Cheniere Energy Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 15 speakers on the call.

Operator

Good day, and welcome to the Cheniere Energy First Quarter 2023 Earnings Call and Webcast. Today's conference is being recorded. At this time, I'd like to turn the conference over to Randy Bhatia. Please go ahead.

Speaker 1

Thanks, operator. Good morning, everyone, and welcome to Cheniere's 1st quarter 2023 earnings conference call. The 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 Anatol Fagan, Executive Vice President and Chief Commercial Officer Zack Davis, Executive Vice President and CFO and other members of Cheniere's senior management. 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.

Speaker 1

Slide 2 of our presentation contains a discussion of those forward looking statements and associated risks. In addition, we may include to certain non GAAP financial measures such as consolidated adjusted EBITDA and distributable cash flow. A reconciliation of these measures to the most comparable GAAP measure can be found in the appendix to the slide presentation. As part of our discussion of Cheniere's results, today's call may also include selective financial information and results For Cheniere Energy Partners LP or CQP. We do not intend to cover CQP's results separately from those of Cheniere Energy Inc.

Speaker 1

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 will now turn the call over to Jack Fusco, Cheniere's President and CEO.

Speaker 2

Thank you, Randy. Good morning, everyone. Thanks for joining us this morning as we review our Q1 results and improved 2023 outlook. As you can see from the results, we have continued our exceptional performance from 2022 and our improved outlook for the rest of this year is reflected in our The Q1 was highlighted by excellent performance across Cheniere's platform from operations to project execution to capital allocation and origination. While we are not yet able to share specific details, Last week, we executed a new long term SPA with an investment grade Asian end user that is linked to the SPL expansion project.

Speaker 2

This is an exciting signal that we are already gaining early commercial momentum on our recently announced expansion plans at Sabine Pass. We look forward to providing more detail on this SPA in the near future. Please turn To Slide 5, where I'll review key operational and financial highlights from the Q1 2023 and introduce our upwardly revised annual financial guidance. We generated consolidated adjusted EBITDA of approximately $3,600,000,000 in the Q1 and distributable cash flow of nearly $3,000,000,000 This Q1 benefited from a number of discrete factors, which drove EBITDA and DCF hire, which Zach will address in a few minutes. During the Q1, Zach and his team continued to make excellent progress On our capital allocation plan, we paid down nearly $900,000,000 of debt and solidified investment grade ratings across the Cheniere complex as we discussed on this past February call.

Speaker 2

We bought back over 3,000,000 shares for about $450,000,000 and paid our quarterly dividend of $0.395 So in total, almost $1,500,000,000 in capital return during the quarter, plus another approximately $550,000,000 invested at Stage 3 for our future growth. Operationally, in the Q1, we picked up right where we left off last year, further reinforcing Cheniere's status as a leading global operator, Reliably producing LNG with safety at the foundation of every action we take. We set a new quarterly record Exporting 167 cargoes of LNG in the Q1, surpassing our prior record, which was set in the Q4 of last year. Looking ahead to the balance of 2023, as I mentioned before, our forecast has improved. We're raising full year guidance by $200,000,000 on both EBITDA and distributable cash flow.

Speaker 2

Our new ranges are $8,200,000,000 to 8 point $7,000,000,000 in EBITDA and $5,700,000,000 to $6,200,000,000 in DCF. The increase is mainly driven by the team Capturing and locking in higher margins, both upstream and downstream of our facility. Zach will provide more color on the increase and preemptively answer your questions on guidance in a few minutes. Turn now to Slide 6, where I will update you on the status of our expansion projects: Corpus Christi Stage 3, which is under construction Corpus Christi mid scale trains 89, which is now in the FERC process and SPL expansion, which is in the pre filing with FERC. First, on Corpus Christi Stage 3, construction is ramping up as is headcount on the site, which is now Approximately 750 workers and we expect this to grow rapidly as we begin to transform from site preparation and groundwork into mechanical works over the coming months.

Speaker 2

Over 7,000 piles have been driven and soil stabilization is effectively complete. The foundations are beginning to be poured. Piping and spools have begun to arrive and we expect to receive the first coal box at site next month and its installation is an important construction milestone for Stage 3. Overall, EPC progress is currently 28.7%, which is well ahead of plan. While construction is only 3.4% complete, early construction activities are already tracking ahead of schedule, increasing my confidence in schedule outperformance and potentially having more volumes in 2025 and possibly the entire 7 Train project being completed by the end of 2026 months ahead of the guaranteed schedule.

Speaker 2

Next, on Corpus Christi, mid scale trains 89, in line with what we told you last year when we pre filed this project, We submitted the full application to FERC on Trains 89 in late March. We are optimistic about the permitting process for this project given its Distinct advantages of being identical to the Stage 3 trains, being fully commercialized with creditworthy counterparties And not requiring significant supporting infrastructure and the synergy of Bechtel already being mobilized on the site. We look forward to working with FERC and all relevant stakeholder agencies and regulators on a smooth and transparent review process. Moving on to the Sabine Pass expansion project, which we revealed on our call back in February. I'm Extremely excited about developing this major 20,000,000 ton expansion, which has the ability to leverage our massive infrastructure position at Sabine Pass For economically advantaged incremental capacity, we have submitted the pre filing documents to FERC.

