth companies.

As a foreign private issuer and an “emerging growth company” (as defined in the JOBS Act), we are subject to different disclosure and other requirements than domestic U.S. registrants andnon-emerging growth companies. For example, as a foreign private issuer, in the United States, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports onForm 10-Q or to file current reports onForm 8-K upon the occurrence of specified significant events, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. In addition, we have relied, and intend to keep relying, on exemptions from certain U.S. rules which permit us to follow Mexican legal requirements rather than certain of the requirements that are applicable to U.S. domestic registrants.

Furthermore, foreign private issuers are required to file their annual report onForm 20-F within 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report onForm 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure under the Securities Act, aimed at preventing issuers from making selective disclosures of material information. As a result of the above, even though we are required to file reports onForm 6-K disclosing the information which we have made or are required to make public pursuant to Mexican law, or are required to distribute to shareholders generally, and that is material to us, you may not receive information of the same type or amount that is required to be disclosed to shareholders of a U.S. company.

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for emerging growth companies. Under this act, as an emerging growth company, we are not subject to the same disclosure and financial reporting requirements asnon-emerging growth companies. For example, as an emerging growth company we are permitted to take (and intend to continue taking) advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Also, we do not have to comply with future audit rules promulgated by the PCAOB (unless the SEC determines otherwise) and our auditors do not need to attest to our internal control under Section 404(b) of the Sarbanes-Oxley Act. We may follow these reporting exemptions until we are no longer an emerging growth company. As a result, our shareholders may not have access to certain information that they deem important. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual revenues of at least US$1.07 billion (as adjusted for inflation), or (c) in which we are deemed to be a large accelerated filer, which means the market value of our series A shares that is held bynon-affiliates exceeds US$700.0 million as of the prior September 30, and (2) the date on which we have issued more than US$1.0 billion innon-convertible debt during the prior three-year period. Accordingly, the information about us available to you is not the same as, and may be more limited than, the information available to shareholders of anon-emerging growth company.

We cannot predict if investors will find our series A shares or the ADSs less attractive because we rely on these exemptions. If some investors find our series A shares and the ADSs less attractive as a result, there may be a less active trading market for our series A shares and the ADSs and our share price may be more volatile.

 

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ADS holders may be subject to additional risks related to holding ADSs rather than series A shares.

Because ADS holders do not hold their series A shares directly, they are subject to additional risks, including:

 

  

as an ADS holder, we do not treat you as one of our shareholders and you may not be able to exercise shareholder rights;

 

  

distributions on the series A shares represented by your ADSs are paid in Mexican Pesos to a custodian through Indeval, and before such custodian transfers any such distributions to the depositary for your benefit, it would be required to deduct withholding taxes, if any. The depositary would also be required to convert distributions made in Mexican Pesos into U.S. Dollars. Additionally, if the exchange rate fluctuates significantly prior to the depositary converting any distribution into U.S. Dollars, the amount of such distribution may decrease in terms of U.S. Dollars; and

 

  

we and the depositary may amend or terminate the Deposit Agreement without the ADS holders’ consent in a manner that could prejudice ADS holders or that could affect the ability of ADS holders to transfer ADSs.

We have granted, and may continue to grant, share incentive awards, which may result in increased share-based compensation expenses and holders of our series A shares and ADSs may suffer further dilution.

We adopted our Long Term Incentive Plan in April 2018 for purposes of attracting and retaining talented people as officers, directors, employees and consultants which are key to us, incentivizing their performance and aligning their interests with ours. Under the Long Term Incentive Plan, our Board of Directors is authorized to grant restricted series A shares (“Restricted Stock”) and options to purchase our series A shares (“Stock Options”) to our officers, directors, employees and consultants. We reserved 8,750,000 series A shares issued on December 18, 2017 for the implementation of the Long Term Incentive Plan. As of December 31, 2019, 487,890 series A shares have been vested and are outstanding in connection with the Long Term Incentive Plan. We believe the granting of share incentive awards is of significant importance to our ability to attract and retain employees, and we will continue to grant share incentive awards to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

Additionally, the vesting of series A shares reserved for the Long Term Incentive Plan may cause immediate dilution to our existing shareholders and may also have a dilutive effect in our earnings per share. If all 8,262,110 series A shares currently reserved for the Long Term Incentive Plan became outstanding, our issued and outstanding share capital would increase approximately 9.6% based on 87,303,462 series A shares outstanding as of the date of this annual report.

ADS holders may be unable to exercise voting rights with respect to the shares underlying the ADSs at our shareholders’ meetings.

The depositary is treated by us for all purposes as the shareholder with respect to the shares underlying your ADSs. As a holder of ADSs, you do not have direct shareholder rights and may exercise voting rights with respect to the shares represented by the ADSs only in accordance with the Deposit Agreement relating to the ADSs. There are no provisions under Mexican law or under our bylaws that limit the exercise by ADS holders of their voting rights through the depositary with respect to the underlying series A shares. However, there are practical limitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. ADS holders may be unable to exercise voting rights with respect to the series A shares underlying the ADSs as a result of these practical limitations.

 

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Preemptive rights may be unavailable tonon-Mexican holders of ADSs and, as a result, such holders may suffer dilution.

Under our currentby-laws, whenever we issue new shares for subscription and for payment in cash, subject to certain exceptions (such as those related to public offerings, mergers, or conversion of convertible securities, including our Warrants), we must grant preemptive subscription rights to our shareholders, giving them the right to purchase a sufficient number of shares to maintain their existing ownership percentage. We may not be able to offer preemptive rights to foreign shareholders and ADS holders identical to those of our shareholders residing in Mexico in connection with any future issuance of shares, unless we comply with certain specific requirements under the laws and regulations of the applicable jurisdictions of ournon-Mexican shareholders. In the case of United States shareholders and ADS holders, we might not be able to offer them shares pursuant to preemptive rights granted to our shareholders in connection with any future issuance of shares, unless the offer of such shares is registered under the Securities Act or an exemption from the registration requirement is available.

We intend to evaluate, at the time of any preemptive prescription rights offering, the costs and potential liabilities associated with a registration statement or similar requirement to enable U.S. or othernon-Mexican shareholders and ADS holders to exercise their preemptive subscription rights in the event of an issuance of shares; the indirect benefits of enabling U.S. and othernon-Mexican shareholders and ADS holders to exercise preemptive subscription rights; and any other factors that we consider appropriate at the time. We will then decide whether to file such a registration statement or otherwise comply with a similar requirement.

In the event that a required registration statement or similar requirement is not filed or satisfied, U.S. or othernon-Mexican shareholders or ADS holders, would not be able to exercise their preemptive subscription rights in connection with future issuances of our shares, and their stake in the Company might be diluted. In this event, the proportion of the economic and voting interests of such U.S. or othernon-Mexican shareholders or ADS holders in our total equity could decrease in proportion to the size of the issuance. Depending on the price at which shares are offered, such an issuance could result in dilution in the book value per share to U.S. or othernon-Mexican shareholders or ADS holders not participating in the capital increase.

Substantial sales of our series A shares or the ADSs could cause the price of our series A shares or the ADSs to decrease.

The market price of our series A shares and the ADSs may decline as a result of sales of a large number of series A shares and ADSs or the perception that these sales may occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Our shareholders or entities controlled by them or their permitted transferees will be able to sell their shares in the public market from time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by regulations promulgated by the SEC, as well as any other regulation (including anti-trust rules) that may apply. If any of our shareholders, the affiliated entities controlled by them or their respective permitted transferees were to sell a large number of their shares, the market price of our series A shares may decline significantly and, as a result, the market price of the ADSs. In addition, the perception in the public markets that sales by them might occur may also adversely affect the market price of our series A shares and the ADSs.

The protections afforded to minority shareholders in Mexico are not as comprehensive as those in other jurisdictions, such as the United States.

Under Mexican law, the protections afforded to minority shareholders and the responsibilities and duties of directors and senior officers are different or not as complete as those in the United States. Although Mexican law establishes specific duties of care and loyalty applicable to our directors, committee members and senior officers, the Mexican legal regime governing directors, committee members and senior officers, and their duties, is not as comprehensive or developed as in the United States and has not been the subject of as broad and precise judicial interpretation. In addition, the criteria applied in other jurisdictions, including in the United States, to ascertain the independence of corporate directors may be different from the criteria applicable under corresponding Mexican laws and regulations. Furthermore, in Mexico, there are different procedural requirements for shareholder suits that work exclusively for our benefit (such as with respect to derivative suits) and not for the benefit of our shareholders (even those that initiate an action). As a result, it may be more difficult in practice for our minority shareholders to enforce their rights against us or our directors, committee members or senior officers, including for breach of their duties or care or loyalty) than it would be for shareholders of a United States or othernon-Mexican company or to obtain compensation for minority shareholders, for losses caused by directors, committee members or senior officers as a result of a breach of their duties.

 

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Our bylaws contain provisions aimed at restricting the acquisition of our shares and restricting the execution of voting agreements among our shareholders.

Pursuant to our bylaws, every direct or indirect acquisition of shares, or attempted acquisition of shares, of any nature by one or more persons or entities requires the prior written approval by the Board of Directors each time that the number of shares to be acquired, when added to any shares already owned by such person or entity, results in the acquirer holding 10% or more of our outstanding capital stock. Once such percentage is reached, such person or entity must notify our Board of Directors of any subsequent acquisition of shares by any such person or entity through which they acquire additional shares representing 2% or more of our outstanding capital stock. Prior, written approval must also be requested from our Board of Directors for the execution of written or oral agreements, as a consequence of which voting association, block voting, or binding or joint vote mechanisms or covenants are formed or adopted or certain shares are combined or shared in any other manner, which effectively results in a change in control of our Company or a 20% ownership interest in our Company. No additional authorization is required tocarry-out such acquisitions or to execute a voting agreement until the ownership percentage of our outstanding capital stock is equal to or greater than 20%, nor is any additional authorization required with respect to entering temporary agreements for appointment of minority directors.

If an acquirer does not comply with the procedures described above, such acquired shares or shares regarding any voting agreement will not have any voting rights at any shareholders’ meeting of our Company. Any such acquired shares which have not been approved by our Board of Directors shall not be registered in our stock registry book, entries in our stock registry book made beforehand will be canceled and the Company will not acknowledge or give any value to the records or listings referred to in Article 290 of the Mexican Securities Market Law (Ley del Mercado de Valores), any other provision that might substitute it from time to time and other applicable law. Therefore, such records or listings mentioned above will not be considered evidence of ownership of shares, shall not grant the right to attend shareholders’ meetings or validate the exercise of any legal action, including any legal action of a procedural nature.

The provisions in our bylaws described above may only be amended or removed by the approval of shareholders holding at least 95% of our shares. This could hinder the process of selling our shares or the execution of agreements in connection with those shares.

These provisions in our bylaws could potentially discourage future purchases of a significant number of our shares, including potential future acquirers of our business, and, accordingly could adversely affect the liquidity and price of our series A shares.

Holders of our series A shares and the ADSs may suffer further dilution as a result of the exercise of our outstanding warrants.

The issuance of shares upon the exercise of outstanding warrants may cause immediate dilution to our existing shareholders. As of the date of this annual report, we had 70,000,000 Warrants and 29,680,000 Sponsor Warrants outstanding (totaling 99,680,000 warrants outstanding) that are exercisable for 23,333,333 and 9,893,333 series A shares, respectively. Three warrants entitle the holder thereof to purchase one series A share at a price of US$11.50 per series A share. The exercise of such warrants and the corresponding issuance of series A shares may also have a dilutive effect in our earnings per share. The warrants expire on April 4, 2023 or earlier if, after exercisability, the closing price for a series A share for any 20 trading days within an applicable30-trading day period equals or exceeds the Mexican Peso equivalent of US$18.00 and we decide to early terminate the exercise period thereof. See “Item 8—Additional Information—Memorandum and Articles of Association—Warrants.”

If all outstanding warrants were exercised, our issued and outstanding share capital would increase by 33,226,667 series A shares, or approximately 36.06% based on 87,303,462 series A shares outstanding as of the date of this annual report. This would result in an immediate dilution to our shareholders and ADSs holders. Exercise of the outstanding warrants may also put demand pressure on the price of our series A shares and the ADSs.

 

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The payment and amount of dividends are subject to the determination of our shareholders.

The amount available for cash dividends, if any, will be affected by many factors, including our future operating results, financial condition and capital requirements as a result thereof, and the terms and conditions of legal and contractual restrictions. Also, the amount of cash available for dividend payments may vary significantly from estimates. There can be no assurance that we will be able to pay or maintain the payment of dividends. Our actual results may differ significantly from the assumptions made by our Board of Directors in recommending dividends to shareholders or in adopting or amending a dividend policy in the future. Also, there can be no assurance that our Board of Directors will recommend a dividend payment to our shareholders or, if recommended, that our shareholders will approve such a dividend payment. The payment of dividends and the amounts of dividend payments paid by us to our series A shares are subject to the approval of our shareholders and our having absorbed or repaid losses from prior years and also may only be paid from retained earnings approved by our shareholders and if legal reserves have been created.

Dividend distributions to holders of our series A shares will be made in Mexican Pesos.

We will make dividend distributions to holders of our series A shares in Mexican Pesos. While the Mexican government does not currently restrict the ability of Mexican or foreign persons or entities to convert Mexican Pesos into U.S. Dollars or other currencies, it could institute restrictive exchange control policies in the future. Future fluctuations in exchange rates and the effect of any exchange control measures adopted by the Mexican government on the Mexican economy cannot be predicted.

We will be required to assess our internal control over financial reporting on an annual basis and any future adverse findings from such assessment could result in a loss of investor confidence in our financial reports, and significant expenses to remediate any internal control deficiencies and could ultimately have an adverse effect on the market price of the ADSs.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report onForm 20-F for the year ending December 31, 2020, our management will be required to report on the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting, and can provide no assurance that from time to time we will not identify concerns that could require remediation. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. In addition, if we fail to maintain the adequacy of our internal control over financial reporting we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 which may have an adverse effect on us.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

We are required to comply with various regulatory and reporting requirements, including those required by the Commission and the CNBV. Complying with these reporting and regulatory requirements is time consuming, resulting in increased costs to us or other adverse consequences. As a public company, we are subject to the reporting requirements of the Exchange Act, and the requirements of the Sarbanes-Oxley Act, in addition to the existing disclosure requirements by the Mexican Securities Market Law and CNBV rules. These requirements may place a strain on our systems and resources. The Exchange Act rules applicable to us as a foreign private issuer requires that we file annual and current reports with respect to our business and financial condition. Likewise, CNBV rules require that we make annual and quarterly filings and that we comply with disclosure obligations including current reports. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, results of operations and financial condition.

 

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Our bylaws, in compliance with Mexican law, restrict the ability ofnon-Mexican shareholders to invoke the protection of their governments with respect to their rights as shareholders.

As required by Mexican law, our bylaws provide thatnon-Mexican shareholders are considered to be Mexican with respect to shares held by them. Moreover,non-Mexican shareholders explicitly agree not to invoke the protection of its own government by asking such government to interpose a diplomatic claim against the Mexican government with respect to the shareholder’s rights as a shareholder, though such agreement is not deemed to include a waiver to any other rights (for instance, any rights under the United States securities laws, with respect to its investment in us). If you invoke such governmental protection in violation of this provision of the bylaws, your series A shares may be forfeited to the Mexican government.

As a foreign private issuer, we are permitted to, have relied, and intend to keep relying, on exemptions from certain NYSE corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to holders of the ADSs.

The NYSE’s rules require listed companies to have, among other things, a majority of their board members be independent and to have independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer and a controlled company, we are permitted to follow home country practice in lieu of the above requirements. Mexican law does not require that a majority of our board consist of independent directors or the implementation of a compensation or nominating committee, and our board may thus not include, or include fewer, independent directors than would be required if we were subject to the NYSE rules applicable to most U.S. companies. As long as we rely on the foreign private issuer and controlled company exemptions to the NYSE rules, a majority of our Board of Directors is not required to consist of independent directors and we will not be required to have a compensation or nominating committee. Therefore, our board’s approach may be different from that of a board with a majority of independent directors, and, as a result, the management team’s oversight of the Company may be more limited than if we were subject to the NYSE rules applicable to most U.S. companies.

It may be difficult to enforce civil liabilities against us or our directors or officers.

We are a publicly traded company with variable capital (sociedad anónima bursátil de capital variable) organized under the laws of Mexico, and a majority of the members of our Board of Directors and Management Team, our advisors and independent auditors reside or are based outside the United States. All of our assets and the assets of our subsidiaries are located, and all of our revenues and the revenues of our subsidiaries are derived from, sources outside the United States, particularly in Mexico and Argentina. Consequently, it may not be possible for you to effect service of process upon us or these other persons. Because judgments of U.S. courts or courts of other jurisdictions outside of Mexico and/or Argentina for civil liabilities based upon foreign laws of other jurisdictions outside Mexico and/or Argentina may only be enforced in Mexico and/or Argentina if certain requirements are met, you may face greater difficulties in protecting your interests through actions against us, our directors or the members our Management Team than would shareholders of a corporation incorporated in the United States or in other jurisdictions outside of Mexico. There is doubt as to the enforceability, in original actions in Mexican courts and/or Argentine courts or in actions for enforcement of judgments obtained in courts of jurisdictions outside Mexico and/or Argentina, of liabilities predicated, in whole or in part, on the civil liability provisions of U.S. federal securities laws. No treaty exists between the United States and Mexico for the reciprocal enforcement of judgments issued in the other country. In addition, the enforceability in Argentine courts of judgments of U.S. ornon-Argentine courts with respect to matters arising under U.S. federal securities laws or othernon-Argentine regulations will be subject to compliance with certain requirements under Argentine law, including the condition that any such judgment does not violate Argentine public policy (orden público argentino) and provided that an Argentine court will not order the attachment on any property located in Argentina and determined by such court to be essential for the provision of public services.

ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by law, holders and beneficial owners of ADSs irrevocably waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to the ADSs or the deposit agreement. If

 

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this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. If we or the depositary opposed a jury trial demand based on the waiver, the court would analyze whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. In determining whether to enforce a contractualpre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and / or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action, depending on, among other things, the nature of the claims, the judge or justice hearing such claims, and the venue of the hearing.

No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

Holders of our series A shares who sell or transfer series A shares acquired after January 1, 2018 and representing 10% or more of our equity may be subject to Argentine capital gains tax under Argentine tax law.

Under Argentine tax law,non-Argentine residents who sell or transfer shares or other interests in foreign entities acquired after January 1, 2018 may be subject to capital gains tax in Argentina if 30% or more of the market value of the foreign entity is derived from assets located in Argentina and the shares being sold or transferred represent 10% or more of the equity interests of such foreign entity. Therefore, anynon-Argentine holder of our series A shares who sell or transfer series A shares acquired after January 1, 2018 representing 10% or more of our equity interests would be subject to the Argentine capital gains tax.

 

ITEM 4.

INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF THE COMPANY

Vista Oil & Gas, S.A.B. de C.V. is asociedad anónima bursátil de capital variable organized under the laws of Mexico. We were originally incorporated in Mexico on March 22, 2017.

Our principal executive offices are located at Calle Volcán No. 150, Floor 5, Colonia Lomas de Chapultepec, Alcaldía Miguel Hidalgo, Mexico City, Zip Code 11000, Mexico. Our telephone number at this location is +52 (55) 4163-9205. Our website is http://www.vistaoilandgas.com. Information contained on, or accessible through, this website is not incorporated by reference in, and will not be considered part of, this annual report. The Securities and Exchange Commission maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission.

Significant Events of 2019

Production and reserves growth

During 2019, average daily production was 29,112 barrels of oil equivalent per day (boe/d), comprised of 18,244 barrels of oil per day(representing 63% of the total production), 1.62 million cubic meters per day (MMm3/d) of natural gas (representing 35% of the total production) and 700 boe/d of NGL, representing the remaining 2% of total production. Total production in 2019 increased 19% as compared to total production in 2018, which was 24,470 boe/d.

 

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Proved reserves reached 101.8 MMboe as of December 31, 2019, a 77% increase compared to the 57.6 MMboe as of December 31, 2018, as certified by our independent qualified reserves auditors, D&M and NSI. The increase was mainly driven by our shale oil development in Bajada del Palo Oeste, which added 49.2 MMboe. The implied reserves replacement ratio as of December 31, 2019 was 516%, resulting from a reserves replacement ratio of 633% in oil reserves and 298% in gas reserves.

Vaca Muerta Development

During 2019, we completed andtied-in our first 8 shale wells and drilled the third4-well pad, which took our Bajada del Palo Oeste shale production from zero to more than 10,000 boe/d in August 2019, and had an average daily production of 4.9 Mboe/d in the year ended December 31, 2019. In each of the three pads, two wells were landed in La Cocina while the other two were landed in Organic. We completed each pad with 10 clusters per frac stage with a frac spacing of 246 feet (75 meters) in the first pad and 197 feet (60 meters) in the second and third ones (except for one well in the third pad that was completed with a 40 meter frac spacing). We believe that the focus and expertise of our team allowed us to achieve 19.3 hours of pumping time in a24-hour period, fluids of 12,697 m3 and sand of 42,856 sxs, resulting in 8 frac stages in a single day and 5.0 average frac stages per day in our first pad. Such figures were improved in our second4-well pad, by reaching a pumping time of 22 hours in a single day and, consequently, achieving 11 frac stages in a single day and 7.6 average frac stages per day. The performance and cost improvements in the drilling of our third pad were mainly driven by the use of a spudder rig (which has a lower tariff rate) to drill the surface and intermediate sections, the use of a Rotary Steering System during thebuild-up section, the transfer of water to tanks on location using a flat-hose to improve water cost and logistics during completion and the continued improvement through our“One-Team” contracting model.

Global Offering in the U.S. and NYSE listing and other public debt issuances

In July 2019, we completed a global offering consisting of afollow-on public offering in Mexico of our series A shares and an international public offering in the United States and other countries of our series A shares represented by American Depositary Shares on the NYSE for a total amount of 10,906,257 series A shares (including all over-allotment options). Our ADSs began trading on the NYSE on July 26, 2019, under the ticker symbol “VIST.” The gross proceeds of the global offering amounted to approximately $101 million, before fees and expenses.

In addition, in July 2019, Vista Argentina issued a24-month bullet bond for US$50 million at a flat interest rate of 7.88% per annum. In August 2019, Vista Argentina issued a36-month bullet bond for an additional US$50 million at a flat interest rate of 8.50% per annum. See Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”

Águila Mora Unconventional Exploitation Concession

On November 29, 2019, the Governor of the Neuquén Province issued the Decree 2597 pursuant to which Gas y Petróleo del Neuquén S.A. (“GyP”) was granted an unconventional exploitation concession over the Águila Mora block for a term of 35 years (renewable upon termination and subject to certain conditions for successive10-year extensions) in replacement of the existing exploration permit over the block.

GyP holds the mining rights over Águila Mora. Vista (i) holds a 90% working interest in a joint venture with GyP for the exploration and exploitation of the hydrocarbons in Águila Mora; and (ii) is the operator of Águila Mora.

The abovementioned unconventional exploitation concession includes an initial pilot plan of two years, during which Vista must (i) return to production three wells previously drilled and completed by the former operator, (ii) drill two new horizontal wells, and (iii) build surface facilities, for a total investment of approximately US$32,000,000.

In consideration for the concession, Vista paid the Neuquén Province the following amounts: (i) US$700,000 as an infrastructure bonus; and (ii) US$800,000 for corporate and social responsibility.

 

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Corporate Reorganization

On July 2, 2019, we completed a corporate reorganization process whereby APCO Oil & Gas S.A.U. and APCO Argentina were merged by absorption without liquidation into Vista Argentina as part of atax-free reorganization under the terms of the Argentine Income Tax Law (the “Argentine Reorganization”). The Argentine Reorganization was effective as of January 1, 2019 and since such date APCO Oil & Gas S.A.U. and APCO Argentina had effectively been operating as a consolidated entity under Vista Argentina.

Sale of Series A Shares to Kensington Investments B.V.

On February 12, 2019, we completed the sale to Kensington Investments B.V. (“Kensington”) of 5 million series A shares and 5 million warrants to purchase series A shares for an amount of US$50.0 million and, additionally, 500,000 series A shares for an amount of US$5.0 million. Kensington, a wholly-owned subsidiary of the Abu Dhabi Investment Council Company P.J.S.C., a public joint stock company indirectly owned by the government of the Emirate of Abu Dhabi in the United Arab Emirates, is the sole limited partner of Riverstone Vista Capital Partners, L.P. (“RVCP”). The aforementioned sale was consummated pursuant to a certain forward purchase agreement among Vista and RVCP, that provided for the sale by Vista of certain series A shares and warrants to purchase series A shares to RVCP and its permitted transferees, and a related subscription commitment between Vista and Kensington. At the closing of the aforementioned sale, RVCP instructed Vista to transfer the relevant series A shares and warrants to Kensington.

Recent Developments

Completion of third pad

In February 2020, we completed our third4-well pad in our Vaca Muerta development in the Bajada del Palo Oeste concession. We completed our third pad with a total of 177 frac stages, resulting in a cost per frac stage of US$189 thousands, compared to US$220 thousands in our first pad. The total normalized (to a 2,500 meters and 34 frac stages well) cost per well in the third pad totaled US$11.7 million, resulting in savings of 15% from the US$13.8 million of our first pad. We believe the improvement in our completion performance in our third pad is mainly a result of using silobags to store proppant near the pad’s location and a monoline frac-manifold system to connect all the 4 wells, as well as arig-lock wireline connection and frac valves remote greasing.

Covid-19 pandemic

In late December 2019, a novel form of a pneumonia first noticed in Wuhan, Hubei province(Covid-19, caused by a new strain of coronavirus) was reported to the World Health Organization, with cases soon confirmed in multiple provinces in China, as well as in other countries. On March 11, 2020, the World Health Organization characterized theCovid-19 as a pandemic. Several measures have been undertaken by governments of the countries where the coronavirus has affected broad swathes of the population, such as the countries of the European Union, the United Kingdom, the United States of America, South Korea and Japan, among others, to control the coronavirus, including mandatory quarantines, travel restrictions to and from the above listed countries by air carriers and foreign governments.

TheCovid-19 outbreak is currently causing a significant impact on the global economy and financial markets, the oil and gas industry, and our operations in Argentina and Mexico.

We summarize below the main drivers that we currently believe will affect our performance during 2020, and probably beyond:

 

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Decline in oil demand. The demand of our crude oil and gas products is largely influenced by the economic activity and growth in Argentina, Mexico and globally. The effects of theCovid-19 global crisis have led to a worldwide economic slowdown, and as a result there has been a decrease in global demand for crude oil and derivatives. Latest estimates from EIA, IEA and OPEC forecast that global crude oil demand would decline by between 12 MMbbl/d and 23 MMBbl/d during the second quarter of 2020 compared to the second quarter of 2019. In addition, governments around the globe, including Argentina and Mexico, have implemented measures to protect their population against theCovid-19. These preventive measures have caused a decrease in demand of certain goods and services, including petroleum products. As of the date of this annual report, we cannot predict what effect these measures will have on our operations or our financial condition. In Argentina we are currently experiencing similar levels of crude oil demand contraction, which has forced us toshut-in production, as explained below.

Decline in international crude oil prices. As discussed in “Item 3—Key Information—Risk Factors—Risks related to our Business and Industry—We are exposed to the effects of fluctuations in the international prices of oil and gas”, during March and April 2020, Brent oil prices were forced downwards by contracting crude oil demand and the lack of consensus between OPEC and OPEC+ regarding production curtailments in early March. Argentine crude oil prices are linked to Brent, so were also forced downwards, amid a collapsing demand in the domestic market. As a result, our average realized oil prices during March were $24.6/bbl. It is not possible to predict whether these price levels will improve during the following quarters.

Activity. In light of lower realized prices in Argentina and Mexico, and due to the sudden drop in crude oil demand in Argentina, on March 20, 2020 we decided to stop our drilling and completion activity in our Vaca Muerta project in Bajada del Palo Oeste.

Production. Due to the contraction in crude oil demand, on March 20, 2020, we decided toshut-in our 12 wells in Vaca Muerta, which equates to approximately 30% of our total production. Prior to this curtailment we had achieved a peak of 11,500 boe/d in our shale production, with over 2,600 boe/d from a single well. As of the date of this annual report we have little visibility regarding when demand levels will be sufficient to enable us to return such wells to production. In this respect, we have hired a shipping vessel to store our crude oil production for a total amount of approximately 300,000 barrels, to be loaded during the second quarter of 2020 and delivered tooff-takers during the third and fourth quarters of 2020.

Cost Savings. We are currently implementing several cost-saving plans to reduce capital expenditures, operating expenditures and general expenses for the year 2020, prioritizing cash preservation and seeking to maintain a solid cash position. Capital expenditure savings will be related to reduced drilling and completion activity, as discussed above, and postponing facilities and other projects to 2021. Operating expenditure savings are expected to be generated by lower pulling activity and the renegotiation of rates and tariffs with service contractors.

Financial performance. The combination of lower realized prices and lower production levels will likely adversely impact our net revenues, Adjusted EBITDA and cash flows from operations in the coming quarters. Continuous poor economic performance could eventually lead to recognition of impairment charges of some assets which could include accounts receivables, deferred tax assets goodwill and property, plant and equipment in the future, a deterioration in our financial coverage ratios, and cause us to exceed the financial covenants agreed upon in the Syndicated Loan. A contraction of crude oil demand could also affect us financially, including our ability to pay our suppliers for their services, which could, in turn, lead to further operational distress.

In light of all the above mentioned circumstances and given the uncertainty of the lasting effect of theCovid-19 pandemic, Vista has adopted decisive measures. Vista has continued to operate during theCovid-19 pandemic, while monitoring the impact on the health of our workers and on our business operations. In accordance with our business continuity plan, we have reduced our workforce active in our fields, implemented alternating shifts, allowed most of our workforce to work remotely and implemented additional procedures to disinfect our facilities. In addition, we are performing temperature checks for those employees working in the fields and implemented a protocol forCovid-19 symptoms and diagnosis.

 

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For more information on the risks related to theCovid-19 pandemic see “Item 3—Key Information—Risk Factors—Risks related to our Business and Industry—We are exposed to the effects of fluctuations in the international prices of oil and gas”, “Item 3—Key Information—Risk Factors—Risks related to our Business and Industry—We are exposed to contractions in the demand of crude oil and natural gas and contractions in the demand of any of theirby-products” and “Item 3—Key Information—Risk Factors— Risks Related to the Argentine and Mexican Economies and Regulatory Environments—The novel coronavirus could have an adverse effect on our business operations”.

Changes to the capital structure of Aleph Midstream

Aleph Midstream S.A. (“Aleph Midstream”) is a company that started operating in August 2019 and became the first midstream player focused on providing gathering, processing and evacuation services for oil and gas production in the Neuquina basin, spearheading a new paradigm for the development of the Vaca Muerta shale play built on the concept of long-term partnerships with upstream-focused producers.

In light of the uncertain macroeconomic and industry scenario and the reduction of our midstream facilities capex needs, we agreed to terminate our midstream joint venture with an affiliate of Riverstone, an affiliate of Southern Cross Group and certain individualco-sponsors (the “Financial Sponsors”) that we had entered into in June, 2019. Accordingly, on March 31, 2020, Vista completed the acquisition from the Financial Sponsors of all of the issued and outstanding equity interests of each of the Financial Sponsors in Aleph Midstream, at an aggregate purchase price of US$37.5 million (equivalent to the entire equity effectively contributed to Aleph Midstream by the Financial Sponsors). As a result of such transactions, Aleph Midstream is a wholly owned subsidiary of Vista. For more information on Aleph Midstream, see “Item 7—Major Shareholder and Related Party Transactions—Related Party Transactions—Aleph Midstream”.

Issuance of4-year bond by Vista Argentina

On February 22, 2020, Vista Argentina issued a4-year bullet bond for US$ 50 million with a 3.50% annual interest rate payable biannually. See Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”

BUSINESS OVERVIEW

We are an independent Latin American oil and gas company operating since April 4, 2018. We own high-quality,low-operating cost, high-margin conventional producing assets in Argentina and Mexico, with most of our production and revenues originating in Argentina. In addition, most of our ongoing drilling and workover activities, estimated proved reserves and assets are located in Argentina, including our currently-producing Vaca Muerta wells. Led by an experienced management team, we seek to generate strong returns for our shareholders by leveraging our strong cash flow-producing conventional assets and developing our premier shale acreage in our approximately 134,000 net acres in the Vaca Muerta shale play in Argentina, as well as by increasing the oil recovery factor of the conventional assets we operate in Argentina, which is currently lower than the average 15% recovery factor observed in analogouson-shore fields with a solution gas drive drainage mechanism.

During the fourth quarter of 2019, we were the fourth largest shale oil producer of Argentina with 8 wells according to the Argentine Secretariat of Energy. Our average daily production was 29,112 boe/d in the year ended December 31, 2019. Our strategy is to increase our total production through the development of our Bajada del Palo Oeste block in Vaca Muerta. As of the date of this annual report, our portfolio of assets includes working interests in 16 hydrocarbons blocks, 13 of which are located in Argentina and 3 in Mexico. We operate ten of those blocks, which represent 97% of our net production. In Argentina, we hold approximately 525,000 net acres, of which we operate 96%.

As of December 31, 2019, our total proved reserves were 101.8 MMboe, 52% of which are located in shale reservoirs, of which 70% consist of oil and 99.7% of which are located in Argentina. We have identified more than 400 potential high-return locations within our core Vaca Muerta development acreage, amounting to an estimated11-year drilling inventory that we plan to increase through further delineation of our prospective acreage, evaluation of additional stacked landing zones and reduced well spacing.

 

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In addition, we increased our average daily production by 19%, from 24,470 boe/d during the year ended December 31, 2018 to 29,112 boe/d during the year ended December 31, 2019. Such growth was mainly driven by the development of our Vaca Muerta acreage in the Bajada del Palo Oeste concession, where we completed andtied-in our first 8 wells. After 180 days, average production of the 8 wells was 28% above our type curve. Additionally, our shale production reached more than 10,000 boe in one day in August 2019 and total production averaged more than 33,000 boe/d during that month. Since the beginning of our operations, we have significantly reduced operating costs and maximized productivity of our assets withstate-of-the-art technology, streamlined service contracts and cost-efficientpay-for-performance contracts.

The following map illustrates the location of our concessions in Argentina, except for twonon-operated blocks in the Noroeste and Golfo San Jorge basins, as of the date of this annual report:

 

LOGO

Our Operations

During the fourth quarter of 2019, we were the fourth largest shale oil producer of Argentina with 8 wells according to the Argentine Secretariat of Energy. Our average daily production was 29,112 boe/d in the year ended December 31, 2019. Our strategy is to increase our total production through the development of our bajada del Palo Oeste block in Vaca Muerta. As of the date of this annual report, our portfolio of assets includes working interests in 16 hydrocarbons blocks, 13 of which are located in Argentina and 3 in Mexico. We operate ten of those blocks, which represent 97% of our net production. In Argentina, we hold approximately 525,000 net acres, of which we operate 96%.

