Cheniere Energy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 11 speakers on the call.

Operator

Operator. Good morning, everyone, and welcome to Cheniere's Q3 2023 Earnings Conference Call. A slide presentation and access to the webcast for today's call are available at cheniere.com. Joining me this morning are Jack Fusco, Cheniere's President and CEO of Anatol Fagan, Executive Vice President and Chief Commercial Officer Zach Davis, Executive Vice President and CFO and other members of the Cheniere senior management team. Before we begin, I would like to remind all listeners that our remarks, including answers to your questions, may contain forward looking statements and actual results could differ materially from what is described in these statements.

Operator

Slide 2 of our presentation contains a discussion of those forward looking statements and associated risks. Of the call. In addition, we may include references to certain non GAAP financial measures, such as consolidated adjusted EBITDA and distributable cash flow. Of a reconciliation of these measures to the most comparable GAAP measure can be found in the appendix of the slide presentation. As part of our discussion of Cheniere's results, today's call may also include selected financial information and results for Cheniere Energy Partners LP or CQP.

Operator

We do not intend to cover CQP's results separately from those of Cheniere Energy, Inc. The call agenda is shown on Slide 3. Jack will begin with operating and financial highlights, Anatol will then provide an update on the LNG market, and Zach will review our financial results and 2023 guidance. After prepared remarks, we will open the call for Q and A. I'll now turn the call over to Jack Fusco, Cheniere's President and CEO.

Speaker 1

Thank you, Randy, and good morning, everyone. Thanks for joining us today as we review our Q3 results to an improved full year 2023 outlook. Before we get started, I would like to acknowledge the tragedies of war taking place around the world. Our thoughts and prayers are with those whose lives have been and continue to be impacted by these devastating and heartbreaking events. To the financial results.

Speaker 1

These events are contributing to disruption, risk, uncertainty and volatility in the energy markets around the world. International gas supply sources in the critical infrastructure enabling cross border trade have become focal points with risk to this supply and its access increasingly reflected and price and volatility across international gas benchmarks in recent weeks. As the operator of the 2nd largest LNG platform in the world, to our financial results. We are pleased with our progress on our financial results. We are pleased with our progress on our progress on our progress on our progress on our progress.

Speaker 1

As you all know, ensuring stable and reliable operations at our facilities with safety as a foundation has been my central focus to becoming CEO in 2016. When I joined Cheniere, it just begun LNG operations producing its first LNG cargo that February. Today, we produced about 2 cargoes every single day. And during the Q3, we produced our 3,000th cargo of LNG, becoming the fastest LNG producer in history to achieve that milestone. I'm extremely proud of the work we do at Cheniere.

Speaker 1

As a result of that work, we're providing tangible benefits in the lives of millions of people around the world. Our customers can take comfort knowing that my focus and the focus of my approximately 1600 of Cheniere colleagues remains on maintaining best in class operations to help ensure energy security for our 30 plus customers throughout 5 continents. Turn now to slide 5, where I'll review key operational and financial highlights from the Q3 of 2023 as well as cover another long term SBA we announced this morning. We achieved successes across the Cheniere platform during the Q3, generating consolidated adjusted EBITDA of approximately $1,700,000,000 distributable cash flow of approximately $1,200,000,000 and net income of approximately $1,700,000,000 We exported a total of 152 cargoes, an increase relative to the Q2 as we had lower maintenance in the Q3. As I just mentioned, we also produced our 3,000th cargo during the quarter and maintained our perfect track record of foundation customer cargo deliveries.

Speaker 1

To the financial results. These operational milestones are a tremendous source of pride for Cheniere and serve to further distance our reputation from the competition. Looking ahead to the balance of 2023, our forecast has improved slightly. And while we aren't raising our full year guidance today, to the high end of the $8,300,000,000 to $8,800,000,000 of consolidated adjusted EBITDA in the $5,800,000,000 to $6,300,000,000 of DCF ranges. The improvement to our outlook is mainly driven by portfolio optimization activities, the timing of some expenses to a lesser extent from higher marketing margins than previously forecasted.

Speaker 1

Zach will provide more color on the guidance, but we have excellent visibility into the balance of the year and our ability to finish the year at the high end of the ranges. On the commercial front, Anatol and his team continue to build momentum for the SPL expansion project. As we signed a long term contract with BASF in August, early volumes under the offtake agreement will begin in 2026, ramping to the full 800,000 tons with commercial start of the first to Train 7 of the SPL expansion project and extending until 2,043. This contract illustrates the rapid evolution of LNG into Europe has its long term contract executed directly with an industrial consumer in Germany, which only a year ago didn't have a single LNG import terminal. And I hope you saw earlier this morning, we announced our 2nd 20 year agreement with ForEx, building upon the SBA we executed with it in late 2021 that commenced earlier this year.

Speaker 1

Of the almost 6,000,000 tons of long term offtake executed year to date, over 75% of that annual total is contracted with repeat customers who clearly value their long term partnership with Cheniere, is a testament to the reputation and trust we have earned with our long term customers. This foreign contract is for approximately 900,000 tons will extend until 2,050 and notably marks the first SPA tied to the 2nd train of the SPL expansion Train 8 as commercialization on the first train has effectively been completed. We are extremely excited about the market's response to the SPL expansion project and demand for additional capacity from Cheniere. To the company's financial results. Since announcing the project in February, we have signed nearly 6,000,000 tons per annum of long term contracts in support of the project.