Speaker 2

We recently signed a contract with Bechtel for the FEED work related to this large scale project, including for the carbon capture component. Commercially, The project is already gaining traction. As I highlighted earlier, last week we executed an SBA of approximately 400,000 tons Granum for over 20 years has been investment grade Asian end user for LNG volumes delivered through 2,047. Most of the volumes associated with the SPA are subject to FID of Train 1 of the Sabine Pass expansion project. We're excited to have already signed an SBA linked to the project and to be building commercial momentum as we progress development.

Speaker 2

We progressed these project developments in an environment marked by cost inflation, rising interest rates and extremely competitive LNG markets. These realities not only underscore the importance of Cheniere's competitive advantages, but also our resolute commitment to the investment parameters that guide our disciplined approach to capital investment. As you have heard me say before, We are not in the FID business. Our focus is on long term value creation. We are developing these projects with the same discipline, Rigor and high standards that form the foundation of our existing infrastructure platform.

Speaker 2

We are extremely excited about our organic growth prospects and we continue to target market leading project returns on a risk adjusted basis that our investors and stakeholders have come to expect from Cheniere. Thank you all again for your continued support of Cheniere. I will now turn the call over to Anatol, who will provide an update on the LNG market.

Speaker 3

Thanks, Jack, and good morning, everyone. Please turn to Slide 8. LNG production in the Q1 reached new highs as global reliability improved with record monthly supports of 36,000,000 tons in March. Following the period of outages across various plants worldwide, year over year increases in production were achieved in Norway, Australia and Qatar in particular. In Norway, the Hammerfest facility was offline in Q1 last year.

Speaker 3

In Australia, Prelude was shut down after loss of power in December 2021 and did not restart until April of last year. Hennencutter, Two mega trains were undergoing major planned maintenance in Q1 last year. Exports from the U. S. Were broadly flat year over year as Freeport LNG restarted production in February after having been offline since June of last year.

Speaker 3

While the uptick in global LNG production over the past few months has helped to balance the market and further stabilize price levels Throughout the Q1, we expect limited overall supply growth this year as few new projects are scheduled to come online in the next 18 months. Until then, we expect supply and demand to remain precariously balanced and sensitive to supply disruptions, weather and demand shocks. We remain optimistic that the U. S. Will continue to be a critical source of flexible supply in the market.

Speaker 3

U. S. Flows to Europe continued to remain strong in Q1, helping ease market pressures and contributing to moderating prices. In fact, approximately 80% of cargoes produced by our two sites were delivered to Europe in the Q1. The TTF monthly settlement prices averaged approximately $19.50 per MMBtu in the first Q3, 35% lower year on year.

Speaker 3

Similarly, the JKM average settlement price decreased by 16% year on year to an average of approximately $26 per MMBtu. While both pricing indices are markedly lower than last year, Global gas benchmarks remain at elevated levels. Q1 marked an inflection point for average quarterly global gas prices as JKM surpassed TTF for the first time since Russia invaded Ukraine last year. Cheniere's value proposition Built on market leading reliability is of course further enhanced by a stable and affordable commodity. In the U.

Speaker 3

S, In March, the Henry Hub front month contract price fell below $2 an MMBtu for the first time since September of 2020. Henry Hub averaged approximately $3.40 in Q1 and the front month contract is now trading in the mid-two dollars per MMBtu. Following the elevated pricing in North American gas markets last year, our production response led to a more normalized pricing environment, underscoring the abundance and relative affordability of Gulf Coast LNG. Now let's turn to Slide 9 to address current European dynamics in some more detail. Europe has closed out this winter with gas inventories at or near the high end of its 5 year range, thanks in part to record mild weather and of course sustained LNG flows.

Speaker 3

LNG imports remained robust increasing 8% year over year despite labor strike activity affecting several French U. S. Exports to Europe increased approximately 4% year on year in Q1 and about 15% quarter over quarter. The addition of 5 FSRUs over the past few months across the Netherlands, Germany and Finland helped increase LNG import capacity and reduce locational price spreads. However, mild weather coupled with significant demand reduction efforts by European consumers resulted in a 12% year on year decline in gas demand in Europe's key gas markets in Q1.

Speaker 3

Gas burn in the power market remained suppressed down 15% year on year, although elevated coal and emissions pricing could present opportunities for fuel switching. As mentioned with storage levels above the 5 year average this year, Europe is positioned well as it looks to replenish supplies ahead of the 2023, 2024 winter season. While further reductions in Russian pipe gas remain a risk, much of this volume was already lost in the demand response last year. Nevertheless, despite the European market's advantaged position coming out of the 2nd warmest winter on record, the shortfall in Russian supply should remain an ongoing challenge for the global balance until new supply is dispatched. Longer term forecasts indicate European LNG imports will remain stable at elevated levels despite net zero rhetoric and policy induced pressure on the demand outlook for European gas.

Speaker 3

Leading LNG consultants predict that LNG demand in Europe will increase through the end of the decade before stabilizing above the 100,000,000 ton level through 2,040 and possibly beyond. Let's now turn to Slide 10 to discuss Asia. Demand in Asia remained stable with overall LNG flows flat relative to Q1 last year and up 4% quarter on quarter. The demand decline observed over the last year in certain key Asian markets, India, Pakistan, Bangladesh and China to name a few has narrowed considerably as spot prices continued to moderate this quarter. Demand response in these price sensitive markets, especially with further moderation in prices, normalized weather and a pickup in economic activity will be a key determinant of market tightness in the medium term.