 

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As of December 31, 2019, our total proved reserves were 101.8 MMboe, 52% of which are located in shale reservoirs, of which 70% consist of oil and 99.7% of which are located in Argentina.

We combine conventional assets that generate significantlow-risk cash flow, with a solid balance sheet and an actionable and profitable growth plan to develop our shale oil acreage. The following table presents information on our concessions, estimated reserves and production for the periods indicated:

 

Block

  Gross acres   Net acres   Interest  Operator  Net proved
reserves as of
Dec. 31, 2019
(MMboe)
   Average net
production
for the year
ended
Dec 31, 2019
(Mboe/d)
   Concession
Expiration
 

Neuquina basin

            

Entre Lomas Neuquén

   99,665    99,665    100  Vista   2.8    2.9    2026 

Entre Lomas Río Negro

   83,349    83,349    100  Vista   16.2    5.6    2026 

Bajada del Palo Oeste

   62,641    62,641    100  Vista   62.7    9.8    2053 

Bajada del Palo Este

   48,853    48,853    100  Vista   2.9    1.4    2053 

Jarilla Quemada(1)

   47,617    47,617    100  Vista   0.9    0.7    2040 

Charco del Palenque(1)

   47,963    47,963    100  Vista   —      —      2034 

25 de Mayo-Medanito

   32,247    32,247    100  Vista   6.7    3.5    2026 

JDM

   48,359    48,359    100  Vista   6.7    4.3    2025 

Coirón Amargo Norte

   26,598    14,629    55  Vista   0.4    0.3    2037 

Águila Mora

   23,475    21,128    90  Vista   —      0.0    2054 

Coirón Amargo Sur Oeste

   16,440    1,644    10  Shell   1.6    0.2    2053 

Golfo San Jorge basin

            

Sur Río Deseado Este

   75,604    12,807    16.9  Alianza Petrolera   —      —      2021 

Noroeste basin

            

Acambuco

   293,747    4,406    1.5  

Pan American

Energy

 

 

  0.6    0.2    2036/2040 

Mexico

            

CS-01

   23,517    11,758    50  Vista(2)   0.2    0.2    2047 

A-10

   85,829    42,915    50  Vista(2)   0.1    0.2    2047 

TM-01

   17,889    8,944    50  Jaguar   —      0.0    2047 

 

(1) 

Jarilla Quemada consolidates the Agua Amarga production information (Jarilla Quemada plus Charco del Palenque production).

(2) 

Jaguar will be the operator until the approval of transfer of operatorship to Vista by the CNH.

Main Operating Subsidiaries

Vista Argentina

Vista Argentina (formerly PELSA, our predecessor company) is an Argentine company with administrative offices in Buenos Aires and Neuquén and a field office with technical staff located on the Entre Lomas concession dedicated to the E&P of hydrocarbons and the commercialization of oil, natural gas and NGL. In the Neuquina basin, it currently operates and holds a (i) 100.00% interest in the following exploitation concessions: Entre Lomas Neuquén, Entre Lomas Río Negro, Bajada del Palo Oeste, Bajada del Palo Este, Charco del Palenque, Jarilla Quemada, 25 de Mayo-Medanito and JDM, (ii) 55% operated interest in the exploitation concession Coirón Amargo Norte located in the Province of Neuquén, (iii) 16.95%non-operating interest in the exploitation concession Sur Río Deseado Este, located in the Province of Santa Cruz, operated by a subsidiary of Cruz Sur Energy (formerly known as Pentanova Energy Corp.), Alianza Petrolera, (iv) 44%non-operating interest in an exploration agreement relating to Sur Río Deseado Este, operated by Quintana E&P Argentina S.R.L. (“Quintana E&P”), (v) 1.50%non-operating interest in the exploitation concession Acambuco, located in the Province of Salta, operated by Pan American Energy

 

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LLC (Argentine Branch), (vi) 90% operated interest in the unconventional exploitation concession Águila Mora located in the Province of Neuquén, and (vii) 10%non-operating interest in the Coirón Amargo Sur Oeste unconventional exploitation concession (operated by Shell). As of December 31, 2019, Vista Argentina had 294 direct employees and approximately 2,100 outsourced staff available to provide services in our operations, of which approximately 450 are required for Vista Argentina’s daily operations.

On July 2, 2019, we completed a corporate reorganization process whereby APCO Oil & Gas S.A.U. and APCO Argentina were merged by absorption without liquidation into Vista Argentina as part of atax-free reorganization under the terms of the Argentine Income Tax Law. The Argentine Reorganization was effective as of January 1, 2019 and since that date APCO Oil & Gas S.A.U. and APCO Argentina had effectively been operating as a consolidated entity under Vista Argentina.

APCO Oil & Gas S.A.U.

APCO Oil & Gas S.A.U. ceased to exist on July 2, 2019, date on which it was merged by absorption without liquidation into Vista Argentina as a result of the Argentine Reorganization.

Vista Holding I

Vista Holding I is a Mexican company with administrative offices in Mexico City incorporated for purposes of, among other things, participate as a partner, shareholder or investor in all kinds of businesses or entities, whether commercial or civil, associations, trusts, or of any other nature, whether Mexican or foreign, from their inception or by acquiring shares, equity interests or other kind of interests, regardless of the name they are given, in all kind of corporations, as well ascarrying-out any activities in the energy sector. It currently holds a 100% interest in Vista Argentina and a 100% indirect interest in Aleph Midstream.

Vista Holding II

Vista Holding II is a Mexican company with administrative offices in Mexico City incorporated for purposes of, among other things, participate as a partner, shareholder or investor in all kinds of businesses or entities, whether commercial or civil, associations, trusts, or of any other nature, whether Mexican or foreign, from their inception or by acquiring shares, equity interests or other kind of interests, regardless of the name they are given, in all kind of corporations, as well ascarrying-out any activities in the energy sector. It is the holder of 50% working interests in theCS-01,TM-01 andA-10 license contracts. As of December 31, 2019, Vista Holding II had 6 employees.

Aleph Midstream

Aleph Midstream is a company that started operating in August 2019 and became the first midstream player focused on providing gathering, processing and evacuation services for oil and gas production in the Neuquina basin, spearheading a new paradigm for the development of the Vaca Muerta shale play built on the concept of long-term partnerships with upstream-focused producers.

On March 31, 2020, Vista completed the acquisition from affiliates of Riverstone, Southern Cross Group and certain individualco-sponsors (the “Financial Sponsors”) of all of the issued and outstanding equity interests of each of the Financial Sponsors in Aleph Midstream, at an aggregate purchase price of US$37.5 million (equivalent to the entire equity effectively contributed to Aleph Midstream by the Financial Sponsors). As a result of such transactions, Aleph Midstream is a wholly owned subsidiary of Vista.

Argentina

Overview

During the years ended December 31, 2018 and, 2019 our production was concentrated in the Neuquina basin in the following assets: Entre Lomas Neuquén, Entre Lomas Río Negro, Bajada del Palo Oeste, JDM, 25 de Mayo-Medanito, Bajada del Palo Este, Charco del Palenque, Jarilla Quemada and Coirón Amargo Norte. We also have some assets in Golfo San Jorge and Noroeste basins which, together with the Neuquina basin assets, amount to approximately 525,000 net acres. As of December 31, 2019, we owned 1,004 productive wells and over 200 injector wells in Argentina.

 

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We have approximately 134,000 net acres located in the Vaca Muerta shale oil formation in Bajada del Palo Oeste, Bajada del Palo Este, Águila Mora and Coirón Amargo Sur Oeste. We operate three of these blocks, representing 99% of our shale net acreage. These assets are surrounded by blocks in which other operators have conducted successful pilots and are in full field development, including Loma Campana, La Amarga Chica, El Orejano, Bandurria Sur, Cruz de Lorena and Sierras Blancas blocks with an oil average daily production of 107.7 Mbbl/d in 2019 (representing 72% of the total Vaca Muerta average daily oil production of the period). We believe our exposure to geological and operational risk is reduced as a result of the successful pilots and developments from the surrounding concessions. In addition, the Bajada del Palo Oeste block, where wetied-in all of our 12 operated shale oil wells targeting the Vaca Muerta formation, and which took our shale production from zero to more than 10,000 boe/d in August 2019, boosted by strong individual well performance, is adjacent to our existing transportation and treatment facilities, which have sufficient spare capacity to process and deliver our initial shale production to the market, thus supporting our productionramp-up and cash flow generation targets. Given that most of our operated shale acreage is clustered together, we will be able to take advantage of the synergies generated by shared surface facilities, drilling rigs, completion service contracts and operations and maintenance service contracts to lower the development and operating costs of our shale production.

We have a significant inventory of over 400 drilling locations targeting the Vaca Muerta shale oil formation within our core development acreage, which provide us with over 11 years of drilling inventory. Our drilling inventory is currently located in the Bajada del Palo Oeste block and provides attractive production growth and high return opportunities. We intend to expand our drilling inventory by testing additional stacked pay zones, such as the Upper, Mid and Lower Carbonate, reducing well spacing in the Bajada del Palo Oeste block and further delineating our acreage in the Bajada del Palo Este and Águila Mora blocks.

As of December 31, 2019, our total proved reserves in Argentina were 101.5 MMboe, of which 70% consisted of oil reserves. Our average daily production for the year ended December 31, 2019 was 28,741 boe/d, of which 63% was crude oil, 35% natural gas and the remaining 2% was NGL. We have reduced our average operating cost from US$13.9 per boe during the year ended December 31, 2018 (information corresponding to all assets acquired in the Initial Business Combination) to US$10.8 per boe for the year ended December 31, 2019 by controlling costs with a new contracting model and strong focus on absorbing unconventional production growth with the existing cost base.

Crude Oil Production and Natural Gas Production in Argentina

We operate most of our blocks. Almost 100% of our production is Medanito light crude oil, which has a gravity higher than 30º API density.

 

Block

  Average net oil
production for the
year ended
December 31, 2019
(Mbbl/d)(2)
   Average net gas
production for the
year ended
December 31, 2019
(MMcf/d)(2)
   Average net NGL
production for the
year ended
December 31, 2019
(Mbbl/d)(2)
 

Neuquina basin

      

Entre Lomas Neuquén

   1.3    0.9    0.6 

Entre Lomas Río Negro

   3.3    2.2    —   

Bajada del Palo Oeste

   5.5    24.1    —   

Bajada del Palo Este

   0.6    4.2    0.1 

Jarilla Quemada(1)

   0.3    1.9    0.0 

Charco del Palenque(1)

   —      —      —   

25 de Mayo-Medanito

   3.3    1.1    —   

JDM

   3.3    5.9    —   

Coirón Amargo Norte

   0.2    0.2    —   

Águila Mora

   0.0    0.0    —   

Coirón Amargo Sur Oeste

   0.2    0.1    —   

Golfo San Jorge basin

      

Sur Río Deseado Este

   —      —      —   

Noroeste basin

      

Acambuco

   0.0    0.9    —   

 

(1) 

Jarilla Quemada consolidates the Agua Amarga production information (Jarilla Quemada plus Charco del Palenque production).

(2)

Oil production is comprised of production of crude oil, condensate and natural gasoline. Natural gas production excludes natural gas consumption. NGL production is comprised of production of propane and butane (LPG) and excludes natural gasoline. Our production of natural gasoline is mixed and sold with our crude oil and condensate production and represents less than 0.05% of our average daily production.

 

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Block

  Average net oil
production for the
nine-month
period ended
December 31, 2018
(Mbbl/d)(3)
   Average net gas
production for the
nine-month period
ended
December 31, 2018
(MMcf/d)(3)
   Average net NGL
production for the
nine-month period
ended
December 31, 2018
(Mbbl/d)(3)
 

Neuquina basin

      

Entre Lomas Neuquén

   1.2    1.8    0.1 

Entre Lomas Río Negro

   3.8    12.9    0.6 

Bajada del Palo Oeste(1)

   1.2    20.1    0.1 

Bajada del Palo Este(1)

   0.6    4.4    0.0 

Jarilla Quemada(2)

   0.4    2.6    0.0 

Charco del Palenque(2)

            

25 de Mayo-Medanito

   3.7    1.8    0 

JDM

   3.1    5.8    0 

Coirón Amargo Norte

   0.3    0.2    0 

Águila Mora

   0    .    0 

Coirón Amargo Sur Oeste

   0.2    0.1    0 

Golfo San Jorge basin

      

Sur Río Deseado Este

   0    0    0 

Noroeste basin

      

Acambuco

   0.0    1.1    0 

 

(1) 

Based on the proved developed reserves for Bajada del Palo Oeste and Bajada del Palo Este blocks to the working interest of Vista as of December 31, 2018 (which constituted a single block prior to December 21, 2018), we estimate that from Bajada del Palo’s total production during the nine-month period ended December 31, 2018, 66% of total oil volumes, and 82% of total natural gas volumes correspond to the Bajada del Palo Oeste concession.

(2) 

Jarilla Quemada consolidates the Agua Amarga production information (Jarilla Quemada plus Charco del Palenque production).

(3) 

Oil production is comprised of production of crude oil, condensate and natural gasoline. Natural gas production excludes natural gas consumption. NGL production is comprised of production of propane and butane (LPG) and excludes natural gasoline. Our production of natural gasoline is mixed and sold with our crude oil and condensate production and represents less than 0.05% of our average daily production.

The information included in the table below corresponds to all assets acquired by us in the Initial Business Combination. Our average daily production was 24,470 boe/d for the year ended December 31, 2018.

 

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Block

  Average net oil
production for the
three-month
period ended
March 31, 2018
(Mbbl/d)
   Average net gas
production for the
three-month
period ended
March 31, 2018
(MMcf/d)
   Average net NGL
production for the
three-month
period ended
March 31, 2018
(Mbbl/d)
 

Neuquina basin

      

Entre Lomas Neuquén

   1.2    1.7    0.1 

Entre Lomas Río Negro

   4.0    11.0    0.6 

Bajada del Palo Oeste

   1.3    20.0    0.1 

Bajada del Palo Este

   0.7    4.4    0.0 

Jarilla Quemada(1)

   0.5    3.1    0.0 

Charco del Palenque(1)

   —      —      —   

25 de Mayo-Medanito

   3.6    2.2    0 

JDM

   3.0    6.1    0 

Coirón Amargo Norte

   0.3    0.4    0 

Águila Mora

   0    0    0 

Coirón Amargo Sur Oeste

   0.1    0.1    0 

Golfo San Jorge basin

      

Sur Río Deseado Este

   0    0    0 

Noroeste basin

      

Acambuco

   0.0    1.2    0 

 

(1) 

Jarilla Quemada consolidates the Agua Amarga production information (Jarilla Quemada plus Charco del Palenque productions).

Concessions

We have obtained participation interests in the following oil and gas concessions in Argentina:

Neuquina basin: (a) a 100% operating interest in the exploitation concessions 25 de Mayo-Medanito and Jagüel de los Machos, Entre Lomas Neuquén and Entre Lomas Río Negro, which we refer to collectively as “Entre Lomas,” Bajada del Palo Oeste, Bajada del Palo Este, and Jarilla Quemada and Charco del Palenque, which we refer to collectively as “Agua Amarga” (in all cases, as operator); (b) a 55% operating interest in the exploitation concession Coirón Amargo Norte (as operator); (c) a 90% operating working interest in the unconventional exploration concession Águila Mora and (d) a 10%non-operating interest in the CASO block (operated by Shell);

Golfo San Jorge basin: 16.95%non-operating interest in the exploitation concessions Sur Río Deseado Este (operated by Alianza Petrolera); and

Noroeste basin: a 1.5%non-operating interest in the exploitation concessions Acambuco (operated by Pan American Energy).

 

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The map below shows the location of our shale blocks in Argentina in which we have working interests as of December 31, 2019:

Neuquina Basin Unconventional Blocks

 

LOGO

Our Argentine concession agreements have no change of control provisions, though any assignment of these concessions is subject to the prior authorization by the executive branch of the province where the concession is located. For the four years prior to the expiration of each of these concessions, the concession holder must provide technical and commercial justifications for leaving any inactive andnon-producing wells unplugged. Each of these concessions can be terminated for default in payment obligations and/or breach of material statutory or regulatory obligations. We may also voluntarily relinquish acreage to the Argentine authorities.

Entre Lomas Neuquén and Entre Lomas Río Negro (“Entre Lomas”)

We are the operator and holder of a 100% interest in the exploitation concessions Entre Lomas Neuquén and Entre Lomas Río Negro, which we refer to collectively as “Entre Lomas,” in the Neuquina basin located in the provinces of Neuquén and Río Negro, respectively. The Entre Lomas concessions are located about 950 miles southwest of the city of Buenos Aires on the eastern slopes of the Andes Mountains. They straddle the provinces of Río Negro and Neuquén approximately 60 miles north of the city of Neuquén. The Entre Lomas Neuquén concession covers a surface area of approximately 99,665 gross acres and the Entre Lomas Río Negro concession covers an area of 83,349 gross acres, both of which produce oil and gas from several formations. The Entre Lomas Neuquén and Entre Lomas Río Negro blocks have proved reserves of 2.8 MMboe and 16.2 MMboe, respectively, as of December 31, 2019 and production of 1.3 Mboe/d (46% oil) and 3.3 Mboe/d (60% oil), respectively, in the year ended December 31, 2019. The Entre Lomas Neuquén and Entre Lomas Río Negro concessions expire in 2026.

As of December 31, 2019, the Company had committed to drill 8 development and 2step-out wells to the Province of Rio Negro, for an estimated cost of US$20.0 million, make capital investments in 9 well workovers and abandon 3 wells for an estimated cost of US$5.3 million in our concessions, through 2022.

The productive units are the continental fluvial and aeolian sandstones of the Tordillo, Punta Rosada formations and the carbonatic facies of Quintuco formation. The remaining primary development consists of the drilling of wells located in the fields’ edges and in small, isolated traps related to areas with echelon fault systems. In addition, there are ongoing secondary recovery projects, such as water conformance and infill drilling, in which we see significant upside potential based on the low current recovery factors.

 

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Bajada del Palo Oeste

We are the operator and holder of 100% of the unconventional exploitation concession granted for the Bajada del Palo Oeste block in the Neuquina basin located in the Province of Neuquén. This block has proved reserves of 50.9 MMboe of shale reserves and 11.7MMboe of conventional reserves as of December 31, 2019 and production of 9.8 Mboe/d (56% oil) for the year ended December 31, 2019. The35-year term unconventional exploitation concession was granted to us in December 2018 and expires in December 2053. In connection with the granting of such unconventional concession, as of December 31, 2019, Vista has already fulfilled the commitment of drilling 8 horizontal wells for a total investment of US$105.6 and related facilities for US$14.7 million by June 2020.

During 2019, we completed andtied-in our first 8 wells, which took our Bajada del Palo Oeste shale production from zero to more than 10,000 in August 2019, and had an average daily production of 4.9 Mboe/d in the year ended December 31, 2019. In addition, in February 2020 we completed andtied-in our third4-well pad. We employ a strict drawdown management policy to preserve frac integrity and stable bottom-hole pressure. In each of the three pads, two wells were landed in La Cocina while the other two were landed in Organic. We completed each pad with 10 clusters per frac stage with a frac spacing of 246 feet (75 meters) in the first pad and 197 feet (60 meters) in the second and third ones (except for one well in the third pad that was completed with a 40 meter frac spacing). During the drilling and completion of our third pad, we managed to improve our drilling efficiency by increasing our drilling speed by 20% to an average 726 feet per day, from an average of 477 feet per day with respect to our first pad. Furthermore, we also improved our completion cost by reducing our average cost per frac stages by 14% to US$189 thousands from US$220 thousands with respect to our first pad. As a result, the average drilling and completion cost per well (normalized to a lateral length of 2,500 meters and 34 frac stages) decreased from US$13.8 million to US$11.7 million, resulting in savings of 15%. We believe that the focus and expertise of our team allowed us to achieve 19.3 hours of pumping time in a24-hour period, fluids of 12,697 m3 and sand of 42,856 sxs, resulting in 8 frac stages in a single day and 5.0 average frac stages per day in our first pad. Such figures were improved in our second4-well pad, by reaching a pumping time of 22 hours and, consequently, achieving 11 frac stages in a single day and 7.6 average frac stages. The performance and cost improvements in the drilling of our third pad were mainly driven by the use of a spudder rig (which has a lower tariff rate) to drill the surface and intermediate sections, the use of a Rotary Steering System during thebuild-up section, the transfer of water to tanks on location using a flat-hose to improve water cost and logistics during completion and the continued improvement through our“One-Team” contracting model. Additionally, the improvement in our completion performance in our third pad is mainly a result of using silobags to store proppant near the pad’s location and a monoline frac-manifold system to connect all the 4 wells, as well as arig-lock wireline connection and frac valves remote greasing.

 

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LOGO

The estimated type curve for Bajada del Palo Oeste is based on real production data gathered from public data of horizontal wells in La Amarga Chica, Bandurria Sur, Loma Campana, Sierras Blancas and Cruz de Lorena Blocks, corroborated by numerical simulation. Each well was declined following common industry methods, to arrive to individual estimates on ultimate recovery. Subsequently,P10-P50-P90 type wells were estimated based on the distribution of ultimate recoveries. To check consistency, we applied a numerical simulation workflow. Effective porosity and water saturation were estimated by petrophysical interpretation of open hole logs from legacy wells in Bajada del Palo Oeste. Vertical heterogeneity of the rock has an effect on hydraulic fracture growth, so a detailed interpretation of borehole image logs coupled with a comprehensive description of available cores in Vaca Muerta formation were used as a heterogeneity input in a hydraulic fracture simulator. This workflow gathers geomechanical properties and vertical heterogeneities of the rock and simulates fracture geometry for a given fracture design. The results are used as input for numerical reservoir simulation, where the fracture geometry is combined with the storage and flow capacity of the rock, and fluid properties of the hydrocarbons. The output of the numerical simulation was then compared with the P50 curve from the real production data distribution for consistency of the results.

 

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The180-day performance of our first 8 wells compares favorably against the oil lateral Permian wells (between 1,900 and 3,000 meters of lateral length)tied-in between 2017 and 2019 (normalized to 2,500 meters lateral length) and all the oil lateral wells drilled in Vaca Muerta ever as shown in the charts below:

 

LOGO

The implementation of the One Team Contracts model, which aligns the interests of key contractors and Vista behind the same goals, by sharing performance and compensation metrics, in conjunction with best practices in terms of logistics, enabled us to achieve outstanding completion results when compared to the basin. We believe that this pad represents a groundbreaking event for us, highlighting Vista’s technical prowess, dedication to efficiency, quality of infrastructure, and capabilities as a premier operator. The following provides an indicative timeline of our fast-track development plan supported by our“one-team” approach, compared to a typical development in Vaca Muerta:

 

LOGO

Bajada del Palo Oeste has 62,641 gross acres with exposure to core shale oil Vaca Muerta acreage, adjacent to blocks already under development or with completed pilot tests and where more than 823 wells have already been drilled as of December 31, 2019.

Our current 11 years drilling inventory targeting the Vaca Muerta shale oil formation amounts to 400 locations located in this block. We intend to expand such drilling inventory by testing additional stacked pay zones, such as the Upper, Mid and Lower Carbonate, reducing well spacing in this block and further delineating our acreage in the Bajada del Palo Este and Águila Mora blocks.

 

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In addition to the exposure to core shale oil Vaca Muerta acreage, this block has black oil production coming from the Tordillo formation, which is under primary recovery and has some water flooding projects ongoing. Dry gas potential has already been tested in the marine sandstones of the Lotena formation, in which 3 wells were drilled in 2018.

Bajada del Palo Este

We are the operator and holder of 100% of the exploitation concession granted for the Bajada del Palo Este block in the Neuquina basin located in the Province of Neuquén. This block has proved reserves of 2.9 MMboe as of December 31, 2019 and production of 1.4 Mboe/d (42% oil) for the year ended December 31, 2019. A35-year term unconventional exploitation concession was granted on December 21, 2018 and expires in December 2053. Along with the granting of the concession, Vista has committed the drilling of 5 horizontal wells totaling an investment of US$51.8 million by December 2021, which as of the date of this annual report had not been disbursed.

Bajada del Palo Este has 48,853 gross acres with exposure to shale oil Vaca Muerta acreage, which we intend to delineate in order to expand our current shale drilling inventory. In addition, this block has fluvial and aeolian sandstones of the Tordillo formation producing black oil together with secondary recovery projects still under study.

Jarilla Quemada and Charco del Palenque (“Agua Amarga”)

We are the operator and holder of a 100% interest in the exploitation concessions Jarilla Quemada and Charco del Palenque, which we refer to collectively as “Agua Amarga,” in the Neuquina basin located in the Province of Río Negro and cover approximately 47,617 and 47,963 gross acres, respectively. These concessions had proved reserves of 0 MMboe and 0.9 MMboe as of December 31, 2019, respectively and joint production of 0.7 Mboe/d (48% oil) for the year ended December 31, 2019. The Charco del Palenque concession expires in October 2034, while the Jarilla Quemada concession expires in August 2040.

The productive unit is the Tordillo formation, which also has secondary recovery projects yet to be tested.

25 de Mayo-Medanito

We are the operator and holder of a 100% interest in the exploitation concession 25 de Mayo-Medanito in the Neuquina basin, located in the Province of Río Negro. The block had proved reserves of 6.7 MMboe as of December 31, 2019 and a production of 3.5 Mboe/d (94% oil) for the year ended December 31, 2019. The concession expires in October 2026.

Productive units are volcaniclastic facies of Choiyoi formation, fluvial sandstones of Tordillo formation and carbonatic and mixed clastic-carbonatic facies of the Quintuco formation. Based on the low current recovery factors, we see significant upside potential for secondary recovery.

JDM

We are the operator and holder of a 100% interest in the JDM exploitation concession in the Neuquina basin, located in the Province of Río Negro, which covers approximately 48,359 gross acres. The block had proved reserves of 6.7 MMboe as of December 31, 2019 and a production of 4.3 Mboe/d 76% oil) for the year ended December 31, 2019. The concession expires in September 2025.

The 25 de Mayo-Medanito and JDM concessions have the following capital commitments with the Argentine Secretariat of Energy and Mining of the Province of Río Negro:

 

  

as of December 31, 2019, we were committed to drill and complete 10 development wells, 4step-out wells and 1 exploration well for an estimated cost of US$20.3 million by 2021; and

 

  

in addition, as of December 31, 2019 we were committed to perform 11 well workover and abandon 21 wells for an estimated cost to fulfill this commitment of US$7.4 million by 2021.

 

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Productive units are volcaniclastic facies of Choiyoi formation, fluvial sandstones of the Tordillo formation and carbonatic and mixed clastic-carbonatic facies of the Quintuco formation. Based on the low current recovery factors, we see a significant upside potential for secondary recovery.

Coirón Amargo Norte

We are the operator and holder of a 55% participation interest in the unincorporated joint venture for the exploitation concession for Coirón Amargo Norte in the Neuquina basin located in the Province of Neuquén, which covers approximately 26,598 gross acres. This block has proved reserves of 0.4 MMboe as of December 31, 2019 and a production of 0.3 Mboe/d (87% oil) for the year ended December 31, 2019. The concession expires in 2037. There are no pending capital commitments.

This block has aeolian sandstones of the Tordillo formation producing black oil. Based on dry gas potential in the Lotena formation which has already been identified in Bajada del Palo Oeste, we believe there is an opportunity of extending such delineation to Coirón Amargo Norte in the future, if there is an increase in natural gas prices.

Águila Mora

We are the operator and holder of a 90% participation interest in the unincorporated joint venture with G&P for the unconventional exploitation concession for Águila Mora in the Neuquina basin located in the Province of Neuquén, which covers approximately 23,475 gross acres, which we intend to delineate in order to expand our current shale drilling inventory.

On November 29, 2019, the Governor of the Neuquén Province issued the Decree 2597 pursuant to which Gas y Petróleo del Neuquén S.A. (“GyP”) was granted an unconventional exploitation concession over the Águila Mora block for a term of 35 years (renewable upon termination and subject to certain conditions for successive10-year extensions) in replacement of the existing exploration permit over the block.

GyP holds the mining rights over Águila Mora. Vista (i) holds a 90% working interest in a joint venture with GyP for the exploration and exploitation of the hydrocarbons in Águila Mora; and (ii) is the operator of Águila Mora.

The abovementioned unconventional exploitation concession includes an initial pilot plan of two years, during which Vista must (i) return to production three wells previously drilled and completed by the former operator, (ii) drill two new horizontal wells, and (iii) build surface facilities, for a total investment of approximately US$32,000,000.

In consideration for the concession, Vista paid the Neuquén Province the following amounts: (i) US$700,000 as an infrastructure bonus; and (ii) US$800,000 for corporate and social responsibility.

This block had a production of 37 boe/d (100% oil) for the year ended December 31, 2019.

Coirón Amargo Sur Oeste

This block is an unconventional exploitation concession which includes approximately 16,440 gross acres located in the core of the Vaca Muerta unconventional play located in the Province of Neuquén, adjacent to blocks that are already under development or with completed pilot projects. We are the holder of a 10% participation interest in an unincorporated joint venture with Shell (operator of the block) and G&P with 80% and 10% participating interest respectively.

In March 2018, the first well was drilled with actual production above the estimated type curve. This block had proved reserves of 1.6 MMboe as of December, 31 2019 and a production of 0.2 Mboe/d (89% oil) for the year ended December 31, 2019. As of December 31, 2019, the are no pending capital commitments with the Province of Neuquén, as we already fulfilled in 2019 the pending investments consisting of the drilling and completion of 3 horizontal wells.

 

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Sur Río Deseado Este

We hold a 16.95% participation interest in the joint venture for the exploitation concession for Sur Río Deseado Este in the Golfo San Jorge basin located in the Province of Santa Cruz, which covers approximately 75,604 gross acres. The operator of this assessment block is Alianza Petrolera. This block has no proved reserves as of December 31, 2019 nor production during the year ended December 31, 2019. The concession expires in 2021. There are no pending capital commitments.

APCO Argentina Branch (currently Vista Argentina) entered into an unincorporated joint venture agreement for the exploration of a portion of Sur Río Deseado Este concession, in which it has a 44% participation interest and in which Quintana E&P Argentina S.R.L. is the operator. This exploration agreement covers approximately of 63,249 gross acres out of the total 75,604 gross acres of Sur Río Deseado Este.

Acambuco

We hold a 1.5% participation interest in the unincorporated joint venture for the exploitation concession for Acambuco in the Noroeste basin located in the Province of Salta, which covers approximately 293,747 gross acres. The operator of this assessment block is Pan American Energy which holds a 52% interest. The remaining interests are held by three other partners, YPF which holds 45% interest, and a subsidiary of WPX Energy, Northwest Argentina Corporation, which holds the remaining 1.5% interest. This block has proved net reserves of 0.6 MMboe as of December 31, 2019 and a net production of 0.2Mboe/d (12% oil) for the year ended December 31, 2019. San Pedrito Exploitation lot under the Acambuco concession expires in 2036 and Macueta Exploitation lot, also under the Acambuco concession, expires in 2040. There are no pending capital commitments.

Mexico

Farm-in to blocks held by Jaguar

On October 30, 2018, we completed the acquisition of a 50% interest in three blocks held by two Mexican E&P companies, Jaguar Exploración y Producción 2.3, S.A.P.I. de C.V., a company wholly-owned by Jaguar Exploración y Producción de Hidrocarburos, S.A.P.I. de C.V. (“Jaguar”), and Pantera Exploración y Producción 2.2, S.A.P.I. de C.V. (“Pantera”), a company 67% owned by Jaguar and 33% owned by Sun God Energía México, S.A. de C.V., pursuant to an assignment agreement (the “Jaguar JVA”).

As a consequence of this transaction, which was approved by the CNH on October 2, 2018, we hold a 50% working interest in the following blocks:

 

  

CS-01 (23,517 gross acres) andA-10 (85,829 gross acres), both to be operated by Vista (upon the approval of transfer of operatorship by the CNH), and

 

  

TM-01 (17,889 gross acres) operated by Jaguar.

 

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The map below shows the location of our blocks in Mexico in which we have working interests as the date of this annual report:

 

LOGO

The table below summarizes information regarding the blocks in Mexico in which we have working interests.

 

Block

  Gross
acres
   Interest   

Operator

  

Lithology

  Wells
Drilled
   Fields   Concession
Expiration
 

CS-01

   23,517    50  Vista  Sandstone   73    2    2047 

A-10

   85,829    50  Vista  Coarse Grained Sands Boundstone Limestone Breccia   19    4    2047 

TM-01

   17,889    50  Jaguar  Reef limestone   40    3    2047 

The operators set forth in the table above are subject to the approval of transfer of the operatorship by the CNH.

The following is a summary of the characteristics as of December 31, 2019 of the license contracts that we will operate in Mexico:

 

Block

  

Main Fields

  Formations /
Depths (mts)
   Productive
wells
   Injector
wells
 

CS-01

  Cafeto, Vernet   3,500/1,300    8    0 

A-10

  Viche, Güiro, Acachúy Acahual   2,596/3,000/2,500/2,500    3    0 

 

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CS-01 Block

We hold a 50% participating interest in the license contract signed with CNH forCS-01 block covering approximately 23,517 gross acres and located in Tabasco, Jaguar being the other licensee holding the remaining 50% interest. Jaguar is the current operator, but will be replaced by Vista, pursuant to the Jaguar JVA and upon approval of CNH, within the following months. This block had a net production of approximately 0.2 boe/d (91% oil) for the year ended December 31, 2019. This license contract terminates in 2047. As of December 31, 2019, the Company’s estimated pending capital commitments amounted to approximately US$6.3 million, corresponding to an estimated amount of 15,549 Unidades de Trabajo (“UTs”).

We intend to optimize artificial lift systems and to install systems capable of handling sand production. Additionally, we plan to drill new prospects and execute workovers to produce undeveloped reserves at upper Zargazal and Amate formations.

A-10

We hold a 50% participating interest in the license contract signed with CNH forA-10 block covering approximately 85,829 gross acres located in Tabasco, with Pantera as the other licensee and holding the remaining 50% interest. Pantera is the current operator, but will be replaced by Vista, pursuant to the Jaguar JVA and upon approval of CNH, within the following months. Net production was approximately 0.2 boe/d (0% oil) for the year ended December 31, 2019. This license contract terminates in 2047. As of December 31, 2019, the Company’s estimated pending capital commitments amounted to approximately US$6.2 million, corresponding to an estimated amount of 12,250 UTs.

We intend to install wellhead compressors in existing wells and to further delineate Amate formation within this block with exploratory wells.

TM-01

We hold a 50% participating interest in the license contract signed with CNH forTM-01 block covering approximately 17,889 gross acres and located in Veracruz, with Jaguar as operator and the other licensee holding the remaining 50% interest. Net production of the block totaled 5 boe/d (100% oil) for the year ended December 31, 2019. The license contract terminates in 2047. As of December 31, 2019, the Company’s estimated pending capital commitments amounted to approximately US$9.1 million, corresponding to an estimated amount of 6,850 UTs.

