Cheniere Energy Inc
NYSE:LNG
US |
Fubotv Inc
NYSE:FUBO
|
Media
|
|
US |
Bank of America Corp
NYSE:BAC
|
Banking
|
|
US |
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
|
US |
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
|
CN |
NIO Inc
NYSE:NIO
|
Automobiles
|
|
US |
Fluor Corp
NYSE:FLR
|
Construction
|
|
US |
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
|
US |
TopBuild Corp
NYSE:BLD
|
Consumer products
|
|
US |
Abbott Laboratories
NYSE:ABT
|
Health Care
|
|
US |
Chevron Corp
NYSE:CVX
|
Energy
|
|
US |
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
|
US |
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
|
US |
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
|
US |
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
|
US |
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
|
US |
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
152.0989
191.79
|
Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
Fubotv Inc
NYSE:FUBO
|
US | |
Bank of America Corp
NYSE:BAC
|
US | |
Palantir Technologies Inc
NYSE:PLTR
|
US | |
Uber Technologies Inc
NYSE:UBER
|
US | |
NIO Inc
NYSE:NIO
|
CN | |
Fluor Corp
NYSE:FLR
|
US | |
Jacobs Engineering Group Inc
NYSE:J
|
US | |
TopBuild Corp
NYSE:BLD
|
US | |
Abbott Laboratories
NYSE:ABT
|
US | |
Chevron Corp
NYSE:CVX
|
US | |
Occidental Petroleum Corp
NYSE:OXY
|
US | |
Matrix Service Co
NASDAQ:MTRX
|
US | |
Automatic Data Processing Inc
NASDAQ:ADP
|
US | |
Qualcomm Inc
NASDAQ:QCOM
|
US | |
PayPal Holdings Inc
NASDAQ:PYPL
|
US | |
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
Good morning and welcome to the Cheniere Energy 1Q 2019 Earnings Call and Webcast. Today’s conference is being recorded. At this time, I would like to turn the call over to Randy Bhatia, VP of Investor Relations. Please go ahead.
Thanks, operator. Good morning, everyone and welcome to Cheniere Energy’s first quarter 2019 earnings conference call. A slide presentation and access to the webcast for today’s call are available at cheniere.com. Joining me on today’s call are Jack Fusco, Cheniere’s President and CEO; Anatol Feygin, Executive Vice President and Chief Commercial Officer; and Michael Wortley, Executive Vice President and CFO.
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. Slide 2 of our presentation contains a discussion of those forward-looking statements and associated risks. In addition, we may include references to non-GAAP financial measures, such as consolidated adjusted EBITDA and distributable cash flow. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in the appendix of the slide presentation.
As part of our discussion of Cheniere Energy, Inc.’s results, today’s call may also include selected 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.
The call agenda is shown on Slide 3. Jack will begin with operating and financial highlights, Anatol will provide an update on the LNG markets and then Michael will review our financial results. After prepared remarks, we will open the call for Q&A.
I will now turn the call over to Jack Fusco, Cheniere’s President and CEO.
Thank you, Randy and good morning everyone. I am happy to be here today to discuss our results for the first quarter, which was another excellent quarter and one marked by a number of successes from continued unparalleled execution of our LNG platform to a flawlessly executed maintenance turnaround at Sabine Pass and financial results in line with our previous forecast. This enables me to reconfirm our full year 2019 financial guidance.
Slide 5 presents a summary of key results from the first quarter. We generated net income of $141 million, consolidated adjusted EBITDA of $650 million and distributable cash flow of over $200 million on revenue of almost $2.3 billion in the first quarter. Looking forward to the balance of 2019, today we are reconfirming our full year consolidated EBITDA guidance of $2.9 billion to $3.2 billion and distributable cash flow guidance of $600 million to $800 million. Michael will cover our financial results and outlook in more detail later in the call.