Speaker 3

As shown in the middle chart, Korea's imports were up 7% in Q1 due to nuclear maintenance, curtailed coal burn and LNG inventory replenishment. However, elevated storage levels and the expected start up The new 1.3 gigawatt nuclear plant in Q4 could impact spot buying from Korea in the upcoming months. In Taiwan, imports rose 4% in Q1 driven by reduced coal fired generation during the winter and the decommissioning of a nuclear reactor in March. Thailand also grew in parts 7% in Q1 in order to cover declines in both domestic output and pipeline imports from Myanmar. In contrast, LNG imports in Japan remained weak amid high inventory levels and improved nuclear availability year on year.

Speaker 3

Nevertheless, lower Japanese imports and reduced demand in China and India balanced the gains in Korea and other parts of Asia. In China, Q1 LNG imports were down 3% or 500,000 tons year on year, but we have observed Some green shoots in leading indicators for demand growth as economic activity continues to pick up post lockdowns. With GDP expanding 4.5% year on year in the Q1, China's gas demand grew 5.6% year on year in March And LNG imports rose 14% year on year in March, marking the first positive increase in over a year. A potential increase in industrial gas demand from a 56% month on month rise in new home sales could provide further tailwinds for LNG demand later this year. Despite the recent weakness in Chinese LNG consumption, we believe China's long term fundamentals remain strong And the nation is on track to become the first 100,000,000 ton LNG market before the end of the decade.

Speaker 3

China's significant investment in natural gas infrastructure From pipelines to regas terminals to gas fired power generation capacity, coupled with its active role in the long term contracting market, has demonstrated the region's commitment to natural gas as a long term solution. As we've discussed before, we expect The immense economic growth and energy evolution forecasted for the Asia region to underpin decades of growth in LNG demand, driving the need for substantial investment in new liquefaction capacity. The over 20 year SBA we recently signed with an investment grade Asian buyer that Jack mentioned is linked to the SPL Expansion Project and further evidences the global need for long term reliable gas supply. The SPL expansion project is a major source of prospective new LNG supply, and we look forward to building on this commercial momentum, Developing the project according to our high standards and ultimately enhance Cheniere's capabilities to provide the market with reliable, flexible and cleaner burning LNG supply for decades to come. With that, I'll turn the call over to Zach to review our financial results and guidance.

Speaker 3

Thanks, Anatol,

Speaker 4

and good morning, everyone. I'm pleased to be here today to review our Q1 2023 results and key financial accomplishments and to update you on our upwardly revised outlook for the full year. Once again, the outstanding financial results we reported today are the product of our team's unwavering commitment to operational excellence, execution and financial discipline as we continue to create value for our stakeholders. Turning to Slide 12. For the Q1, we generated net income of approximately $5,400,000,000 Consolidated adjusted EBITDA of approximately $3,600,000,000 and distributable cash flow of approximately $2,900,000,000 As Jack mentioned, our Q1 results were aided by our marketing team's proactive selling forward of some of our Q1 open exposure starting last year at margins higher than current market margins as well as the contribution of 16 cargoes loaded at year end 2022 but delivered in 2023, the majority of which were CMI spot cargoes and only 11 cargoes in transit at the end of Q1.

Speaker 4

In addition, we benefited from a higher contribution from certain portfolio optimization activities from our IPM deals as well as vessel sub chartering. These benefits were partially offset by a higher proportion of our volume being sold under long term contracts and lower lifting margin due to lower Henry Hub prices compared to the Q1 last year. During the Q1, we recognized an income 6 19 TBtu of physical LNG, all of which was produced at our 2 projects. Approximately 84% of these LNG volumes recognized in income were sold under long term SBA or IPM agreements with initial terms greater than 10 years. As we've noted in prior earnings calls, 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.

Speaker 4

The further decline Sustained moderation and volatility of international gas price curves throughout the Q1 served to benefit the mark to market valuation of these agreements, driving a negative cost of sales number for the quarter and increasing our net income line item for the Q2 in a row. Excluding the impact of $4,700,000,000 of total unrealized non cash derivatives, net income for the Q1 Would still have been over $2,000,000,000 and cost of sales would have been around positive $3,000,000,000 instead of negative $1,500,000,000 With today's results, we have earned cumulative net income of over $7,700,000,000 for the trailing 12 months And have now reported positive net income on a quarterly and cumulative trailing 4 quarter basis 2 quarters in a row. Throughout the quarter, we continued to strategically pay down debt, prepaying approximately $900,000,000 of consolidated long term indebtedness and bringing our total debt pay down to approximately $7,500,000,000 since launching our original capital allocation plan in 2021. As noted on our last call, in the 1st week of January, we redeemed the remaining almost $500,000,000 of outstanding principal of the CCH notes due 2024. And throughout the quarter, we continued to utilize our open market repurchase program, opportunistically repurchasing Nearly $400,000,000 in principal of outstanding CCH notes with maturities ranging from 2027 to 2,039.

Speaker 4

These transactions represent some of the tools we have utilized to address our consolidated leverage and strengthen our balance sheet over the past few years, and these actions have been recognized by the rating agencies. During the quarter, we received our 2nd investment grade rating of BBB- at CEI from Fitch And S and P upgraded SBL from BBB to BBB plus with a stable outlook. Thanks to our team's ability to deploy capital to address our leverage Both opportunistically and efficiently, we are officially investment grade and index eligible across our corporate structure with our next debt maturity not until next year. After the achievement of IG across our corporate structure during the quarter, we have begun to shift our capital allocation weighting to our buyback program. During the Q1, we repurchased approximately 3,100,000 shares for approximately $450,000,000 as we continue to recalibrate our future cumulative debt pay down to share repurchase ratio from 4:one to 1:one.