We intend to expand production by reopening inactive existing wells, which will allow us to produce the remaining oil in the Abra, Tamabra and San Andrés formations. In addition, we expect to drill new exploratory and development wells.

Oil and Natural Gas Reserves

Reserves

The information included in this annual report regarding estimated quantities of proved reserves is derived from estimates of the proved reserves as of December 31, 2019. The proved reserves estimates are derived from the report dated February 6, 2020 prepared by D&M, for our blocks located in Argentina, and the report dated February 18, 2020 prepared by NSI for our blocks located in Mexico. The 2019 Reserves Reports are included as exhibits 99.1 and 99.2 to this annual report. D&M and NSI are independent reserves engineering consultants. The 2019 Reserves Report prepared by D&M is based on information provided by us and presents an appraisal as of December 31, 2019 of oil and gas reserves located in the Entre Lomas Río Negro, Entre Lomas Neuquén, Bajada del Palo Oeste, Bajada del Palo Este, Charco del Palenque, Jarilla Quemada, Coirón Amargo Norte, Coirón Amargo Sur Oeste, Acambuco, Jagüel de los Machos, 25 de Mayo-Medanito blocks in Argentina. The 2019 Reserves Report prepared by NSI is based on information provided by us and presents an appraisal as of December 31, 2019 of our oil and gas reserves located in theCS-01 andA-10 blocks in Mexico.

 

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We believe our evaluators´ estimates of remaining proved recoverable oil and gas reserve volumes to be reasonable. Pursuant to Rule4-10 of RegulationS-X, promulgated by the SEC, proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible-from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations-prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

Crude oil prices used to determine proved reserves in Argentina were the average price during the12-month periods prior ended December 31, 2019, and December 31, 2018, determined as an unweighted arithmetic average of thefirst-day-of-the-month price for each month within such periods. Additionally, since there are no benchmark market natural gas prices available in Argentina, we used average realized gas prices during the year to determine our gas reserves. For more information, see Note 35 of our Audited Financial Statements.

Crude oil and gas prices used to determine proved reserves in Mexico are based on the12-month unweighted arithmetic average of thefirst-day-of-the-month price for each month in the period January through December 2019. For oil volumes, the average West Texas Intermediate spot price per barrel is adjusted for quality, tariffs, and market differentials. For gas volumes, the average Henry Hub spot price per MMBTU is adjusted by field for energy content, tariffs, and market differentials. All prices are held constant throughout the lives of the properties.

The following table sets forth summary information about the oil and natural gas net proved developed and undeveloped reserves of the assets we own in Argentina and Mexico as of December 31, 2019. The proved developed and undeveloped reserves estimates included below were calculated at their respective working interest percentages, including 100% working interest in Entre Lomas Río Negro, Entre Lomas Neuquén, Bajada del Palo Oeste, Bajada del Palo Este, Charco del Palenque, Jarilla Quemada, Jagüel de los Machos and 25 de Mayo-Medanito; 50% inCS-01,TM-01 andA-10; 55% in Coirón Amargo Norte, 10% in Coirón Amargo Sur Oeste and 1.5% in Acambuco.

 

   

Crude oil,

condensate

and NGL(1)

(MMbbl)

   

Consumption

plus natural

gas sales(2)

(Bncf)

   

Total proved reserves

(MMboe)

   % Oil 

Net Proved developed:

   30.3    108.7    49.7    61

Net Proved undeveloped:

   40.7    64.1    52.1    78

Total Net Proved

   71.0    172.8    101.8    70

Total figures may not add up due to rounding.

 

(1) 

Our hydrocarbon liquid volumes include crude oil, condensate and NGL (LPG and natural gasoline). We do not include separate figures for NGL reserves because they represented less than 2% and 3.1% of our proved developed and undeveloped reserves as of December 31, 2019 and December 31, 2018, respectively.

(2) 

Natural gas consumption represented 16.9% of total natural gas reserves (consumption plus natural gas sales) as of December 31, 2018 and 14.1% as of December 31, 2019.

As of December 31, 2019, the oil and gas proved reserves of the assets we own in Argentina (developed and undeveloped) totaled 101.5 MMboe (70.8 MMbbl of oil, condensate and NGL and 172.0Bncf, or 30.6 MMboe of gas), proved undeveloped reserves of crude oil, condensate and NGL represented 70% of our total proved reserves.

 

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   Total Proved Developed   Total Proved Undeveloped   Total Proved   Total 
   

Crude oil,

condensate

and
NGL(1)

   

Consumption

plus natural

gas sales(2)

   

Crude oil,

condensate

and NGL

   

Consumption

plus natural

gas sales

   

Crude oil,

condensate

and NGL

   

Consumption

plus natural

gas sales

     
   (MMbbl)   (Mmboe)   (MMbbl)   (Mmboe)   (MMbbl)   (Mmboe)   (Mmboe) 

Bajada del Palo Oeste Conventional

   2.0    5.8    0.3    3.7    2.3    9.5    11.7 

Bajada del Palo Oeste Shale

   5.3    1.0    37.7    6.9    43.0    7.9    50.9 

Bajada del Palo Oeste

   7.3    6.8    38.0    10.6    45.3    17.4    62.7 

Bajada del Palo Este

   1.5    1.5    —      —      1.5    1.5    2.9 

Coirón Amargo Norte

   0.3    0.1    —      —      0.3    0.1    0.4 

Charco del Palenque

   0.4    0.1    0.4    0.1    0.8    0.2    0.9 

Jarilla Quemada

   —      —      —      —      —      —      —   

Entre Lomas Río Negro

   7.7    7.6    0.4    0.5    8.0    8.1    16.2 

Entre Lomas Neuquén

   1.9    0.9    —      —      1.9    0.9    2.8 

Jaguel de los Machos

   5.1    1.5    0.1    0.0    5.2    1.5    6.7 

25 de Mayo-Medanito SE

   5.8    0.3    0.5    0.0    6.3    0.3    6.7 

Coirón Amargo Suroeste

   0.1    0.0    1.3    0.2    1.4    0.2    1.6 

Acambuco

   0.0    0.5    —      —      0.0    0.5    0.6 

Mexico

   0.2    0.1    —      —      0.2    0.1    0.3 

Total

   30.3    19.4    40.7    11.4    71.0    30.8    101.8 

 

(1) 

Our hydrocarbon liquid volumes include crude oil, condensate and NGL (LPG and natural gasoline). We do not include separate figures for NGL reserves because they represented less than 2% and 3.1% of our proved developed and undeveloped reserves as of December 31, 2019 and December 31, 2018, respectively.

(2) 

Natural gas consumption represented 16.9% of total natural gas reserves (consumption plus natural gas sales) as of December 31, 2018 and 14.1% as of December 31, 2019.

Reserves Estimation Process—Internal Controls

We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with our independent reserves engineers to ensure the integrity, accuracy and timeliness of data furnished to our independent reserves engineers in their estimation process and who have knowledge of the specific properties under evaluation. Our Chief Operating Officer, Juan Garoby, is primarily responsible for overseeing the preparation of our reserves estimates and for the internal control over our reserves estimation. He has more than 20 years of exploration and production and oilfield services experience.

In order to ensure the quality and consistency of our reserves estimates and reserves disclosures, we maintain and comply with a reserves process that satisfies the following key control objectives:

 

  

estimates are prepared using generally accepted practices and methodologies;

 

  

estimates are prepared objectively and free of bias;

 

  

estimates and changes therein are prepared on a timely basis;

 

  

estimates and changes therein are properly supported and approved; and

 

  

estimates and related disclosures are prepared in accordance with regulatory requirements.

 

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Throughout each fiscal year, our technical team meets with “Independent Qualified Reserves Engineers,” who are provided with full access to complete and accurate information pertaining to the properties to be evaluated and all applicable personnel. This independent assessment of the internally-generated reserves estimates is beneficial in ensuring that interpretations and judgments are reasonable and that the estimates are free of preparer and management bias.

Recognizing that reserves estimates are based on interpretations and judgments, there might be differences between the proved reserves estimates prepared by us and those prepared by an Independent Qualified Reserves Engineer. Although such differences were discussed in the technical meetings, the reports include figures estimated by our Independent Qualified Reserves Engineer. Once the process is finished, the Independent Qualified Reserves Engineer sends a preliminary copy of the reserves report to members of our senior management, who act as a Reserves Review Committee. Our Chief Operating Officer, Chief Executive Officer, Chief Financial Officer and Investor Relation and Strategic Planning Officer are part of this committee.

Independent Reserves Engineers

The 2019 reserves data of the assets we own in Argentina were certified by a third party: D&M. D&M is a global oil and gas consultancy that has been offering technical, commercial, and strategic advice to the oil and gas industry since 1936. Vista asked D&M to prepare a report which was issued on February 6, 2020 covering reserves as of December 31, 2019 of the assets we own in Argentina.

The reserves estimates shown herein have been independently evaluated by NSI, a subsidiary of Netherland, Sewell, & Associates Inc. (“NSAI”), a worldwide leader of petroleum property analysis for industry and financial organizations and government agencies. NSAI was founded in 1961 and performs consulting petroleum engineering services under Texas Board of Professional Engineers Registration No.F-2699. Within NSAI, the technical persons primarily responsible for preparing the estimates set forth in the NSAI reserves report incorporated herein are Mr. Joseph Wolfe and Mr. Philip Hodgson. Mr. Wolfe, a Licensed Professional Engineer in the State of Texas (No. 116170), has been practicing consulting petroleum engineering at NSAI since 2013 and has over 5 years of prior industry experience. Mr. Hodgson, a Licensed Professional Geoscientist in the State of Texas, Geology (No. 1314), has been practicing consulting petroleum geoscience at NSAI since 1998 and has over 14 years of prior industry experience. Both technical principals meet or exceed the education, training, and experience requirements set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers; both are proficient in judiciously applying industry standard practices to engineering and geoscience evaluations as well as applying SEC and other industry reserves definitions and guidelines. Vista asked NSI to prepare a report which was issued on February 18, 2020 covering reserves as of December 31, 2019 of the assets we own in Mexico.

Technology used in reserves estimation

According to SEC guidelines, proved reserves are those quantities of oil and gas which, by analysis of geoscience and engineering data, can be estimated with “reasonable certainty” to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation

The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within five years. The term “reasonable certainty” implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. Reasonable certainty can be established using techniques that have been proved effective by actual production from projects in the same reservoir or an analogous reservoir or by other evidence using reliable technology that establishes reasonable certainty. Reliable technology is a grouping of one or more technologies (including computational methods) that have been field tested and have been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.

 

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There are various generally accepted methodologies for estimating reserves including volumetric, decline analysis, material balance, simulation models and analogies. Estimates may be prepared using either deterministic methods. The particular method chosen should be based on the evaluator’s professional judgment as being the most appropriate, given the geological nature of the property, the extent of its operating history and the quality of available information. It may be appropriate to employ several methods in reaching an estimate for the property.

Estimates must be prepared using all available information (open and cased hole logs, core analyses, geologic maps, seismic interpretation, production/injection data and pressure test analysis). Supporting data, such as working interest, royalties and operating costs, must be maintained and updated when such information changes materially.

Our estimated proved reserves as of December 31, 2019 are based on estimates generated through the integration of available and appropriate data, utilizing well-established technologies that have been demonstrated in the field to yield repeatable and consistent results. Data used in these integrated assessments include information obtained directly from the subsurface via wellbore, such as well logs, reservoir core samples, fluid samples, static and dynamic pressure information, production test data, and surveillance and performance information. The data utilized also include subsurface information obtained through indirect measurements, including high quality2-D and3-D seismic data, calibrated with available well controls. Where applicable, geological outcrop information was also utilized. The tools used to interpret and integrate all this data included both proprietary and commercial software for reservoir modeling, simulation and data analysis. In some circumstances, where appropriate analog reservoir models are available, reservoir parameters from these analog models were used to increase the reliability of our reserves estimates.

Acreage

As of December 31, 2019, our total developed and undeveloped acreage in Argentina, both gross and net, was as follows. The table includes the total acreage by us and our subsidiaries, joint operations and associates.

 

   Total Acreage   Total Developed Acreage   Total Undeveloped Acreage 
   Gross   Net   Gross   Net   Gross   Net 

Argentina

   906,558    525.308    93,258    74.132    813.300    451,176 

Mexico

   127,235    63,617    18,457    9,229    108,778    54,389 

Figures are approximate amounts.

Productive Wells

As of December 31, 2019, our total gross and net productive wells in Argentina and Mexico were as follows. The table includes the total gross and net productive wells by us and our subsidiaries, joint operations and associates. Among the two exploratory wells drilled during 2019, one was dry. Among the 25 development wells completed during 2019, none of them was dry.

 

   Oil   Gas   Total 
   Gross   Net   Gross   Net   Gross   Net 

Argentina

   942    933    77    71    1,019    1,004 

Mexico

   10    5    3    2    13    7 

Figures are approximate amounts.

 

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Present Activities

The following table shows the number of wells in Argentina and Mexico that are in the process of being drilled or are in active completion stages, and the number of wells suspended or waiting on completion as of December 31, 2019. For more information on our present activities, see “Item 4—Information on the Company—History and Development of the Company—Oil and Natural Gas Reserves Production—Drilling Activities.”

 

   

Wells in process of being drilled or

in active completion in Argentina

   

Wells in process of being drilled or

in active completion in Mexico

 

Oil wells

    

Gross

   0    0 

Net

   0    0 

Gas wells

    

Gross

   0    0 

Net

   0    0 

 

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Production

The following table set forth information on our oil and natural gas production sales volumes in Argentina for the year ended December 31, 2019.

 

Block

  Production for the year ended
December 31, 2019
   Working Interest  Operator 
   Oil(1)
(in thousands of
barrels)
   Natural gas
sales(2) (in millions
of cubic feet)
        

Neuquina basin

       

Entre Lomas Neuquén

   486.7    1,872.4    100  Vista 

Entre Lomas Río Negro

   1,219.5    4,552.3    100  Vista 

Bajada del Palo Oeste

   1,993.0    8,792.6    100  Vista 

Bajada del Palo Este

   212.8    1,515.1    100  Vista 

Jarilla Quemada(3)

   117.1    690.2    100  Vista 

Charco del Palenque

   —      —      100  Vista 

25 de Mayo-Medanito

   1,218.0    404.1    100  Vista 

JDM

   1,186.9    2,160.3    100  Vista 

Coirón Amargo Norte

   81.2    70.9    55  Vista 

Águila Mora

   13.5    —      90  Vista 

Coirón Amargo Sur Oeste

   56.9    39.9    10  Shell 

Golfo San Jorge basin

       

Sur Río Deseado Este

   —      —      16.95  Alianza Petrolera 

Noroeste basin

       

Acambuco

   8.5    344.4    1.5  Pan American Energy 

 

(1) 

Oil production is comprised of production of crude oil, condensate and natural gasoline. Our production of natural gasoline is mixed and sold with our crude oil and condensate production.

(2) 

Natural gas production excludes natural gas consumption.

(3) 

Consolidates information of both Jarilla Quemada and Charco del Palenque

 

Block

  Production for the nine-month
period ended December 31, 2018
   Working Interest  Operator 
   Crude oil(1)
(in thousands of
barrels)
   Natural gas
(in millions of
cubic feet)
        

Neuquina basin

       

Entre Lomas Neuquén

   433.2    647.3    100  Vista 

Entre Lomas Río Negro

   1,383.3    4,721.7    100  Vista 

Bajada del Palo Oeste

   450.3    7,336.1    100  Vista 

Bajada del Palo Este

   232.0    1,610.4    100  Vista 

Jarilla Quemada

   157.1    938.4    100  Vista 

Charco del Palenque

   —      —      100  Vista 

25 de Mayo-Medanito

   1,362.0    671.4    100  Vista 

JDM

   1,134.0    2,117.4    100  Vista 

Coirón Amargo Norte

   102.8    84.4    55  Vista 

Águila Mora

   0    0    90  Vista 

Coirón Amargo Sur Oeste

   75.5    53.3    10  Shell 

Golfo San Jorge basin

       

Sur Río Deseado Este

   0    0    16.95  Alianza Petrolera 

Noroeste basin

       

Acambuco

   8.2    398.5    1.5  Pan American Energy 

 

(1) 

Oil production is comprised of production of crude oil, condensate and natural gasoline. Our production of natural gasoline is mixed and sold with our crude oil and condensate production and represents less than 0.05% of our average daily production.

 

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Drilling Activities

As of the date of this annual report, all of our drilling activities are concentrated in Argentina. During the year ended December 31, 2019, we drilled and completed 19 conventional wells and performed 11 workovers. Among the drilled and completed wells, 12 new wells targetedoil-weighted formations, whereas 5 wells targeted gas formations and 2 were exploratory wells. Total capital expenditures in conventional drilling and workover activities during the year ended December 31, 2019 were US$50.0 million and total capital expenditures in associated facilities and others totaled US$24.9 million.

Additionally, we deployed capital expenditures in our shale development in Vaca Muerta. During the year ended December 31, 2019, we invested US$150.2 million, of which US$117.7 million correspond to the drilling and completion activities in our Vaca Muerta development in Bajada del Palo Oeste, where we completed our first two4-well pads, drilled the third one and performed 1 workover, US$30.0 million correspond to the construction of associated facilities and others, and US$2.5 million to CASO block. During the 2018 Successor Period we invested US$57.7 million, of which US$53.8 million correspond to the Bajada del Palo Oeste development operated by Vista and US$3.9 million correspond to new well activity in the CASO block operated by Shell.

Total capital expenditures during the year ended December 31, 2019 totaled US$224.1 million, 99% of which were invested in our assets in Argentina

Delivery Commitments

As of the date of this annual report, all of our oil and gas delivery commitments are concentrated in Argentina. The principal sources of oil and gas that we produce in Argentina are the Bajada del Palo Oeste, Entre Lomas Neuquén, Entre Lomas Río Negro, 25 de Mayo-Medanito and JDM blocks. For more information on the amounts we expect to receive from these blocks, see “Item 4—Information on the Company—History and Development of the Company—Our Operations—Argentina—Crude Oil Production and Natural Gas Production in Argentina.”

We are committed to providing fixed and determinable quantities of crude oil, natural gas and NGL in the near future under a variety of contractual arrangements, some of them under firm arrangements and others on a spot basis. Although seasonal demand behavior during winter and autumn affects the prices that we receive for our production, the impact of such seasonality has not played a significant role in our ability to conduct our operations, including drilling and completion activities.

As of December 31, 2019, 100% of our oil production was subject to monthly delivery commitments. According to our estimates, as of December 31, 2019, our contractual delivery commitments, which do not extend beyond December 31, 2019, could be met with our own production.

For natural gas, between March 2019 and April 2019 we signed annual commitments that represent approximately 90% of our marketable total production, with seasonal pricing arrangements. The remainder is being sold to the spot market while we secure firm delivery opportunities.

For NGL, we are committed to deliver a specific quota of propane under an agreement with the Argentine Secretariat of Energy that represents approximately 40% or our annual production to guarantee local demand of residential grids, and the remaining production is freely marketed; regarding Butane we deliver under a National Decree approximately 80% of our annual production to guarantee local NGL cylinders demand for residential consumers.

 

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One Team Contracts

We have implemented a contracting approach (“One Team Contracts”) which aims to align the commercial interests of operators and contractors through performance payments. Operationally, we aim to integrate with our service providers by sharing common objectives and goals and by using same key performance indicators, which provide economic incentives to the personnel of all companies working under the One Team Contracts. Some of the most relevant contracts have already migrated to One Team Contracts: (i) One Team Drilling, which involves Schlumberger and Nabors drilling, (ii) One Team Completion, which involves Schlumberger and BrentEnergía y Servicios, and (iii) One Team Pulling, which involves Quintana Well Pro. Other One Team Contracts are currently being negotiated for operations and maintenance, which are expected to be implemented during 2020.

Transportation and Treatment

In our operated blocks in Argentina, we transport and treat our oil, gas and water production in existing transportation treatment facilities that have sufficient spare capacity to process and deliver our current production and initial shale production to the Oldelval andTransportadora Gas del Sur (“TGS”) pipeline system. Such existing treatment facilities are comprised of two oil and gas pipelines, 29 batteries distributed along the blocks, 2 oil treatment plants, 2 water treatment plants, 10 compression plants (1 of which is expected to start operating in May 2020) and 1 gas complex.

All production from Entre Lomas, Bajada del Palo Oeste, Bajada del Palo Este, Agua Amarga, Coirón Amargo Norte, except for gas production of Bajada del Palo Oeste which is injected in a nearby gas pipeline, is gathered and transported to Entre Lomas’ oil treatment plant, water treatment plant and gas complex (“Entre Lomas Central Production Facility”). Such Entre Lomas Central Production Facility is composed of: (i) a gas complex which has an existing capacity of approximately 45 MMscf/d of gas, with idle capacity of approximately 65%, (ii) a crude oil treatment plant, which has a capacity of 25,000 bbl/d with idle capacity of approximately 55% and (iii) a water treatment plant with an existing capacity of approximately 80,000 bbl/d and idle capacity of approximately 20%.

Production from 25 de Mayo-Medanito and JDM blocks is gathered and transported to 25 de Mayo-Medanito’s oil treatment plant and water treatment plant (“Medanito Central Production Facility”). Such Medanito Central Production Facility is composed of: (i) a crude oil treatment plant with an existing capacity to process approximately 19,000 bbl/d, with an idle capacity of approximately 70% and (ii) a water treatment plant with an existing capacity of approximately 70,000 bbl/d with idle capacity of approximately 55%. Gas production is gathered and delivered to Medanito S.A. gas processing plant, where it is sweetened and processed.

Once treated, we transport our oil and gas production in several ways depending on the infrastructure available and the cost efficiency of the transportation system in any given location. We use the oil pipeline system and oil tankers to transport oil to our customers. Oil is customarily sold through contracts whereby producers are responsible for transporting produced oil from the field to a port for shipping, with all costs and risks associated with transportation borne by the producer. Gas, however, is sold at the point of delivery of the gas pipeline system near the field and, therefore, the customer bears all transportation costs and risks associated therewith. Oil and gas transportation in Argentina operates in an “open access”non-discriminatory environment under which producers have equal and open access to the transportation infrastructure. We maintain limited storage capacity at the oil Terminal located in Puerto Rosales, near Bahía Blanca from which oil is delivered to our end customers.

Overview of exploitation concessions in Argentina

For an overview of the framework governing oil and gas exploitation concessions in Argentina, see “Item 4—Information on the Company—History and Development of the Company—Industry and Regulatory Overview—–Oil and Gas Regulatory Frameworks in Argentina.”

Customers and Marketing

Oil Markets

In Argentina, our crude oil production is mainly sold to domestic refineries. Our main customers are Shell (Raizen) and Trafigura, which combined represented 98% and 74% of our total oil revenues for the year ended December 31, 2019 and the 2018 Successor Period, respectively. Approximately 99% of our oil is produced in the Neuquina basin and is referred to as Medanito crude oil, a high-quality oil generally in strong demand among Argentine refiners for subsequent distribution in the domestic market. Production from our Neuquina basin properties is transported to Puerto Rosales, a major industrial port in the southern region of the Province of Buenos Aires through the Oldelval pipeline system, then goes to either the domestic refining market, which consists of five active refiners, or to international customers through maritime transportation. Even though we prioritize long-term relationships with domestic customers, we are seeking relationships with international customers in order to establish a diversified portfolio for our expected production increase in the upcoming years.

 

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In Mexico, all the crude oil production is sold to Pemex. Jaguar has entered into an oil purchase agreement with Pemex covering the three blocks in which we hold a working interest in Mexico. Pursuant to this purchase agreement, Jaguar (as operator) sells 100% of the production to Pemex, and Vista Holding II pays Jaguar a fee on such sales. See “Item 4—Information on the Company—Industry and Regulatory Overview—Mexico’s Oil and Gas Industry Overview.”

Natural Gas Markets and NGL

In Argentina, we have established a very diversified portfolio of customers for natural gas. Our primary customers in 2019 and the 2018 Successor Period were industrial customers, representing 55% and 85% of our total natural gas revenues for such period, respectively. Argentina has a highly developed natural gas market and a sophisticated infrastructure in place to deliver natural gas to export markets or to industrial and residential customers in the domestic market. However, natural gas markets in Argentina are regulated by the Argentine government. Even though the Argentine government sets the price at which natural gas producers sell volumes to residential customers, volumes that are sold to industrial and other customers are not regulated and pricing varies with seasonal factors and industry category. We generally sell our natural gas to Argentine customers pursuant to short-term contracts and in the spot market. The Neuquina basin is served by a substantial gas pipeline network that delivers gas to the Buenos Aires metropolitan and surrounding areas, and the industrial regions of Bahia Blanca and Rosario. Natural gas produced in our Neuquina basin properties is readily marketed due to accessibility to such infrastructure. Our properties are well situated in the basin with two major pipelines in close proximity. Natural gas produced in this basin that is not under contract can readily be sold in the spot market. In Mexico, all the natural gas production is sold to Pemex.

With regards to our NGL production, we comply with domestic commitments set by the Argentine government with the objective of ensuring the supply for propane and bottled butane for residential uses. Our remaining NGL production is marketed within the Neuquina basin.

Competition

The oil and gas industry is competitive, and we may encounter strong competition from other independent operators and from major oil companies in acquiring and developing licenses or oil agreements. In Argentina, we compete for resources with state-owned YPF, as well as with privately-owned companies such as Pan American Energy, Pluspetrol, Tecpetrol, Chevron, Wintershall, Total, Sinopec, among others. In Mexico, we compete for resources with Pemex the state-owned company and local and international oil companies.

We are also affected by competition for drilling rigs and the availability of related equipment. Higher commodity prices generally increase the demand for drilling rigs, supplies, services, equipment and crews, and can lead to set rig services contracts with international contractors, or shortages of, and increasing costs for, drilling equipment, services and personnel. Over the past several years, oil and natural gas companies have experienced higher drilling and operating costs. Shortages of experienced drilling crews and equipment and services or increasing costs could restrict our ability to drill wells and conduct our operations.

Intellectual Property

Our intellectual property is an essential element of our business, and our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patent, trade secret, trademark and other intellectual property laws, confidentiality agreements and license agreements to establish and protect our intellectual property rights. As of December 31, 2019, we had no pending patent applications.

 

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Information Technology

We rely on our information technology systems and automated machinery to effectively manage our production processes and operate our business. As with other companies, our information technology systems may be vulnerable to damage or interruption from cyber-attacks and other security breaches. Our computer systems are supported by Dell and IBM infrastructure for data processing, NetApp and EMC for storage and backup and Cisco for networking and firewall cybersecurity. As of the date of this annual report, we are working on the implementation of S/4 Hana, a cloud-based ERP licensed by SAP (Systeme, Anwendungen und Produkte in der Datenverarbeitung– Systems, Applications & Products in Data Processing), which we expect will standardize administrative processes and improve internal control across our entire organization.

We depend on digital technology, including information systems to process financial and operating data, analyze seismic and drilling information and oil and gas reserves estimates as well as real-time systems for monitoring and controlling production. We have increasingly connected equipment and systems to the Internet. Because of the critical nature of their infrastructure and the increased accessibility enabled through connection to the Internet, they may face a heightened risk of cyber-attack. See “Item 3—Key Information—Risk Factors—Risks Related to Our Business and Industry—Our industry has become increasingly dependent on digital technologies to carry out daily operations.”

Insurance

We maintain insurance coverage of types and amounts that we believe to be customary and reasonable for companies of our size and with similar operations in the oil and gas industry. However, as is customary in the industry, we do not insure fully against all risks associated with our business, either because such insurance is not available, insurance coverage is subject to a cap or because premium costs are considered prohibitive.

Currently, our insurance program includes, among other things, construction, fire, vehicle, technical, umbrella liability, director’s and officer’s liability and employer’s liability coverage. Our insurance includes various limits and deductibles or retentions, which must be met prior to or in conjunction with recovery. A loss not fully covered by insurance could have a materially adverse effect on our business, financial condition and results of operations.

Health, Safety and Environmental Matters

General

We and our operations are subject to various stringent and complex international, federal, state and local environmental, health and safety laws and regulations in the countries in which we operate that govern matters including the emission and discharge of pollutants into the ground, air or water; the generation, storage, handling, use and transportation of regulated materials and human health and safety. These laws and regulations may, among other things:

 

  

require the acquisition of various permits or other authorizations or the preparation of environmental assessments, studies or plans (such as well closure plans) before seismic or drilling activity commences;

 

  

enjoin some or all of the operations of facilities deemed not in compliance with permits;

 

  

restrict the types, quantities and concentration of various substances that can be released into the environment in connection with oil and natural gas drilling, production and transportation activities;

 

  

require establishing and maintaining bonds, reserves or other commitments to plug and abandon wells; and

 

  

require remedial measures to mitigate or remediate pollution from our operations, which, if not undertaken, could subject us to substantial penalties.

 

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Environmental Policy

Our health, safety and environmental management plan is focused on undertaking realistic and practical programs based on recognized world practices. Our emphasis is on building key principles and company-wide ownership and then expanding programs internally as we continue to grow. Our program has been developed to not only consider the activities we are involved in, but also activities involving our contractors.

We believe that oil and gas can be produced in an environmentally-responsible manner with proper care, understanding and management. We have within our Health, Safety and Environment (“HSE”) program a team that is exclusively focused on securing the environmental authorizations and permits for the projects we undertake. This team is also responsible for the achievement of the environmental standards set by our board of directors and for training and supporting our personnel. In these activities, we are supported by experienced oil and gas environmental consulting firms. Our senior executives have also received training in proper environmental management.

Health and Safety Policy

The implementation of additional safety procedures in our operations in consistency with our Policy, such as training, work permits, internal audits, drills, tailgate safety meetings, job safety analysis and risk evaluations, has led to a reduction in the number of workforce safety incidents. As of December 31, 2019, on a rolling12-month basis, our Total Recordable Incident Rate (“TRIR”) has improved 68%vis-à-vis the previous operator track record: our TRIR was 1.2 (based on a rate of 3,201,623 labor hours) as compared to a 3.93 (based on a rate of 2,802,044 labor hours) as of December 31, 2018. The TRIR for the nine-month period ended December 31, 2018 covered by our operations was 3.24. We had no fatalities due to workforce incidents involving Vista employees related to operations in the years ended December 31, 2019 and December 31, 2018.

 

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INDUSTRY AND REGULATORY OVERVIEW

Recent Trends in the Latin American E&P Sector

The Latin American E&P sector is an increasingly desirable destination for investments on account of multiple improvements in the investment climate. These include the successful ongoing development of Vaca Muerta in Argentina as the only large-scale, commercially developed shale play outside of North America; the improving security situation with the recently signed peace accord along with a longstanding attractive regulatory framework in Colombia and recent Ecopetrol’s asset sale rounds; and Brazil’s recent regulatory improvements aimed at fostering investments in the E&P sector, the launching of Petrobras’ divestment program, and the announcement of Brazilian National Agency of Petroleum’s new bidding rounds, among others. Given the scale of resources and the competitive terms the region offers, actionable opportunities for investment in the Latin American E&P sector present a strong value proposition.

In Latin America, the competition for assets is still low in comparison to other regions worldwide, particularly in North America, which is reflected in lower acquisition costs as measured by different metrics, such as price per flowing barrel of production, price per barrel of oil equivalent of proven reserves and price per acre (specific for shale plays). Since the commodity price crunch in 2014, oil majors have been heavily investing in the region to develop their positions, primarily in Brazil and Argentina.

 

Argentina’s Oil and Gas Industry Overview

Introduction

As of December 2019, Argentina was the fourth largest crude oil producer and the largest natural gas producer in Latin America, based on BP Statistical Review of World Energy 2018. In terms of hydrocarbons reserves, according to the Argentine Secretariat of Energy, as of December 31, 2018, the country had proved developed and undeveloped (1P) natural gas reserves of approximately 13.1 trillion cubic feet (Tcf) and 2.4 billion barrels of oil (Bnbbl), while total proved, probable and possible reserves (3P) were 25.8 Tcf and 4.0 Bnbbl respectively. Additionally, Argentina is home to the world’s fourth largest shale oil prospective resources and second largest shale gas prospective resources, with an estimated of 27 Bnbbl and 802 Tcf, respectively, as of December 31, 2017, and the only commercially producing play outside North America.

 

World Shale Oil Resources (Bnboe)

  

World Shale Gas Resources (Tcf)

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Source: EIA/ARI (2013). World Shale Gas and Shale Oil Resource Assessment, June 2013.

Although the hydrocarbons production in Argentina declined during the years the emergence of shale resources has transformed the outlook of Argentina, bringing significant investments and therefore changing the outlook. The oil majors have built, and continue to build, exposure, and local players have announced ambitious growth plans. As illustrated in the chart below, shale oil production has been increasing at an annual rate of 54% from 2013 to 2019. Additionally, shale gas production has been increasing at annual rate of 96% from 2013 to 2019.

 

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Average Shale Oil Production 2013—2019 (Mboe/d)

 

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Average Shale Natural Gas Production 2013—2019 (Mboe/d)

 

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Source: Argentine Secretariat of Energy.

Argentina has a high level of dependence on hydrocarbons as it accounts for approximately 84% of the country’s primary energy supply. This dependence on hydrocarbons is greater than that of the region (Latin America and the Caribbean), where oil and gas together represent 67% of the primary energy matrix. The oil and gas industry plays a significant role in the economy of Argentina and the development of the unconventional play could potentially make a positive impact on the country’s balance of trade. Increased domestic oil and gas production will reduce the reliance on expensive imported oil and gas and will drive economic growth.

 

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Argentina Primary Energy Mix (%) as of 2018

 

Latin America and the Caribbean Primary Energy

Mix (%) as of 2017

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Mexico Primary Energy Mix (%) as of 2017

 

Brazil Primary Energy Mix (%) as of 2017

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Source: Argentine Secretariat of Energy and OLADE’s 2017 Yearbook of Energy Statistics.

 

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In 2019, domestic gas demand was fulfilled by domestic production and natural gas imports from Bolivia, amounting to 0.18 Tcf (US$1,266 million). Additionally, 0.06 Tcf of LNG (US$428 million) and 152.7 thousands of cubic meters of diesel (US$78 million) for power generation were imported. Due to the increased production of shale oil and the lower load of the refining complex, it was not necessary to import oil during 2019. However, in 2019, 0.5 million of cubic meters of naphtha and 2.1 million cubic meters of diesel (US$1,421 million) were imported. As a result, energy imports reached US$4,446 million, with exports offsetting such amount, reaching US$4,374 million, mainly due to heavy crude oil exports.

Argentina Energy Trade Balance 2008—2019 (US$ bn)

 

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Source: Argentine Secretariat of Energy.

Argentina Basins Overview

The country’s territory includes five oil and gas producing basins: Neuquina, Golfo San Jorge, Cuyana, Noroeste, and Austral with several conventional and unconventional opportunities.

 

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Source: Wood Mackenzie.