In the first quarter, we produced and exported 87 cargoes, a record number and the quarter was highlighted by achieving substantial completion of Corpus Christi Train 1 in late February and Sabine Pass Train 5 in early March. The achievement of substantial completion of two liquefaction trains, only days apart at separate project sites and both ahead of schedule and on budget. It’s one of the best examples yet of our relentless focus on execution. We set the standard for execution in U.S. LNG at Sabine Pass and we are proud that our reputation and track record are being reinforced as competitive advantages as we begin to bring LNG capacity online at Corpus Christi. We have now demonstrated that execution isn’t site specific, rather it’s Cheniere-wide. I would like to recognize and congratulate the Cheniere and Bechtel teams at both project sites for their performance and contributions is an achievement of these milestones. Commissioning activities began earlier this year for Train 2 at Corpus Christi and we are expecting to introduce feed gas in the coming weeks. We continue to expect Train 2 to be completed in the second half of this year, ahead of schedule and within budget. Construction continues to progress very well at Train 3 at Corpus Christi with the overall project about 52% compared as of the end of March. During the first quarter, we achieved full notice of receipt on the Midship Pipeline project after obtaining all the required regulatory approvals in closing the debt financing. We entered into the credit facility with total commitments of up to approximately $680 million and expect that project to be completed and placed into service by the end of 2019.
Turning now to Slide 6 where I will update you on a few priorities as we look forward to the balance of 2019. Entering 2019 what are my key priorities for the year was to place Trains 1 and 2 at Corpus Christi and Train 5 at Sabine Pass all into service safely, ahead of schedule and on budget. We are already two-thirds of the way towards achieving that goal. And as I just mentioned we are on track to achieve it when we place Train 2 into service in a few months. Next, we expect to reach a positive FID on Train 6 at Sabine Pass in the first half of 2019. Early engineering procurement and site works for Train 6 continued to progress under limited notices to proceed to Bechtel, given that project a head start in anticipation of FID while fixing the cost and construction schedule. Power driving is complete with over 6,000 piles completed and Bechtel is continuing foundation work and beginning the structural skill and erection. We are concluding the financing process for Train 6 deploying infrastructure and expect to progress that project to FID in the near-term.
Next, I would like to address the higher than normal maintenance at Sabine Pass for managing this year. As you may know, we have recently completed a maintenance turnaround on Trains 1 and 2 that I would like to highlight. First, my hats off to Aaron Stephenson and his staff since the turnaround was executed well. Over the course of approximately three weeks over 185,000 man hours were worked and over 1,000 work orders were completed across multiple equipment packages and processes throughout Trains 1 and 2. Not only with this work completed on schedule, but more importantly all of this was completed with zero safety incidents. I would like to recognize the entire production team, maintenance and operation teams and all of those who helped to manage a successful undertaking. If we are demonstrating that safety, it’s one of Cheniere’s core values.
Shifting to the next phase of our growth after Sabine Pass Train 6, we are focused on Corpus Christi Stage 3, a 9.5 million ton per year expansion project. In March, we received a positive environmental assessment on Stage 3 from FERC. So that project is progressing through the regulatory process better than we expected. We will maintain our expectation at Stage 3 while we have all the required regulatory approvals by the end of 2019. We are actively commercializing Stage 3 while is progressing well. Finally a brief update on the development of our capital allocation framework, this effort is one of the highest priorities for Michael and I and the rest of the executive team as well as our Board. We have spend a significant amount of time and effort developing the framework that prioritizes growth investment in our LNG platform and was responsible leverage at our project entities and on a consolidated basis over the long-term and provides for the return of excess capital to our shareholders in a meaningful with flexible manner. We expect to finalize and communicate this framework in the coming weeks. In early June, we plan to host meetings with the investment community to review these important strategic items. We will be sending out more information very soon and we would hope to see many of there.
And now, I will turn the call over to Anatol, who will provide an update on the LNG market.