Speaker 4

As I mentioned on our last call, over the coming year or 2, there's likely a catch up trade on the buyback since we were so aggressive on debt pay down late last year and into Q1 in order to get to investment grade throughout the complex. Our share repurchase program is designed to be flexible in order Take advantage of dislocations in the market like we saw at certain points these past couple of quarters. We will continue to target the 1:one long term ratio we introduced last fall as we deploy the remaining $3,200,000,000 under our current buyback authorization and attempt to buyback over 10% of our market cap in the coming years. We also declared our 7th quarterly dividend of $0.395 Per common share for the Q1 last week, we intend to follow through with our previous guidance of growing our dividend by approximately 10% annually into the mid 2020s through construction of Stage 3, with the next step up planned for later this year. And for the final pillar of our comprehensive capital disciplined growth.

Speaker 4

We funded approximately $550,000,000 of CapEx at our Stage 3 project during the quarter with cash on hand. As Jack mentioned, construction is well underway and we're tracking ahead of schedule. Going forward, we will continue to fund Stage 3 CapEx efficiently with internally generated cash flow and the over $3,000,000,000 still available on our CCH term loan today. As of March 31, we had over $10,000,000,000 of consolidated available liquidity, even after the deployment of nearly $2,000,000,000 towards our capital allocation during the quarter. The financial strength afforded by our accelerated progress across all four pillars of our capital allocation plan has become one of our key competitive advantages as we continue to procure and process over 7 Bcf of natural gas on a daily basis, Deliver 45,000,000 tons of LNG per year and develop further accretive Brownsville growth at both our sites.

Speaker 4

Turn now to Slide 13, where I will discuss our 2023 guidance and update you on our open capacity for the remainder of the year. Today, we are increasing our 2023 financial guidance by $200,000,000 to $8,200,000,000 to $8,700,000,000 and consolidated adjusted EBITDA and $5,700,000,000 to $6,200,000,000 in distributable cash flow. While we don't provide guidance by quarter, obviously given the full year guidance, we are forecasting lower EBITDA across the second, third and fourth quarters compared to our Q1 results. The guidance increase is enabled primarily due to selling some of our open CMI cargoes opportunistically at higher margins than previously forecast. The release of a couple of the origination placeholder cargoes to CMI to sell into the spot market, higher than originally forecast gas supply lifting margins and further contributions from optimizing our shipping portfolio.

Speaker 4

These increased guidance ranges continue to reflect current international gas price curves as well as our increasingly limited open position for the remainder of the year, given the start of several long term contracts this year and our planned maintenance at Sabine Pass this summer. Currently, we have approximately 35 TBtu of unsold LNG remaining this year, 15 of which are reserved for long term origination. We currently forecast that a $1 change in market margin would impact EBITDA by approximately $20,000,000 for the balance of 2023. Highlighting how proactive the team has been in securing margin this year to guide 2023 EBITDA into the mid-eight 1000000000. As always, our results could be impacted by the timing of certain year end cargoes heading into 2024.

Speaker 4

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 do 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 deployment. Despite our limited remaining open exposure this year and moderated international gas prices, Our 2023 guidance ranges are well above the $5,700,000,000 high end of our 9 train run rate guidance, And we remain on track to achieve our 2020 vision of generating over $20,000,000,000 of available cash by 2026 and over $20 of DCF per share on a run rate basis. With every dollar deployed by our team, we are positioning Cheniere for a resilient and profitable future, And it's the visibility of our future cash flows that enable us to meaningfully return capital to our stakeholders and pursue further disciplined growth through cycles, while continuing to reliably and responsibly deliver affordable, cleaner burning energy to our customers worldwide.

Speaker 4

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.

Operator

Thank Our first question will come from Jeremy Tonet with JPMorgan.

Speaker 5

Hi, good morning.

Speaker 2

Good morning, Jeremy.

Speaker 5

Just wanted to start off with the, I guess, the SBA contracting market out there. Good to see That contract for SPL expansion as you noted there, but just wanted to get a feeling of what you guys can share with regards to competitiveness. It Seems like there's a number of players that are maybe a bit more aggressive in their attempt to get contracts at this point and just wondering how you see the balance of maintaining your financial hurdles versus securing contracts for the expansion?

Speaker 2

Yes, Jeremy, I believe it goes hand in hand with our exceptional operational performance. So the fact that we haven't missed the foundation customer cargo is not being unrecognized by the end user Community worldwide community out there. So those folks that we've talked about in the past with the 1,000,000,000,000 of dollars being invested And Natural Gas Infrastructure want to make sure that they have gas to fill up that infrastructure. Those are the folks that we're targeting for our long term contracts. We're not going to change our business model either.

Speaker 2

We're going to commercialize the new investments. We're going to lock in the Price, the performance, the schedule, with Bechtel and then we'll build the infrastructure. But I'll turn over to Anatol on what Competition he sees in the SBA market today.

Speaker 3

Yes. Thanks, Jeremy. Well, as Jack said, over the last And we are we have never been and clearly aren't today in a race to the bottom for a commodity product and we're very selective with whom we transact. As Jack already mentioned, the end users, the counterparties that value that reliability and we Extract a premium for that and we'll continue to do that in what is still a very competitive market as you know. So We'll stick to our knitting and have this great base business meeting those financial objectives And expose ourselves to the upside as we outperform.