Speaker 1

In our best in class long term contracted portfolio, all with investment grade counterparties. And I'm confident we have more to do this year. As always, we remain laser focused on developing that project to meet or exceed to our disciplined capital investment parameters in order to deliver the world class contracted infrastructure returns our shareholders are accustomed to. While on the topic of returns, Sak and his team continue to progress on our comprehensive 2020 vision capital allocation plan. During the Q3, we paid down another $50,000,000 of long term debt.

Speaker 1

We bought back of approximately 2,200,000 shares for $357,000,000 and we increased our quarterly dividend by 10% to $0.435 for the Q3. On Stage 3, we continue to equity fund that project, investing over $300,000,000 during the quarter with a total of over $2,500,000,000 invested to date. Speaking of Stage 3, now let's turn to Slide 6, where I'm pleased to provide an update on the accelerated progress we are seeing. As activities on the project moved more heavily into the construction phase a few quarters ago, we have indicated that certain of these construction activities were taking place ahead of plan as we are now over 44% fleet overall across engineering, procurement and construction. While we remain in single digits in terms of to the percentage completion of construction for the overall project, it's becoming increasingly clear that the project is tracking months ahead of the guaranteed schedule.

Speaker 1

I'm optimistic we'll be commissioning on Train 1 with first LNG production by the end of 2024 and forecast all 7 trains to achieve substantial completion by the end of 2026. We are extremely excited about the progress Pekka was making on Stage 3. We look forward to maintaining accelerating progress in order to again deliver LNG to the market well ahead of schedule, to our operating capacity again starting in 2025. On the earnings call in August, I mentioned, Stage 3 was beginning to take shape as the 1st directional steel was erected and our Train 1 coal boxes had arrived on-site. All Train 1 coal boxes have been set and placed, structural steel installation is advancing and piping and electrical installation has commenced.

Speaker 1

With the excellent progress made to date, headcount of over 1500 personnel on-site each day and the one team culture firmly established between Cheniere and Bechtel. With that, I'll hand it over to Anatol to discuss the LNG market. Thank you again for your continued support of Cheniere.

Speaker 2

Thanks, Jack, and good morning, everyone. While the LNG market kicked off the Q3 with prices reflecting the relatively subdued demand of the shoulder season, unprecedented early winter gas procurement in Europe, coupled with threats of potential supply disruptions globally, resulted in increased volatility and higher pricing throughout August September. Prices remain elevated relative to pre 2021 as the market is still precariously balanced sensitive to any sign of disruption given the lack of spare supply capacity in the system, which is expected to continue for the next few years. The proposed strikes at the Australian LNG export facilities representing approximately 10% of the global LNG market garnered significant coverage during the quarter as market tries to gauge the scale and length of any potential disruption to global flows. Fortunately, these risks were largely averted and LNG exports continue to flow through the end of the quarter.

Speaker 2

Nevertheless, given the threat of disruption led to significant volatility in LNG prices, which was further exacerbated by the about 48% decline in Norwegian pipe gas to Europe in September following extensive maintenance at the Troll field of the Pulsen's gas processing plant. As a result, despite elevated storage inventories throughout the region, volatility persisted as TTF spot prices experienced some fairly significant swings throughout the quarter. The maintenance in Norway supported prices from early June with July settling at $11.30 an MMBtu, while August settled over 25% lower at $8.30 an M as Norwegian volumes returned only to rebound in September, which settled at $11.5 amid concerns around the Australian strikes as well as additional unplanned Norwegian maintenance. Still, TTF prices remained at pre Russia Ukraine war levels during the quarter and continue to edge higher with futures settling October above $12 an ounce. Meanwhile, JCan prices largely tracked TTF throughout the Q3, ultimately settling September slightly below TTF at $11.20 However, more recently, J.

Speaker 2

A. M. Futures settled October higher at $13.30 due to the uncertainty around the potential industrial action in Australia as well as increased demand from China and India. Prices have since climbed further as indications of winter demand started to emerge towards the end of the quarter with JKM November trading around $14 to $15 an M. This is in stark contrast to Henry Hub prices, which averaged $2.55 an M during the quarter as inventories held above the 5 year average.

Speaker 2

These price levels continue to support the attractiveness of U. S. LNG globally. Information. Unfortunately, threats of further disruptions in global gas markets remain ongoing, exposing key risks to an increasingly susceptible market generating lost 12 Bs a day of Russian pipe gas last year.

Speaker 2

Furthermore, the recent leaks at the Baltic Connector add to market apprehension highlighting the critical need for the development of sufficient capacity globally in order to meet the last demand and ensure the security of supply globally for the long term. Let's address the regional dynamics on the next page. Sand were 1,800,000 tons lower in the Q3 due largely to the same fundamental reasons we discussed previously, including high storage levels, to reduced gas use across sectors due to price elasticity as well as conservation efforts, plus increased renewable generation. To the EU gas storage levels continue to grow nearing full as of early October, while lower economic activity put downward pressure on both industrial demand and electricity generation. Demand for gas fired power dropped by nearly 20% in Europe's key markets amid renewable power generation, which was 12% higher year on year.

Speaker 2

As a result, the reduced gas storage fill requirements coupled with the lower gas demand year on year more than compensated for the further reduction in Russian pipe supply and the extended maintenance in Norway, allowing Asia to reenter the market and pull some additional LNG cargoes from the Atlantic basin, as shown in the upper middle and right charts. However, the cross basin price spreads throughout the quarter were not wide enough to drive meaningful volume away from Europe towards Asia. Total LNG imports in Asia grew over 4% or 2,700,000 tons year on year in Q3, driven by a rebound in imports to China and India as prices softened and high summer temperatures boosted spot purchases. However, lower imports across the JKT market largely offset the significant gains seen in China and other emerging Asian markets as shown in the lower left chart. In fact, imports into the key growth markets of China and India were 21% and 27% higher in Q3 respectively.