 

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The Golfo San Jorge basin is comprised of 84% proved oil reserves, while the Neuquina and Austral basins are comprised of 63% and 91% proved natural gas reserves, respectively. Located in west-central Argentina, the Neuquina basin is amongst the most prolific basins of the country accounting for 43% of total oil and 60% of total gas production.

Oil Exploration and Production Sector

During 2019, oil and condensate production averaged 528 Mbbl/d, 4% higher than 2018 average production and represented 17% of the national production.

Oil Production Evolution (Mbbl/d)

 

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Source: Argentine Secretariat of Energy.

2019 Oil Production Breakdown

 

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Source: Argentine Secretariat of Energy.

During the year ended December 31, 2019, Argentina’s main oil producer was YPF with a 45.8% market share, followed by Pan American Energy (20.7%), Pluspetrol (5.6%), Sinopec Argentina (3.6%), Vista (3.4%) and Tecpetrol (2.8%).

As of December 31, 2018, proved oil reserves totaled 2.4 Bnbbl, with the largest share of proved oil reserves was the Golfo San Jorge basin with 61%, followed by Neuquina (31%), Cuyana (4%), Austral (3%), and Noroeste (1%).

Source: Argentine Secretariat of Energy.

 

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Natural Gas Exploration and Production Sector

During 2019, natural gas production reached 4.2 Bncf/d, 5.5% higher than 2018 production and represented 44% of the national production.

Natural Gas Production (Bncf/d)

 

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2019 Natural Gas Production Breakdown

 

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Source: Argentine Secretariat of Energy.

During the year ended December 31, 2019, Argentina’s main producer of natural gas was YPF, with a 30.7% market share, followed by Total Austral (24.1%), Tecpetrol (10.0%), Pan American Energy (9.9%), Pampa Energía (4.8%) and Compañía General de Combustibles (4.6%).

As of December 31, 2018, proved reserves of natural gas reached 13.1 Tncf. As of December 31, 2017 the basin with the highest concentration of proved reserves of natural gas was the Neuquina basin with 55%, followed by Austral (29%), Golfo San Jorge (12%), and Noroeste (4%).

Source: Argentine Secretariat of Energy.

Demand and Consumption

In 2019, domestic demand of natural gas reached 4.2 Bncf/d. The power generation sector drove demand with 34.8% of the gas consumed in the country, followed by the industrial sector (31.7%), residential (21.2%), and others (12.4%). During 2019, in order to meet the demand for natural gas, 0.18 Tcf of natural gas was imported from Bolivia and Chile respectively, 0.06 Tcf of LNG and 152.7 thousands of m3 of diesel.

 

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Vaca Muerta Shale Formation / Unconventional Potential Overview

The Vaca Muerta formation located in the Neuquina basin is considered one of the most prominent shale plays globally, and has already become the largest commercial shale development outside of North America. The development of the Vaca Muerta formation plays an important role in the Argentine economy, and therefore the national and provincial governments have introduced changes to the regulatory framework for exploration and production of unconventional hydrocarbons, in order to attract investments.

Together with the recent reforms to the regulatory framework, significant reductions in well costs and improvements in production rates, Vaca Muerta has already attracted over 30 oil and gas companies, domestic and IOCs, including Chevron, Shell, ExxonMobil, Total, Equinor, Pan American Energy, Petronas, Pluspetrol, Schlumberger, Tecpetrol, Dow, YPF, Wintershall, BP and CNOOC. Most of these companies, which hold acreage neighboring our blocks, have already completed pilots projects and/or announced significant investments for the upcoming years:

Distribution of the Vaca Muerta Formation in the Basin

 

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Source: Company’s Information and Press Articles

 

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Production from Vaca Muerta reached 316.7 Mboe/d in January 2020, mainly driven by Fortín de Piedra, Loma Campana, Aguada Pichana, La Amarga Chica, La Calera and El Orejano blocks with an oil average daily production of 220.8 Mbbl/d. Other recent developments, such as Rincón del Mangrullo, Aguada de la Arena, Bandurria Sur and La Ribera contributed with more than 44.2 Mboe/d.

Gross Shale Oil & Gas Production (Mboe/d)

 

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Source: Argentine Secretariat of Energy.

Vaca Muerta Oil and Gas Production 2020E—2025E (Mboe/d)

 

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Source: Argentine Secretariat of Energy.

 

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2017 Production by Operator (% ; Mboe/d)

 

2024E Production by Operator (% ; Mboe/d)

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Source: Wood Mackenzie.

Vaca Muerta exhibits similar, or even better, geological properties than several of the most successful shale plays in the United States. The table below sets forth Vaca Muerta’s geological characteristics as compared to top tier U.S. onshore plays.

 

Play

  Total Organic Content (“TOC”)(1)
(%)
  Thickness
(m)
  Reservoir Pressure
(psi)

Bajada del Palo Oeste

  4.2  250  0.9

Vaca Muerta

  3 – 10  30 – 450  0.9

Barnett

  4 – 5  60 – 90  0.5

Haynesville

  0.5 – 4  60 – 90  0.9

Marcellus

  2 – 12  10 – 60  0.6

Eagle Ford

  3 – 5  30 – 100  0.5 – 0.9

Wolfcamp (Permian)

  3  200 – 300  0.6

 

(1) 

TOC refers to the measure of a formation’s organic material represented by the percentage of the weight of organic carbon, a higher organic content indicates that the source formation is more likely to generate hydrocarbon products. In management’s view, TOC is an important evaluation parameter of reservoir hydrocarbon source quality that can serve as an indicator that a particular formation is positioned for the exploitation and development of hydrocarbon projects.

Source: Argentine Secretariat of Energy using Wood Mackenzie.

Approximately 90% of the prospective acreage in Vaca Muerta, estimated at more than 8.6 million acres is concentrated among 12 operators. Most concessions are within the 30,000 to 100,000 acres range, which is significantly larger than the average leasehold in the United States. The terms of concessions in Argentina are also competitive compared to those in the United States, with unconventional concessions of 35 years and flat royalties of 12%.

As of January 31, 2020, drilling activity has historically centered within the Loma Campana block operated by YPF in partnership with Chevron, with more than 618 wells drilled out of 1,226 total wells drilled in Vaca Muerta. Vaca Muerta continues to evolve with development beginning to spread beyond the historical center of activity to adjacent blocks such as El Orejano, Fortin de Piedra, La Amarga Chica and Bandurria Sur projects, which are ramping up drilling activity with more than 238 producing wells. According to the Argentine Secretariat of Energy, projections indicate that there will be over 1,900 unconventional oil completed wells by 2025, and over 1,200 unconventional gas completed wells, with over US$33,500 million of capital expenditure investments deployed.

 

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Total Shale Well Count 1Q17—4Q19

 

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Source: Argentine Secretariat of Energy

One of the most critical elements to value creation in every shale play, including Vaca Muerta, is well costs. The increase in drilling efficiency in horizontal wells in Vaca Muerta has thus far shown encouraging results. YPF achieved a 17% reduction in capital expenditure per lateral foot drilled from US$628/ft in 2017 to an average of US$524/ft at the Q3 of 2019, significantly reducing the gap to comparable fields in the United States. During the same period, most operators began drilling wells with longer horizontal laterals of up to approximately 3,000 meters, achieving greater drilling efficiency and, consequently, a reduction in drilling costs per well. Sand is an important component of well construction costs. It is mainly produced in Argentina and some of the main companies producing it are YPF, Cristamine and Arenas Patagónicas.

 

Loma Campana Horizontal Well Cost

 

(’000 US $ / Lat. ft.)

  

Loma Campana Horizontal Well

 

Performance

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Source: Argentine Secretariat of Energy.

According to Wood Mackenzie, standardized well planning and well management tailored to Vaca Muerta’s characteristics, along with the incorporation ofstate-of-the-art technology have allowed the Vaca Muerta play to achieve levels of productivity comparable to those observed in top U.S. basins.

Type Well EUR Benchmarking (Normalized by Lateral Length)—BySub-play (Low Gas Content Only)

 

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Source: Wood Mackenzie Vaca Muerta Development Study.

 

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Vaca Muerta is in a relatively early stage of its development compared to shale plays in the United States and Canada. The Permian basin is a good analogue for Vaca Muerta, with similar geological characteristics and a long history of unconventional hydrocarbon development. However, Vaca Muerta has even more thickness than the Permian, with up to five different pay zones already tested in different blocks of the basin. Operators have drilled less than a thousand wells in Vaca Muerta compared to more than 12,200 in the Permian. It is expected that Vaca Muerta will have a growth trajectory similar to that of the Permian basin or other U.S. shale plays in the coming years. The growing investment in Vaca Muerta by international operators is similar to the early stages of the Permian basin’s remarkable growth since 2008, becoming one of the most prolific shale plays in the world.

Stacked Pay Potential Across Multiple Zones

 

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Source: Vista.

Oil Infrastructure Network

The Argentine crude oil pipeline network is shaped like a semi-circle, connecting the principal oil fields in the west with refineries along the east coast of Argentina. Refineries are situated along the outer band of the semi-circle, from Luján de Cuyo in the Cuyo basin and Plaza Huincul in the Neuquina basin in the west through the Puerto Galvan refinery at Bahía Blanca on the east coast and on to the various refineries in the Province of Buenos Aires. Argentina’s key crude pipeline is the Oleoductos del Valle S.A. (“Oldelval”) system, which runs from Puesto Hernández in the Neuquina basin to Puerto Rosales near the Bahía Blanca complexes via two14-inch pipelines, transports approximately 70% of the production from the Neuquina basin and has a capacity of approximately 150,000 bbl/d.

 

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Gas Infrastructure Network

Argentina’s gas pipeline network contains more than 30,000 km. The high pressure network is divided into five systems: one main line from the north, three from the west, and one from the south, all of which transport to the greater Buenos Aires region.

 

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Source: Argentine Secretariat of Energy.

Activity in Vaca Muerta has leveraged existing infrastructure, but we expect that new construction and upgrades to the existing infrastructure will be undertaken as production increases. For instance, TGS is building a92-km gathering pipeline with 37 MMm³ /d capacity, which can be expanded to 56 MMm³ /d capacity and a conditioning plant to adapt the quality of natural gas before it enters the transport pipelines. The total investment is estimated to be approximately US$800 million with additional expansions planned. Initially, the conditioning plant will have a capacity of 177 MMcf/d but is expandable to up to 2.0 Bncf/d.

Oil and Gas Regulatory Framework in Argentina

Introduction to the Hydrocarbon Market

Enacted in 1967, the Hydrocarbons Law No. 17,319 (Ley de Hidrocarburos) sets forth the basic legal framework for the exploration and production of oil and natural gas. Although amended under various decrees, this law is still in force today. The latest amendments were aimed at improving investment conditions in the industry.

On October 29, 2014, the Argentine Congress enacted Law No. 27,007, which amended the Hydrocarbons Law in certain aspects mainly relating to the E&P of unconventional hydrocarbons (which were not regulated in the previous Hydrocarbons Law), the extension of the concessions and royalties rates, as follows:

 

  

Exploration permits: the term for permits for conventional exploration was divided into two periods of up to three years each plus a discretionary extension of up to five years. Thus, the maximum possible duration of exploration permits was reduced from 14 to 11 years.

 

  

Unconventional exploration: the term of permits was divided into two four-year terms, plus a discretionary extension of up to five years, providing for a maximum term of 13 years. In the case of offshore permits, the term was divided in two periods of up to three years and a discretional extension for up to five years (with a discretional extension of one year each period of the initial term), providing for a maximum term of 14 years.

 

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Concession: the term of conventional exploitation concessions remains at 25 years. For unconventional exploitations, a35-year term was established, including an initial pilot plan of up to five years. For offshore production, concessions will be granted for periods of up to 30 years. Under the previous Hydrocarbons Law regime, the concessions could be extended only once for a10-year term. Law No. 27,007 established successive extensions to conventional and unconventional concessions for10-year periods. Even the concessions, which were in force prior the enactment of the new regime and those, which had already been extended once, may be extended again.

 

  

Reservation of areas and the transportation method: Law No. 27,007 eliminated the possibility for the Argentine government and the provinces to reserve areas for the exploitation by public entities or state-owned companies as from the date in which Law No. 27,007 entered into force and effect. However, contracts already executed by said provincial entities or companies for the exploration and development of reserved areas continue to be subject to the regulations in force prior to Law No. 27,007.

 

  

Exploration permits and exploitation concessions: Law No. 27,007 updated the values of the applicable rights. In the case of exploration permits, it established the possibility of compensating up to 90% with investments in exploration during the second period of the term and of the extension, when applicable.

 

  

Royalties: the general 12% rate for royalties provided for in the Hydrocarbons Law was maintained. As in the previous regime, the possibility of reducing the rate in exceptional cases up to 5% was also maintained, as well as the possibility of increasing it by 3% upon successive extensions. The new law also introduces a maximum limit to such rate in all cases of 18%. In addition, it provided for the possibility of the grantor to apply a reduced rate of up to 50% for projects (i) of production projects in which enhanced or improved oil recovery techniques are applied, (ii) for extra-heavy oil exploitations and (iii) for offshore exploitations.

Law No. 27,007 provided that the National Executive Branch shall include in the Promotional Investment Regime the direct investment projects that involve investments for an amount of no less than US$250 million in a3-year period. Before the enactment of Law No. 27,007, the benefits under this regime applied to projects for amounts higher than US$1,000 million in a five-year period.

The benefits under the Investment Promotional Regime will be enjoyed after the third year and shall allow 20% of the project’s production to be sold at international market prices for onshore projects, whether conventional or unconventional, and 60% for offshore projects. To qualify as an offshore project, the wells’ depth measured between the surface and the seabed must be of at least 90 meters.

Law No. 27,007 also established two contributions payable to the provinces in connection with the projects subject to this Investment Promotional Regime: (i) 2.5% of the initial investment to develop corporate social responsibility projects, payable by the owner of the project and (ii) a contribution, which amount shall be determined by the Commission for the Strategic Coordination and Planning of the National Hydrocarbon Investment Plan (“CPCE”), created by Decree No. 1.277/2012 considering the size and scope of the project, to develop infrastructure projects in the relevant province, payable by the Argentine government.

Finally, Law No. 27,007 provides that the Argentine government and the provinces will promote the adoption of uniform fiscal legislation to foster hydrocarbon activities.

As regards the different programs adopted by the Government to foster the production of natural gas, it could be mentioned Resolution No. 1/2013 (“Resolution 1”), issued by the Commission for Planning and Strategic Coordination of the National Hydrocarbon Investments Plan (the “Commission”) on February 14, 2013. Resolution 1 created the “Natural Gas Additional Injection Stimulus Program” (“Gas Plan”).Under the Gas Plan, companies were invited to file a project with the Commission before June 30, 2013, in order to receive a compensation up to US$ 7.50 per MMBtu for natural gas injected over a base production curve, as adjusted by a declination curve defined by the producer. This resolution was utilized as a mean of increasing natural gas injection. These projects had to comply with minimum requirements established in Resolution No. 1 –subject to consideration by the Commision– and could last a maximum five years renewable at the request of the beneficiary, upon approval of the Commission.

 

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A similar program was created by the Commission through Resolution No. 60/2013, as amended by Resolution No. 83/2013 for gas producers that failed to file their natural gas additional injection projects before the expiration date established by Commission’s Resolution No. 1/2013. The compensation to be received under this new program varied from US$ 4.00 per MMBtu to US$ 7.50 per MMBtu, depending on the production curve reached by the applicable company. Additionally, a third stimulus program entered into effect through Resolution No. 185/2015 for companies without any prior gas production in Argentina at the time of issuance of Resolution 185/2015.

In October 2016, Resolution No. 212/2016 of the Argentine Secretariat of Energy, established four new Transport System Entering Point (TSEP) prices and a new tariff scheme for users who buy gas from distributors. This resolution also established that until the liberalization of the TSEP prices the Argentine Secretariat of Energy will approve the price every six months (April and October). By the application of the regulations, the average rates for residential users went from an average of US$1.29 /MMBtu at the beginning of 2016 to US$4.68 /MMBtu in April 2018.

In October 2017, the Argentine Secretariat of Energy determined the completion of the domestic price for crude oil and fuels agreement. Domestic prices were released after having reached the level of international prices and from that point on they maintained parity with a full operation of market rules until the sharp depreciation of the Argentine Peso in 2018. This crisis led refiners and producers to make agreements to minimize the increase in the price of fuels at the pump. This led to a temporaryde-coupling of oil prices in Argentina from oil prices in the international market. “Gas Plan” was terminated in December 2017 and subsidies for gas production from conventional fuels were eliminated.

On November 15, 2018, Decree of Necessity and Urgency No. 1053/2018 was issued by Argentine government. As explained below, through such regulation, the Argentine government undertook to pay the daily differences accumulated on a monthly basis between the price effectively paid by gas distributors and the price included in the tariffs schemes in force between April 1, 2018 and March 31, 2019. Additionally, the decree provided that agreements between producers and distributors after April 1, 2019, must include an obligation not to pass through to users the increase in costs due to the fluctuations in the exchange rate during the relevant seasonal period.

Finally, it is important to mention that our Argentine concessions are governed by the laws of Argentina and the resolution of any disputes involving the Argentine government must be sought in the Federal Courts, although provincial courts may have jurisdiction over certain matters.

Exploration and Production

The exploration and production of oil and natural gas is carried out through exploration permits and exploitation concessions. Nevertheless, the Hydrocarbons Law permits surface reconnaissance of territories not covered by exploration permits or exploitation concessions. Information obtained through surface reconnaissance must be provided to the office of the corresponding authority, which is prohibited from disclosing such information for a period of two years without the prior authorization of the party that conducted the exploration, except in connection with the granting of exploration permits or exploitation concessions.

In the event that holders of an exploration permit discover commercially exploitable quantities of oil or gas, such holders will be entitled to obtain an exclusive concession for the production and exploitation of the relevant reserves. The exploitation concession provides its holder the exclusive right to produce oil and gas from the area covered by the concession. An exploitation concession also entitles the holder to obtain a transportation concession for transporting of the oil and gas produced.

Under the Hydrocarbons Law, holders of exploration permits and exploitation concessions are required to carry out all necessary works to find or extract hydrocarbons, using appropriate techniques, and to make the investments specified in their respective permits or concessions. In addition, holders must avoid damage to oil and gas fields and hydrocarbon waste, must undertake adequate measures to prevent accidents and damage to agricultural activities, the fishing industry, communications networks and ground water, and must comply with all applicable

 

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federal, provincial and local laws and regulations. Failure by the holder of permits or concessions to make the relevant investments or take the measures required to avoid damages entitles the federal or provincial government who granted such permits or concessions may revoke or terminate them early, as applicable. Recently, provincial governments have revoked certain concessions arguing that concessionaires had failed to make the required investment.

Both holders of exploration permits and holders of concessions must pay an annual fee based on the land area covered by the corresponding permit or concession (as provided in Section 7 of the Hydrocarbons Law). Holders of exploitation concessions are required to pay for such concessions, and to make certain royalty payments to the Argentine government.

After more than two decades without granting exploration permits in offshore reservoirs, in October 2018, Decree No. 872/2018 was published, ordering the Secretariat of Energy to convene an international public tender for the granting of exploration permits over 38 offshore areas, located in the Argentine territorial sea under federal jurisdiction. In November, 2018, Resolution No. 65/2018 of the Secretariat of Energy was published pursuant to which the Secretariat of Energy called for the mentioned tender and approved the applicable bidding terms and conditions. After passing certain technical and financial tests during the prequalification stage, the interested parties submitted their tenders on April 16, 2019 through a public event attended by various international and public officers of the Secretariat of Energy. The event received bids for 18 of the tendered areas, for approximately US$724 million. Five of these areas received more than one offer, while a single consortium of bidders offered a $5.0 million entry bonus in addition to investments in units of work offered. The award of these areas was published in May, 2019 through Resolution No. 276/2019 of the Secretariat of Energy.

Reserves and Resources Certification in Argentina

The estimation of reserves and resources in Argentina is mainly governed by Argentine Secretariat of Energy Resolution No. 324/2006 and Secretariat of Hydrocarbon Resources ResolutionNo. 69-E/2016. These regulations require holders of exploration permits and exploitation concessions to file by March 31 of each year estimates of natural gas and oil reserves and resources existing as of December 31 of the previous year. Estimates must be certified by an external auditor and sent to the Argentine Secretariat of Energy. Information is required to be presented following the criteria approved by the SPE (Society of Petroleum Engineers), the WPC (World Petroleum Council) and the AAPG (American Association of Petroleum Geologists), which are widely accepted internationally.

Under these definitions reserves are those quantities liquid and gaseous hydrocarbons anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves must satisfy four criteria: discovered, recoverable, commercial, and remaining (as of the evaluation’s effective date) based on the development project(s) applied.

Additionally, according to the degree of certainty that will be commercially recoverable, reserves are classified as proved, probable, and possible reserves. Proved developed reserves are expected to be recovered from existing wells and facilities while proved undeveloped reserves are quantities expected to be recovered through future investments. Moreover, the estimation of “proved oil and natural gas reserves” based on Argentine Secretariat of Energy Resolution No. 324/2006 and Secretariat of Hydrocarbon Resources ResolutionNo. 69-E/2016 may differ from the standards required by SEC’s regulations. See “Item 3—Risk Factors—Risks Related to our Business and Industry—The oil and gas reserves that we estimate are based on assumptions that could be inaccurate.”

Contingent resources are those quantities of hydrocarbons estimated, as of a given date, to be potentially recoverable from known accumulations with current technical conditions, but the applied project(s) are not yet considered mature enough for commercial development due to uneconomical production or lack of viable market. Prospective resources estimate defined by SPE/WPC as those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from undiscovered accumulations are not required to be filed.

Technical and economic criteria (including expected sale prices, projected investments, evolution of operative, administrative and transport costs, estimated taxes and duties) used to estimate reserves and contingent resources are defined by the operators and subject to control by external auditors, who validate the information submitted to the Argentine Secretariat of Energy for official certification.

 

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The information included in this section of the annual report regarding Argentina’s proved reserves has been prepared based on official and publicly available information of the Argentine Secretariat of Energy. References to Argentina’s “proved reserves” follow the definition of “proved reserves” as set forth in the guidelines published by the Argentine Secretariat of Energy. However, the information regarding Vista’s proved reserves included elsewhere in this annual report has been prepared according to the definitions of Rule4-10(a) of RegulationS-X or the Society of Petroleum Engineers’ Petroleum Resources Management System, which differ from the relevant guidelines published by the Argentine Secretariat of Energy. For illustrative purposes, 2017 proved reserves volumes corresponding to the fields acquired by Vista were 52.2 MMboe according to Rule4-10(a) of RegulationS-X and 55.8 MMboe according to the Argentine Secretariat of Energy (i.e., a difference of 6.8% between such volumes).

Transportation

The Hydrocarbons Law grants hydrocarbon producers the right to obtain from the Argentine government a concession for the transportation of oil, gas and theirby-products through a public tender process for a period equivalent to the period granted for the exploration concession linked to the transportation concession. Once the original term and all relevant extensions elapse, the facilities revert to the federal or provincial government, as the case may be.

Producers remain subject to the provisions of the Natural Gas Stimulus Program and in order to transport their hydrocarbons do not need to participate in public tenders. The term of a transportation concession may be extended for an additional 10 years upon application to the Argentine government.

The transportation concessionaire has the right to transport oil, gas and refined products and to construct and operate oil pipelines and gas pipelines, storage facilities, pumping stations, compressor plants, roads, railways and other facilities and equipment necessary for the efficient operation of a pipeline system. While the transportation concessionaire is obligated to transport hydrocarbons on anon-discriminatory basis on behalf of third parties for a fee, this obligation applies only if it has surplus capacity available and after such concessionaire’s own transportation requirements are satisfied.

Depending on whether gas or crude oil is transported, tariffs are subject to approval by theEnte Nacional Regulador del Gas in Argentina (established by Law No. 24, 076) (“ENARGAS”) or the Argentine Secretariat of Energy. SE Resolution No. 5/04, as amended, sets forth maximum amounts:

 

  

For tariffs on hydrocarbon transportation through oil pipelines and multiple purpose pipelines, as well as for tariffs on storage, the use of buoys and the handling of liquid hydrocarbons; and

 

  

That may be deducted in connection with crude oil transportation by producers that, as of the date of the regulation, transport their production through their own unregulated pipelines, for the purpose of assessing royalties.

Upon expiration of a transportation concession, ownership of the pipelines and related facilities is transferred to the Argentine government with no compensation to the concessionaire.

On February 7, 2019, the Argentine government issued Decree No. 115/2019, which amends certain relevant provisions of Decree No. 44/1991. Under this regulation, holders of transportation concessions of hydrocarbon products (both existing and new concessions) will have the right to enter into shipping contracts for the providing of transportation services, for prices and volumes to be freely agreed with shippers. Moreover, Decree 115/2019 provides that the capacity that is not engaged or used (“available capacity”) will remain subject to “open access” under the Hydrocarbons Law and Decree No. 44/1991. For such available capacity (to be informed annually by holders of concessions), the Argentine Secretariat of Energy will establish the corresponding fee (to bere-established every 5 years). With respect to the expansion of existing pipelines, the Argentine Secretariat of Energy will provide a mechanism for allocating such new capacity under new concessions.

Furthermore, the new regulation authorizes the Argentine Secretariat of Energy to define the terms and conditions to call for public tenders for the granting of transportation concessions based on particular proposals made by investors (which will give such proposing investors a preferred status), or to call for public tenders based on the demand of transportation services (for an initial term of 35 years followed by subsequent10-year extension periods).

 

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On July 1, 2019, Resolution No. 357/2019 of the Secretariat of Energy approved the terms and conditions of the tender offers to be organized under the above-mentioned Decree on the basis of proposals submitted by those interested in obtaining a transport concession in the terms of Article 46 of the Hydrocarbons Law.

Authorized Governmental Agency

The Undersecretary of Hydrocarbons is the federal governmental agency in charge of enforcing the Hydrocarbons Law. However, the Argentine Executive Branch is in charge of determining areas in which hydrocarbons activities are to be encouraged and, together with provincial governments, the granting of permits and concessions. Pursuant to the Federalization Hydrocarbon Law No. 24.145, each province has the authority to enforce the Hydrocarbons Law within its own territory.

Pursuant to Decree No. 585/18, the former Argentine Ministry of Energy and Mining changed to Argentine Ministry of Energy, as the Ministry of Production took over all of the mining competences. A few months later, through the issuance of Decree No. 801/2018, the Argentine Ministry of Energy was absorbed by the Ministry of Treasury. In this context, the Argentine Ministry of Energy was replaced for all purposes by the ArgentineSecretaría de Energía under the supervision of the Ministry of Treasury, which took over all of the competences of the former Argentine Ministry of Energy. On December 2019, the Decree No. 7/2019 established that the Secretariat of Energy and the Undersecretary of Hydrocarbons are currently under the supervision of the newly created Ministry of Productive Development (Ministerio de DesarrolloProductivo).

For purposes of this annual report, “Argentine Secretariat of Energy” or “SdE” means the ArgentineSecretaría de Energíaunder the supervision of the Ministry of Productive Development, and/or any of its predecessors (the Argentine Ministry of Energy and the Argentine Ministry of Energy and Mining), and/or any other Argentine federal governmental agency that is in charge of enforcing the Hydrocarbons Law in the future, as applicable.

State Energy Company

On October 2004, the Argentine Congress approved Law 25,943 that created a new state energy company, ENARSA (subsequently renamed as IEASA according to the Decree No. 882/2017). IEASA’s objectives are, through third parties or through joint operations with third parties, (i) to study, the exploration and exploitation of natural reserves of hydrocarbons; (ii) the transportation, processing and marketing of hydrocarbons and their derivative products directly or indirectly; (iii) the transportation and distribution of natural gas; and (iv) the generation, transportation, distribution and commercialization of electricity. Likewise, article 2 of Law 25,943 granted IEASA all exploration concessions with respect to all offshore areas located more than 12 nautical miles from the coast, up to the outer limit of the continental shelf, which were vacant when the law was enforced on November 3, 2004. However, that article was later repealed by Article 30 of Law 27,007, which provides for the reversion and transfer of all exploration and concession permits from the national offshore areas to the SdE, for which there were no association agreements signed with IEASA in the framework of Law 25,943. Law 27,007 exempted from said reversion the exploration permits and exploitation concessions existing at the entry into force of the aforementioned law that had been granted prior to Law 25,943. In this way, the offshore areas of Argentina, with the aforementioned caveats, are again under the jurisdiction of the National Government and can be awarded through the mechanisms provided for in the Hydrocarbons Law and other laws that complement it.

In November 2017, the Argentine Executive Branch decreed the merger of ENARSA and EBISA (Emprendimientos Energéticos Binacionales S.A.), the former being the absorbing company, now known as the IEASA (Integración Energética Argentina S.A.).

Equity Requirements

The Hydrocarbons Law requires that, to engage in any oil and gas exploration, production or transportation activity in respect of oil and gas, companies must comply with certain capital requirements and financial solvency standards.

 

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Disposition No. 335/2019 issued by the Undersecretariat of Hydrocarbons, which regulates the solvency required for a company interested in exploring and/or exploiting hydrocarbons areas, sets forth that, in order to receive and maintain permits or concessions, the permit holder or concessionaire must have a minimum net worth amounting to (i) the value in Argentine Pesos of twenty seven thousand barrels of oil foron-shore areas and (ii) the value in Argentine Pesos of two hundred and seventy thousand barrels of oil, in case ofoff-shore areas. The price to be considered in order to determine the value of the domestic oil barrel in the internal market will be the average price during the previous year considered. The coefficient for the conversion of m3 to barrels will be 6,2898 and the applicable exchange rate will be the average wholesale exchange rate published by the BCRA through Communication A 3,500

Non-compliance with this requirement may result in penalties, including fines or even removal from the register of oil and gas companies. Up to 70% of these equity requirements may be satisfied by means of financial or other guarantees.

Crude Oil Market

Resolution No. 1077/2014, issued by the former Ministry of Economy and Public Finances sets forth, for all hydrocarbons listed therein, an international price to be considered (which was to be updated on a monthly basis), a reference Brent and a nominal factor of withholdings and export duties in connection with oil’s international price.

The production of crude oil has shown a downward trend in recent years. Therefore, as was the case in the gas market, the Argentine government began searching for tools and regulations that could restart the path to growth. To that effect, the Argentine government created the Oil Plus Program (Decree No. 2014 and Secretariat of Energy Resolution No. 1312/2008).

According to the Oil Plus Program, oil producers able to prove an increase in their production of oil and the replenishment of their proven reserves were entitled to a series of tax credits that they could apply to the payment of export duties on their oil, NGL and otherby-products that were due under Resolution No.394/2007. The Oil Plus Program came into force on December 1, 2008, with retroactive effect to October 1, 2008. These tax credit certificates issued by the Secretariat of Electric Energy were transferable.

In February 2015, the CPCE’s Resolution No. 14/2015, complemented by Resolution No. 33/2015, was published, creating the Oil Encouragement Program (Programa de Estímulo a la Producción de Petróleo Crudo). Companies participating in the Oil Encouragement Program, agreed to a minimum production floor (the “Base Production”) and could expect to receive US$3/bbl or US$2/bbl (for domestic and export markets respectively) for any barrel in excess of the Base Production up to a maximum price per barrel of US$70/bbl for Escalante oil and US$84/bbl for Medanito oil.

On July 13, 2015, the Argentine government, through Decree No. 1,330/2015, terminated the Oil Plus program, establishing a compensation payable in Argentine sovereign bonds (namely, BONAR 2018 and BONAR 2024) for fiscal credits accrued but not paid under this program.

On January 11, 2017, the Argentine government, producers and refiners signed the “Agreement for the Transition to International Prices of the Argentina Hydrocarbon Industry” establishing apre-defined scheme with respect to the price of the barrel of oil produced in Argentina in order to track international prices.

On March 20, 2017, the Argentine government, through Decree No. 192/2017, created a registry that required authorization of the SdE in order to proceed with the import of crude oil or of certain derivatives. After the termination of the Agreement for the Transition to the International Price of the Argentine Hydrocarbons Industry and Decree No. 192/2017 -pursuant to Decree No. 962/2017-, the current prices in the domestic market for crude oil and refined fuels are freely set by market participants and determined by supply and demand.

As of January 1, 2017, the Argentine government’s ability to set applicable rates for the export duties for crude oil, created by Law No. 25,561 was terminated but in September 2018, the Argentine government reestablished, through Decree No. 793/2018, export duties of 12% on commodities with a cap of 4 Argentine Pesos per U.S. Dollar across certain primary export products (3 Argentine Pesos per U.S. Dollar for the rest of products).

 

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Even though at first the Decree aimed to be applicable to all primary export products, on December 14, 2019 with the enactment of the Decree No. 37/2019 the scope of products under the Decree No. 793/2018 was restricted. According to the 2019 Federal Budget bill, these duties will be in force until December 2020. In addition, on January 2, 2019, Decree No. 1,201/2018 levied exports of services, as defined in the Argentine Customs Code (Law No. 22,415) amended by the Public Budget Law No. 27,467 (i.e. services rendered in the country, effectively used or exploited abroad), rendered for a valuable consideration and not under a labor relationship, with a 12% export duty (with an AR$4 cap for each US$1) as from January 1, 2019 to December 31, 2020. Effective as from January 1, 2020, Decree No. 99/2019 reduced its export rate to 5% and eliminated the aforementioned cap until December 31, 2021.

In addition, given the recent abrupt change in the exchange rate and the prevailing economic and social context, the National Executive Branch issued Decree of Necessity and Urgency No. 566/2019 (as amended by Decree on Necessity and Urgency No. 601/2019) whereby oil prices were intervened.

In this regard, it was established that until November 13, 2019, deliveries of crude oil made in the local market must be invoiced and paid at the price agreed between the producing and refining companies as of August 9, 2019, applying a reference exchange rate offorty-six pesos with sixty-nine cents per U.S. Dollar ($46.69/US$) and a Brent reference price of fifty-nine dollars per barrel (US$59/bbl). In turn, maximum prices were fixed until November 13, 2019, for gasoline and diesel marketed by the refining companies and/or wholesale and/or retail retailers in all their grades, which have as their final destination the supply of fuel at the retail pump (service stations). The maximum price is the price that was valid on August 9, 2019.

Pursuant to Resolution No. 557/2019, the Secretariat of Energy: (i) authorized prices to increase by up to 4% compared to the prices in force as of August 9, 2019; and (ii) increased the benchmark exchange rate for local crude oil deliveries to AR$ 49.30 for each U.S. Dollar and maintained the Brent reference price at US$59 per barrel.

In addition, Article 4 of the referred decree provides that hydrocarbon-producing companies must meet the total demand for crude oil required to them by local refining companies.