Speaker 5

Got it. That's helpful. And maybe just want to kind of level set Results today versus your expectations, it clearly beat the Street median by a big number, But the guidance didn't move up by the same number and just wondering, I think it's important, how did Q1 stack up versus your expectations and maybe the The timing of CMI being open across the year and that kind of led to some of the disconnect, but just curious for any of your thoughts there?

Speaker 4

Hey, Jeremy, it's Zach. And I guess trying to compare Bloomberg estimate for Q1 with our annual EBITDA guidance is like mixing apples and oranges, because by the time we came out with guidance on the last call, which was late February, Literally 2 months ago. I would say we're not off $1,000,000,000 from what we thought Q1 would be. If anything, Q1 was pretty baked by the end of February for us because going into the year, we locked in a significant amount of our open capacity with those margins well over $20 to create such a robust quarter in Q1. So Q1 was always going to be weighted in terms of our EBITDA and it's going to be in our guidance around 40% of the EBITDA for the year.

Speaker 4

And we knew that considering our open capacity or spot volumes for the year, 50% of them We're going to be in Q1. Over 50% of our CMI contribution came in Q1. So I think some of that disconnect is basically a lot of folks maybe spreading out more evenly our EBITDA quarter to quarter. We did have a good amount of in transit and we do make a bit more production in Q1. But basically all of those 20 plus, 30 plus even some 40 plus cargoes That we locked in, in the past year, those were delivered in Q1 and created that outperformance.

Speaker 4

And to say in the last 2 months, we've been able to increase guidance again by $200,000,000 after all of that accounted for On the last call, that's really a testament to the team here that we were able to secure a higher lifting margin upstream in the plants, Took advantage of some of our length on our shipping portfolio by delivering more to Europe and sub chartered a bit more. And then clearly, we still beat the market on some of the cargoes that we sold in the open market for Q2 and Q3 Coming up for the rest of the year.

Speaker 5

Got it. That's very helpful. I'll leave it there. Thanks.

Operator

And our next question will come from Brian Reynolds with UBS.

Speaker 6

Hi, good morning everyone. Maybe to follow-up on the guidance question based off the quarterly outperformance. Zach, you did discuss The forward sale of cargoes, sub charting and optimization, just kind of curious if you could just break down how much the outperformance is maybe attributable to those components And perhaps some of the pull forward on some of that optimization. And then in the context of the $200,000,000 guidance raise, should we view that as a base business kind of positive outlook at this time?

Speaker 4

Yes. Around the $200,000,000 guidance range, we don't forecast in our EBITDA Things that aren't locked in realized at this point. So at this point, when we gave guidance that, Look, the open capacity is 35 TBtu and the dollar move is only $20,000,000 We're talking about 1% to 2% Of our total production, we're talking about 2% of our annual EBITDA. And when this share price that we love to look at Fluctuates with TTF or oil, we kind of scratch our heads when we are this locked in already going into the rest of the year. So basically, I wouldn't assume anything is baked in, in terms of further upside from optimization.

Speaker 4

But in terms of sub chartering, That's not that's locked in. It's either realized or the team has already sold those charters out and have locked in a profit for ourselves. So we feel real good about the new guidance range. And yes, there could be some upside, but We'll just have to see how things play out for the rest of the year.

Speaker 6

Great. Really appreciate that incremental color. Maybe another question for you, Zach, on capital Cheniere bought back $450,000,000 this quarter, but reduced another $400,000,000 in debt. You talked about in your prepared remarks That there could be some more cash available for buybacks. Looking forward, how should we think about maybe debt retirement?

Speaker 6

What are your plans for paper craps this year and next that can maybe impact that share buyback cadence of call it $750,000,000 to $1,000,000,000 quarterly assuming there was no debt pay down this quarter? Thanks.

Speaker 4

Sure. I don't think I have ever said we're going to do $750,000,000 to $1,000,000,000 quarterly. What we have said is Look, we have a $4,000,000,000 buyback program for 3 years. In the last two quarters alone, we bought back almost $1,200,000,000 There's going to be even more robust allocations to buybacks, including this quarter and going forward As we go through that $4,000,000,000 ideally within 3 years or well within 3 years, But the deployment, it's still going to fluctuate a bit. We are not dollar cost averaging on our buyback program.

Speaker 4

It's more opportunistic. So you can imagine we're active today on the buyback. And then in terms of the debt pay down, we actually bought back And in terms of debt, dollars 900,000,000 in Q1, but dollars 500,000,000 of that was in the 1st week. I think people have to remember, we weren't We officially investment grade and index eligible until early January. So we went into the year looking To finally finish that up and we truly front loaded late last year early this year the debt pay down to get there.

Speaker 4

But now that we're there, yes, there's a green light to go back the other way and reset that one to one Cumulative ratio, meaning there's quite a bit of catch up to do on the buybacks going forward, at least $2,000,000,000 through the rest of this year and into next. So we're pretty optimistic in terms of the allocation to buybacks and yes, over time we'll get back to 1 to 1 And eventually buyback over 10% of the market cap.

Speaker 6

Great. Appreciate all that incremental context. Enjoy the rest of your morning.

Speaker 2

Thanks, Brian.

Operator

And our next question comes from Mark Salsia with Barclays.

Speaker 7

Hi, good morning. Maybe just to pick up on 2023 guidance, obviously largely locked in at this point with 20 TBT remaining open. But wonder if you could just talk about some of the factors that could put you at the upper or lower end of the revised range?