Speaker 2

In China, gas demand picked up during the quarter primarily due to the year on year recovery from gas fired power generation following a drought that reduced hydro generation. Despite the higher demand, gas demand recovery in the industrial sector remains subdued with consumption still below 2021 levels. Long term fundamentals remain bullish for the Chinese market due to favorable policy targets and a massive gas infrastructure build out as we described in previous calls. This year alone, China has added 9,000,000 tons of regas capacity across 3 new terminals, bringing the total to 110 MTPA with another 95 MTPA under construction. Similarly, the country continues to expand its gas fired power generation fleet with 46 gigawatts currently under construction on top of the existing 121 gigawatts.

Speaker 2

In India, a prolonged heatwave and below average rainfall during the annual monsoon season increased the region's call on LNG. To the Q3, 1,300,000 tons higher year on year as spot LNG prices moderated, incentivizing downstream gas use in the fertilizer and power sectors. Gas fired generation was up 48% year on year in July August, leading domestic players to issue tenders for cargoes to feed power demand. Furthermore, the new 6.5 MTPA to the Damra LNG terminal, the first on India's East Coast ramped up to import 10 cargoes since starting commercial operations in May, adding to total imports in the quarter. The terminal, which raised the country's regas capacity to 44 MTPA, should enhance gas availability in Northeastern India as connections to the grid improve, making gas more accessible to city gas distributors as well as refineries and fertilizer facilities.

Speaker 2

India's regas capacity is expected to reach 63,000,000 tons and that along with the additional 11,000 kilometers of pipelines under development could make the country a top 3 LNG importer before 2,040. In contrast, JKT imports dropped 11% or 3,700,000 tons during the quarter, following previous declines and offsetting much of the gains in Asia. Year to date, JKT imports are 7,500,000 tons lower versus last year, due largely to increased nuclear availability in Japan and Korea, a structural factor we have discussed previously. Japan's nuclear availability reached its highest level since the Fukushima disaster, and we expect this to present headwinds for gas power generation and LNG demand growth going forward. Accordingly.

Speaker 2

Japan's long term gas demand is expected to decline gradually through 2,040. Let's now elaborate on our updated expectations for long term supply and demand on the next slide. As noted previously, the energy trilemma, especially with the market's heightened focus on long term energy security, has led to significant long term LNG contracting in the past 18 or so months. To the company. These contracts signal the need for further investment in liquefaction capacity and serve to underpin some of the recent project FIDs.

Speaker 2

Details. As a result, we now see a significant amount of new capacity currently under construction. While this is expected to help reverse the systemic market tightening that has resulted from the curtailment of Russian volumes over the last 2 years, we believe that further LNG supply is needed to fully meet demand in 2028 beyond, which we expect to be fulfilled with some of the proposed pre FID export projects, of course including our own expansion plans at Sabine Pass and Corpus Christi. The concentration of FIDs taking place this year next along with the start of delayed projects in East and West Africa should help make LNG more accessible to price sensitive markets, while also making the industry more resilient in the face of supply disruptions or major geopolitical offsets such as those threatening the market balances today. And just as liquefaction development has been of this year, the same is true for the regas side of the business.

Speaker 2

Market players continue to develop import capacity across Europe and Asia, which in total is expected to increase by nearly 50% by 2,030. We continue to forecast healthy demand for LNG over the coming decades with Europe sustaining its growth through the midterm and Asia driving future growth over the long term. As we've discussed before, we expect South and Southeast Asia as well as China to drive future demand growth as LNG plays a critical role in the economic prosperity, energy availability and decarbonization efforts in these regions. Overall, we estimate that by 2,040 more than 130 MTPA of additional supply is needed beyond what is under construction today, which is due in part to the decline in production from legacy projects where feedstock availability and upstream developments appear limited going forward. For all these reasons, we believe overall market conditions remain constructive for Gulf Coast LNG and at Cheniere, we remain resolute in building on the commercial of recent years to support our capacity growth.

Speaker 2

In 2023 alone, we have signed almost 6,000,000 tons per annum with customers across Europe and Asia, including today's announcement of our 2nd 20 year SBA with ForEx. This contract could very well extend into the second half of this century, further evidencing our customers and the market's conviction in the long term role of natural gas in the global energy mix and the need for further development of LNG capacity globally. With that, I'll turn the call over to Zach to review our financial results and guidance. Thanks, Anatol, and good morning, everyone. I'm pleased to be here today to review our Q3 of 2023 results and key financial accomplishments, which are the result of our team's commitment to operational excellence and financial discipline, the long term outlook as we continue to deliver upon our stated objectives of supplying the world with much needed LNG, while creating long term value for our stakeholders.

Speaker 2

Turn to Slide 12. For the Q3, we generated net income of approximately $1,700,000,000 consolidated adjusted EBITDA of approximately $1,700,000,000 and distributable cash flow of approximately $1,200,000,000 Our 3rd quarter results continued to reflect a higher portion of our LNG being sold under long term contracts with less volumes being sold into short term markets as well as the further moderation of international gas prices relative to last year. Once again, these impacts were partially offset by certain portfolio optimization activities upstream and downstream of our facilities. During the Q3, we recognized an income of 5.55 TBtu of physical LNG, including 5.45 TBtu from our projects and 10 TBtu sourced from 3rd parties. Approximately 89% of these LNG volumes recognized in income were sold under long term SBA or IPM agreements with initial terms greater than 10 years.