In order to mitigate the impact of the measures implemented by the government through Decree No. 566/2019, the Secretariat of Energy issued Resolution No. 552/2019 which provided: (i) a transfer tooil-producing companies that apply for it of AR$116.10 per barrel delivered to the local market during September, 2019; and (ii) a transfer to biofuel-producing companies benefiting from the biofuel promotion regime established by Laws No. 26,093 and 26,334, upon request, of the equivalent of 6% of the price set by the Secretariat of Energy for August, 2019, applicable to production delivered to the local market during the month of September, 2019. The application for these compensations byoil-producing companies shall include the waiver to make claims related to the application of Decrees No. 566/2019 and No. 601/2019, while for biofuel producing companies, they must waive claims related to the rules establishing the biofuel pricing methodology and those that define their respective prices under the proposed promotion regime Law No. 26,093.

Resolution No. 688/2019, published on November 1, 2019 in the Official Gazette updated reference exchange rate to $51.77 per US$ and maintained the Brent reference price at US$ 59.00/bbl.

As of the date of this annual report, the price measures implemented through Decree 566/2019 (as amended) are no longer in force, since the deadline set for November 13, 2019 was not extended.

The Solidarity Law sets forth that the Argentine Executive Branch is entitled to set export duties up to a maximum of 33% of the exported goods until December 31, 2021. The Solidarity Law also established a cap of 8% for the export duties for hydrocarbons and mining products. As of the date of this annual report, the Argentine government has not yet issued regulations to reduce duties for hydrocarbons and mining products from the current 12% to 8% or less, as established by the Solidarity Law.

The Hydrocarbons Law empowers the National Executive Power to establish a national policy for the development of Argentina’s hydrocarbon reserves, with the principal purpose of satisfying domestic demand. The final purchaser of crude oil at the domestic market may be a refinery, a large producer, or a fuel marketer.

 

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Stability of Fuel Prices

In the early 2000s, in an effort to mitigate the impact of the significant increase in international prices for oil and petroleumby-products on domestic prices and to ensure price stability for crude oil, gasoline and diesel oil, at the request of the Argentine government, hydrocarbon producers and refineries entered into a series of temporary agreements, which contained price limits with respect to crude oil deliveries. By the end of 2004, in light of increases in the WTI, the Argentine government established a series of measures to ensure the supply of crude oil to local refiners at price levels consistent with the local retail price of refined products. Subsequently, when international prices dropped in 2014 the government, producers and refiners agreed a local oil price higher than the international in order to maintain the level of activity in the upstream.

On October 2017, the SdE determined the completion of the domestic price for crude oil and fuels agreement. Domestic prices are released after having reached the level of international prices and from that point maintain parity with them with a full operation of market rules. Producers and refiners currently freely negotiate purchase and sale prices for oil.

However, the sharp depreciation of the Argentine Peso during 2018 prevented oil producers from capturing increases in commodity prices, given refiners’ inability to pass through cost increases to pump prices. This led to a temporaryde-coupling of crude oil prices in Argentina from crude oil prices in the international market, in addition to the measures explained under “Item 4—Information on the Company—Industry and Regulatory Overview—Argentina’s Oil and Gas Industry Overview—Crude Oil Market.”

Gas Market

The increase in the price received by the producers of natural gas, first by “Plan Gas” and, subsequently, by the increase in domestic gas prices, attracted investments in upstream gas projects and reverted the decline in gas production over recent years. This process allowed Argentina to reduce natural gas imports and even export gas volumes in the summer months, when domestic stationary demand is lower. Various reforms of the gas market aimed to regulate the supply of gas to ensure that the supply of the priority demand is met. This structure is known as the “producers’ agreement,” dividing demand into the following: (i) priority demand (residential), (ii) compressed natural gas, (iii) industrial and power plants, and (iv) exports. Each segment pays a different price for gas, with the industrial and the export segments being the only segments with freely floating market prices.

On March 6, 2017, the SdE issued ResolutionNo.46-E/17 as amended by Resolution419-E/17—creating the “Stimulus Program forNon-Conventional Production,” with the objective of promoting investments innon-conventional gas production (tight gas, compact sand, or shale gas) in fields located at the Neuquina basin. In determining the value of the rates for the public service in gas distribution for 2017, the SdE issued Resolution 74/2017 on March 30, 2017, which adopted the gas values at the point of entry into the transport system and is applicable as of April 1, 2017. Additionally, on November 30, 2017, the SdE issued Resolution474-E/2017 which adopted the gas values at the point of entry into the transport system and is applicable as of December 1, 2017.

Under the “Stimulus Program forNon-Conventional Production” Companies are entitled to collect a compensation to be calculated as the difference between the guaranteed minimum price (set at: (i) US$ 7.50/MMBtu for 2018, (ii) US$ 7.00/ MMBtu for 2019, (iii) US$ 6.50/ MMBtu for 2020, and (iv) US$ 6.00/ MMBtu for 2021) and the weighted average monthly price by volume of total natural gas sales in Argentina published by the Undersecretariat of Hydrocarbon Resources (Subsecretaría de Recursos Hidrocarburíferos). Resolution419-E/17 defines the guidelines considered by the former Undersecretariat of Hydrocarbon Resources (currently the Hydrocarbons Subsecretary) to determine the weighted average monthly price by volume of total sales of natural gas in Argentina.

On April 3, 2018, the former Ministry of Energy issued Resolution No. 97/2018 approving the procedure for the cancellation of outstanding amounts under Gas Plan and other similar programs (the “Procedure”). However, on February 21, 2019, the Secretariat of Energy issued Resolution No. 54/19, partially amending Resolution No. 97/2018, adapting it to the payment mechanism defined by Article 55 of Law No. 27,467. It provided,inter alia, that in order to request settlement pursuant to such mechanism, the beneficiaries must express their consent within theten-day period of notification, and that, when consenting to the aforementioned settlement mechanism, they should waive any right, action or claim in connection with the programs, administrative acts of compensation and payment orders that have been issued.

On February 28, 2019, Joint Resolution No. 21/19 of the Finance and Economy Secretariats set forth the issuance, on February 27, 2019, of the “Natural Gas Bonds Program” for an amount up to a face value of US$1,600 million, due on June 28, 2021, to amortize in 29 monthly and consecutive installments. Such payment program provides no interest rate.

 

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On July 24, 2019 the Secretariat of Energy issued Resolution No. 417/2019 which (i) replaced the procedures for obtaining gas export permits established by Resolution No. 104/2018, with a new procedure provided in such Resolution; (ii) entrusted the Undersecretariat of Hydrocarbons and Fuels with: (a) the regulation of energy substitution mechanisms to be used also for exports of natural gas under firm conditions, (b) the development and approval of a natural gas export operating procedure, applicable to natural gas exporters, to be used if domestic supply security is at risk; and (c) grant export permits by issuing the relevant certificate.

Decree of Necessity and Urgency No. 1053/2018

The macroeconomic instability faced by emerging markets and the Argentine economy, in particular, had an impact on the oil and gas sector, among other industries. Between May 2, 2018 and October 1, 2018, the Argentine Peso slid from 20.9 to 38.7 Argentine Pesos per U.S. Dollar according to the U.S. Dollar buying rate published byBanco de la Nación Argentina. Due to the fact that end user domestic prices are set in local currency, upstream companies were unable to pass-through an increase in downstream, therefore collecting lower prices in U.S. Dollar terms. Although the prices of natural gas in Argentina are denominated in U.S. Dollars, the rates paid by regulated end users are denominated in local currency. In this context, due to the impossibility of adjusting tariffs in the short term, wellhead prices decreased from an average of US$4.4 per MMBtu in 2017 to US$4.1 per MMBtu average 2018 for gas delivered to regulated customers.

In this context, on November 16, 2018 Decree No. 1053/2018 stablished that the Federal Government would exceptionally pay the daily differences accumulated on a monthly basis –with cause on exchange rate variations-, between the price of natural gas bought and delivered by gas distributors and the tariffs approved for residential users during the period April 2018-March 2019.

On February and August 2019, Resolutions No. 72/2019 and 466/2019, as modified by Resolution No. 624/2019, issued by ENARGAS applicable from April 1, 2019, approved the pass-through rules and the general procedure for calculating accumulated daily differences. The amounts to be paid to each distribution company were approved by the ENARGAS through Resolution No. 735/2019.

Finally, in response to the recent fluctuations in the exchange rate, the Secretariat of Energy has resolved by Resolution No. 521/2019 – as amended by Secretariat of Energy Resolution 791/2019 – to defer thesix-monthly adjustment of the transport and distribution tariffs, from its deadline on October 1, 2019 to February 1, 2020. That decision includes the deferment of adjustments of natural gas prices payable by natural gas distributors from October 1, 2019 to February 1, 2020, at which time appropriate adjustments shall be resolved for the periods deferred, including calculation of the daily differences during such period.

The Social Solidarity and Productive Reactivation Law

On December 23, 2019, the Government enacted Solidarity Law , declaring a public emergency in economic, financial, fiscal, administrative, pension, tariff, energy, health and social matters. The Solidarity Law establishes the restructuring of the energy tariff scheme and froze the natural gas and electricity tariffs. In addition, the Solidarity Law entitles the National Executive Branch to intervene the ENARGAS and the ENRE.

Mexico’s Oil and Gas Industry Overview

Mexico is the eleventh largest producer of oil in the world and has the fourth largest proved oil reserves in Latin America, after Venezuela, Brazil and Ecuador, which makes it one of the most attractive destinations for investment in hydrocarbon Exploration and Production (E&P) activities in the world. Mexico has significant hydrocarbon resources with estimated oil and gas proved developed and undeveloped reserves of 8.5 Bnboe, 3P reserves of 25.5 Bnboe and estimated prospective resources of 112.8 Bnboe, in each case as of January 1, 2018. There exist multiple formations to develop productive fields across the country and many opportunities to take advantage of the recent reforms to the energy sector.

 

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LOGO

Source: Wood Mackenzie.

The Mexican subsurface has multiple geological plays and provides sizeable opportunities across the risk spectrum, from onshore mature fields to large deep-water projects. While oil and gas reserves are strongly concentrated in Southeast Basin plays, prospective resources are spread across multiple plays across several basins, which could lead to more opportunities for oil and gas participants to access previously untapped reservoirs. Mexico’s total oil production has declined from 3.33 MMbbl/d in 2005 to 1.75 MMbbl/d in 2018 due to the decrease in production from the Cantarell giant field, according to CNH. Nevertheless, there exists opportunities for private operators and Pemex to increase production through the introduction of new technologies for the use and exploitation of fields more technically challenging resources from shallow and deep-water exploration, as well as secondary and tertiary recovery projects in onshore conventional fields and unconventional resource exploration.

 

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Mexican Oil and Gas Reserves as of January 1, 2019

 
(Bnboe)                
       Reserves     

Geological basin

  Cumulative
production
   1P   3P   Prospective
resources
 

Southeast

   48.3    7.1    17.2    14.4 

Tampico Misantla

   7.4    0.9    6.4    37.1 

Burgos

   2.5    0.2    0.4    14.0 

Veracruz

   0.9    0.2    0.5    2.0 

Sabinas

   0.1    0.0    0.0    14.3 

Others*

   0.0    0.0    0.1    3.0 

Deepwater

   0.0    0.1    0.9    28.0 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Mexico

   59.2    8.5    25.5    112.8 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Pemex

   59.2    7.7    21.1    23.4 
  

 

 

   

 

 

   

 

 

   

 

 

 

Rest of opportunities

   —      0.8    4.4    89.4 

 

*

Includes Cinturón Plegado de Chiapas and Plataforma Burro-Picachos

Source: Pemex and CNH.

Although the largest resources are in the offshore and unconventional plays, substantial potential still exists in onshore conventional reservoirs. According to Mexico Oil and Gas Review, there are approximately over 500 mature fields that are currently generating aggregate production of approximately 2,500 kbbl/d. Mexico’s unconventional resource base is among the largest in the world and is located only a few hundred miles away from the more developed U.S. shale plays with which the formations share many similarities. According to the EIA, technically recoverable shale resources, estimated at 545 Tcf of natural gas and 13.1 Bnbbl of oil, are potentially larger than the country’s proven conventional reserves.

Multiple E&P plays across basins

 

LOGO

Source: EIA.

 

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Private investment opportunities are available across Mexico’s energy industry, including oil and gas E&P, the development, the construction and the management of new pipeline capacity and the bolstering of existing capacity, the development and the building of liquids and gas storage and transport facilities and revamping the country’s gasoline-station sector, among others, that will require significant amounts of capital.

In addition to these sources of opportunities for private investment, Mexico exhibits significant potential to increase oil production through the wider application of secondary and tertiary techniques, significantly enhancing current recovery factors. For example, a one percentage point increase in recovery factors would represent a volume of approximately 1.6 Bnbbl (equivalent to more than two years of the total oil production of Mexico).

In conclusion, we believe that Mexico is particularly attractive for investment by E&P companies, as it features several hydrocarbon basins that are under-explored and under-exploited because Mexico’s E&P sector was closed to private sector participation for over 75 years and is now open to new players.

The 2013 Energy Reform

Mexico’s energy industry has recently undergone historic and vital reforms aimed at encouraging growth and modernization that we believe will attract significant private investment in the sector. In 2013, Mexico’s government proposedfar-reaching constitutional reforms aimed at modernizing the energy industry and increasing access to the country’s oil and gas reserves, production capacity and overall supply infrastructure to aid in Mexico’s economic growth, increase fiscal revenues and strengthen the federal budget. Furthermore, and relying on the approved constitutional reforms, Mexico’s Congress passed secondary economic and technical legislation in August 2014, impacting energy related activities ranging from upstream to downstream activities and from resource exploitation to power generation.

Particularly relevant for Mexico’s oil and gas industry, the reforms seek to boost oil and gas exploration and production by allowing private investor participation for the first time in over 75 years and increasing access to technology, expertise, and capital. The regulatory framework adopted by the reforms is considered to have abided by policy best practices and transparency at an international level.

The reforms granted the E&P sector more independence from Pemex. Prior to the reform, the Mexican Constitution stated that Pemex must carry out, by itself, all of the activities of the country related to the oil and gas industry. With the energy reform, the figure of Exploration and Production Agreements (E&P Agreements) of hydrocarbons was incorporated into the Mexican Constitution. The E&P Agreements now allow private companies to participate in the national energy sector, including E&P activities as operators ornon-operators, with the ability to report oil and gas reserves in their financial statements. Also, derived from the reform Pemex is allowed to partner with private companies to carry out various activities of the productive chain of the sector, giving Pemex access to much advanced capital, technology andknow-how, as well as allowing it to become a more efficient state-owned productive enterprise.

Mexico’s E&P sector has received significant attention from the international community, given that Mexico’s energy reform has included not only a series of high profile E&P Agreements allocation rounds, but also mechanisms that allow Pemex to more easily partner with private companies and investors through farm-outs and migrations from E&P integrated services contracts to E&P Agreements. There are three principal means for private entities to invest in Mexico’s E&P sector: Pemex farm-outs, E&P services contract migrations, and CNH’s bidding rounds.

Hydrocarbon tender rounds

As mentioned above, the energy reform allowed CNH to allocate E&P Agreements. The Mexican Ministry of Energy (“SENER”) establishes prequalification requirements for each bidding round, such as the operational, technical, financial, and legal capabilities required, and the bidding process is conducted by a committee of CNH members.

As part of the energy reforms, SENER released a five year (2015 – 2019) hydrocarbon tender plan (the “Five Year Plan”). The Five Year Plan was intended to be a blue print of the government’s strategy to increase hydrocarbon production, replenish existing reserves and maximize interest from participants in future licensing rounds. The Five Year Plan is considered a fundamental pillar of Mexico’s energy policy and one of the key instruments for implementation of the energy reforms. SENER will also seek feedback from industry participants and operators in order to offer the most attractive opportunities.

 

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As of the date of this annual report, the CNH has awarded and executed 112 contracts of exploration and production. Of those, almost half (46%) have been onshore, while approximately one third (29%) have been in shallow waters and one quarter (25%) have been in deep waters. In 2017, production reached 38.7 Mbd of oil and 48.2 MMpcd of natural gas.

To date, the Mexican government has successfully completed the first, second and third bidding rounds. One hundred and four blocks were awarded through nine different tenders, 38 in Round 1, 50 in Round 2 and 16 in Round 3. Many reputable international oil and gas companies have been awarded blocks in these rounds, including, among others, Total, Shell, ENI, Petronas, Ecopetrol, Repsol, Murphy, Ophir, Premier, Statoil, DEA, Lukoil, CNOOC, Pan American, Fieldwood and Talos. These represent the first E&P Agreements awarded in Mexico since 1938.

On December 11, 2018, the CNH cancelled the second and third bids for Round 3. This was due to the fact that SENER required the withdrawal of all the blocks that were going to be tendered in order to carry out a greater analysis of the prospects incorporated in the tenders. As of the date of this annual report, the CNH had not published new calls for bids and had not released the yearly update of the Five Year Plan. Further, during a press conference held on January 24, 2020 the head of SENER stated that hydrocarbon tender rounds and farm-outs are not currently a part of the Federal Government’s plans to increase oil production.

Farm-outs

Farm-outs are a mechanism by which a license holder to an energy resource assigns an interest in the license to another party. Pemex is using farm-outs to partner with international E&P operators with the financial resources and expertise to accelerate development and extract value from its extensive hydrocarbon asset base. The firstfarm-out contract was assigned in December 2016 to BHP Billiton, resulting in a partnership with Pemex to develop the Trion deep-water oilfield in the Perdido area.

In its 2017-2021 business plan, Pemex unveiled an aggressivefarm-out program aimed at attracting new private sector partners. Thefarm-out projects include opportunities in onshore, shallow water and deep-water fields. Some of these fields are already in the production phase and represent over 1,000 square kilometers and 4,139 MMboe of Mexico’s 3P reserves. Pemex estimates that these assets will require over US$40 billion to develop. Pemex hopes to increase production in its fields by 15% through thesefarm-out agreements, according to Pemex’sPlan de Negocios 2017-2021.

The firstfarm-out agreement for the Trion field was executed in March 2017 by Pemex and BHP Billiton. In March 2017, the CNH, began a tender process for the second production sharing agreement with Pemex in the shallow waters of theAyín-Batsil fields in the Gulf of Mexico and, in September of the same year, the process for thefarm-out in the deep water gas Nobilis Maximino field initiated. The first tender was declared null and the other process was canceled in December. In October 2017, two partnership processes were finalized in the Cárdenas Mora (3P reserves: 93.19MMboe) and Ogarrio (3P reserves: 53.97MMboe) fields. The farm-outs were awarded to Cheiron Holding Limited and DEA Deutsche Erdoel AG, respectively.

In April 2018, CNH published the tenderCNH-A6-7 Associations/2018, to partner with Pemex through a“farm-out” for the extraction of oil in a group of fields in the Mexican states of Veracruz, Tabasco and Chiapas; however, on June 13, 2019 CNH canceled such tender, due to the fact that all fields were withdrawn as consequence of Pemex’s forfeit of the migration processes that gave rise to the tender. During a press conference held on January 24, 2020 the head of SENER stated that hydrocarbon tender rounds and farm-outs are not currently a part of the Federal Government’s plans to increase oil production.

E&P Services Contract Migration

The energy reform also provides for Pemex to migrate existing oil and gas integrated E&P services contracts to production sharing agreements or licenses, as a means to continue boosting investment in the E&P sector. These contracts were signed by Pemex and private companies prior to the energy reform and were known asContratos

 

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Integrales de Exploración y Producción andContratos de Obra Pública Financiada contracts. With the newly enacted regulatory regime, it is expected that these services contracts will migrate into E&P services contracts, transforming the relationship with Pemex from a service contractor into a joint venture. Pemex has identified a total of 22 service contracts which it plans to migrate in two separate blocks. The contract migration process began in 2015and as of the date of this annual report 5 integrated E&P services contracts have been successfully migrated to production sharing agreements or licenses.

Oil and Gas Services Sector

Despite the growing demand for refined products throughout the country, Mexico lacks efficient transportation, distribution and storage infrastructure for liquid petroleum products. While trucks and ships continue to provide a significant percentage of refined petroleum transportation, there are increasing opportunities to provide more efficient transportation to reach growing demand at consumption centers. According to the Ministry of Energy Oil and Refined Products Outlook 2017-2031, the demand for gasoline and diesel from the auto transport sector grew from 2006 to 2016 at a CAGR of 1.4% and 1.2%, respectively. During 2016, demand of liquid petroleum products increased 2.9% as compared to 2015, representing a potential investment opportunity in liquid petroleum transportation and storage infrastructure.

The following map shows projects with the objective of improving existing infrastructure and developing new infrastructure for the refined products sector between 2014 and 2018.

 

LOGO

Source: SENER, Mexican Energy Regulatory Commission and Pemex, 2015

Oil and Gas Regulatory Framework in Mexico

Upstream and Downstream

On December 21, 2013, a decree amending several articles of the Mexican Constitution was enacted, by means of which Articles 25, 27, and 28 of the Mexican Constitution were amended leading to the opening of the oil, natural gas, and power sectors to private investment.

 

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In August of 2014, Congress passed secondary laws to implement the reforms. The reforms allow the Mexican government to grant contracts to private-sector entities in the upstream sector through public tenders. These amendments also allow private-sector entities to obtain permits for the processing, refining, marketing, transportation, storage, import and export of hydrocarbons, including the processing, compression, liquefaction, regasification, transportation, distribution, marketing and retail of natural gas, the transportation, storage, distribution, marketing and retail of oil products, including NGL, and the transportation (through pipelines) and related storage of petrochemicals, including ethane.

The legislation enacted in 2014 includes the Mexican Hydrocarbons Law (Ley de Hidrocarburos), which preserves the concept of state ownership over hydrocarbons while located in the subsoil but allows private companies to take ownership over the hydrocarbons once they are extracted. The Mexican Hydrocarbons Law allows private-sector entities holding a permit granted by the Mexican Energy Regulatory Commission to store, transport, distribute, commercialize and carry out direct sales of hydrocarbons, as well as to own and operate pipelines and liquefaction, regasification, compression andde- compression stations or terminals, and related equipment in accordance with technical and other regulations. In addition, private-sector entities may import or export hydrocarbons subject to a permit from the SENER.

Permits granted prior to the enactment of the Mexican Hydrocarbons Law, including their general terms and conditions, will remain in force during their original term, and rights held by permit-holders will not be affected by the new laws and regulations. However, new permits, such as marketing permits granted by the Mexican Energy Regulatory Commission and import and export permits granted by the SENER are required. Additionally, legislation requires that oil companies make small percentage payments to landowners for any oil or gas extracted on their property. It also increased the amount of oil revenue that is to be transferred to local and state governments.

Reserves and Resources Certification in Mexico

On August 13, 2015, Mexico’s National Hydrocarbons Commission (CNH) published a set of guidelines (the “CNH Guidelines”) that governs the valuation and certification of Mexico’s reserves and the related contingency resources. The CNH Guidelines follow the same SPE/WPC/AAPG international standards as those described with respect to the reserves and resources certification process in Argentina (see “Item 4—Information on the Company—History and Development of the Company—Industry and Regulatory Overview—Oil and Gas Regulatory Framework in Argentina—Reserves and Resources Certification in Argentina”). Therefore, the processes for reserves classification and certification in Mexico are similar to those described with respect to Argentina.

Economic valuation criteria established by the CNH for proved reserves also follow the U.S. Securities and Exchange Commission’s definitions in Rule4-10(a) of RegulationS-X which establishes that selling prices considered shall be the average price during the12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of thefirst-day-of-the-month price for each month within such period.

Regulatory Entities

For midstream and downstream activities, including oil refining and natural gas processing, the Hydrocarbons Law establishes a permit regime that is granted by the SENER and the Energy Regulatory Commission (Comisión Reguladora de Energía or “CRE”), as applicable. The Hydrocarbons Law also sets forth the process by which entities may apply for these permits. The CRE began issuing permits for the retail sale of gasoline and diesel fuel in 2016.

The SENER is responsible for developing the country’s upstream policy, including the determination of which areas will be made available through public bidding. They decide the bidding schedule and the contract models that are to apply. Additionally, they approve allnon-fiscal terms of the contract. The Ministry of Finance (SHCP) approves all fiscal terms that apply to the contracts. The Ministry of Finance also participates in audits.

The CNH conducts the bidding rounds that award contracts to oil companies and consortiums of companies. They interface with Pemex and private companies and manage all E&P contracts. Permits for the transportation, storage, distribution, compression, liquefaction, decompression, regasification, marketing, and sale of crude oil, oil products, and natural gas are granted by the CRE.

 

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The National Agency for Industrial Safety and Environment Production is a new agency created by the energy reforms. This agency regulates all safety and environmental concerns. The National Natural Gas Control Center (“CENEGAS”) is another recently-created federal agency. It is responsible for managing the system for gas distribution and storage, a task that previously belonged to Pemex.

The Mexican Federal Economic Competition Commission (“COFECE”) is an independent body of the Mexican government that has joint jurisdiction in the activities of natural gas, NGL, oil products and ethane concerning the prevention of, and enforcement against, monopolistic practices and economic concentrations. With the approval of COFECE, the Mexican Energy Regulatory Commission may issue new regulations to develop competitive markets in the hydrocarbons sector, which may include bundling restrictions, shareholder limitations, and caps in economic operators’ participation in marketing activities.

State Oil Company

As a result of the energy reform, Pemex was transformed from a decentralized public entity into a productive state-owned company on October 7, 2014—the day on which the new Pemex Law took effect, with the exception of certain provisions. As a productive state-owned company, Pemex remains wholly owned by the Mexican government and has the corporate purpose of generating economic value and increasing the income of the Mexican nation subject to principles of equity, as well as social and environmental responsibility.

Transportation

Before the energy reform, Pemex had exclusivity on certain activities such as processing, storage, transportation, distribution and marketing of petroleum products. The energy reform allows private sector participation in the construction and operation of oil products storage and transportation facilities.

The development of midstream and downstream natural gas activities, NGL, ethane and other oil derivatives are subject to the provisions of the Mexican Hydrocarbons Law, the Mexican Energy Sector Coordinated Regulatory Agencies Law (Ley de los Órganos Reguladores Coordinados en Materia Energética), the Mexican National Agency for Industrial Safety and Protection of the Environment of the Hydrocarbons Sector Law (Ley de la Agencia Nacional de Seguridad Industrial y de Protección al Medio Ambiente del Sector Hidrocarburos), the Mexican Hydrocarbon General Regulations, the Regulations Relating to the Activities Specified in Title Three of the Mexican Hydrocarbons Law and applicable environmental and safety regulations. Directives and General Rules (Disposiciones Administrativas de Carácter General) issued by the Mexican energy and environmental authorities, Mexican Official Standards (Normas Oficiales Mexicanas) and terms and conditions set forth in related permits also regulate our activities. See “Item 3—Key Information—Risk Factors—Risks Related to our Business and Industry— Our operations are subject to extensive regulation in the countries in which we operate.”

Building and operating natural gas, LNG, NGL, ethane and oil products storage facilities, pipelines and distribution systems require governmental permits and authorizations from federal, local and municipal authorities, such as the Mexican Energy Regulatory Commission, the Mexican Federal Economic Competition Commission, SEMARNAT, ASEA and the SENER, real estaterights-of-way, and other related authorizations. Permits issued by the Mexican Energy Regulatory Commission also impose a series of regulatory obligations and specific terms and conditions commonly referred to as “general terms and conditions” (Términos y Condiciones Generales).

Market Regulations

In the past, the Mexican government has imposed price controls on the sales of natural gas, NGL, gasoline, diesel, gas oil intended for domestic use, fuel oil and other products. In accordance with the 2017 Federal Revenue Law(Ley de Ingresos de la Federación para el Ejercicio Fiscal de 2017), during 2017 the Mexican government gradually removed price controls on gasoline and diesel as part of the liberalization of fuel prices in Mexico. To date, sale prices of gasoline and diesel have been fully liberalized and are determined by the free market.

 

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Federal Environmental Law

The Mexican Federal Environmental Liability Law(Ley Federal de Responsabilidad Ambiental) enacted on July 7, 2013 regulates environmental liability arising from damages to the environment including remediation and compensation. In the event of intentional and unlawful action or inaction, the responsible party will be fined up to approximately 48 million Mexican Pesos for 2017. This liability regime is independent from administrative, civil or criminal liability regimes, which may be applicable depending on the performed conduct.

Environmental liability may be attributed to an entity for conduct carried out by its representatives, managers, directors, employees, or officers who are directly involved in operations. The statute of limitations to claim environmental liability is twelve years from the date of the environmental damage. The law allows the interested parties to solve disputes by means of alternative dispute resolution mechanisms, provided that public interest or third party rights are not affected.

 

 ITEM 4C.

ORGANIZATIONAL STRUCTURE

The following diagram shows our main subsidiaries as of the date of this annual report:

 

LOGO

 

(1) 

Vista Oil & Gas Holding I, S.A. de C.V. holds a 0.27% direct interest in Aleph Midstream. The remaining 99.73% interest is held through wholly-owned legal entities.

 

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 ITEM 4D.

PROPERTY, PLANT AND EQUIPMENT

We have freehold and leasehold interests, but there is no specific interest that is individually material to us. The majority of our property, consisting of oil and gas reserves, oil and gas wells and corporate office buildings are located in Argentina. In each of the countries in which we operate, the state is the exclusive owner of all hydrocarbon resources located in such country and has full authority to determine the rights, royalties or compensation to be paid by private investors for the exploration or production of any hydrocarbon reserves. In Argentina, the Argentine Republic grants such rights through exploitation concessions. In Mexico, the Mexican State performs E&P activities through entitlements, granted to productive state-owned companies, or by granting productive state-owned companies or private entities, individually or under a consortium, exploration and extraction agreements. Entitlements and exploration and extraction agreements have different regulatory schemes. Entitlements can only be granted to productive state-owned companies (in Mexico, only PEMEX), and are assigned directly by the Mexican government. In contrast, exploration and extraction agreements are granted through public and competitive bidding processes held by CNH. See “Item 4—Information on the Company—Business—Health, Safety and Environmental Matters”.

 

 ITEM 4A.

UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Forward-Looking Statements” and “Item 3—Key Information—Risk Factors” and the matters set forth in this annual report generally.

The following discussion is based on, and should be read in conjunction with our Audited Financial Statements and related notes contained in this annual report, as well as “Item 3—Key Information—Selected Financial Data.”

 

 ITEM 5A.

OPERATING RESULTS

Source of Revenues

Vista is principally engaged in the oil and gas business in the E&P industry. Our oil and gas operations derive revenues mainly from the sale of crude oil, natural gas, and NGL. During the year ended December 31, 2019, oil sales contributed 81.3% of our total revenues, natural gas sales contributed 17.2% of our total revenues and NGL

 

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sales contributed 1.5% of our total revenues. During the 2018 Successor Period, oil sales contributed 78.5% of our total revenues, natural gas sales contributed 19.7% of our total revenues and NGL sales contributed 1.8% of our total revenues. During the 2018 Predecessor Period, oil sales contributed 70.8% of our total revenues, natural gas sales contributed 25.7% of our total revenues and NGL sales contributed 3.5% of our total revenues. During 2019, most of our revenues were generated in Argentina. For the periods of 2018 and 2017, all of our revenues were generated in Argentina.

Our sales volumes directly impact our results of operations. As reservoir pressure declines, production from a given well or formation decreases. Growth in our future production and reserves will depend on the development of our acreage and the corresponding capital expenditure, which will determine our ability to add proved reserves in excess of our production. Accordingly, we plan to maintain our focus on adding reserves by further drilling our acreage, in particular our shale acreage and testing additional stacked pay zones and reducing well spacing. Our ability to add reserves through acquisitions is dependent on many factors, including prevailing market conditions and our ability to raise capital, obtain regulatory approvals, procure drilling rigs and personnel and successfully identify and consummate acquisitions.

Our business is inherently volatile due to the influence of external factors, such as domestic demand, market prices, availability of financial resources for our business plan and its corresponding costs and government regulations. Consequently, our past financial condition, results of operations and the trends indicated by such results and financial condition may not be indicative of current or future financial conditions, results of operations or trends.

We sell our oil and gas to many creditworthy purchasers. Since our production is sold in the commodities market where several customers or markets are accessible to us, we do not believe the loss of any customer would have a material adverse effect on our business.

Production Results and Other Operating Data

The following table sets forth summary unaudited information about the oil and natural gas historical production volumes and other relevant operating and financial data of the assets we own in Argentina and Mexico. The historical production volumes and other relevant operating data included below was calculated at their respective working interest percentages, including 100% working interest in Entre Lomas, Agua Amarga, Bajada del Palo Oeste and Bajada del Palo Este concessions, 10% in Coirón Amargo Sur Oeste, 55% in Coirón Amargo Norte, 1.5% in Acambuco, 100% in JDM and 100% in 25 de Mayo-Medanito, 90% in Águila Mora, in each case for the periods indicated, and 50% working interest in the blocksCS-01,A-10 andTM-01, only for the year ended December 31, 2019. Royalties payable to provinces have not been deducted from our net production amounts given that substantially all of our production is currently in Argentina and under Argentine law royalties constitute a production tax payable in cash (and do not give provinces a direct interest in such production to make lifting and sales arrangements independently). We account for royalties as cost of sales.

 

   Successor   Predecessor 
   Year ended
December 31,
   Period from
April 4 to
December 31,
   Period from
January 1 to
April 3,
   Year ended
December 31,
 
   2019   2018   2017 

Net production volumes(1):

         

Oil (MMbbl)

   6.7    4.0    0.5    2.4 

Natural Gas (Bncf)

   20.8    14.0    2.7    9.8 

NGL (MMboe)

   0.3    0.2    0.1    0.2 

Total (MMboe)

   10.6    6.7    1.1    4.4 

Average daily net production (boe/d)

   29,112    24,425    11,583    12,032 

Average realized sales price(2):

         

Oil (US$/bbl)

   53.0    67.2    60.8    60.7 

Natural Gas (US$/MMBtu)

   3.3    4.6    4.1    4.5 

NGL (US$/bbl)

   23.78    34.17    29.74    23.26 

Average realized sales price (US$/boe)

   39.15    49.3    42.7    45.1 

Average unit costs (US$/boe)(3):

         

Operating expenses

   10.8    12.8    17.6    17.6 

Royalties(4)

   5.7    7.5    6.5    6.4 

Depreciation, depletion and amortization

   14.4    11.1    13.6    13.9 

Other data (in thousands of US$)

         

Operating expenses

   114,431    86,245    18,367    77,461 

Royalties(4)

   61,008    50,323    6,795    28,163 

Depreciation, depletion and amortization

   153,001    74,772    14,194    61,211 

 

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(1) 

Measured based on our working interest. There was no production due to others during the applicable periods. Oil production is comprised of production of crude oil, condensate and natural gasoline. Natural gas production excludes natural gas consumption. NGL production is comprised of production of propane and butane (LPG) and excludes natural gasoline. Our production of natural gasoline is mixed and sold with our crude oil and condensate production and represents less than 0.05% of our average daily production.