Speaker 4

Sure. So again, as I mentioned, it was about $200,000,000 worth the CMI contribution not locked in today. We're talking about, yes, like 2% of the EBITDA still floating out there. So what's the upside? There could be some upside from selling those cargoes at higher margins depending on where markets settle through the rest of the year, Even though our open capacity is definitely coming down, as I said before, half of our open capacity was in the Q1.

Speaker 4

We have new contracts coming online this year that are starting up and we also have the major maintenance turnaround at Sabine this summer. So there's a few things there that just were always baked into our guidance in terms of having more open capacity earlier in the year. The other upside could be basically we still have 15 TBCU reserved for long term contracting. If those over time are released to our short term team, they'll be able to sell those at market prices. There could be a little upside there.

Speaker 4

And then on production, we're already estimating around 5,000,000 tons per train and that's with the major maintenance embedded in all of that. So that's going to take some time to give you any update on production increases. Let's get through the major maintenance turnaround this summer. Let's get through the hurricane season And we'll see where we are later this year on that. That could provide a little bit of upside.

Speaker 4

And then lastly, we don't bake in any Optimizations upstream or downstream of the plants that aren't already locked in. So we'll see how that flushes out through the year. So We feel real good that at the very least, even with extreme pressures on margins for the rest of the year, potentially in a hypothetical, We'll make our guidance. But besides that, we're in a good spot.

Speaker 7

Got it. I appreciate all the color there. And then EU gas inventory levels, obviously, tracking above seasonal averages coming out of the winter. With LNG now price close to energy equivalency parity with other fuel sources and green shoots of recovery in price sensitive demand in both Europe and emerging markets, Curious how you see those factors interplay in terms of the LNG commodity price outlook over this summer?

Speaker 3

Yes. Thanks, Mark. This is Anatol. I We're watching the same things as you and Zach went through. We have relatively minimal exposure to those dynamics, but we learn from them.

Speaker 3

Obviously, our commitment is to supplying our long term counterparties with our affordable, stable and environmentally attractive product And the amount of infrastructure that's being added today is just staggering and the world is going to add over 120 1,000,000 tons per annum of regas capacity just in Q1, Europe added over 13, China alone added over 13. And even though you're of course right that European storage is around the high watermark, it's actually now Slightly below where it was in 2020, not that we want a repeat of that, but it just tells you that Infrastructure should not be a constraint. And as you mentioned, we're seeing green shoots of incremental tenders From the price sensitive markets like India, in March, very active Chinese market, Weak PMI for the last month, the manufacturing PMI, but we're optimistic that the second half will show a meaningful turnaround. So We're optimistic. We think these price levels are great.

Speaker 3

Coal prices are still elevated. Emissions prices are still elevated, as you mentioned. So We feel very good about the hand we're dealt.

Speaker 7

Great. Appreciate the time.

Operator

And our next question comes from Spiro Dounis with Citi.

Speaker 8

Thanks, operator. Good morning, guys. First question maybe for you Zach, just starting with the Sabine Pass expansion. Still early days here, but just wondering if you can Walk us through a little bit about the general plan to fund that expansion. I don't believe a lot of that CapEx was factored into the 2020 vision You all laid out in the fall.

Speaker 8

So just curious how should we be thinking about that funding relative to the capital allocation plan in place?

Speaker 4

Sure. So the 2020 Vision capital allocation plan really only goes through 2026. And in that, we still had 1,000,000,000 of dollars for new developments, but that was mainly the incremental mid scale trains at Corpus. But there was still money above and beyond that, that work is baked in and we'll be spending some money to get ahead of that SPL expansion. Again, it's going to take a couple of years to get everything ready for FID and to officially start deploying meaningful money down at Sabine.

Speaker 4

And now that we have 6 trains fully up and running there, we have a base plus variable DPU policy. We're set up pretty well to live within cash flows there and continue to pay out at the very least the base and have More than enough equity cash flow there to live within the cash flows. And as we develop these projects and think about CapEx, let's say, 6 to 7 times Unlevered returns highly contracted at 10%, 50% leverage, which gives you to under 4 times on a debt to EBITDA basis. It all pencils out just fine. So we'll be well placed for that.

Speaker 4

And I guess it'll be in our next Capital allocation plan, where we're baking that in, it probably just won't be for the 3rd September in a row this year.

Speaker 8

Got it. That's good color, Zach. Second one, maybe for you Anatol, just thinking about SPAs, Martha, really kind of focusing on the tenure. You mentioned over 20 years on this recent SPA and the over kind of caught my ear Just given that this is supplied, it's really not starting up until closer to 2,030. And so I'm just curious, is that a general trend you're kind of seeing across Other commercial discussions, are tenders actually increasing this time around?

Speaker 8

And then just curious sort of in that context, how much Features like carbon capture are playing a role in these discussions now versus maybe a year or 2 ago?

Speaker 3

Yes. Thanks, Spiro, we were never in the camp that the 20 year deal is dead. Obviously, over the last couple of years, the market has largely absorbed that. And you're seeing but that said, you're clearly seeing the average 10 or over whatever period extending. So we are we've done some 15 year deals.