Speaker 2

As a reminder, Our reported net income is impacted by the unrealized non cash derivative impacts to our revenue and cost of sales line items, which are primarily related to the mismatch of accounting methodology for the purchase of natural gas and the corresponding sale of LNG under our long term IPM agreements. The decline in international gas price curves quarter over quarter led to a lower mark to market valuation of the future liabilities associated with these agreements, increasing our net income. With today's results, we have earned cumulative net income of approximately $12,400,000,000 for the trailing 12 months and have now reported positive net income on a quarterly and cumulative trailing 4 quarter basis, 4 quarters in a row. Throughout the quarter, we continued to deploy capital pursuant to our comprehensive capital allocation plan, our 2020 vision, increasing shareholder returns, strengthening our balance sheet and investing in accretive growth. During the quarter, we repaid $50,000,000 of long term indebtedness, redeeming a portion of the senior secured notes due in 2024 at SPL.

Speaker 2

As a reminder, in July, we used the proceeds from our inaugural investment grade offering at CQP to refinance and redeem $1,400,000,000 of the SPL 2024 notes. We plan to address the remaining balance of the SPL 20 24 notes with cash on hand in 4Q and into the first half of next year, to the company's financial results, after which point we will have addressed all maturities in the complex through early 2025, with currently no refinancing needs across our complex until then. Since rolling out our revised capital allocation plan last year, we have received 14 distinct rating upgrades throughout are structured, a result of our operational track record and capital allocation plan to opportunistically delever and efficiently refinance in in a short amount of time, which has not only strengthened our balance sheet for 3 cycle resilience, but has also positioned Cheniere for our next phase of growth. Most recently S and P upgraded CCH to BBB in mid October. And in August, Moody's upgraded CEI to Baa3 and CCH to Baa2, while Fitch upgraded SBL to BBB plus With the Moody's upgrade, our parent entity is now investment grade across all three agencies, a major milestone for Cheniere considering where it started financially on its LNG export journey over a decade ago.

Speaker 2

As we've previously discussed, now that we have achieved investment grade ratings across our corporate structure, we are targeting a 1:one ratio of and share buybacks on an aggregate basis through 2026. During the Q3, we repurchased approximately 2,200,000 shares of common stock for approximately $357,000,000 which reinforces our intent for the catch up of buybacks compared to the amount of capital deployed towards deleveraging going forward. We expect to continue to work towards achieving that one to 1 ratio over the next year as we continue to initially target buying back approximately 10% of our market cap over time. We expect to deploy the remaining just under $2,500,000,000 of the repurchase authorization ahead of the 3 year plan, but recognize there may be variability quarter to quarter as we aim to be opportunistic and are subject to the parameters of our 10b5-1 program. For the Q3, we followed through earlier this week by announcing an increase of our quarterly dividend by 10% to $0.435 per common share or $1.74 annualized, which is consistent with our 2020 plan of growing our dividend by approximately 10% annually into the mid-twenty 20 through the construction of Stage 3.

Speaker 2

We intend to steadily increase our payout ratio over time while maintaining financial flexibility with a balanced capital allocation plan and the ability to fund brownfield growth with internally generated cash flow. And for the final pillar of our comprehensive capital allocation plan, disciplined growth. We funded approximately $312,000,000 of CapEx at our Stage 3 project during the quarter with cash on hand. We still have over $3,000,000,000 available on our CCH term loan that we plan to utilize beginning in the second half of twenty twenty four as the project progresses and the total capital spend to date continues to grow. By primarily funding the 50% equity component of the project ahead of the drawing down on the construction loan.

Speaker 2

We have saved considerably on interest expense, while retaining all of our liquidity flexibility for the coming years to complete funding of the full project by 2026. Turn now to slide 13, where I'll provide additional detail around 2023 guidance and our open capacity for 2024. Today, we are reconfirming our full year 2023 guidance ranges of $8,300,000,000 to $88,000,000,000 in consolidated adjusted EBITDA and $58,800,000,000 to $63,000,000,000 in distributable cash flow. But as Jack noted, we are tracking to the high end of those ranges. The improved outlook is driven by portfolio optimization activities, primarily in gas procurement and vessel sub chartering and to a lesser extent the timing of some expenses moving into 2024 and higher marketing margins on the minimal and the open capacity for CMI we still had available for sales since the last call.

Speaker 2

With respect to our EBITDA sensitivity for the remainder of the year, We now have an immaterial amount of unsold LNG remaining, so we're confident in our ability to deliver financial results at the high end of the ranges. Stream and downstream of our facilities. Our distributable cash flow for 2023 could also be affected by any changes in the tax code under the IRA. However, the guidance provided today is based on the current IRA tax law guidance in which we would not qualify for the minimum corporate tax of 15% this year. However, as noted previously, both of these dynamics would mainly affect timing and not materially impact our cumulative cash flow generation through the mid-2020s as we think about our overall capital allocation plan and our 2020 vision goals.

Speaker 2

Looking ahead to next year, 2024 will be our most contracted year to date as all of the contracts underpinning the initial 9 Train platform will commence as well as some bridging volumes for contracts tied to our growth. Additionally, our team continues to put away the few remaining uncontracted volumes, leaving us with approximately 50 TBTU unsold for the full year as of today's call, or about 2% of our 2024 production capacity. The open volume is based upon a production forecast of approximately 45,000,000 tons, which is similar to our production this year and takes into account planned maintenance activities for the year. With such minimal open exposure to the market, to the Q4. 2020 4 is expected to look to most like a 9 train run rate year as any we will have, with results that should largely reflect the economics of a long term fixed fee take or pay style cash flow business model.