(2) 

For periods ending on or before April 3, 2018 we calculate our average realized sales price per bbl of oil, per MMBtu of natural gas, per ton of NGL and per boe of total production by dividing our total revenue from oil, natural gas, NGL and total production for the relevant period, respectively, by the production of oil, natural gas, NGL and total production in such period, respectively. For subsequent periods, we calculate our average realized sales price (i) per bbl of oil by dividing our total revenue from oil for the period by the volume of oil sold in such period, (ii) per MMBtu of natural gas and per ton of NGL by multiplying the monthly weighted sales price per client by the corresponding volume sold in each month, divided by the total volume sold during the relevant period, and (iii) per boe of total production by dividing our total revenues for the relevant period by our total production in that period.

(3) 

We calculate average unit costs per boe by dividing operating expenses, royalties or depreciation, depletion and amortization for the relevant period, as applicable, by average daily net production multiplied by days in each period (365 days for 2017, 90 days for 2018 Predecessor Period, 275 days for 2018 Successor Period and 365 days for 2019).

(4) 

Measured based on our working interest. Royalties are applied to the total production of the concessions, and are calculated by applying the applicable royalty rate to the production, after discounting certain expenses in order to bring the value of the cubic meter of crude oil, natural gas and liquefied gas at a price from wellhead.

The following table highlights certain operating data through the end of the fourth quarter of 2019:

 

   2019 
   Three-month
period ended
March 31,
   Three-month
period ended
June 30,
   Three-month
period ended
September 30,
   Three-month
period ended
December 31,
 

Average Brent Oil Price (US$ per bbl)(1)

   63.83    68.47    62.03    62.42 

Average Medanito Crude Oil Price (US$ per bbl)(2)(3)

   54.00    59.57    52.05    50.41 

Average Natural Gas Price (US$ per MMBtu)(3)

   3.45    3.58    3.83    2.54 

Net production volumes:

        

Oil (MMbbl)

   1.4    1.7    1.9    1.7 

Natural Gas (Bncf)

   5.0    4.8    5.5    5.5 

NGL (MMboe)

   0.1    0.1    0.1    0.1 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total (Mboe)

   2.3    2.6    2.9    2.8 

Average realized sales price:

        

Oil (US$/bbl)

   56.7    59.8    48.7    48.1 

Natural Gas (US$/MMBtu)

   3.7    3.8    3.5    2.2 

NGL (US$/bbl)

   23.5    24.5    22.3    19.9 

Lifting Cost (US$/boe)

   12.0    12.3    9.8    9.3 

Number of conventional wells drilled

   14    7    1    1 

Number of unconventional wells drilled

   3    3    3    0 

Revenue from contracts with customers

   93,727    120,361    105,443    96,445 

 

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(1) 

Source: Bloomberg.

(2) 

Light oil extracted from the Neuquina basin. Source: Argentine Secretariat of Energy.

(3) 

Source: Argentine Secretariat of Energy.

(4) 

Source: Argentine Secretariat of Energy and US$/AR$ exchange rate according to Communication “A” 3500 of the Argentine Central Bank.

Factors Affecting our Results of Operations

Our operations are affected by a number of factors, including:

 

  

the volume of crude oil, natural gas and liquid gas we produce and sell;

 

  

the effects of theCovid-19 outbreak and the measures adopted by the countries in which we operate as a result of the pandemic;

 

  

pricing regulation, mainly related to gas;

 

  

export administration by the Argentine and Mexican governments and domestic supply requirements;

 

  

international and domestic prices of crude oil and oil products;

 

  

discount of our oil production to market prices;

 

  

our capital expenditures and financing availability;

 

  

cost increases;

 

  

market demand for hydrocarbon products;

 

  

operational risks, labor strikes and other forms of public protest;

 

  

taxes, including export taxes;

 

  

regulation of capital flows;

 

  

exchange rates; and

 

  

interest rates.

Our business is inherently volatile due to the influence of external factors, such as domestic demand, market prices, availability of financial resources for our business plan and its corresponding costs and government regulations and policies. Consequently, our past financial condition, results of operations and trends indicated by such results and financial condition may not be indicative of current or future financial conditions, results of operations or trends.

Discovery and Exploitation of Reserves

Our results of operations depend to a large extent on our level of success in the exploration campaigns and appraisal of wells, the implementation of secondary and tertiary recovery projects in our conventional blocks, and in the further delineation of stack landing zones and the reduction of well spacing in our Vaca Muerta shale acreage. While we have geological reports evaluating certain proved, contingent and prospective reserves in our blocks, there is no assurance that we will continue to be successful in the exploration, appraisal, development and commercialization of oil and gas. The calculation of our geological and petrophysical estimates is complex and imprecise, which means it is possible that our future exploration will not result in additional discoveries, and, even if we are able to successfully make such discoveries, it is uncertain whether the discoveries will be commercially viable to produce.

 

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Funding our capital expenditures partially relies on oil prices remaining close to, or higher than, our estimates together with other factors to generate sufficient cash flow. Low oil prices may affect our revenues, which in turn may affect our debt capacity and remaining within the leverage ratios defined in the covenants in our financing agreements, as well as our cash flow from operations. Our operations, investor confidence and share price could be adversely affected if we are not able to generate enough cash flows to fund our future operating expenses and capital expenditures.

If average realized oil prices are higher than expected, we would have the ability to allocate additional capital to engage in newin-house projects, potential acquisition opportunities and accelerate the pace of existing operations, in all cases leading to a potential increase of our oil and gas production and cash flows.

Our operations results would be adversely affected in the event that our oil and natural gas reserves and the capital expenditure return does not meet our expectations. In addition, we focus on several factors when analyzing new investment in our blocks or potential acquisitions. As a consequence, it is uncertain whether we will focus in the development of our current assets or make any acquisitions to increase our current production and reserves. Our business, results from operations and financial condition may be materially affected if we do not deploy the necessary capital expenditures to increase the reserves of our current blocks or increase our reserves through profitable acquisition opportunities.

Availability and Reliability of Infrastructure

Our business depends on the availability and reliability of operating and transportation facilities in the areas we operate. Prices, together with the availability of equipment and infrastructure, with the corresponding maintenance thereof, affect our ability to follow our investment plan to operate our business, and thus our operations results and financial condition. See “Item 4—Information on the Company—History and Development of the Company—Our Operations—Oil and Natural Gas Reserves Production—Transportation and Treatment” and Our Business—Our Operations—Investment in Property, Plant and Equipment.”

Contractual Obligations

In order to protect our exploitation rights in our concessions, we must achieve certain milestones, including investment commitments, related to drilling and production in determined time periods, as stated in the corresponding agreements. The operating and maintenance costs may increase significantly due to adverse local or international market conditions, including local recession, foreign exchange volatility or high financing costs, which could prevent us from meeting our commitments under such agreements on commercially reasonable terms or at all, which may force us to forfeit our interests in such areas. If we do not succeed in renewing these agreements and maintaining our operations in these concessions, or securing new ones, our ability to grow our business may be materially affected. We are currently revising and optimizing our total capital expenditures for the year 2020 due to the impact ofCovid-19 on our operations. Health and safety measures introduced by the Argentine and Mexican governments, in conjunction with guidelines and emergency procedures by our Company, have had, and probably will keep having, and impact on our drilling, completion and general operations. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures.”

The Argentine and Mexican Economies

Our main assets and most of our operations are located in Argentina and to a lesser extent in Mexico. Accordingly, our financial condition and results of operations depend to a significant extent on macroeconomic and political conditions prevailing from time to time in Argentina, and to a lesser extent in Mexico.

The general performance of the Argentine economy affects the demand for energy, while inflation, fluctuations in currency exchange rates and social stability affect our costs and our margins. Inflation primarily affects our business by increasing operating costs in Argentine Pesos.

 

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The following table sets forth key economic indicators in Argentina during the periods indicated:

 

   2019  2018  2017  2016  2015   2014 

Real GDP (% change)

   (2.2)(1)   (2.5)(1)   2.7(2)   (2.1  2.7    (2.5

Nominal GDP (in millions of AR$)

   21,650,351(1)   
14,605,790
 
(1) 
  
10,644,779
 
(2) 
  8,228,160   5,954,511    4,579,086 

Consumer Price Index (CPI) variation (in %)(3)

   53.8   47.6   24.8   41.0   26.9    38.0 

Nominal Exchange Rate (in AR$/US$ at period end)

   63.0   37.8   18.8   15.9   13.0    8.6 

 

(1) 

Preliminary data.

(2) 

Provisional data.

(3) 

The inflation from 2013 to 2016 corresponds to the one published by the Buenos Aires City Government.

For more information on these macroeconomic and political conditions, see “Item 3—Key Information—Risk Factors—Risks Relating to the Argentine and Mexican Economies and Regulatory Environments.”

Foreign Exchange Rates

The majority of our sales are directly denominated in U.S. Dollars or indexed to the U.S. dollar. We collect a significant portion of our revenues in Argentine Pesos pursuant to prices which are indexed to the U.S. Dollar, mainly revenues resulting from the sale of natural gas and crude oil, which sales are invoiced in U.S. dollars using the U.S. Dollar/Argentine Peso exchange rate as of the date of issuance of the invoice payable within a30- to45-day payment period. However, our invoices are subject to adjustment to the prevailing U.S. Dollar/Argentine Peso exchange rate in effect as of the date of payment. Any significant increase in the Argentine Peso price as a result of a decline in the peso/dollar exchange rate could lead to decreased sales volumes as a result of increases in the effective price in Argentine Pesos paid by our customers for natural gas and crude oil. We are exposed to the risk that purchasers of our natural gas and crude oil may be unable to pay amounts owed to us following a depreciation of the Argentine Peso.

Argentine Foreign Exchange Regulations

Since September 1, 2019, with the purpose of strengthening the normal functioning of the economy, fostering a prudent administration of the exchange market, reducing the volatility of financial variables and containing the impact of the variations of financial flows on the real economy, foreign exchange controls were reinstated in Argentina. See “Item 10—Additional Information—Exchange Controls.”

Policy and Regulatory Developments in Argentina and Mexico

The Argentine and Mexican oil and gas industry have been subject to major reforms during the past five years and there can be no assurance that future reforms or reversal of existing ones will not have an adverse impact on our revenues and results of operations. Our business is, to a large extent, dependent upon regulatory conditions prevailing in the countries in which we operate and our results of operations may be materially and adversely affected by regulatory changes in these countries. Additionally, the regulatory burden on the oil and gas industry increases the cost of doing business in the industry and consequently affects profitability.

For more information regarding policy and regulatory developments relating to the oil and gas industry in Argentina, see “Item 4—Information on the Company—Industry and Regulatory Overview—Argentina’s Oil and Gas Industry Overview.” For more information regarding policy and regulatory developments relating to the oil and gas industry in Mexico, see “Item 4—Information on the Company—History and Development of the Company—Industry and Regulatory Overview—Mexico’s Oil and Gas Regulatory Overview.”

 

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Seasonality

Although there is some historical seasonality to the prices that we are paid for our production, the impact of such seasonality has historically not been material. Additionally, seasonality does not play a significant role in our ability to conduct our operations, including drilling and completion activities as planned in our budgets.

Warrants

Under IFRS, a contract to issue a variable number of common shares, such as our warrants, should be classified as a financial liability and measured at fair value, with changes in fair value recognized in the consolidated statement of profit or loss and comprehensive income. As of the date of this annual report, we had 70,000,000 Warrants and 29,680,000 Sponsor Warrants outstanding (totaling 99,680,000 warrants outstanding) that are exercisable for 23,333,333 and 9,893,333 series A shares, respectively. These warrants have been accounted for as a liability and are subject to adjustment of their fair market value at each reporting period. The determination of fair market value is subject to assumptions and estimates and changes to these assumptions and estimates could impact the valuation of the warrants, which could in turn have an effect on our consolidated statement of profit or loss and comprehensive income. For more information on our warrants, see “Item 10—Additional Information—Memorandum and Articles of Association—Warrants” and Note 17.3 of our Audited Financial Statements.

Deferred Income Tax

Under IFRS, the difference between the book value of property, plant and equipment (measured in U.S. Dollars, our functional currency) and the tax basis of such property, plant and equipment (which tax basis is expressed in Argentine Pesos or Mexican Pesos, as applicable, and may not bere-valued due to foreign exchange fluctuations under applicable tax laws) is a temporary difference to be considered in the calculation of deferred income tax. For more information, see Note 2.4.14 to our Audited Financial Statements. In addition to property, plant and equipment, we recognize deferred tax assets with respect to the temporary difference between the accounting and tax basis of the well plugging and abandonment provisions relating to our oil and gas properties.

On December 29, 2017, the Argentine government enacted Law No. 27,430 which introduced several changes to the Argentine income tax regime as well as to other federal taxes. Pursuant to Law No. 27,430 the income tax rate for Argentine companies would be gradually reduced from 35% to 30% commencing on tax periods initiated after January 1, 2018 and through December 31, 2019, and to 25% commencing on tax periods initiated after January 1, 2020 (an additional income tax withholding on actual or presumed dividend distributions to Argentine resident individuals or to foreign resident shareholders was also enacted at a 7% and 13% rate, respectively, so that an aggregate 35% tax burden is completed). On December 23, 2019, Law No. 27,541 was published in the Official Gazette, providing –among many other federal tax aspects, including the creation of theso-called “PAIS Tax”- the suspension of the application of the 25% corporate tax rate for one tax period. Pursuant to further clarifications unofficially made by the Argentine tax authorities, the 25% corporate tax rate (coupled with the 13% income tax withholding on actual or presumed dividend distributions of profits) would be applicable as of tax periods initiated after January 1, 2021. Despite these changes, there are many transactions and calculations for which the ultimate tax determination is still uncertain. We recognize liabilities for potential tax claims based on estimates of whether additional taxes will be due in the future. For more information, see Note 2.4.14 to our Audited Financial Statements.

Acquisitions

Our results of operations are significantly affected by our past acquisitions. We generally incorporate our acquired business into our results of operations at or around the date of closing, which limits the comparability of periods including such acquisitions, including our Initial Business Combination, with periods prior to them.

Leases

I Effective January 1, 2019, we adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application on January 1, 2019 and recognized all the leases agreements and service agreements that are in substance a lease their corresponding right of use asset and liability. Under this method, the standard is applied with the cumulative effect of initially applying the standard recognized at the date of initial application. Please refer to Note 2.2 of our Audited Financial Statements for more details regarding the impact that adoption of this standard have in our financial information.

 

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Depreciation, Depletion and Amortization

IFRS requires us to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses, among other line times, relating to our oil and gas properties. Actual results could differ from such estimates. Depreciation, depletion and amortization rates can fluctuate as a result of development costs, acquisitions, impairments, as well as changes in proved reserves or proved developed reserves. For more information, see note 2.4.2.2 of our Audited Financial Statements.

Oil and Gas Market Conditions

The oil and gas industry is cyclical and commodity prices are highly volatile. During 2015 and 2016, global and domestic oil supply continued to outpace demand resulting in ongoing low realized oil and gas prices. Although during 2017 and most of 2018 commodity prices tended to improve, prices declined in the fourth quarter of 2018. During 2019, global oil prices continued to decrease, especially during the second half of the year, mainly due to the political developments in Middle East and the trade dispute between China and the United States. In addition, domestic oil prices in Argentina suffered a further impact as a consequence of the Presidential Decree No. 566. Therefore, it is likely that commodity prices will continue to fluctuate due to global supply and demand, inventory supply levels, weather conditions, geopolitical and other factors. Additionally, the oil and gas industry is subject to a number of operational trends, some of which affect the basins we operate. Oil and gas companies are increasingly utilizing new techniques to lower drilling costs and increase the efficiency of operations.

The operating results and cash flows of our business are susceptible to risks relating to the volatility of international oil prices. Due to regulatory, economic and government policy factors, oil prices in Argentina in the past have lagged far behind the prevailing prices in the international market. Furthermore, in order to ensure the domestic supply and increase government revenue, Argentina’s government has imposed high export duties and other restrictions on exports in the past that have prevented companies from benefiting from significant increases in international oil prices. Oil exports remain subject to authorization from the Argentine Secretariat of Energy, which requires producers to demonstrate that local demand has been met or that an offer to sell oil to the local buyer has been made and rejected. We cannot predict if, when or what measures will be implemented or maintained by the Argentine government, nor what effects such measures will have, particularly on oil prices in Argentina.

The price of natural gas in Argentina has been limited by a series of government measures intended to ensure domestic supply at affordable prices. Therefore, gas producers can elect to sell to distributors the gas necessary to meet the needs of the regulated internal market at prices established by the relevant authorities. Alternatively, gas producers can only sell their surplus gas production on the deregulated market, either in Argentina or potentially, and subject to meeting certain requirements, through exports. Historically, gas prices in the regulated market have lagged far behind prices in the deregulated and regional markets.

The following table highlights the quarterly average price trends for crude oil and natural gas in U.S. Dollars for the periods presented:

 

   2019   2018   2017   2016   2015   2014 
   Q4   Q3   Q2   Q1 

Average Brent Oil Price (per bbl)(1)

   62.42    62.03    68.47    63.83    71.69    54.74    45.13    53.60    99.45 

Average Medanito Crude Oil Price (per bbl)(2)

   50.41    52.05    59.57    54.00    64.98    56.52    63.40    74.59    79.20 

Average Natural Gas Price (per MMBtu)(3)

   2.54    3.83    3.58    3.45    4.42    3.76    3.21    2.08    2.19 

 

(1) 

Source: Bloomberg.

(2) 

Light oil extracted from the Neuquina basin. Source: Argentine Secretariat of Energy.

(3) 

Source: Argentine Secretariat of Energy.

 

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A sustained drop in oil, natural gas and NGL prices may not only decrease our revenues but may also reduce the amount of oil, natural gas and NGL that we can produce economically and therefore potentially lower our oil, natural gas and NGL reserve quantities.

Covid-19 outbreak

TheCovid-19 outbreak is currently causing a significant impact on the global economy and financial markets, the oil and gas industry, and our operations in Argentina and Mexico.

We summarize below the main drivers that we currently believe will affect our performance during 2020, and probably beyond:

Decline in oil demand. The demand of our crude oil and gas products is largely influenced by the economic activity and growth in Argentina, Mexico and globally. The effects of theCovid-19 global crisis have led to a worldwide economic slowdown, and as a result there has been a decrease in global demand for crude oil and derivatives. Latest estimates from EIA, IEA and OPEC forecast that global crude oil demand would decline by between 12 MMbbl/d and 23 MMBbl/d during the second quarter of 2020 compared to the second quarter of 2019. In addition, governments around the globe, including Argentina and Mexico, have implemented measures to protect their population against theCovid-19. These preventive measures have caused a decrease in demand of certain goods and services, including petroleum products. As of the date of this annual report, we cannot predict what effect these measures will have on our operations or our financial condition. In Argentina we are currently experiencing similar levels of crude oil demand contraction, which has forced us toshut-in production, as explained below.

Decline in international crude oil prices. As discussed in “Item 3—Key Information—Risk Factors—Risks related to our Business and Industry—We are exposed to the effects of fluctuations in the international prices of oil and gas”, during March and April 2020, Brent oil prices were forced downwards by contracting crude oil demand and the lack of consensus between OPEC and OPEC+ regarding production curtailments in early March. Argentine crude oil prices are linked to Brent, so were also forced downwards, amid a collapsing demand in the domestic market. As a result, our average realized oil prices during March were $24.6/bbl. It is not possible to predict whether these price levels will improve during the following quarters.

Activity. In light of lower realized prices in Argentina and Mexico, and due to the sudden drop in crude oil demand in Argentina, on March 20, 2020 we decided to stop our drilling and completion activity in our Vaca Muerta project in Bajada del Palo Oeste.

Production. Due to the contraction in crude oil demand, on March 20, 2020, we decided toshut-in our 12 wells in Vaca Muerta, which equates to approximately 30% of our total production. Prior to this curtailment we had achieved a peak of 11,500 boe/d in our shale production, with over 2,600 boe/d from a single well. As of the date of this annual report we have little visibility regarding when demand levels will be sufficient to enable us to return such wells to production. In this respect, we have hired a shipping vessel to store our crude oil production for a total amount of approximately 300,000 barrels, to be loaded during the second quarter of 2020 and delivered tooff-takers during the third and fourth quarters of 2020.

Cost Savings. We are currently implementing several cost-saving plans to reduce capital expenditures, operating expenditures and general expenses for the year 2020, prioritizing cash preservation and seeking to maintain a solid cash position. Capital expenditure savings will be related to reduced drilling and completion activity, as discussed above, and postponing facilities and other projects to 2021. Operating expenditure savings are expected to be generated by lower pulling activity and the renegotiation of rates and tariffs with service contractors.

 

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Financial performance. The combination of lower realized prices and lower production levels will likely adversely impact our net revenues, Adjusted EBITDA and cash flows from operations in the coming quarters. Continuous poor economic performance could eventually lead to recognition of impairment charges of some assets which could include accounts receivables, deferred tax assets goodwill and property, plant and equipment in the future, a deterioration in our financial coverage ratios, and cause us to exceed the financial covenants agreed upon in the Syndicated Loan. A contraction of crude oil demand could also affect us financially, including our ability to pay our suppliers for their services, which could, in turn, lead to further operational distress.

In light of all the above mentioned circumstances and given the uncertainty of the lasting effect of theCovid-19 pandemic, Vista has adopted decisive measures. Vista has continued to operate during theCovid-19 pandemic, while monitoring the impact on the health of our workers and on our business operations. In accordance with our business continuity plan, we have reduced our workforce active in our fields, implemented alternating shifts, allowed most of our workforce to work remotely and implemented additional procedures to disinfect our facilities. In addition, we are performing temperature checks for those employees working in the fields and implemented a protocol forCovid-19 symptoms and diagnosis.

For more information on the risks related to theCovid-19 pandemic see “Item 3—Key Information—Risk Factors—Risks related to our Business and Industry—We are exposed to the effects of fluctuations in the international prices of oil and gas”, “Item 3—Key Information—Risk Factors—Risks related to our Business and Industry—We are exposed to contractions in the demand of crude oil and natural gas and contractions in the demand of any of theirby-products” and “Item 3—Key Information—Risk Factors— Risks Related to the Argentine and Mexican Economies and Regulatory Environments—The novel coronavirus could have an adverse effect on our business operations”.

Note Regarding Comparability of Our Results of Operations

On April 4, 2018, Vista consummated the Initial Business Combination. For more information on the Initial Business Combination, see “Presentation of Information—Financial Statements and Information” and “Presentation of Information—The Initial Business Combination.”

The comparability of our results of operations is affected by the consummation of the Initial Business Combination and purchase accounting. Considering the reporting treatment given to PELSA as our predecessor company, our results of operations for periods prior to the Initial Business Combination do not include the results of the APCO Entities, JDM and 25 de Mayo—Medanito and those from the 3.85% direct interest in theEL-AA-BP Concessions, and therefore are not comparable to our results for the period after the consummation of the Initial Business Combination.

Results of Operations

The following discussion relates to certain financial and operating data for the periods indicated. You should read this discussion in conjunction with our Audited Financial Statements and the accompanying notes thereto. We measure our performance by our net profit (loss) for the period, gross profit and operating profit and use these metrics to make decisions about allocating resources and to evaluate our financial performance.

 

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Year ended December 31, 2019 compared to Period from April 4, 2018 through December 31, 2018 (Successor) and Period from January 1, 2018 through April 3, 2018 (Predecessor)

 

   Successor  Predecessor 
   For the year ended
December 31, 2019
  For the period from
April 4, 2018 through
December 31, 2018
  For the period from
January 1, 2018
through April 3, 2018
 
   (in thousands
of US$
except per
share data)
  (% of
revenues)
  (in
thousands
of US$
except per
share
data)
  (% of
revenues)
  (in
thousands
of US$
except
per share
data)
  (% of
revenues)
 

Revenue from contract with customers

   415,976   100  331,336   100  44,463   100

Cost of sales

   (328,130  (79%)   (212,581  (64%)   (38,623  (87%) 

Gross profit

   87,846   21  118,755   36  5,840   13

Selling expenses

   (27,138  (7%)   (21,341  (6%)   (3,091  (7%) 

General and administrative expenses

   (42,400  (10%)   (24,202  (7%)   (1,466  (3%) 

Exploration expenses

   (676  (0%)   (637  (0%)   (134  (0%) 

Other operating income

   3,165   1  2,699   1  1,240   3

Other operating expenses

   (6,180  (1%)   (18,097  (5%)   (135  (0%) 

Impairment recovery of property, plant and equipment

   —     —     —     —     —     —   

Operating profit

   14,617   4  57,177   17  2,254   5

Interest income

   3,770   1  2,532   1  239   1

Interest expense

   (34,163  (8%)   (15,746  (5%)   (23  (0%) 

Other financial results

   (715  (0%)   (22,920  (7%)   (1,159  (3%) 
  

 

 

   

 

 

   

 

 

  

 

 

 

Financial results, net

   (31,108  (7%)   (36,134  (11%)   (943  (2%) 
  

 

 

   

 

 

   

 

 

  

 

 

 

(Loss)/Profit before income tax

   (16,491  (4%)   21,043   6  1,311   3
  

 

 

   

 

 

   

 

 

  

 

 

 

Current income tax (expense)

   (1,886  (0%)   (35,450  (11%)   (4,615  (10%) 

Deferred income tax (expense) / benefit

   (14,346  (3%)   (11,975  (4%)   (3,345  (8%) 
  

 

 

   

 

 

   

 

 

  

 

 

 

Income tax (expense)

   (16,232  (4%)   (47,425  (14%)   (7,960  (18%) 
  

 

 

   

 

 

   

 

 

  

 

 

 
  

 

 

   

 

 

   

 

 

  

 

 

 

Net (loss) / profit for the year/period

   (32,723  (8%)   (26,382  (8%)   (6,649  (15%) 
  

 

 

   

 

 

   

 

 

  

 

 

 

Other comprehensive (loss)

       

Other comprehensive (loss) that will not be reclassified to profit or loss in subsequent periods

       

- Remeasurements (loss) related to defined benefits plans

   (1,577  (0%)   (3,565  (1%)   (89  (0%) 

- Deferred income tax benefit

   394   0  891   (0%)   22   0
  

 

 

   

 

 

   

 

 

  

 

 

 

Other comprehensive (loss) that will not be reclassified to profit or loss in subsequent periods

   (1,183  (0%)   (2,674  (1%)   (67  (0%) 
  

 

 

   

 

 

   

 

 

  

 

 

 

Other comprehensive (loss) for the year/period, net of tax

   (1,183  (0%)   (2,674  (1%)   (67  (0%) 
  

 

 

   

 

 

   

 

 

  

 

 

 

Total comprehensive (loss)/profit for the year/period

   (33,906  (8%)   (29,056  (9%)   (6,716  (15%) 
  

 

 

   

 

 

   

 

 

  

 

 

 

(Losses)/Earnings per share attributable to equity holders of the parent

       

Basic and Diluted (In U.S. dollars per share):

   (0.409  N/A   (0.375  N/A   (0.070  N/A 

 

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Revenue from contracts with customers

The detail of our revenues from contracts with customers is the following:

 

   Successor   Predecessor 
Types of goods  For the year
ended December

31, 2019
   For the period from
April 4, 2018 through
December 31, 2018
   For the period from
January 1, 2018
through
April 3, 2018
 

Revenue from crude oil

   338,272    260,079    31,501 

Revenue from natural gas

   71,524    65,164    11,418 

Revenue from NGL

   6,180    6,093    1,544 

Revenue from other goods and services

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Revenue from contracts with customers

   415,976    331,336    44,463 
  

 

 

   

 

 

   

 

 

 

Total revenue from contracts with customers increased to US$416.0 during the year ended December 31, 2019 compared to US$44.5 million during the 2018 Predecessor Period and US$331.3 million during the 2018 Successor Period. Excluding the effect of the reporting treatment given to PELSA as our predecessor company, which effect accounts for the contribution of US$52.6 million to our total revenues during the year December 31, 2019 (see “Item 5—Operating and Financial Review and Prospects—Operating results—Note Regarding Comparability of Our Results of Operations”). This increase was primarily driven by theramp-up of shale production Vaca Muerta development, which reached 5,135 boe/d during the year ended December 31, 2019 compared to no production in the previous year. Such increase was partially offset by a decline of both oil and natural gas realized prices.

Revenues from crude oil increased to US$ 338.3 during the year ended December 31, 2019 compared to US$31.5 million during the 2018 Predecessor Period and US$260.0 million during the 2018 Successor Period, which represented 81.3%, 70.8% and 78.5% of our total revenue from contracts with customers, respectively. Excluding the effect of the reporting treatment given to PELSA as our predecessor company (see “Item 5—Operating and Financial Review and Prospects—Operating results—Note Regarding Comparability of Our Results of Operations”), this increase was primarily driven by the shale development of Vaca Muerta, which led to an increase of total daily production of 228% and 25% compared to the 2018 Predecessor Period and 2019 Successor Period, respectively. The increase in production was partially offset by the abovementioned decline in realized sales prices as a consequence of a decline in the average Brent reference price of 5% compared to the 2018 Predecessor Period and 12% compared to the 2018 Successor Period, and the effect of Presidential Decree No. 566, whereby oil prices were intervened. See “Item 4—Information on the Company—Industry and Regulatory Overview—Oil and Gas Regulatory Framework in Argentina—Crude Oil Market.”

Total volume of crude oil sold was 6,386 Mbbl during the year ended December 31, 2019, compared to 563.5 Mbbl during the 2018 Predecessor Period and 3,982 Mbbl during the 2018 Successor Period.

Average realized crude oil sales prices was 53.0 during the year ended December 31, 2019, compared to US$ 60.8/bbl during the 2018 Predecessor Period and US$67.2/bbl during the 2018 Successor Period, a decrease of 13% and 21%, respectively.

Revenues from natural gas decreased to US$71.5 during the year ended December 31, 2019, compared to US$11.4 million during the 2018 Predecessor Period and US$65.2 million during the 2018 Successor Period, which represented 17.2%, 25.7 % and 19.7% of our total revenue from contracts with customers, respectively. This decrease was primarily driven by a decrease in realized prices mainly due to an oversupplied domestic market.

 

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Total volume of natural gas sold was 3,665 Mboe during the year ended December 31, 2019, compared to 479.5 Mboe during the 2018 Predecessor Period and 2,444 Mboe during the 2018 Successor Period.

Average realized natural gas sales prices was US$3.3/MMBtu during the year ended December 31, 2019, a decrease of 28% and 20% as compared to US$4.6/MMBtu during the 2018 Successor Period and US$4.1/MMBtu during the 2018 Predecessor Period, respectively.

Revenues from NGL decreased to US$6.2 million during the year ended December 31, 2019, compared to US$1.54 million during the 2018 Predecessor Period and US$6.1 million during the 2018 Successor Period, which represented 1.5%, 3.5% and 1.8% of our total revenue from contracts with customers, respectively.

During 2019, 99% of our revenue was generated by our oil and gas properties in Argentina, while during the 2018 Predecessor Period, the 2018 Successor Period and the 2017 Predecessor Year all of our revenues were generated by our oil and gas properties in Argentina.

Cost of Sales

 

   Successor   Predecessor 
   For the year
ended December

31, 2019
   For the period from
April 4, 2018 through
December 31, 2018
   For the period from
January 1, 2018
through

April 3, 2018
 
   (in thousands of US$) 

Operating expenses

   (114,431   (86,245   (18,367

Crude oil stock fluctuation

   310    (1,241   733 

Depreciation, depletion and amortization

   (153,001   (74,772   (14,194

Royalties

   (61,008   (50,323   (6,795
  

 

 

   

 

 

   

 

 

 

Cost of sales

   (328,130   (212,581   (38,623
  

 

 

   

 

 

   

 

 

 

Cost of sales increased to US$328.1 million during the year ended December 31, 2019, compared to US$38.6 million during the 2018 Predecessor Period and US$212.6 million during the 2018 Successor Period. Total cost of sales included fluctuations in the inventory of crude oil, operating expenses, depreciation, depletion and amortization and royalties. This increase was primarily driven by (i) the reporting treatment given to PELSA as our predecessor company (see “Item 5—Operating and Financial Review and Prospects—Operating results—Note Regarding Comparability of Our Results of Operations”), which effect accounted for US$34.6 million to the total cost of sales during the year ended December 31, 2019; and (ii) an increase in depreciation, depletion and amortizations.

Operating expenses increased to US$114.4 during the year ended December 31, 2019, compared to US$18.4 million during the 2018 Predecessor Period and US$86.2 million during the 2018 Successor Period, which represented 34.9%, 47.6% and 40.6% of our total cost of sales, respectively. This increase was primarily driven by the abovementioned reporting treatment given to PELSA as our predecessor company (see “Item 5—Operating and Financial Review and Prospects—Operating results—Note Regarding Comparability of Our Results of Operations”), which was partially offset by havingin-sourced operations and maintenance crews, eliminating servicemark-up and maximizingend-to-end control in our field operations, the impact of “One Team pulling” novel contracting model and the positive impact of the Argentine peso devaluation.

Operating expenses per produced barrel decreased to 10.8 US$/boe during the year ended December 31, 2019 from 17.3 US$/boe during the 2018 Predecessor Period and 12.9 US$/boe in the 2018 Successor Period. Such decrease was mainly driven by leveraging our shale productionramp-up on the existing conventional operations, diluting fixed cost base.

Depreciation, depletion and amortization increased to US$153.0 during the year ended December 31, 2019, compared to US$14.2 million during the 2018 Predecessor Period and US$74.8 million during the 2018 Successor Period, which represented 46.6%, 36.8% and 35.38% of our total cost of sales, respectively. This increase was primarily driven by the reporting treatment given to PELSA as our predecessor company (see “Item 5—Operating and Financial Review and Prospects—Operating results—Note Regarding Comparability of Our Results of Operations”) and the increase of capital expenditures from US$130.0 million in the year ended December 31, 2018 (including information for the three-month period ended March 31, 2018 corresponding to all assets acquired in the Initial Business Combination) to US$224.1 million in the year ended December 31, 2019.

 

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Royalties increased to US$61.0 million during the year ended December 31, 2019, compared to US$6.8 million during the 2018 Predecessor Period and US$50.3 million during the 2018 Successor Period, which represented 18.6%, 17.6% and 23.7% of our total cost of sales, respectively. This increase was primarily driven by the aforementioned increase in the volumes sold of crude oil and natural gas.

Gross Profit

Gross profit decreased to US$87.8 million during the year ended December 31, 2019, compared to US$5.8 million during the 2018 Predecessor Period and US$ 118.7 million during the 2018 Successor Period, which represented 21.1% and 35.8% and 12.0% of our total revenue from contracts with customers, respectively.

Selling Expenses

Selling expenses increased to US$27.1 million during the year ended December 31, 2019, compared to US$3.1 million during the 2018 Predecessor Period and US$21.3 million during the 2018 Successor Period, which represented 6.5%, 6.9% and 6.4% of our total revenue from contracts with customers, respectively. This increase was primarily driven by taxes, rates and contributions, which increased 770.8% and 26.7% compared to the 2018 Predecessor Period and the 2018 Successor Period, respectively and transportation expenses, which increased 1,119.3% and 63.3% compared to the 2018 Predecessor Period and the 2018 Successor Period, respectively. Both increases were mainly driven by the increase in production.