Speaker 3

We've done some well over 20 year deals over the last couple of years And we like those transactions, again, especially when it is end user and it is a building block to a relationship that we expect will last For decades and will lead to incremental volume. The other component of your question, like since it is starting the Sort of the 20 year piece, if you will, is starting in the back half of the decade. There are some early volumes incorporated into that, As Zach mentioned, in part some of the volumes we reserve in the portfolio for that opportunity and we're navigating that using the portfolio. So you kind of have a 20 year plus structure that we like and our kind of reliable customers like and That's what we've done a fair amount of in Asia and expect to do more.

Speaker 8

Great. Super helpful color. Thanks, Enzal.

Operator

And our next question will come from Jean Ann Salisbury with Bernstein.

Speaker 9

Good morning. I just have one. I wanted to get your thoughts on the new DOE policy making it harder to get permit extensions if you're not under construction. How do you see this policy affecting the pace and size of the U. S.

Speaker 9

LNG build out, if at all? And does that have any kind of secondary impact on Cheniere?

Speaker 2

Hi, Jean Ann. Thanks for the question. So I actually view the policy in a positive way That much like what we do today, which is we commercialize our projects Before we fully go into construction or finance, they want to make sure that there is a needs basis for what they've permitted. So I think it will help with some of the projects that have been on the books for a while That maybe they have allocated gas flows to that they help them help move them along. So Some of these projects surpass my timeline here at Cheniere, which is 7 years, I've been on the books for over a decade and it's quite frankly, it's time to either build the project or not.

Speaker 2

And so I view relatively positively. In fact, all of the administration, whether it's DOE or FERC, I have begun to embrace that natural gas is here to stay. It's going to be a very, very important Transition fuel for clean energy and beyond quite frankly. So we're starting to see some movement there on all the Infrastructure projects.

Speaker 9

Great. Thanks. That's all for me.

Operator

And the next question will come from Sean Morgan with Evercore.

Speaker 10

Hey, guys. Thanks for taking the question. Regarding the issue with the formaldehyde, I think you guys You've tested 41 or 44 turbines to be compliant With the government standards, what's the plan for the remaining 3 and other sort of CapEx The ability to sort of remediate any problems you have, if there's anything outstanding?

Speaker 2

No, the remaining 3, John, are just a matter of, I'll say, supply chain. So we're waiting for some parts From Baker Hughes and when those parts get installed during planned downtime, then we We'll retest them, but it's our belief and we've got enough data now that we are well within compliance. And as you know, this is not an issue at all at Corpus. It's only been at Sabine with the water injection, but it will be immaterial and you all won't.

Speaker 7

Okay.

Speaker 10

And then I think Zach might have mentioned something about Eligibility now for the index, I assume the S and P 500, have you guys met all of the criteria that's required for Inclusion at this point?

Speaker 4

So the eligibility I was talking about was the investment grade index eligibility. But in terms of your question, yes, we meet it and we've met it now for 2 quarters in a row. Our LCME EBITDA net income is over Our market cap is large enough that we're probably in the top 5 largest companies in this country that

Operator

And the next question is from Michael Blum with Wells Fargo.

Speaker 11

Thanks. Good morning, everyone. So I want to just had a market question. Q1 looks like most of the 80% of your cargoes went to Europe, which Frankly, surprised at least me a little bit given storage levels in Europe and China reopening. So I wonder if you could just talk to the dynamics there and then how do you think the rest of

Speaker 3

Yes. Thanks, Mike. It's Anatol. Look, the pricing was more attractive in Europe than it was in Asia And it's as simple as that. We obviously don't control the vast majority of the volume that we produce and our customers Took advantage of the destination flexibility and as did we, which as Zach and Jack discussed, had led to some Chartering out of shipping length that we had penciled in for Asia, but ultimately did not materialize.

Speaker 3

So Just the benefit of this product, it reliably goes to the market of highest netbackmostneed and We're seeing a very delicate balancing act today between Asia and Europe and things can shift on a dime. We always The May call is always tricky because you're sitting in the shoulder period and that is a global dynamic before Things really pick up mid summer. So we expect that strength to materialize in Asia, kind of the hint in your question and the back half of the year, I would expect that volumes tend to go to Asia more so than to Europe given its recovery.

Speaker 11

Okay, great. And then, just wondering if there's been any change in the tenure of discussions with Europe, I know politically it's been more or less call it more challenging to sign long term contracts. I wonder if there's been any change in that dynamic?

Speaker 3

No, I mean, the bottom line is you'll see kind of similar dynamics that you saw last year and you're So you're right that most counterparts in Europe have a difficult time going beyond 15 years. It doesn't mean that those are Transactions that we would not entertain, but as we've always said, we expect that the fundamental demand driver to be Asia and we're seeing Much more comfort with multi, multi decade commitments out of that theater than out of our European counterparties, but we expect to see some success In Europe as well.

Speaker 11

Great. Thank you.

Operator

And the next question will come from Craig Shere with Tuohy Brothers.

Speaker 12

Good morning. Thanks for taking the question. First, Anatol, you commented as usual about not Competing for the lowest cost. And historically, last couple of quarters, I think you pointed out that some At least partially contracted peers may not be able to reach FID due to financing, The competitive pricing of their offtake and other issues. Do you think at this point that there could be 5 or 10 MTPA plus of orphan downstream demand that may be looking for a home in the next year?

Speaker 3

The short answer is yes. There are different types of counterparties that have contracted for projects that are Unlikely to move forward and some of that demand is structural and we would look to meet that. Other demand is opportunistic and that may not materialize. But we do think as the market shakes out, To your point, we did expect more than 2 FIDs in 2022 and obviously Q1 saw a number of FIDs here. We Continue to expect more, but to the extent that some of these relatively well contracted projects at Aggressive rates that are difficult to prosecute in the aggregate fall by the wayside, we do think that there is some Fundamental demand that could be a good opportunity for us.