Speaker 2

With that said, currently forecasted at a $1 change in market margins would impact EBITDA by approximately $50,000,000 for the full year. With market margins currently elevated through the next year compared to our run rate CMI assumption of $2.25 per MMBtu. We should be able to still beat the midpoint of our 9 Train run rate of $5,500,000,000 of EBITDA before any further volatility in commodity prices. 2024 results are expected to come down from this year as our open capacity narrows until Stage 3 starts ramping up our operational capacity again in 2025. Thanks to our cash flow visibility, 2024 was always assumed to be a heavily contracted year will be consistently baked into our financial plans, including in our 2020 vision to generate over $20,000,000,000 of available cash through 2026, provided back in September 2022.

Speaker 2

As Jack noted, given the progress made by the Bechtel and Cheniere teams on Stage 3, we remain optimistic and hope to be in commissioning with first LNG from Train 1 by the end of next year, which would provide additional LNG supply to the delicately balanced market Anasil discussed earlier and increase our operational LNG capacity again in 2025. However, as a reminder, commissioning volumes would not impact our revenues or EBITDA for the year and instead show up in our financials as a reduction in our capital costs. With the meaningful progress achieved to date, we expect to invest between $1,500,000,000 to $2,000,000,000 of CapEx towards Stage 3 in 2024. Consistent with this year, as we still expect to fund another approximately $500,000,000 of equity into the project this quarter. While the last few years have proven Cheniere's ability to respond to market signals and optimize throughout our business, our conviction in our highly contracted business model rooted in longer duration fixed fee cash flows from creditworthy counterparties has only been reinforced as we look forward to internally funding further growth as well as even more meaningful shareholder returns that can be relied on over time.

Speaker 2

These dependable cash flows form the foundation of the $40,000,000,000 natural gas infrastructure platform we have developed over the last decade plus. We remain focused on maintaining reliable and safe operations to ensure we can continue delivering affordable LNG as well as meaningful long term value to our stakeholders around the world for decades to come. That concludes our prepared remarks. Thank you for your time and your interest in Cheniere. Operator, we are ready to open the line for questions.

Speaker 3

Thank we'll take our first question from Michael Blum with Wells Fargo.

Speaker 4

Thanks. Good morning, everyone. First question, I just wanted to make sure I understood. This quarter, There's a pretty big variance in volume at Sabine at the CQP level. Just wanted to confirm that that was really just maintenance taking the facility offline or is there anything else to flag over there?

Speaker 2

This is Zach and I'd say there's not much to flag there. Basically, the major maintenance on Trains 12 at Sabine were in June. And with that, the ramp up then begun and it takes time to eventually deliver those volumes. So It reduced the amount of in transit going into Q3. And then on top of that, it was a really warm summer.

Speaker 2

So with the ambient temperatures, we had a little less volume than you'd have if you were a bit cooler. Though, regular course still on track with our forecast.

Speaker 4

Okay. Got it. That makes sense. And then on the Sabine Pass expansion, obviously, by our map, you're roughly, I don't know, 30% contracted on the total size of the project, but you're almost at contracted on the first train. So My question is, would you consider going ahead with FID on just one train of the capacity?

Speaker 4

Are you going to wait till you get some percentage of the total project before you FID the entire project.

Speaker 1

No, I think, Michael, this is Jack. And you're right. It would be our goal to FID in whatever fashion that made the most financial sense. And if it makes sense to build it in phases, do Train 7 first and then Train 8 later, we're going to do it that way. So we're currently working through Bechtel not only on a fixed price for the entire project, but also on implementation and execution.

Speaker 1

And so that's the way we think about it also. But we're going to continue to do it the way we've done it in the past, which is We're going to commercialize the project. We're going to get a fixed price and we're going to work with Bechtel to make sure that they're that were locked in with price schedule and budget.

Speaker 4

Perfect. Thank you.

Speaker 3

We'll go next to Ben Nolan with Stifel.

Speaker 5

Yes, thanks. Congrats on the good quarter guys. I'll put both of my questions into 1 if I could.

Speaker 6

Effectively

Speaker 5

with the new contracts including the 2 that are here, You're assuming, I suppose, a certain level of economics and cost inflation. And I know, Zach, you and I have talked that you're not going to do something that's non economic, but inflation continues to go higher. I guess, really my question is some of these have bridging volumes. So how does the mechanism work such that if inflation goes up and you're already committed and are already in some degree selling on volumes. How do you adjust for that if the cost ends up coming in higher than what you thought it was going to?

Speaker 2

Hey, this is Zach. So I'd basically say anything that's firm, we're assuming is going to be part of the operations of the 9 trains plus Stage 3. So the economics work, we're making the margins that we want to make and we're being covered for inflation in that, let's say, 15% to 20% plus range to the fixed fee over time, which is really attractive and covering what we've experienced over the last to the Q3. In terms of the rest, those are CP ed to the FIDs of those projects and we're just going to be disciplined. I think you've seen that in every FID that we've done.

Speaker 2

And if we can target that around, let's say, 7 times CapEx to EBITDA, get to 10% unlevered returns and always hold it up to beating the returns just embedded in buying back more of the stock without the growth, we're going to do that. And with inflation and cost of capital going up, that should be embedded in the stock price to an extent. So we'll keep ourselves honest and make sure it's clearly accretive to Cheniere.

Speaker 5

That makes sense. And just maybe as a follow-up, in your conversations thus far with Bechtel on the expansions, Are you starting to see some stability with respect to price any sort of early indications as to whether or not things are leveling off a bit?

Speaker 1

Yes. This is Jack, Ben. And we are and I'm glad to say that some of the steel prices in cement and rebar and everything else structural steel have come back down off their highs. So I think it's all moving in the right directions. And I feel really good about the timing of the project and we have time to wait to see how this all works out before we lock in.