General and Administrative Expenses

General and administrative expenses increased to US$ 42.4 million during the year ended December 31, 2019, compared to US$1.5 million during the 2018 Predecessor Period and US$24.2 million during the 2018 Successor Period, which represented 10.2%, 3.3% and 7.3% of our total revenue from contracts with customers, respectively. This increase was primarily driven by salaries and social security charges, which increased 2,822.1% and 68.8% compared to the 2018 Predecessor Period and the 2018 Successor Period, respectively, share-based payments expense, which increased 165.0% compared to the 2018 Predecessor Period and the 2018 Successor Period, and employee benefits, which increased 2,293.3% and 155.9% compared to the 2018 Predecessor Period and the 2018 Successor Period, respectively.

Exploration Expenses

Exploration expenses remained flat in US$0.7 million during the year ended December 31, 2019, compared to US$0.1 million during the 2018 Predecessor Period and US$0.6 million during the 2018 Successor Period, with similar exploration activity levels.

Other Operating Income

Other operating income decreased to US$3.2 million during the year ended December 31, 2019, compared to US$1.2 million during the 2018 Predecessor Period and US$2.7 million during the 2018 Successor Period. This decrease was mainly driven by a reduction in services to third parties, which decreased 8.6% as compared to the 2018 Predecessor Period and 2018 Successor Period combined and Surplus Gas Injection Compensation (SGIC) which decreased from US$0.3 million during the 2018 Predecessor Period to zero during the year ended December 31, 2019.

Other Operating Expenses

Other operating expenses decreased to US$6.2 during the year ended December 31, 2019, compared to US$0.1 million during the 2018 Predecessor Period and US$18.0 million during the 2018 Successor Period. This decrease was primarily driven by the reduction in restructuring expenses, that decreased 73.0% compared to the 2018 Successor Period, and had reached US$12.0 million during such period due to the Initial Business Combination.

 

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Operating Profit

Operating profit decreased to US$14.6 million during the year ended December 31, 2019, compared to US$2.2 million during the 2018 Predecessor Period and US$57.2 million during the 2018 Successor Period, which represented 3.5%, 5.1% and 17.3% of our total revenue from contracts with customers, respectively.

Interest Income

Interest income increased to US$3.8 million during the year ended December 31, 2019, compared to US$0.2 million during the 2018 Predecessor Period and US$2.5 million during the 2018 Successor Period. This increase was primarily driven by an increase of accrued interest on government notes at amortized costs (due to additional investments in such government notes), which increased 921.8% and 500.0% compared to the 2018 Predecessor Period and the 2018 Successor Period, respectively. Such increase was partially offset by a decrease in gains from financial interests, which decreased 37.5% compared to the 2018 Successor Period.

Interest Expense

Interest Expense increased to US$34.2 during the year ended December 31, 2019, compared to US$0.1 million during the 2018 Predecessor Period and US$15.7 million during the 2018 Successor Period. This increase was primarily driven by a higher level of borrowings, including the Syndicated Loan, and the two series of bonds issued by Vista Argentina in July and August 2019. Borrowings interest accrued on our outstanding debt increased 119.7% compared to the 2018 Successor Period.

Other Financial Results

Other financial loss decreased to US$0.7 million during the year ended December 31, 2019, compared to US$ 1.2 million during the 2018 Predecessor Period and US$22.3 million during the 2018 Successor Period. This decrease was primarily driven by changes in the fair value of warrants, which varied from a loss of US$8.9 million during the 2018 Successor Period, to a gain of US$6.8 million during the year ended December 31, 2019, effect of discount of assets and liabilities at present value, which increased from a loss of US$2.7 million during the 2018 Successor Period, to zero during the year ended December 31, 2019 and costs of early settlements of borrowings and other financing costs, which increased from a loss of US$14.5 million during the 2018 Successor Period, to a loss of US$2.1 million during the year ended December 31, 2019. Such effects were partially offset by foreign currency exchange difference, net, which decreased from a loss of US$1.0 million and a gain of US$3.0 million during the 2018 Predecessor Period and 2018 Successor Period, respectively, to a loss of US$ 3.0 million during the year ended December 31, 2019.

Profit Before Income Taxes

Loss before income taxes decreased to a loss of US$16.5 million during the year ended December 31, 2019, compared to a gain of US$1.3 million for the 2018 Predecessor Period and US$21.0 million during the 2018 Successor Period.

Income Tax expense

Our income tax expense decreased to US$16.2 million during the year ended December 31, 2019, compared to US$8.0 million during the 2018 Predecessor Period and US$47.4 million during the 2018 Successor Period. This decrease was primarily driven by (i) a decrease in current income tax expense of 59.1% and 94.7% compared to the 2018 Predecessor Period and the 2018 Successor Period respectively (which was mainly driven by the fact that Vista Argentina, our main subsidiary, generated tax losses during 2019, resulting from the combined impact of a devaluation of the Argentine Peso versus the U.S Dollar and a net debt position in U.S. Dollars) and (ii) a decrease in deferred income tax expense, which decreased 328.9% and 19.8% compared to the 2018 Predecessor Period and 2018 Successor Period, respectively. This effect is due to the Company´s taxable basis, which is determined in a currency (Argentine peso) different to our functional currency (U.S. dollar) and the existence of the aforementioned tax losses in Vista Argentina during 2019. For more information, see “Item 5—Operating and Financial Review and Prospects—Operating Results—Factors Affecting Our Results of Operations—Deferred Income Tax.”

Net (loss) profit for the period/year

Net loss was stable, totalizing US$32.7 million during the year ended December 31, 2019, compared to US$6.6 million during the 2018 Predecessor Period and US$ 26.4 million during the 2018 Successor Period.

 

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Period from April 4, 2018 through December 31, 2018 (Successor) and Period from January 1, 2018 through April 3, 2018 (Predecessor) compared to the year ended December 31, 2017 (Predecessor)

 

   Successor  Predecessor 
  

For the period from

April 4, 2018 through

December 31, 2018

  

For the period from

January 1, 2018 through

April 3, 2018

  

For the year ended

December 31, 2017

 
   

(in thousands of

US$ except per

share data)

  

(% of

revenues)

  

(in thousands of

US$ except per

share data)

  

(% of

revenues)

  

(in thousands of

US$ except per

share data)

  

(% of

revenues)

 

Revenue from contracts with customers

   331,336   100  44,463   100  198,075   100

Cost of sales

   (212,581  (64%)   (38,623  (87%)   (174,401  (88%) 
  

 

 

   

 

 

   

 

 

  

Gross profit

   118,755   36  5,840   13  23,674   12
  

 

 

   

 

 

   

 

 

  

Selling expenses

   (21,341  (6%)   (3,091  (7%)   (13,264  (7%) 

General and administrative expenses

   (24,202  (7%)   (1,466  (3%)   (6,774  (3%) 

Exploration expenses

   (637  (0%)   (134  (0%)   (1,049  (1%) 

Other operating income

   2,699   1  1,240   3  17,802   9

Other operating expenses

   (18,097  (5%)   (135  0  (5,125  (3%) 

Impairment recovery of property, plant and equipment

   —     —     —     —     5,290   3
  

 

 

   

 

 

   

 

 

  

Operating profit

   57,177   17  2,254   5  20,554   10
  

 

 

   

 

 

   

 

 

  

Interest income

   2,532   1  239   1  166   0

Interest expense

   (15,746  (5%)   (23  0  (18  0

Other financial results

   (22,920  (7%)   (1,159  (3%)   (436  0
  

 

 

   

 

 

   

 

 

  

Financial results, net

   (36,134  (11%)   (943  (2%)   (288  0
  

 

 

   

 

 

   

 

 

  

Profit before income tax

   21,043   6  1,311   3  20,266   10

Current income tax expense

   (35,450  (11%)   (4,615  (10%)   (15,956  (8%) 

Deferred income tax expense

   (11,975  (4%)   (3,345  (8%)   9,595   5
  

 

 

   

 

 

   

 

 

  

Income tax expense

   (47,425  (14%)   (7,960  (18%)   (6,361  (3%) 
  

 

 

   

 

 

   

 

 

  

Net (loss) profit for the period/year

   (26,382  (8%)   (6,649  (15%)   13,905   7
  

 

 

   

 

 

   

 

 

  

Other comprehensive income (loss)

       

Other comprehensive income (loss) that will not be reclassified to profit or loss in subsequent periods

       

—Remeasurements loss related to defined benefits plans

   (3,565  (1%)   (89  0  (355  0

—Income Tax benefit

   891   0  22   0  124   0
  

 

 

   

 

 

   

 

 

  

Other comprehensive benefit (loss) that will not be reclassified to profit or loss in subsequent

periods

   (2,674  (1%)   (67  0  (231  0
  

 

 

   

 

 

   

 

 

  

Other comprehensive benefit (loss) for the period/year, net of tax

   (2,674  (1%)   (67  0  (231  0
  

 

 

   

 

 

   

 

 

  

Total comprehensive (loss) income for the period

   (29,056  (9%)   (6,716  (15%)   13,674   7
  

 

 

   

 

 

   

 

 

  

(Losses) earnings per share attributable to equity holders of the parent

       

Basic—(In U.S. Dollars per share):

   (0.37  N/A   (0.07  N/A   0.14   N/A 

Diluted—(In U.S. Dollars per share):

   (0.37  N/A   (0.07  N/A   0.14   N/A 

 

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Revenue from contracts with customers

The detail of our revenues from contracts with customers is the following:

 

   Successor   Predecessor   Predecessor 
   For the period
from April 4, 2018
through
December 31, 2018
   For the period
from January 1, 2018
through
April 3, 2018
   For the year ended
December 31, 2017
 
       (in thousands of US$) 

Revenue from crude oil

   260,079    31,501    146,635 

Revenue from natural gas

   65,164    11,418    45,947 

Revenue from NGL

   6,093    1,544    5,477 

Revenue from contracts with customers

   —      —      16 
  

 

 

   

 

 

   

 

 

 

Total revenue from contracts with customers

   331,336    44,463    198,075 
  

 

 

   

 

 

   

 

 

 

Total revenue from contracts with customers increased to US$44.5 million during the 2018 Predecessor Period and US$331.3 million during the 2018 Successor Period, compared to US$198.1 million during the 2017 Predecessor Year. This increase was primarily driven by (i) the APCO Acquisition, which contributed US$54.5 million of revenues and (ii) the acquisition ofJDM-Medanito, which contributed US$130.0 million of revenues, in each case during the 2018 Successor Period.

Revenues from crude oil increased to US$31.5 million during the 2018 Predecessor Period and US$260.0 million during the 2018 Successor Period, compared to US$146.6 million during the 2017 Predecessor Year, which represented 70.8%, 78.5% and 74.0% of our total revenue from contracts with customers, respectively. This increase was primarily driven by (i) the APCO Acquisition, which contributed US$39.5 million of crude oil revenues, and (ii) the acquisition ofJDM-Medanito, which contributed US$119.1 million of crude oil revenues, in each case during the 2018 Successor Period.

Total volume of crude oil sold was 563.5 Mbbl during the 2018 Predecessor Period and 3,982 Mbbl during the 2018 Successor Period, compared to 2,599 Mbbl during the 2017 Predecessor Year.

Average realized crude oil sales prices was US$65.3/bbl during the 2018 Successor Period, an increase of 16.8% and 15.8% as compared to US$55.9/bbl during the 2018 Predecessor Period and US$56.4/bbl during the 2017 Predecessor Year, respectively.

Revenues from natural gas increased to US$11.4 million during the 2018 Predecessor Period and US$65.2 million during the 2018 Successor Period, compared to US$45.9 million during the 2017 Predecessor Year, which represented 25.7%, 19.7% and 23.2% of our total revenue from contracts with customers, respectively. This increase was primarily driven by (i) the APCO Acquisition, which contributed US$13.6 million of natural gas revenues and (ii) the acquisition ofJDM-Medanito, which contributed US$10.9 million of natural gas revenues, in each case during the 2018 Successor Period.

Total volume of natural gas sold was 479.5 Mboe during the 2018 Predecessor Period and 2,444 Mboe during the 2018 Successor Period, compared to 2,399 Mboe during the 2017 Predecessor Year.

Average realized natural gas sales prices was US$4.6/MMBtu during the 2018 Successor Period, an increase of 12.2% and 39.4% as compared to US$4.1/MMBtu during the 2018 Predecessor Period and US$3.3/MMBtu during the 2017 Predecessor Year, respectively.

Revenues from NGL increased to US$1.54 million during the 2018 Predecessor Period and US$6.1 million during the 2018 Successor Period, compared to US$5.5 million during the 2017 Predecessor Year, which represented 3.5%, 1.8% and 2.8% of our total revenue from contracts with customers, respectively. This increase was primarily driven by the APCO Acquisition, which amounted to US$1.3 million during the 2018 Successor Period.

 

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During the 2018 Predecessor Period, the 2018 Successor Period and the 2017 Predecessor Year all of our revenues were generated by our oil and gas properties in Argentina.

Cost of Sales

 

   2018 Successor Period   2018 Predecessor Period   Predecessor 
   from April 4, 2018 to
December 31, 2018
   from January 1, 2018 to
April 3, 2018
   For the year ended
December 31, 2017
 
       (in thousands of US$)     

Crude oil stock fluctuation

   1,241    733    7,566 

Operating expenses

   86,245    18,367    77,461 

Depreciation, depletion and amortization

   74,772    14,194    61,211 

Royalties

   50,323    6,795    28,163 
  

 

 

   

 

 

   

 

 

 

Total Cost of sales

   212,581    38,623    174,401 

Cost of sales increased to US$38.6 million during the 2018 Predecessor Period and US$212.6 million during the 2018 Successor Period, compared to US$174.4 million during the 2017 Predecessor Year. Total cost of sales included fluctuations in the inventory of crude oil, operating expenses, depreciation, depletion and amortization and royalties. This increase was primarily driven by (i) the APCO Acquisition, which contributed US$40.6 million to the cost of sales and (ii) the acquisition ofJDM-Medanito, which contributed US$53.9 million to the cost of sales, which increase was partially offset by a reduction in the operating expenses per produced barrel in the 2018 Successor Period.

Operating expenses increased to US$18.4 million during the 2018 Predecessor Period and US$86.2 million during the 2018 Successor Period, compared to US$77.5 million during the 2017 Predecessor Year, which represented 47.6%, 40.6% and 44.4% of our total cost of sales, respectively. This increase was primarily driven by (i) the APCO Acquisition, which contributed US$18.4 million and (ii) the acquisition ofJDM-Medanito, which contributed US$14.0 million, in each case during the 2018 Successor Period, which increase was partially offset by a reduction in the operating expenses per produced barrel in the 2018 Successor Period.

Operating expenses per produced barrel decreased from 16.8 US$/boe during the 2017 Predecessor Year, to 17.3 US$/boe during the 2018 Predecessor Period and 12.9 US$/boe in the 2018 Successor Period. Such decrease was mainly driven by the renegotiation of certain key contracts, theright-sizing of O&M providers and the depreciation of the Argentine Peso during the 2018 Successor Period.

Depreciation, depletion and amortization increased to US$14.2 million during the 2018 Predecessor Period and US$74.8 million during the 2018 Successor Period, compared to US$61.2 million during the 2017 Predecessor Year, which represented 36.8% , 35.38% and 35.1% of our total cost of sales, respectively. This increase was primarily driven by additions to property plant and equipment during the 2018 Successor Period mainly related to the APCO andJDM-Medanito acquisitions.

Royalties increased to US$6.8 million during the 2018 Predecessor Period and US$50.3 million during the 2018 Successor Period, compared to US$28.2 million during the 2017 Predecessor Year, which represented 17.6%, 23.7% and 16.1% of our total cost of sales, respectively. This increase was primarily driven by an increase in oil and gas sales mainly related to the APCO andJDM-Medanito acquisitions during the 2018 Successor Period.

Gross Profit

Gross profit increased to US$5.8 million during the 2018 Predecessor Period and US$ 118.7 million during the 2018 Successor Period, compared to US$ 23.7 million during the 2017 Predecessor Year, which represented 13.1% and 35.8% and 12.0% of our total revenue from contracts with customers, respectively. This increase was primarily driven by the increase in revenues from contracts with customers, which was partially offset by the increase in cost of sales, as explained in the paragraphs above.

 

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Selling Expenses

Selling expenses increased to US$3.1 million during the 2018 Predecessor Period and US$21.3 million during the 2018 Successor Period, compared to US$13.3 million during the 2017 Predecessor Year, which represented 7.0%, 6.4% and 6.7% of our total revenue from contracts with customers, respectively. This increase was primarily driven by higher expenses contributed by the APCO andJDM-Medanito acquisitions during the 2018 Successor Period.

General and Administrative Expenses

General and administrative expenses increased to US$1.5 million during the 2018 Predecessor Period and US$24.2 million during the 2018 Successor Period, compared to US$6.8 million during the 2017 Predecessor Year, which represented 3.3% and 7.3% and 3.4% of our total revenue from contracts with customers, respectively. This increase was primarily driven by (i) higher expenses contributed by the APCO acquisition during the 2018 Successor Period and (ii) an increase in fees and compensation for services, salaries and social security charges, employee benefits and share-based payments expense during the 2018 Successor Period.

Exploration Expenses

Exploration expenses decreased to US$0.1 million during the 2018 Predecessor Period and US$0.6 million during the 2018 Successor Period, compared to US$1.0 million during the 2017 Predecessor Year. This decrease was primarily driven by a decrease in exploration activity during the 2018 Successor Period.

Other Operating Income

Other operating income decreased to US$1.2 million during the 2018 Predecessor Period and US$2.7 million during the 2018 Successor Period, compared to US$17.8 million during the 2017 Predecessor Year. This decrease was primarily due to the compensation received in 2017 amounting to US$16.9 million related to the surplus gas injection program. For more information, see Note 2.4.7.3 to our Audited Financial Statements.

Other Operating Expenses

Other operating expenses increased to US$0.1 million during the 2018 Predecessor Period and US$18.0 million during the 2018 Successor Period, compared to US$5.1 million during the 2017 Predecessor Year. This increase was primarily driven by restructuring expenses of US$12.0 million and transaction costs related to the Initial Business Combination of US$2.4 million, in each case incurred during the 2018 Successor Period.

Operating Profit

Operating profit increased to US$2.2 million during the 2018 Predecessor Period and US$57.2 million during the 2018 Successor Period, compared to US$20.6 million during the 2017 Predecessor Year, which represented 5.1%, 17.3% and 10.4% of our total revenue from contracts with customers, respectively. This increase was primarily driven by the reasons explained in the paragraphs above.

Interest Income

Interest income increased to US$0.2 million during the 2018 Predecessor Period and US$2.5 million during the 2018 Successor Period, compared to US$0.2 million during the 2017 Predecessor Year. This increase was primarily driven by US$2.1 million financial interest income accrued during the 2018 Successor Period arising from higher short-term investments in the 2018 Successor Period.

Interest Expense

Interest Expense increased to US$0.1 million during the 2018 Predecessor Period and US$15.7 million during the 2018 Successor Period, compared to nil during the 2017 Predecessor Year. This increase was primarily driven by US$15.6 million in borrowing interest expense accrued during the 2018 Successor Period from the Bridge Loan, which was prepaid in full in July 2018, and the Syndicated Loan (for more information, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources”).

 

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Other Financial Results

Other financial loss increased to a loss of US$ 1.2 million during the 2018 Predecessor Period and US$22.3 million during the 2018 Successor Period, compared to a loss of US$0.4 million during the 2017 Predecessor Year. This increase was primarily driven by (i) a loss of US$8.9 million due to changes in the fair value of Warrants during the 2018 Successor Period, (ii) costs of early settlements of borrowings and other financing costs of US$14.5 million during the 2018 Successor Period and (iii) a US$2.7 million loss during the 2018 Successor Period mainly related to the effect of the discount of assets and liabilities at present value.

Profit Before Income Taxes

Loss before income taxes increased to US$1.3 million loss for the 2018 Predecessor Period and US$21.0 million during the 2018 Successor Period, compared to US$20.3 million loss for the 2017 Predecessor Year. This increase was primarily driven by the reasons explained in the paragraphs above.

Income Tax expense

Our income tax expense increased to US$8.0 million during the 2018 Predecessor Period and US$47.4 million during the 2018 Successor Period, compared to US$6.4 million during the 2017 Predecessor Year. This increase was primarily driven by (i) an increase in the current income tax expense, from US$16.1 million in the 2017 Predecessor Year to US$4.2 million in the 2018 Predecessor Period and US$35.5 million during the 2018 Successor Period and (ii) an increase in the deferred income tax expense, from income of US$9.6 million in the 2017 Predecessor Year to an expense of US$3.3 million in the 2018 Predecessor Period and an expense of US$12.0 million during the 2018 Successor Period, being both increases mainly derived from the additional taxable income generated by the APCO and JDM / Medanito acquisitions and the devaluation of the Argentine peso mainly during the second and third quarters of 2018, which derived in a higher deferred income tax liability mainly from our property, plant and equipment as a result of an increase in the temporary difference between the tax bases and carrying amount of suchnon- monetary assets . This effect is due to the Company´s taxable basis, which is determined in a currency (Argentine peso) different to our functional currency (U.S. dollar) and, consequently, fluctuations in the exchange between these two currencies give rise to temporary differences under IFRS. For more information, see “Item 5—Operating and Financial Review and Prospects—Operating Results—Factors Affecting Our Results of Operations—Deferred Income Tax.”

Net (loss) profit for the period/year

Net Profit (loss) decreased to a US$6.6 million loss during the 2018 Predecessor Period and a US$ 26.4 million loss during the 2018 Successor Period, compared to US$13.9 million of net profit during the 2017 Predecessor Year. This decrease was primarily driven by the reasons provided in the paragraphs above.

ITEM 5B. LIQUIDITY AND CAPITAL RESOURCES

Our financial condition and liquidity is and will continue to be influenced by a variety of factors, including:

 

  

changes in oil, natural gas and liquid gas prices and our ability to generate cash flows from our operations;

 

  

our capital expenditure requirements; and

 

  

the level of our outstanding indebtedness and the interest we are obligated to pay on this indebtedness.

Since our incorporation in March 22, 2017, we have raised US$650 million in public equity offerings, US$95 million in private equity offerings and US$300 million through borrowings, as described further below, which net of the redemption rights, as explained below, have been used to fund the Initial Business Combination, our capital expenditures program and to increase our liquidity.

 

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On August 15, 2017, we completed our US$650 million initial global offering of 65,000,000 series A shares and 65,000,000 warrants exercisable for such series A shares (the “Warrants”), generating net proceeds to us, after offering expenses, of US$640 million. The series A shares and warrants issued pursuant to our initial global offering are listed on the Mexican Stock Exchange.

Three Warrants entitle the holder thereof to purchase one series A share at a price of US$11.50 per series A share. The Warrants expire on April 4, 2023 or earlier if, after exercisability, the closing price for a series A share for any 20 trading days within an applicable30-trading day period equals or exceeds the Mexican Peso equivalent of US$18.00 and we decide to early terminate the exercise period thereof. In the event that we declare an early termination, we will have the right to declare that the exercise of the warrants be made on a “cashless basis.” See “Item 10—Additional Information—Memorandum and Articles of Association—Warrants.”

Concurrently with our initial global offering, Vista Sponsor Holdings, L.P. and the Management Team (excluding Gastón Remy) purchased a total of 29,680,000 warrants exercisable for series A shares in a private placement (the “Sponsor Warrants”), generating gross proceeds to us of US$14,840,000. The Sponsor Warrants are identical to and fungible with the Warrants. However, the Sponsor Warrants may be exercised for cash or on a cashless basis at the discretion of Vista Sponsor Holdings, L.P. and the Management Team, or their permitted transferees. See “Item 10—Additional Information—Memorandum and Articles of Association—Warrants.”

On August 15, 2017, we also executed a forward purchase agreement (the “FPA”) pursuant to which RVCP agreed to purchase a total of up to 5,000,000 series A shares (the “FPA Shares”) and up to 5,000,000 warrants (“FPA Warrants”) for a total purchase price of US$50 million (or US$10 per unit).

Further, on September 12, 2018, we entered executed a subscription agreement with Kensington, RVCP’s sole limited partner, for the subscription of the FPA Shares and the FPA Warrants that could be purchase by RVCP, or its permitted transferees, pursuant to the FPA. On February 12, 2019, we completed the sale of the FPA Shares and the FPA Warrants to Kensington for an amount of US$50.0 million pursuant to the FPA and, additionally, 500,000 series A shares for an amount of US$5.0 million pursuant to certain subscription commitment among Vista and Kensington. The FPA Warrants are subject to the same terms as the Sponsor Warrants. See “Item 10—Additional Information—Memorandum and Articles of Association—Warrants.”

As of the date of this annual report, we hold 33,226,667 series A shares in treasury for delivery upon exercise of any Warrants, Sponsor Warrants or FPA Warrants, as the case may be.

As per the unanimous shareholders resolutions dated July 28, 2017, our shareholders resolved to reduce a portion of our outstanding capital stock. As a result, a number of series A shares, which represented a portion of the amount authorized to be reduced, were reimbursed for cash and canceled.

On April 4, 2018, the date we consummated our Initial Business Combination:

 

  

we entered into a bridge loan agreement (the “Bridge Loan”) with Citibank, N.A., Credit Suisse AG Cayman Islands Branch and Morgan Stanley Senior Funding, Inc. in an aggregate principal amount equal to US$260.0 million, maturing on February 11, 2019, bearing interest at a variable rate between 3.25% and 5%. The Bridge Loan was prepaid in full on or about July 19, 2018 with the proceeds of the Syndicated Loan.

 

  

approximately 31.29% of holders of series A shares exercised their redemption rights, as a result of which 20,340,685 series A shares were redeemed for an amount of US$204.6 million. The holders of remaining series A shares were capitalized net of the deferred offering expenses paid to the underwriters in our initial global offering for an amount of US$442.5 million, and

 

  

we obtained from a private placement transaction a capital contribution of US$95,000,000 representing 9,500,000 series A shares that were paid in.

 

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We believe that our working capital is sufficient for our present requirements.

In July 2019, we completed a global offering consisting of afollow-on public offering in Mexico of our series A shares and an international public offering in the United States and other countries of our series A shares represented by American Depositary Shares on the NYSE for a total amount of 10,906,257 series A shares (including all over-allotment options). Our ADSs began trading on the NYSE on July 26, 2019, under the ticker symbol “VIST”. The gross proceeds of the global offering amounted to approximately $101 million, before fees and expenses.

Indebtedness

As of December 31, 2019, we had total outstanding indebtedness of US$ 451.4 million.

On July 19, 2018, Vista Argentina, in its capacity as borrower, Vista, Vista Holding I, APCO Argentina and APCO International, as guarantors, entered into a syndicated term loan agreement (the “Syndicated Loan Agreement”) with a syndicate of banks for an aggregate principal amount equal to US$300 million (the “Syndicated Loan”).

The Syndicated Loan consists of (i) a five year fixed rate tranche and (ii) a floating rate tranche. On July 19, 2018, Vista Argentina requested a loan disbursement in an amount equal to US$300 million pursuant to the Syndicated Loan. The funds from the loans were used to (i) repay in full all of the outstanding loans, obligations, interests, fees, costs and expenses under the bridge loan agreement dated as of April 4, 2018, among Vista, as borrower, Vista Argentina, Vista Holding I, APCO Argentina, APCO International and Vista Holding II, as guarantors, and a syndicate of banks for an aggregate principal amount of US$260 million (the “Bridge Loan”), (ii) for general corporate purposes and (iii) pay related transaction fees, costs and expenses. Vista used the proceeds from the Bridge Loan to finance a portion of the Initial Business Combinations.

The Syndicated Loan is an unsecured facility that amortizes on a semi-annual basis beginning eighteen months after the disbursement date. On October 22, 2018, Vista Holding II became a guarantor and a loan party to the Syndicated Term Loan, and on October 31, 2018, APCO Oil & Gas S.A.U. assumed the obligations of APCO International under the Guaranty in its capacity as the successor to APCO International (see “Item 4—Information on the Company—History and Development of the Company—Corporate Reorganization”). Pursuant to the terms of the Syndicated Loan, Vista may be required from time to time to add additional material subsidiaries of Vista as Guarantors under the Syndicated Loan. Any such Guarantors are subject to the affirmative and negative covenants and other restrictions applicable to loan parties under the Syndicated Loan. See “Item 3—Key Information—Risk Factors—Our debt obligations include operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions.” As of the date of this annual report, there is no default or event of default outstanding under the Syndicated Loan.

On June 10, 2019, Vista Argentina, we, Vista Holding I, APCO Argentina, APCO International and Vista Holding II entered into an amendment (the “First Amendment”) to the Syndicated Loan Agreement with certain lenders constituting the required lenders under the Syndicated Loan and with Itaú Unibanco S.A., Nassau Branch, as administrative agent. Among other things, the First Amendment provides us, the other Guarantors and Vista Argentina with additional flexibility to make certain investments in other loan parties and in third parties (subject to certain ceilings) and provides Vista Holding I with additional flexibility during the eighteen month period (ending on January 19, 2020) following the date of the Syndicated Loan Agreement to make certain dividends and distributions to Vista and other persons (subject to certain ceilings).

On March 12, 2020, Vista Argentina, we, Vista Holding I and Vista Holding II entered into a further amendment (the “Second Amendment”) to the Syndicated Loan Agreement with certain lenders constituting the required lenders under the Syndicated Loan and with Itaú Unibanco S.A., Nassau Branch, as administrative agent. Among other things, the Second Amendment provides for the adjusted consolidated net debt to adjusted consolidated EBITDA ratio to be tested on a consolidated basis at the level of Vista Holding I (excluding debt of Vista Holding I owing to us or any of the guarantors). Previously, such ratio excluded the indebtedness and EBITDA of Vista Holding I for testing purposes.

On May 7, 2019 the shareholders of Vista Argentina approved the creation of a program for the issuance of short-, medium- or long-term, subordinated or unsubordinated, secured or unsecured, simplenon-convertible debt securities, (obligaciones negociables simples no convertibles en acciones), for up to an aggregate principal amount at any time outstanding of US$800,000,000 or its equivalent in other currencies (the “Notes Program”). The Notes Program was approved by the Argentine Securities Commission (theComisión Nacional de Valores, or the “CNV”). Accordingly, Vista Argentina may publicly offer and issue debt securities in Argentina.

On July 30, 2019, Vista Argentina entered into a loan agreement with BBVA Argentina S.A. for an amount of US$15,000,000, at an annual fixed rate of 9.4% and for36-month term.

 

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On July 31, 2019, Vista Argentina issued a24-month bullet bond for US$50 million at a flat interest rate of 7.88% per annum. In addition, on August 7, 2019, Vista Argentina issued a36-month bullet bond for an additional US$50 million at a flat interest rate of 8.50% per annum. In February 2020, Vista Argentina issued an additional4-year bullet bond for US$50 million at a flat interest rate of 3.50% per annum.

On December 12, 2019, Vista Argentina entered into a loan agreement with BBVA Argentina S.A. for an amount of AR$725,000,000, at an annual fixed rate in Argentine pesos of 62.0% and for a three-month term. The loan was repaid on March 25, 2020.

On December 12, 2020, Vista Argentina entered into a loan agreement with Banco de Galicia y Buenos Aires S.A.U. for an amount of AR$600,000,000, at an annual floating interest rate in Argentine pesos of Adjusted Badlar base rate plus an applicable margin of 8.25% and for a three-month term. The loan was repaid on March 27, 2020.

On January 15, 2020, Vista Argentina entered into a loan agreement with Banco Macro S.A. for an amount of US$30,000,000, at an annual fixed rate of 5.25% and for asix-month term.

On April 1, 2020, Vista Argentina entered into a loan agreement with Banco BBVA Argentina S.A. for an amount of AR$725,000 for a12-month term at an annual floating interest rate equal to TM20 adjusted base rate plus an applicable margin of 6%.

On September 11, 2019, the Board of Directors of the U.S. International DFC, formerly OPIC, approved the provision of up to US$300 million in financing to Vista Argentina for aten-year period and US$150 million to Aleph Midstream for aten-year period. This financing is still subject to the completion of definitive documentation and the fulfillment of conditions precedent. We intend to use the proceeds of such financing to fund capital expenditures relating to our development plan in the Bajada del Palo Oeste block and the related facilities. While the process for obtaining such financing has begun, no assurances can be given that OPIC will approve and grant such financing.

On April 27, 2020, Vista Argentina signed a loan agreement with Bolsas y Mercados Argentinos S.A. for an amount of AR$ 95 million at an annual interest rate of 18.62% and for a period of 30 days, guaranteed with government bonds held by Vista Argentina.

Capital Expenditures

The amount and allocation of future capital expenditures will depend upon a number of factors, including our cash flows from operating, investing and financing activities and our ability to execute our drilling program. We periodically review our capital expenditure budget to assess changes in current and projected cash flows, debt requirements and other factors. If we are unable to obtain funds when needed or on acceptable terms, we may not be able to finance the capital expenditures necessary to maintain our production or proved reserves. We intend to fund our capital expenditures with cash generated from our operations, cash on hand, and debt and equity financing.

Because we operate a high percentage of our acreage, capital expenditure amounts (in addition to our capital expenditures committed under our concessions) and timing are largely discretionary and within our control. We determine our capital expenditures depending on a variety of factors, including, but not limited to, existing commitments under the concessions, the success of our drilling activities, prevailing and anticipated prices for oil and natural gas, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other working interest owners. A deferral of planned capital expenditures, particularly with respect to drilling and completing new wells, could result in a reduction in anticipated production and cash flows. Moreover, we may be required to unbook some portion of our current proved undeveloped reserves if such deferral of planned capital expenditures implies that we will be unable to develop such reserves within five years of their initial booking.

During the year ended December 31, 2019, we made total capital expenditures of US$224.1 million. During the nine-month period ended December 31, 2018, we made total capital expenditures of US$123.7 million. During the three-month period ended March 31, 2018, we made total capital expenditures of US$6.3 million (information corresponding to all assets acquired in the Initial Business Combination).

 

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We are currently revising and optimizing our total capital expenditures for the year 2020 due to the impact ofCovid-19 on our operations. Health and safety measures introduced by the Argentine and Mexican governments, in conjunction with guidelines and emergency procedures by our Company, have had, and probably will keep having, and impact on our drilling, completion and general operations. In addition, the contraction of crude oil demand and the drop in international and domestic prices, might cause some of the investments originally budgeted for 2020 to become uneconomical and therefore we might decide to defer such projects. See “Item 3—Key Information—Risk Factors— We are exposed to contractions in the demand of crude oil and natural gas and contractions in the demand of any of theirby-products” and “Item 3—Key Information—Risk Factors—The novel coronavirus could have an adverse effect on our business operations.”