Speaker 12

Great. That's helpful. And for my second one, Now that we're starting to think about the end of the decade and beyond, I thought I had read that the DOE is Looking to draw a hard line in the sand about the 7 year export authorization Time lines of people having actually broken ground and gotten financing. And I'm wondering if There's a thought now that so much in total is authorized for export, though obviously not A good portion of it is not in the works at the moment. I wonder if there's a thought that by the end of the decade, The DOE may be more the governing factor than FERC and those that are A little more reliable and consistent in their project development and timelines may have competitive advantages.

Speaker 2

We haven't seen either agency Being competitive to anything that we wanted to do ourselves. Look, I've been here for 7 years and we have built how many tons Anatol in my 7 years.

Operator

This claims to you, FID over 20,000,000 tons.

Speaker 2

Yes, FID over 20,000,000 tons. So It hasn't slowed us down. I don't think it will. I do think it will help focus The regulators and the stakeholders on projects that are really going to move forward in a timely fashion. So I think it's a positive, not a negative overall for the industry.

Speaker 12

Very good. Thank you.

Operator

And the next question comes from Sam Burwell with Jefferies.

Speaker 13

Hey, thanks for squeezing me in here guys. Wanted to hit on CapEx quickly. So a little over 700,000,000 Spend in 1Q, dollars 550,000,000 of that being CCL3. Just curious if both of those are good estimates for like Quarterly run rate for the rest of the year or anything driving that higher in 1Q? And then with respect to CCL3 funding, I just wanted to confirm that the plan is still to Lever that project 50% and what the factors driving the funding from cash to the balance sheet now might be if that's a function of Short term rates or when we might expect it to be back leveraged?

Speaker 4

Sure. So on the CapEx for the year, The $550,000,000 was more than a typical quarter. We had some milestones during the quarter And that was deployed into Stage 3. But Stage 3, I think the CapEx for the year will be around, if not a little less than $1,500,000,000 And all in, when you start adding in maintenance CapEx, you add in other growth CapEx, which is mainly This development or this early work and FEED work at Sabine expansion and with midscale 8 and 9, We'll be well under $2,000,000,000 in total CapEx for the year. In terms of funding the Stage 3 fifty-fifty, That's still the intent.

Speaker 4

It's just right now, when you think about $6,000,000,000 or so DCF, I account for that CapEx, we're at $4,000,000,000 or so of free cash flow. I account for the debt pay down, the dividend, there's still Well over $2,000,000,000 that could technically be allocated over time to the buyback program going into the end of this year and early next. So we have plenty of money to actually fund the equity component first Of Stage 3, retain the flexibility, retain the commitments from the banks that don't expire for another 6 years, Save 100 of 1,000,000 of dollars on interest expense and keep on plugging away. And we'll see if we use that leverage to finish up Stage 3 Or even to help us fund the yes, the Corpus expansion thereafter. So we do intend to use that money.

Speaker 4

It's just flexibly There for us and pretty cheap to hold on to for the time being.

Speaker 13

Okay, got it. All makes sense. Thanks, Zach.

Operator

And our last question will come from Alex Kania with Wolfe Richards.

Speaker 14

Hi there. How's everybody doing? Just a question, I guess, as we're looking in the back half of the decade With just upstream infrastructure, just how do you feel like the connecting gas pipeline situation is going to Look for both Corpus Christi and I guess looking even further out to Sveen Pass, do you think the industry is kind of caught up with the expected demand that you're seeing? And does that have any other questions about how you're thinking about investment?

Speaker 2

No, I think look, Corpus has a little bit of a benefit over Sabine that it's in Texas and it's close to the Permian and you probably saw that the Permian Just in 2022 went from 15. 13.5 Bcf to 10.5 Bcf. Almost 19. So significant growth in natural gas coming out of the Permian and We intend to take advantage of it and you can build pipe in Texas these days. At Sabine, it's going to be a little more complicated, because we've never wanted to make ourselves Overly dependent on one basin.

Speaker 2

So we're going to look for opportunities to tap into multiple basins to take care of this to being Growth. But as you're seeing from FERC, things are moving, projects are getting Approved and we're hopeful that we'll be able to move swiftly when the time is right.

Speaker 14

Great. Thanks. And maybe just a last question is, with respect to long term contract against PAs, are you still getting a lot of interest on IPM Sort of frameworks rather than kind of the international off taker as an option. Just I guess apart from a couple in recent past, we haven't seen a lot of that type recently, but I'm curious if there's still appetite for that.

Speaker 3

Yes. I guess, in short, our Forward book of business as we look at it very much rhymes with what we have done in recent history. So expect a healthy mix of IPM and delivered NFOB contracts. We like the diversity of that. We like a lot of aspects of IPM deals, the Gas supply, the optimization opportunities, so expect to see us do more of that.

Speaker 3

But as we've always said, it is a Relatively finite amount of counterparties that we can transact those with.

Speaker 4

Thanks very much.

Speaker 2

Thank you all. And thanks to all of you for your support and your kind words and Be safe out there. Thank you.

Operator

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.

Remove Ads
Powered by Quartr
Earnings Conference Call
Cheniere Energy Q1 2023
00:00 / 00:00
Remove Ads