Speaker 6

Got you. I appreciate it.

Speaker 5

Thanks for in May, guys.

Speaker 3

We'll go next to Jeremy Tonet with JPMorgan.

Speaker 7

Hi, good morning.

Speaker 1

Good morning, Jeremy.

Speaker 7

Question maybe somewhat more operational or construction development in nature here, but just Curious if we look back, I guess, on the history of LNG development, both domestically and internationally, there's been just a long list of projects that have has been delayed and not come online on time yet. Cheniere is not just hitting in the timelines of bringing them forward early. Just wondering Specifically, if you could help us understand how Cheniere is able to bring these facilities online earlier than expected. And I guess is there room for more?

Speaker 1

Yes. So Jeremy, I mean that's where our relationship with Bechtel has really paid off. When we talk about the one team approach between Cheniere and Bechtel, we really mean it. We do everything together. We walk the site together.

Speaker 1

We try to execute on different construction plans to see which one will work better for us, be more efficient, more effective. It really is a win win between the two companies. And I can't say enough about how appreciative I am of Bechtel for working so collaboratively with us over these at least for me close to the last 8 years. So it's no more or less than that.

Speaker 7

Got it. That's helpful. Thank you for that. And then maybe just kind of pivoting towards capital allocation a little bit here, Zack, if I could. Just wondering, current thoughts here, I guess, on the pace of buybacks as you see it as it relates to debt pay down and also financing.

Speaker 7

The Corpus expansion, latest thoughts on how you see that all balancing. It looks like on the balance There is a mountain of cash that's pretty high. So just wondering what your current thoughts are?

Speaker 2

Hey, Jeremy. I was expecting that question from you. But basically, yes, we have over $3,000,000,000 of cash sitting at CEI specifically. And you should assume over time as we fund Corpus and there's still about $1,200,000,000 of equity funding to go on Stage 3 and obviously pick up on the buyback that will trend to $1,000,000,000 in a run rate phase once we get really through Stage 3. And in terms of the buyback, you just look at the last two quarters and You're starting to see that the buyback deployment is higher than the debt pay down.

Speaker 2

Just in Q3, it was $300,000,000 higher, 7 times as much. And at this point, buybacks for the year are about to eclipse the amount of debt pay down we did mainly earlier this year to get to IG. And for everyone to just be tracking the buyback, it will be lumpy, volatile quarter to quarter as we try to be opportunistic. But what you can track it to is basically we have already deployed over $3,500,000,000 to debt pay down in the updated capital allocation plan and just over $1,500,000,000 of buybacks so far in the same plan. So there's basically a $2,000,000,000 plus catch up trade that needs to occur really through 2024.

Speaker 2

So You can imagine we're pretty focused at CEI on funding the Corpus Stage 3 growth as it accelerates and to catch up on the buybacks with that, yes, at least $2,000,000,000 to go in the next year or so. In the meantime, we'll focus on Sabine growth, getting ready with all this commercialization that we've done by is likely ramping down the variable DPU next year to start being in a position to fund that project once we can FID that in the next few years. And in terms of the Stage 3 expansion upon that for trains 8 to 9, Yes, we might fund that debt. There's going to be plenty of equity up there as well with the $20,000,000,000 plus of available cash through 2026.

Speaker 7

Got it. Very helpful. That makes sense. And also looking forward to Corpus coming online early for marketing margins there helping out even more. So thank you for all the color and we'll be talking later.

Speaker 7

See you at the conference.

Speaker 2

Thanks, Jeremy.

Speaker 3

We'll go next to John McKay with Goldman Sachs.

Speaker 6

Hey, good morning everyone. Thank you for the time. Why don't we pick up on the CQP variable distribution comments there? I figured that would be a 4th quarter call conversation, but thanks for kind of flagging that. Would just be curious on kind of where you think that sheet go to, to be able to fund the SDL expansion if that moves forward?

Speaker 2

Sure. So we'll provide guidance for EBITDA and DCF for CEI on the Q4 call in February and we'll provide guidance on the DPU for CQP at the same time as we work through with our partners in Brookfield, Blackstone and the Board there. But basically, CEI is going to be focused on the growth and focused on the catch up on the buyback in the billions. CQP is going to be focused on a robust distribution and really trending their debt to EBITDA metrics closer and closer to 4 times or under. Basically, CEI is a consolidated entity and why and grade is because we're already under 4 times on a run rate basis with lower margins than today.

Speaker 2

CQP is slightly above. So how we think about it is basically if we can retain some of that cash flow over the next couple of years, get the metrics down a bit lower, We're going to give ourselves a lot of flexibility financially to really re up the leverage when we FID the Sabine expansion, to keep at the very least, but probably more than the base distribution going. And yes, keep the ratings and everything intact, while growing that DPU over time to something closer to over $5 So yes, we're still pretty comprehensive across the board in terms of debt pay down, buybacks and growth, it's just going to be mix between LNG and CQP.

Speaker 6

I would appreciate that. Maybe just picking up on one thing we haven't talked about, I guess more recently. Just the CCS potential for some of the expansions. We'd just be curious to hear how much you're getting asked by your customer base to kind of include to that. I know you've been able to sign a couple of different types of customers without necessarily moving forward on that, but would be curious kind of where broader sentiment sits there.

Speaker 6

Thank you.

Speaker 1

Yes. Thanks, John. I'll talk about the CCUS capabilities or what we've been doing at to Sabine in Corpus. We've spent an enormous amount of time on engineering, looking at ways to capture whatever carbon or greenhouse gases we can. We think the IRA bill going from $50 to $85 was a step in the right direction.