As part of the terms and conditions governing the concession agreements relating to our oil and gas properties in Argentina, we are committed to making capital investments for drilling and completing wells, performing well workovers and investing in facilities. We have estimated the amount of capital expenditures required to comply with our commitments under such concessions based on the historical costs of drilling and completing wells, performing well workovers and investing in facilities. According to our best estimates, we anticipate our capital expenditures required to comply with our commitments under the concessions to be approximately US$138.7 million from December 31, 2019 through December 31, 2022. We may elect to defer in whole or in part the capital investments in Argentina that we had originally scheduled for 2020, depending on how the contraction of crude oil demand and the drop in international and domestic prices evolve during 2020. For more information on these investment commitments, see Note 28 to our Audited Financial Statements.

We have also committed to make certain capital investments in our three blocks in Mexico once the exploratory plans are approved by CNH. We have estimated that we will be required to make capital expenditures at our working interest for an estimated amount of US$21.6 million. Capital commitments in the Mexican blocks should be completed in 24 months since the approval of each of the explorations plans by CNH. TheCS-01 exploration plan was approved by CNH in February 2019, theTM-01 exploration plan was approved by CNH in February 2019, and theA-10 exploration plan was approved by CNH in August 2019. We may elect to defer in whole or in part the capital investments in Mexico that we had originally scheduled for 2020, depending on how the contraction of crude oil demand and the drop in international and domestic prices evolve during 2020. See “Item 3—Key Information—Risk Factors—We are exposed to contractions in the demand of crude oil and natural gas and contractions in the demand of any of theirby-products.”

Cash Flows

The following table sets forth our cash flows for the periods indicated:

 

   Successor   Predecessor 
   For the year
ended
December 31,

2019
   For the period from
April 4, 2018 to
December 31, 2018
   For the period from
January 1, 2018 to
April 3, 2018
   For the year ended
December 31,
2017
 
   (in thousands of US$, except margins) 

Cash flows provided by (used in)

  

Operating activities

   134,258    125,522    22,279    45,867 

Investing activities

   (235,009   (857,250   (8,943   (46,570

Financing activities

   266,301    141,544    —      (6,733

Net (decrease) increase in cash and cash equivalents

   165,550    (590,184   13,336    (7,436

Cash Flows Provided by Operating Activities

For the year ended December 31, 2019, net cash generated by operating activities was US$134.3 million, mainly due to the loss for the period of US$32.7 million adjusted fornon-cash items (mainly relating to depreciation charges, net exchange differences, share-based payment expense, interest expense and accrued income tax), which was partially offset by a decrease of US$22.1 million in accounts payable and other payables and income tax payments of US$26.3 million.

 

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For the 2018 Predecessor Period, net cash generated by operating activities was US$22.3 million, mainly due to the loss for the period of US$6.6 million adjusted fornon-cash items of US$20.8 million (mainly relating to depreciation charges, net exchange differences and accrued income tax), which was partially offset by a decrease of US$1.0 million in accounts payable, accrued liabilities and other payables, decreases in inventory of US$2.3 million and trade and other receivables of US$9.7 million, and income tax payments of US$0.99 million.

For the 2018 Successor Period, net cash provided by operating activities was US$125.5 million, mainly generated by the net loss for the period of US$26.4 million, adjusted fornon-cash items of US$165.2 million (mainly relating to depreciation charges and the accrued income tax), an increase of US$32.9 million in trade and other receivables, an increase of US$33.7 million in accounts payable, accrued liabilities and other payables, a decrease in inventory of US$11.0 million and income tax payments of US$16.6 million.

Cash Flows Used in Investing Activities

For the year December 31, 2019, net cash used in investing activities was US$235.0 million, mainly attributable to payments for acquisition of property, plant and equipment for US$240.3 million.

For the 2018 Predecessor Period, net cash used in investing activities was US$8.9 million, mainly attributable to payments for acquisition of property, plant and equipment of US$12.5 million and acquisition of other financial assets for US$8.2 million, partially offset by proceeds from sales of other financial assets of US$11.4 million.

For the 2018 Successor Period, cash used in investing activities was US$857.2 million, resulting mainly from the net cash outflow used to finance the acquisitions of US$725.2 million plus additional capital expenditures of US$117.8 million and other intangible assets of US$31.5 million partially offset by proceeds from sales of other financial assets of US$16.7 million.

Cash Flows Provided by (used in) Financing Activities

For the year ended December 31, 2019, cash provided by financing activities was US$266.3 million, primarily generated by proceeds from capitalization of serie A shares net of issue costs for US$146.1 million and proceeds from borrowings for US$234.7 million and partially offset by payments of borrowings’ principal for US$90.2 million and payments of borrowings’ interest for US$32.4 million.

For the 2018 Predecessor Period, cash provided by financing activities was nil.

For the 2018 Successor Period, cash provided by financing activities was US$141.5 million, primarily generated from the proceeds of loans and borrowings for an amount of US$560.0 million, including the proceeds received from Syndicated Loan, and the proceeds from the private investment for an amount of US$95.0 million, which were partially offset by US$204.6 million paid for the redeemable series A shares (net of offering expenses) and the repayment of US$260.0 million of the outstanding principal amount of the Bridge Loan.

ITEM 5C. RESEARCH AND DEVELOPMENTS, PATENTS AND LICENSES, ETC.

Non applicable.

ITEM 5D. TREND INFORMATION

See “Item 4—Information on the Company—Industry and Regulatory Overview”.

In addition to the information set forth in this section, additional information about the trends affecting our business can be found in “Item 3—Key Information—Risk Factors—Risks Related to our Business and Industry” You should also read our discussion of the risks and uncertainties that affect our business in “Item 3—Key Information—Risk Factors—Risks Related to the Argentine and Mexican Economies and Regulatory Environments” including matters related to potential risks and disruptions related to theCovid-19 outbreak.

 

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ITEM 5E.OFF-BALANCE SHEET ARRANGEMENTS

We do not have anyoff-balance sheet agreements.

ITEM 5F. CONTRACTUAL OBLIGATIONS

The following table sets forth information with regard to our commitments under financial and commercial contracts for the periods indicated below, as of December 31, 2019:

 

   Less than 1
year
   1-3 years   3-5 years   More than 5
years
   Total 

Syndicated Loan(1)

   52,189    199,277    107,540    —      359,006 

Other borrowings(1)

   38,517    127,570    —      —      166,086 

Operating leases obligations(2)

   9,025    15,263    7,015    14,566    45,868 

Investments commitments(3)

   29,471    130,824    —      —      160,295 

Employee pension plan liabilities(4)

   871    1,688    1,695    4,554    8,808 

Other financial liabilities(5)

   37,500    —      —      —      37,500 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   167,573    474,621    116,250    19,120    777,563 

 

 (1)

Corresponds to principal and interest that the Company must pay during the term of the loans. Includes estimates related to floating rate interest and exchange differences that could affect the amount of the obligations in the future.

 (2)

Corresponds to minimum lease payments with respect tonon-cancellable operating leases, for which some of them the Company has initiated certain renegotiations.

 (3)

Estimated allocation of our investment commitments with government authorities under concessions and under joint operations as stated in note 29.4 to the Audited Financial Statements. However, we are currently revising and optimizing our total capital expenditures for the year 2020 due to the impact ofCovid-19 on our operations and our actual capital expenditures for the year 2020 may differ from such estimates. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures.”

 (4)

Estimated expected benefits payments for the next ten years. The amounts in the table represent the undiscounted cash flows and therefore do not reconcile to the obligations recorded at the end of the year. See Note 22 to the Audited Financial Statements.

 (5)

Related to Aleph’s investment agreement. See Note 27 to the Audited Financial Statements.

This table does not include concessions, easements and canons payable to the provinces for the exploitation areas.

Since December 31, 2019, there have not been material changes in our commitments under financial and commercial contracts. See “Item 5—Indebtedness.”

ITEM 5G. SAFE HARBOR

See the discussion at the beginning of this annual report under the heading “Forward-Looking Statements” for forward-looking statement safe harbor provisions.

 

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Board of Directors

Under the Mexican Securities Market Law, public companies must have a board of directors comprised of no more than 21 members, of which at least 25% must be independent. Independent members must be selected based on their experience, ability and reputation at the issuer’s shareholders’ meeting; whether or not a director is independent must be determined by the issuer’s shareholders and such determination may be challenged by the CNBV. The Mexican Securities Market Law permits then-acting members of the board of directors (as opposed to shareholders) to select, under certain circumstances and on a temporary basis, new members of the board of directors.

 

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Boards of directors of public companies are required to meet at least four times during each calendar year and have the following principal duties:

 

  

determine general strategies applicable to the issuer;

 

  

approve guidelines for the use of corporate assets;

 

  

approve, on an individual basis, transactions with related parties, subject to certain limited exceptions;

 

  

approve unusual or exceptional transactions and any transactions that imply the acquisition or sale of assets with a value equal to or exceeding 5% of the issuer’s consolidated assets or that imply the provision of collateral or guarantees or the assumption of liabilities equal to or exceeding 5% of the issuer’s consolidated assets;

 

  

approve the appointment or removal of the chief executive officer;

 

  

approve waivers in respect of corporate opportunities;

 

  

approve accounting and internal control policies;

 

  

approve the chief executive officers’ annual report and corrective measures for irregularities; and

 

  

approve policies for disclosure of information.

Directors have the general duty to act for the benefit of the issuer, without favoring a shareholder or group of shareholders.

Our board of directors is responsible for the management of our business and is comprised of six members, four of which are independent. Set forth below are the name, age, position and biographical description of each of our current directors. Our directors were appointed by the unanimous consent of our shareholders on July 28, 2017, except for Pierre-Jean Sivignon, who was appointed by our board of directors on May 10, 2018 and ratified by the shareholders on April 25, 2019.

 

Name

  

Position

  

Independent*

  

Age

  

Term Expires on

Miguel Galuccio  Chairman  No  52  No expiration date
Kenneth Ryan  Director  No  47  No expiration date
Susan L. Segal  Director  Yes  67  No expiration date
Mauricio Doehner Cobian  Director  Yes  45  No expiration date
Pierre-Jean Sivignon  Director  Yes  63  No expiration date
Mark Bly  Director  Yes  61  No expiration date

 

*

Independent under NYSE standards, applicable SEC rules and the CNBV Rules.

Miguel Galuccio serves as our Chairman and Chief Executive Officer. Mr. Galuccio is currently an independent member of the board of directors of Schlumberger, a global oil services firm. Mr. Galuccio served as the Chairman and Chief Executive Officer of YPF, Argentina’s largest oil company, from May 2012 to April 2016, which under his leadership became the largest producer of hydrocarbons from shale formations globally outside North America. Prior to joining YPF, Mr. Galuccio was an employee of Schlumberger and held a number of international positions in North America, the Middle East, Asia, Europe, Latin America, Russia and China, his last being President of Schlumberger Production Management. Other senior roles held by Mr. Galuccio at Schlumberger include President of Integrated Project Management, General Manager for Mexico and Central America and Real Time Reservoir Manager. Prior to his employment at Schlumberger, he served in various executive positions at YPF and its subsidiaries, including YPF International, where he participated in its internationalization process as Manager within Maxus Energy. Mr. Galuccio holds a bachelor’s degree in petroleum engineering from the Instituto Tecnológico de Buenos Aires in Argentina.

 

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Kenneth Ryan serves as member of our board of directors. Mr. Ryan is a Partner, head of corporate development, capital strategies and investor relations at Riverstone. He is based in New York. In addition, Mr. Ryan has primary responsibility for Riverstone Energy Limited, an affiliated publicly traded energy investment company that is listed on the London Stock Exchange. Prior to joining Riverstone, he worked for Gleacher & Company/Gleacher Partners in both London and New York, most recently as Managing Director andco-head of Investment Banking. Prior to Gleacher, Mr. Ryan worked in the investment banking division of Goldman Sachs in London and New York. Mr. Ryan currently serves on the Board of Directors of TrailStone, Riverstone Energy Limited and Vista Oil & Gas S.A. de C.V. Mr. Ryan is a member of the investment committee of Riverstone Credit Partners, Riverstone’s Credit Fund. Mr. Ryan received his degree in law from the University of Dublin, Trinity College.

Susan L. Segal serves as an independent member of our Board of Directors. Ms. Segal was appointed President and CEO of Americas Society / Council of the Americas in 2003, after working in the private sector in Latin America and other emerging markets for more than 30 years. Prior to her current appointment, she was a Partner at Chase Capital Partners / JPMorgan Partners with a focus on private equity in Latin America and pioneering venture capital investments in the region. During her career as a banker, she focused in investment banking, founding a trading unit for emerging market bonds and, was actively involved in the Latin American debt crisis in the 1980s and 1990s, serving as President of the Board for the Advisory Committees of Chile and the Philippines. Ms. Segal is a member of the Board of Americas Society / Council of the Americas, the Tinker Foundation, Scotiabank and Mercado Libre, as well as Chairman of the Board of Scotiabank USA, a wholly-owned private subsidiary of ScotiaBank. She is also a member of the Council on Foreign Relations. Ms. Segal graduated from Sarah Lawrence University and received a master’s degree in business administration from Columbia University in the United States. In 1999, she was awarded the Orden Bernardo O’Higgins, Grado de Gran Oficial in Chile. In 2009, Colombia honored her with the Orden de San Carlos. In 2012, Mexico bestowed on her the Orden Mexicana del Águila Azteca. In 2013, the North American-Chilean Chamber of Commerce recognized her as the Honorary Chilean of the Year. In 2018, Susan was awarded Peru’s Order of “Merit for Distinguished Services” in the rank of Grand Official.

Mauricio Doehner Cobian serves as an independent member of our Board of Directors. Mr. Doehner has been Executive Vice President of Corporate Affairs and Enterprise Risk Management at CEMEX since May 2014 and is a member of its Executive Committee, reporting directly to the CEO. Mr. Doehner began work with CEMEX in 1996 and has held various executive positions in areas such as Strategic Planning, Institutional Relations and Communications and Business Risk Management for Europe, Asia, Middle East, South America, and Mexico. While acting in such capacities, he has led interactions and collaboration with several governments worldwide, as well as engaging in evaluation of tax structures, public policy initiatives, corporate social responsibility, communications, and crisis management. Further, he worked in Mexico’s Presidential Administration in 2000, leading its relationship with Mexican NGO’s, dealing with diverse issues such as government reforms and the national budget. Mr. Doehner also worked at Violy Byorum & Partners Investment Bank. Currently, he is the President of the Board of the National Chamber of Cement (CANACEM), Vice-president of the Confederation of Industrial Chambers (CONCAMIN) and a member of the boards of the Trust for the Americas organization affiliated to the Organization of American States (OAS), the Center of Citizen Integration (CIC), the Industrials Club of Monterrey, the Museum of Modern Art of Monterrey (MARCO) and a member of the GAP Group within the Consejo Mexicano de Negocios (CMN). Mr. Doehner leads a seminar on economic, financial and political analysis at Tecnológico de Monterrey and is a Board Member of Tec Milenio. He is also a contributor to Expansión Magazine. Mr. Doehner holds a bachelor’s degree in economics from Tecnológico de Monterrey, a master’s degree in business administration from IESE/IPADE, and a professional certificate in competitive intelligence from the FULD Academy of Competitive Intelligence in Boston, Massachusetts.

Pierre-Jean Sivignon serves as an independent member of our Board of Directors. Mr. Pierre-Jean Sivignon was an advisor to the Chairman and CEO of Carrefour Group in Paris until December 2018, where he previously held the positions of Deputy CEO, CFO and Member of the Executive Board as well as Chairman of the Board of their publicly traded subsidiary in Brazil. Prior experience includes positions as the Chief Financial Officer, Executive Vice President, Member of the Board of Management at both Royal Philips Electronics in Amsterdam and at Faurecia Group in Paris. He also held various high level financial and managerial positions with the Schlumberger Group in different locations, including New York and Paris. Mr. Sivignon sat as member of the board of directors of Imerys and Technip FMC, both companies traded on the Paris Stock Exchange. Mr. Sivignon graduated from French baccalaureate with honors in France and received an MBA from ESSEC (Ecole Superieure des Sciences Economiques et Commerciales) also in France.

 

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Mark Bly serves as an independent member of our Board of Directors. Mr. Bly has more than 30 years of experience in the oil and gas industry, and is currently thenon-executive Chairman of the Board of Baytex Energy Corp, an oil and gas company based in Calgary, Canada. Previously , he occupied various executive positions at an international level at British Petroleum (“BP”). Mr. Bly’s last role at BP was Executive Vice President of Safety and Operational Risk, where he led a global effort that resulted in safety and reliability improvements in the operating units of BP after the Deepwater Horizon incident in the Gulf of Mexico in 2010. Mr. Bly also led the internal investigation of the 2010 incident, and is the author of the “Bly Report,” which came to define the understanding of the event by the industry and represented the founding of the new global drilling practices program at BP. Mr. Bly had previously been a part of BP’s E&P Executive Group, responsible for monitoring an international portfolio with units in Angola, Trinidad, Egypt, Algeria and the Gulf of Mexico. During his earlier years at BP, Mr. Bly led several key E&P units in Alaska, the North Sea and in North America. Mr. Bly received a master’s degree in structural engineering from the University of California at Berkeley and a bachelor’s degree in civil engineering from the University of California at Davis.

As provided in our bylaws, members of the Board of Directors appointed by shareholders at the time they authorized our initial global offering, shall remain in office at least until August 9, 2019.

For a detailed description of the operation and authorities of our board of directors, see “Item 5—Operating and Financial Review and Prospects——Directors, Senior Management and Employees—Board of Directors.”

Duties and Liabilities of Directors

The Mexican Securities Market Law also imposes duties of care and loyalty on directors.

The duty of care generally requires that directors obtain sufficient information and be sufficiently prepared to support their decisions and to act in the best interest of the issuer. The duty of care is discharged, principally, by requesting and obtaining from the issuer and its officers all the information required to participate in discussions, obtaining information from third parties, attending board meetings and disclosing material information in possession of the relevant director. Failure to act with care by one or more directors subjects the relevant directors to joint liability with the other directors involved in an action for damages and losses caused to the issuer and its subsidiaries, which may be limited (except in the instances of bad faith, or illegal acts or willful misconduct) under the company’s bylaws or by resolution of a shareholders’ meeting. Liability for a breach of the duty of care may also be covered by indemnification provisions and director and officer liability insurance policies.

The duty of loyalty primarily consists of a duty to maintain the confidentiality of information received in connection with the performance of a director’s duties and to abstain from discussing or voting on matters where the director has a conflict of interest. In addition, the duty of loyalty is breached if a shareholder or group of shareholders is knowingly favored or if, without the express approval of the board of directors, a director takes advantage of a corporate opportunity. The duty of loyalty is also breached if a shareholder or group of shareholders is knowingly favored, if the director discloses false or misleading information or fails to register any transaction in the issuer’s records that could affect its financial statements or causes material information not to be disclosed or to be modified. The duty of loyalty is also breached if the director uses corporate assets or approves the use of corporate assets in violation of an issuer’s policies. The violation of the duty of loyalty subjects the offending director to joint liability for damages and losses caused to the issuer and its subsidiaries. Liability also arises if damages and losses result from benefits obtained by the directors or third parties, as a result of activities carried out by the directors. Liability for breach of the duty of loyalty may not be limited by the company’s bylaws, by resolution of a shareholders’ meeting or otherwise.

Claims for breach of the duty of care or the duty of loyalty may be brought solely for the benefit of the issuer (as a derivative suit) and may only be brought by the issuer or by shareholders representing at least 5% of any outstanding shares.

As a safe-harbor for directors, the liabilities specified above will not be applicable if the director acted in good faith and (i) complies with applicable law and the bylaws, (ii) acted based upon information provided by officers, external auditors or third-party experts, the capacity and credibility of which may not be the subject of reasonable doubt, (iii) selected the more adequate alternative in good faith or in a case where the negative effects of such decision may not have been foreseeable, based upon the then available information, and (iv) actions were taken in compliance with resolutions adopted at the shareholders’ meeting.

 

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Under the Mexican Securities Market Law, the issuer’s chief executive officer and principal executives are also required to act for the benefit of the company and not of a shareholder or group of shareholders. Principally, these executives are required to submit to the board of directors for approval the principal strategies for the business, to submit to the audit committee proposals relating to internal control systems, to disclose all material information to the public and to maintain adequate accounting and registration systems and internal control mechanisms.

Board Committees

The Mexican Securities Market Law requires us to have an Audit and Corporate Governance Committee, which must be composed of at least three independent members under the Mexican Securities Market Law. We believe that all of the members of the Audit and Corporate Governance Committee are independent under the Mexican Securities Market Law and comply with the requirements of Rule10A-3 of the Exchange Act. On May 10, 2018, the Board created a Compensation Committee.

Audit Committee

Members of our audit committee were appointed by the unanimous consent of our shareholders on July 28, 2017, except for Mr. Pierre-Jean Sivignon who was appointed as new member of the committee by the Board on May 10, 2018, to replace Mr. Anthony Lim, who resigned effective such date. Mr. Sivignon was also nominated by the Board to chair the Audit Committee. The current members of our audit committee are:

 

  

Pierre-Jean Sivignon (chair);

 

  

Susan L. Segal;

 

  

Mauricio Doehner Cobian; and

 

  

Mark Bly.

There is no expiration date on the term of the appointment of the members of our audit committee. For a detailed description of the operation and authorities of our audit committee, see “Item 10—Additional Information—Shareholder’s Meetings—Audit and Corporate Practices Committees.”

Corporate Practices Committee

Members of our corporate practices committee were appointed by the unanimous consent of our shareholders on July 28, 2017. The current members of our corporate practices committee are:

 

  

Mauricio Doehner Cobian (chair);

 

  

Pierre-Jean Sivignon;

 

  

Susan L. Segal; and

 

  

Mark Bly.

There is no expiration date on the term of the appointment of the members of our corporate practice committee. For a detailed description of the operation and authorities of our audit committee, see “Item 10—Additional Information—Description of the Series A Shares and Bylaws—Shareholder’s Meetings—Audit and Corporate Practices Committees.”

 

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Compensation Committee

On May 10, 2018, the Board created a Compensation Committee with the intention of (i) setting the compensation strategy for our executive officers and directors, (ii) setting compensation levels for the CEO, and (iii) approving compensation policies forC-suite executives upon CEO recommendation. The current members of our compensation committee are:

 

  

Susan L. Segal (chair);

 

  

Pierre-Jean Sivignon;

 

  

Mauricio Doehner Cobian; and

 

  

Mark Bly.

For a detailed description of the operation and authorities of our audit committee, see “Item 10—Additional Information—Description of the Series A Shares and Bylaws—Shareholder’s Meetings—Audit and Corporate Practices Committees.”

Agreements with Directors

There are no agreements between us and the members of our Board of Directors that provide for any benefits upon termination of their designation as directors. None of our directors maintains service contracts with us except as described in “Principal Shareholders” and “Related Party Transactions.”

Management Team

The following table sets forth the members of our Management Team as of the date of this annual report, which were designated on August 1, 2017.

 

Name

  

Position

  

Age

Miguel Galuccio  Chairman and Chief Executive Officer  52
Pablo Manuel Vera Pinto  Chief Financial Officer  42
Juan Garoby  Chief Operations Officer  49
Alejandro Cherñacov  Strategic Planning and Investor Relations Officer  38

The Management Team set forth in the table above were designated to their respective positions prior to the Initial Business Combination and continued to hold their positions following its consummation on April 4, 2018. From April 4, 2018 to March 31, 2020, Gastón Remy was a member of the Management Team (from April 4, 2018 to November 2019 as the Chief Executive Officer of Vista Argentina and from November 2019 to March 31, 2020 as Corporate Director of Vista).

Mr. Javier Rodríguez Galli is our general counsel and he is not part of the Management Team, as such term is used in this annual report.

Miguel Galuccio. See “Item 5—Operating and Financial Review and Prospects—Directors, Senior Management and Employees—Board of Directors—Miguel Galuccio.”

Pablo Manuel Vera Pinto serves as our Chief Financial Officer since August 1, 2017, and has been involved with us since our incorporation on March 22, 2017. Mr. Vera Pinto was previously the Head of Business Development at YPF Argentina from October 2012 to February 2017 and, prior to that, served as Director of Transformation at YPF from May 2012 until September 2012. Mr. Vera Pinto was a member of the board of directors of the fertilizer company Profertil (a joint venture between Agrium of Canada and YPF), power generation company Central Dock Sud S.A. (a joint venture between Enel of Italy, YPF and Pan American Energy) and gas distributor Metrogas S.A. (controlled by YPF, acquired from British Gas in 2012). Overall, Mr. Vera Pinto led the execution of

 

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over 20 mergers and acquisitions transactions during his time at YPF. Previously, Mr. Vera Pinto worked with Leadgate Investment Corp., a private investment firm focused on restructuring acquired businesses where he had experience as Restructuring Manager, Chief Financial Officer and General Manager of the firm’s controlled businesses. Mr. Vera Pinto also worked for management consultancy McKinsey & Company in Europe and investment banking firm Credit Suisse First Boston NA based in New York. Mr. Vera Pinto holds a bachelor’s degree in economics from Universidad Torcuato Di Tella in Buenos Aires, Argentina and a master’s degree in business administration from INSEAD in Fontainebleau, France.

Juan Garoby serves as our Chief Operations Officer since August 1, 2017, and has been involved with us since our incorporation on March 22, 2017. Mr. Garoby served as Interim Vice President of Exploration & Production of YPF from August 2016 to October 2016, Head of Drilling and Completions from April 2014 to August 2016 and Head of Unconventional from June 2012 to April 2014, (when he also served as President of YPF Servicios Petroleros S.A., aYPF-owned drilling contractor). Prior to his time at YPF, Mr. Garoby worked at Schlumberger as Operations Manager for Europe and Africa. Mr. Garoby has also held several positions at Baker Hughes, including Director of Baker Hughes do Brasil, Country Manager of Baker Hughes Centrilift Brazil and Country Manager of Baker Hughes Centrilift Ecuador & Peru, among others. Mr. Garoby holds a bachelor’s degree in petroleum engineering from the Instituto Tecnológico de Buenos Aires in Argentina.

Alejandro Cherñacov serves as our Strategic Planning and Investor Relations Officer since August 1, 2017, and has been involved with us since our incorporation on March 22, 2017. Mr. Cherñacov served as Chief Financial Officer at Jagercor Energy Corp, asmall-cap Canadian Securities Exchange-listed E&P company from January 2015 to February 2017. Previously, Mr. Cherñacov served as Investor Relations Officer of YPF, where he was responsible for repositioning the company in the local and international capital markets. Mr. Cherñacov previously held several positions in YPF’s E&P department where his last role was being in charge of the upstream portfolio management process, which covered Argentina, Brazil and Bolivia. Mr. Cherñacov holds a bachelor’s degree in economics from the Universidad de Buenos Aires, a master’s degree in finance from the Universidad Torcuato Di Tella in Buenos Aires and a strategic decision and risk management professional certificate from Stanford University in Palo Alto, California.

Gastón Remy served as Vista Argentina’s Chief Executive Officer from April 4, 2018 until November 2019 and as our Corporate Director until March 31, 2019. Mr. Remy was the president of Dow Argentina, and south region of Latin America (Argentina, Bolivia, Chile, Paraguay, and Uruguay) from the beginning of 2014 until his departure in March 2018. He joined Dow in 2002 as a Manager of Legal Affairs and in 2015 he moved to Buenos Aires as a Director of Legal Affairs for the south region in Latin America. In 2006 he also led Public Affairs and Government relations in the same area. Two years later he moved to Midland where he was Director for global projects, mergers and acquisitions at the Legal department. Then, in 2011 he moved to Sao Paulo as a Legal Director for Latin America, prior to return to Argentina in 2014. Mr. Remy is the President for the Instituto para el Desarrollo Empresarial de la Argentina (IDEA) and was the President for the 53° Coloquio Anual in 2017. He is a lawyer from Universidad de Buenos Aires, and holds an LLM from Columbia University, New York. In 2016, he was recognized as a CEO of the year, an award given by PwC, El Cronista newspaper, and Apertura magazine.

Javier Rodríguez Galli serves as our General Counsel since August 1, 2017. Mr. Rodríguez Galli is a partner at the firm Bruchou, Fernández Madero & Lombardi – Abogados with offices in Buenos Aires, Argentina where he has led the Oil and Gas practice area since joining the firm in 2005. In recent years he has been legal counsel for various international oil companies that have invested in Argentina, attracted by the development of unconventional hydrocarbons. In December 2014, he advised PETRONAS, the national oil company of Malasia, in its negotiations and agreements with YPF that led to the joint venture between these two companies in the La Amarga Chica area in Neuquén, to produce unconventional. Currently, he is a member of the board of Petronas E&P Argentina, S.A. Additionally, he has participated in multiple national and international negotiations related to oil and gas acquisitions, divestments, joint ventures and strategic alliances and has extensive experience in corporate matters. From 1999 until 2005, he was general counsel of Molinos Río de la Plata, an Argentine leader in food and commodities controlled by the Pérez Companc family. From 1993 to 1999, he was anin-house lawyer at YPF, S.A., the largest oil and gas company in Argentina, providing legal services to its international business development group. Mr. Rodríguez Galli graduated with honors from the Law School of Universidad de Buenos Aires in 1991, obtained a master’s degree from the London School of Economics in 1993 and a diploma from the College of Petroleum and Energy Studies at Oxford University in 1996.

 

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Actions by our Management Team

Our Chief Executive Officer and the other relevant officers (including members of our Management Team) are required under the Mexican Securities Market Law to focus their activities on maximizing shareholder value in our Company. Our Chief Executive Officer and senior management may be held liable for damages to us, our subsidiaries and others for the following: (i) favoring a single group of shareholders, (ii) approving transactions between us, or our subsidiaries, with related persons without complying with applicable legal requirements, (iii) taking advantage of our subsidiaries’ assets for their own personal gain contrary to Company policy (or authorizing a third party to do so on their behalf), (iv) making inappropriate use of our, or our subsidiaries’non-public information or (v) knowingly disclosing or revealing false or misleading information.

Our Chief Executive Officer and the other relevant officers (including members of our Management Team) are required under the Mexican Securities Market Law to act for the benefit of our Company and not that of a particular shareholder or group of shareholders. Our Chief Executive Officer is also required to (i) implement the instructions of our shareholders (as delivered during a shareholders’ meeting) and our board of directors, (ii) submit to our board of directors for approval the principal strategies for the business, (iii) submit to the audit and corporate practices committees proposals for systems of internal control, (iv) disclose all material information to the public and (v) maintain adequate accounting and registration systems and mechanisms for internal control. Our Chief Executive Officer and the members of the other relevant officers (including members of our Management Team) are also subject to the same fiduciary duty obligations as our directors.

Supplemental Information on the Management Teams of our Subsidiaries

The following table sets forth the members of the management team of our subsidiaries as of the date of this annual report:

 

Name

  

Position

  

Age

Alex García  Chief Executive Officer Vista Mexico  46

Gaston Remy was the chief executive officer of Vista Argentina from April 4, 2018 until November 2019. See “Item 5—Operating and Financial Review and Prospects—Directors, Senior Management and Employees—Management Team—Gaston Remy.”

Alex Garcíais the chief executive officer of our Mexican branch, and has 22 years of experience in the oil and gas industry. He worked for 19 years at Schlumberger, where he held several management positions in the Schlumberger Production Management (SPM) and the Schlumberger Integrated Project Management (IPM) groups. Mr. García led the SPM Operations in Mexico for four years and throughout the implementation of the recent energy reform in Mexico. He managed the IPM & SPM business in Latin America, leading projects such as a partnership with Ecopetrol and there-development of one of the largest oil fields in Ecuador. He was the director of the Chicontepec I and Chicontepec II drilling projects (Eastern Mexico) and Deputy Project Manager in Burgos (Northern Mexico). He also led the bidding team that was awarded with the Chicontepec II tender. In the earlier years of his career, he held different positions as Drilling Engineer and QHSE Manager in Indonesia, Oman, Venezuela, Qatar, France and Peru. Mr. García holds a Mechanical Engineering Degree from Universidad Simon Bolívar (Venezuela) and an MBA from INSEAD Business School (France & Singapore).

Family Relationships

There are no family or kinship relationships among our directors and the members of our Management Team.

Compensation

During the year ended December 31, 2019, the aggregate remuneration paid by the Issuer to the members of its board of directors and its senior management for services in all capacities to the Issuer and its subsidiaries during 2019 was US$18.3 million.

 

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Long Term Incentive Plan

On March 22, 2018, a shareholders’ meeting authorized our Long Term Incentive Plan (the “Plan”). The purpose of the plan is to provide the means for the Company and its subsidiaries to attract and retain talented people as officers, directors, employees and consultants which are key to the Company and its subsidiaries, enhancing the profitable growth of the Company and its subsidiaries. That same shareholders’ meeting vested our Board of Directors with the authority to administer the Plan and approved the reservation of 8,750,000 series A shares issued by the Company on December 18, 2017, for the implementation of the Plan. Share purchase plans are classified as equity-settled transactions on the grant date. As of the date of this annual report, 2,450,140 Restricted Stock and 3,993,990 Stock Options were granted under the Plan. The exercise prices and expiration dates of the Stock Options granted under the Plan are as follows (i) 1,330,527 Stock Options at an exercise price of US$10.00 per series A share, expiring on April 4, 2023, and (ii) 2,663,463 Stock Options at an exercise price of US$6.70 per series A share, expiring on February 19, 2024.

The following paragraphs describe the principal terms and conditions of the Plan.

Type of Awards. The Plan permits different awards in the form of Stock Options, Restricted Stock or Performance Restricted Stock.

Plan Administration. The Plan is administered by our Board of Directors. The Board may delegate certain authority under the Plan to some individual or individuals among the officers of the Company. The administrator of the Plan has the power and authority to determine the persons who are eligible to receive awards, the number of awards, as well as other terms and conditions of awards.

Award Agreement. Any award granted under the Plan is evidenced by an award agreement or a certificate issued by the Company that sets forth terms, conditions and limitations for such award, which may include the number of Restricted Stock or Stock Options awarded, the exercise price, the provisions applicable in the event of the participant’s employment or service terminates, among other provisions. The Board may amend the terms of the Plan and/or any particular award; provided that no such amendment shall impair the rights of any participant under the Plan.

Eligibility. We may grant awards to directors, officers, employees and consultants of our Company or any of our Subsidiaries.

Vesting Schedule. Except as otherwise set forth by the Plan regarding certain cases of termination (with or without cause) of employment or service, resignation, retirement, disability and/or death, Restricted Stock and Stock Options shall vest and becomenon-forfeitable in accordance with the following calendar: (i) 33% on the first anniversary, (ii) 33% on the second anniversary and (iii) 34% on the third anniversary of the date of grant. If a change of control event occurs, such participant’s Restricted Stock and options will be immediately vested and exercisable.

Exercise of Stock Options. Vested options will become exercisable during five years since the date of grant. The exercise price per share under a Stock Option shall be the Fair Market Value per share on the date of grant. The number of Stock Options to be awarded to an Eligible Person shall be determined by the Manager at the time of grant following the Black-Scholes method.

Transfer Restrictions. Except under the laws of descent and distribution or otherwise permitted by the plan administrator, the pa