Under both company guidance and our more conservative projections, we seethe company’s credit profile strengthening and leverage levels remainingsuperior to YPF’s SOE peers. YPF guided that growth (5%/year productiongrowth to ~700k boed/10%/year EBITDA growth) will be driven by aproduction transformation from conventional to unconventional resources(56% of production will be unconventional) as upstream prices converged withinternational prices while downstream prices were liberalized. We are moreconservative with our outlook (low single-digit growth), however thecompany’s guidance is not unreasonable, in our view, and managementasserted priority to grow while strengthening its already solid credit profile.    Company could begin making more meaningful dividend payments startingwith 2019; management did emphasize it will do so only when it is generatingsignificant free cash flow and keeping its conservative 1.5x net leverage targetin mind. Given covenant restrictions (for which it does not intend to get afuture waiver), YPF is currently unable to make dividend payments, but thecompany should begin making relatively small dividend payments starting in2018; if the company generates meaningful FCF starting in 2019 it could beginmarking larger dividend payments then scaling to an eventual 3% dividendyield.    In our lower production Base Case with 2%/year production growth (8%/yearEBITDA growth) and continued negative FCF burn in 2018 (company is guidingfor a return to FCF generation), we still see the company’s net leveragedeclining to 1.7x by 2020E (well within the margin of error versus companyguidance).    We rate YPF’s ’24 and ’25 bonds a Buy (Hold on ’18, ’21, and ‘27 notes) due tothe company’s solid stand-alone credit profile (low leverage vs. regionalSOE’s), its position as a key strategic asset for the Argentine state, andoutsized yields and spread to sovereign (relative to leverage). YPF’s keynegative risks are a halt to downstream price adjustments matching inflation /currency depreciation (which is unlikelier now given the liberalization ofdownstream prices), and an end to attractive natural gas pricing (for which wehave pricing visibility through 2021). Key positive risks include the ability toincrease domestic fuel prices in 2017 to more than match FXdepreciation/inflation (which is now likelier given competitive marketdynamics) plus substantial asset sale proceeds.

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