Speaker 1

And we continue to look for opportunities to make our operations cleaner and more sustainable, which is a real focal point of myself and the team and our customers. As you know, quite a few of them are from to Western Europe and they're asking us as many questions as you are. And I'll turn it over to Anatol.

Speaker 2

Yes. Thanks, Jack. Thanks for the question, John. The customers that engage with us on this front and obviously to growing percentage, as Jack mentioned, some of the key European partners that are probably in more advanced stages of developing these strategies. Is a comprehensive approach and we partner with them across a number of dimensions.

Speaker 2

Nothing is prescriptive, but One of the reasons we have these engagements and have the opportunity to proceed is because of all of the things that we are doing to improve our lifecycle emissions profile. CCS is part of it as well as all of our programs with producers, pipeline shipping companies that measure and ultimately report our emissions. We have the only program to date that issues cargo emissions with every cargo that we've in place for a little over a year. All those are critical components to these engagements. None of it is so prescriptive as to say we will work on X and we will deliver Y.

Speaker 1

And if you haven't already seen it, it's posted on our website. Our CR report went live about 2 months ago. All right. Appreciate the thoughts. Thank you.

Speaker 3

We'll then next to Jean Salisbury with Bernstein.

Speaker 8

Hi, good morning. There's been some news articles recently highlighting that the Biden administration is moving extremely slowly on approving non FTA LNG export permits. Could this become a gating issue for CC89 FID and is there any flexibility that you might have in your portfolio to FID CC89 even if you're waiting for that permit?

Speaker 1

I don't think it's going to be a gating issue at all. We're already commercialized. They're repeat customers. 89 are backed by Chevron, Equinor and PetroChina. Yes.

Speaker 1

So I Feel pretty good about where 8 and 9 are. I'm also very optimistic. I mean, Chairman, Willie Phillips at FERC, he's been moving things along. I mean, he's been acting in a bipartisan manner. We've seen good signs coming out of there recently.

Speaker 1

I'm hopeful that energy security now is on top of everybody's mind and our allies need more not less from the U.

Speaker 2

S. And I'll just add, basically, we need to get going on construction of trains 89 at Corpus in 2026 as the first seven trains complete. And our goal is definitely well ahead of to get going. In the meantime, with the cash that we have, the flexibility we have in our revolvers and term loans, long lead items opportunistically. We'll lock that in, in the coming year or so when possible.

Speaker 2

So, yes, we don't see issues there. We have quite a bit of buffer just with Trains 1 through 7 coming online in 2025 and 20 26.

Speaker 8

Okay, great. That's helpful. Sounds like the news reports are a little overstated. And then as a follow-up, my understanding is that most or all of the recent contracts that you signed that are linked to the Sabine Pass expansion can be kept even if you delay the expansion, which would give you the option to be close to 100% contracted on your volumes Exiting path expansion. Am I thinking about this correctly as sort of the base case for Cheniere here if you can't ultimately get to the numbers that you want for the Sabine path expansion?

Speaker 2

Hey, Sudan. I guess, we'll tag team this to some extent. But yes, you're absolutely right in the sense that the contracts that we enter into give us tremendous flexibility on where they ultimately wind up and what projects they ultimately support. Now of course, Foran, we're very proud of the fact that unlike most projects to date, it does not have bridging volumes. It is linked initially to Sabine Train 8, our first contract that supports Train 8.

Speaker 2

But ultimately, we have full flexibility on where that contract ends up. So you're absolutely right in your assumption of kind of an extreme case that can be the decision to will keep the contract if we so choose and not proceed for example. Yes, that's right. So basically depending on the timing, yes, we might have to bridge some of these contracts with existing capacity and we'll have that with our 55 +1000000 tons once Stage 3 comes online. And in these other scenarios that you just can't see when you're seeing out on the curve still $5 $6 margins in a few years.

Speaker 2

Yes, we could be 100% contracted in a downside scenario, but that's not the plan. We're moving forward with development at both of the sites and we're going to try to stick to that 90% give or take contracted level.

Speaker 8

Great. Thank you so

Speaker 3

much. We'll go next to Kate Stanley with Wolfe Research.

Operator

Hi, good morning. On the 2024 volume, so realize it's only 50 TBtu unsold and you're closer to the run rate EBITDA. Is there any way to think about or quantify if any material amount of next year's production was sold as bridging volumes for Stage 3 or shorter term contracts that are more linked to what forward curves were at the time? Or Should we think of it as 98% of productions effectively sold at long term SPA type prices?

Speaker 2

I'd say almost, so some of the numbers I'd give you is basically this year we had over 40,000,000 tons of long term contracts. Next year once we have full years of some of the contracts that started this year, some step ups and even the start of the contract with Petronas will be over 43,000,000 tons of long term contracting. I will say with 50 TB2 open, the team has always been proactive and they've already sold a few cargoes for next year in the short on a short term basis, but just a few, but in that $9 to $10 range that you can see on the curves today. So there's a little already embedded in there. And yes, we'll see where we are in February.

Speaker 2

We'll probably sold a bit more, but this is really our operational coverage to really fulfilling our obligations on 43 +1000000 tons of long term contracts.

Operator

That's helpful. Second one, just clarifications on Stage 3 with it running ahead of plan. So Can you remind us commissioning cargoes are treated as a reduction of the capital cost, but if you get the substantial completion early, those excess volumes should drive higher EBITDA in 2025 and 2026? And then relatedly, if we think about a 7 train project, Should we expect if the first train comes on 3 to 6 months early, is that pretty even then for the rest of the trains as you see it coming on 3 to 6 months early or is it lumpy?

Speaker 2

Basically, yes. We'll give you updates as we keep on progressing on each. We have goals for each of the trains. 1st and foremost is getting Train 1 up and running. And hopefully the rest are relatively cookie cutter to there, but it will take through 20 26 really to complete the 7 trains and get them to substantial completion.

Speaker 2

And you're right, if we get into commissioning, you won't see like you won't see EBITDA in 2024 related to Stage 3. But at the rate we're going, next November's call for production in 2025 and open capacity will be a lot more interesting than today.

Speaker 3

We'll go next to Craig Shere with Tuohy Brothers.

Speaker 9

Hi. Thanks for taking the questions. So what how does it look in terms of further potentially upsizing legacy train capacity beyond 5 MTPA? And could any concerted effort in that regard work concurrently with your efforts to contract out in FID your SPL to Stage 5 expansion.

Speaker 1

Yes. So Craig, this is Jack. So the team is constantly looking at our debottlenecking and maintenance optimization program. So I have a lot of respect and faith for this operating group and their ability to continue to surprise us. So it's my expectation that we'll get technically get above 5 MTPA per train, but it may take some additional work before we get there.

Speaker 1

As far as how it connects to the SBL expansion, as Zach said, our focus is to get that commercialized to get those costs under control and locked in and meet our financial objectives and build those trains. So while we have a lot of optionality and flexibility, we are 100% focused on construction.

Speaker 2

And Craig, just for some numbers that we've talked about before is basically with Stage 3, we'll be a little over 55,000,000 tons. And then with Train Data 9, those are 3,000,000 that's 3,000,000 tons, but we hope just by adding those trains and some debottlenecking from Stage 3 and even maybe some from Trains 1, 2, 3 there, we're going to get to 60,000,000 tons. And then as we think about some of the efforts that we're doing and the development at Sabine, we're thinking of things like oil off, re liquefaction of the gas. So that could add incremental capacity as well. So we're pretty focused on the debottlenecking today.

Speaker 2

We're still at 5,000,000 tons per train and we'll update you when we make more progress there.

Speaker 9

Thanks. And The second question more for Anatol. The Foran agreement seems comparatively more vanilla than your prior SBL Stage V offtake agreements or related agreements. Would you say that the market is starting to with higher interest rates, with worry about cost capital and execution in large infrastructure projects that the progress you've already made on STL Stage 5, your obvious historic execution and worries about peers are starting to make market off takers Look at saving expansion with greater value even without all the bells and whistles of DES or early cargoes and things like that.

Speaker 2

Yes, Craig, I will not take offense to your comments on behalf of the origination team. But as we've said in the past, We do expect as we move forward that the contractual support will largely rhyme with what we've done in the past. It will be a mix of fab, DES. The complexity in these transactions is, as you guys know, Stage 5 and especially Train 8 is quite far out. So there's nothing that is as valuable in the market today as prompt volumes.

Speaker 2

You could see that obviously in the curve. And when we're talking about a contract that will start in most likely early next decade and continue for 20 years, There's complexity in that, right? So that is the key issue there. But you're absolutely right on the second leg of your complement. As Jack said, 3,000 plus cargoes, perfect delivery track record at a time when other facilities in the U.

Speaker 2

S. Globally Globally, the utilization rate for liquefaction is in the mid-80s. And of course, we don't even count the Libyas and the Yemen's in those numbers, right? So our track record and the team's performance is a standout relative to our peers globally and that is being reflected in our commercial engagements.

Speaker 9

Great. Thank you.

Speaker 3

We'll go next to Brian Reynolds with UBS.

Speaker 10

Hey, good morning, everyone. I'll keep it to one question knowing that we're over the hour. Zach, thanks for clarification on the follow-up on the 9 train run rate guidance and the commentary there. But Senior has made a lot of money on optimization on the portfolio, whether it's gas sourcing, regas or shipping. So just kind of curious if you can just update us if this is included in kind of the 9 Train run rate guidance.

Speaker 10

Is there a way to kind of capitalize this number going forward just given that It seems pretty ratable over the last 24 months or should we think about more cargoes going to Asia over the long term, maybe biting into some of that optimization? Thanks.

Speaker 2

Sure. So basically, I mean, you can even look at like other revenue where the sub charting revenue comes in and that goes all over the place quarter to quarter just depending on the dynamics of how much links we have in our shipping portfolios even sublease out. So these types of things, They wouldn't be in our run rate numbers whatsoever. They're not even usually in our guidance until it's locked in, because we just can't rely on it. It's another reason why we wait for guidance in February because there is a good amount of variability for in transit between 2023 2024.

Speaker 2

Those are the types of things we don't want to count on with the guidance and somehow miss for just a timing reason. So that's why we'll come out with guidance in 2024 and you can assume when we give you guidance maybe on the high end, we're taking advantage of some of the optimization not just in sub chartering out our length on the side and using 3rd party volumes that deliver some of our DEF deals, but upstream of the sites as well. We've been really successful this year taking advantage of basis differentials in lifting margin and yes, enhancing that lifting margin that we've made at both facilities. So not baked into run rate guidance and we'll see where we are in February, but usually a tailwind to our guidance quarter to quarter. Great.

Speaker 2

Makes sense. I'll leave it there.

Speaker 10

Thanks the reminder on the CapEx to EBITDA swap for commissioning cargoes. Enjoy the rest of your morning.

Speaker 2

Thank you. Thank you.

Speaker 3

At this time, there are no further questions. I will now turn the call back to management for additional or closing remarks.

Speaker 1

I just want to thank everybody for their continued support of Cheniere and we'll talk soon.

Speaker 3

This does conclude today's conference. We thank you for your participation.

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Earnings Conference Call
Cheniere Energy Q3 2023
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