Thanks Jack and good morning everyone. The LNG market is currently undergoing a phase of strong growth as nearly 11 million tons of new LNG supply was added year-over-year in the first quarter of 2019. This is the largest year-over-year quarterly increase since the first quarter of 2010 when Qatar’s megatrains were brought into service. The supply growth followed an equally strong year-over-year increase in the fourth quarter of 2018 when 5 trains began production, more than half of the total capacity that started up last year. 2 of those trains were of course are trains, Sabine Pass Train 5 and Corpus Christi Train 1, which leads to substantial completion in the first quarter of ahead of schedule and on budget.
The incremental supply volumes in Q1 coincided with a reduced appetite for spot LNG in Asia as a result of warmer than normal winter temperatures and higher storage levels across the region, which led to a flat year-over-year Asian LNG demand number in the first quarter of 2019. The combination of the temperature driven moderation in Asian demand growth and strong global supply growth resulted in record flows into European regas terminals during the quarter. Q1 imports into Europe reached 21 million tons more than double the level seen in the first quarter of 2018 resulting in higher storage levels. The increased storage levels have led to lower spot gas prices, but have underpinned an increase in gas fire power generation. Increasing carbon prices have also played a role in incentivizing higher gas fire power generation especially in countries such as Germany, where ample capacity exists to displace coal in the generation stat. As you can see from the price chart on the bottom right and not surprisingly recent LNG supply and demand dynamics have combined to shift global gas prices lower year-to-date. However, we have already begun to see Asian and European prices rebound as strong carbon prices have provided gas pricing support.
Now, please turn to Slide 9 to look at some of the regional trends in more detail. As I mentioned, Asian demand in the first quarter was flat through the first quarter of 2018 and decreased slightly from the fourth quarter of 2018 as mild weather and strong storage levels depressed import demand growth. Temperatures in North Asia were approximately 1 degree Celsius above normal in Q1 resulting in the reduction of heating degree days of over 10% relative to the 30-year average. Imports from the established markets of Japan and South Korea decreased by 9% and 20% respectively compared to the first quarter of last year primarily due to ample storage levels achieved in Q4 and greater nuclear power generation.
Looking forward, we see some positive signals for these markets in South Korea, 2.3 gigawatts of older coal-fired power plants are set to shutdown in the first half of 2019, while nuclear maintenance and a change in coal and LNG taxes that incentivize coal to gas switching during the back half of the year that spur new LNG demand. The country decreased taxes on LNG and raised them on coal starting April 1 as part of its efforts to curb air pollution. In Japan, 5 nuclear reactors totaling 5.6 gigawatts are expected to undergo scheduled maintenance between the second and third quarter. Another 4 reactors will have maintenance in the upcoming winter. Looking further out, Japan’s Nuclear Regulation Authority recently announced news around retrofit extension that could negatively affect 10 reactors, 6 of which are currently online. This increases the uncertainty around nuclear generation output during the early 2020s and could spur an increase in LNG demand.
Emerging LNG markets in Asia exhibited strong year-over-year demand growth in Q1 and help counterbalance the demand weakness in North Asia. China’s imports were up 28% driven by continued economic growth continuing the significant multiyear growth trends in that country. We have spent a significant amount of time in China already this year further solidifying our relationships with key commercial decision-makers of current and prospective counterparties. We remained bullish on Chinese LNG demand growth and believe Henry Hub-linked LNG remains very attractive to Chinese buyers, especially relative to Brent-linked LNG given current market prices and the underweighting of Henry Hub-linked LNG into China.
Elsewhere in emerging Asian markets, Pakistan and Thailand, both recorded double-digit growth percentages to support their growing economies and declining indigenous gas supply. These countries, along with other countries and regions throughout Asia, such as Bangladesh, India, Taiwan and others continue to add new LNG regasification infrastructure that allow for larger LNG import volumes in the future. Based on these regional dynamics, we have seen JKM fall from around 13% of Brent at the beginning of the year to lower end of the 5-year range as of April. Strong supply growth has softened the market and pushed down spot price. We expect lower benchmark gas prices to stimulate a positive LNG demand response in the due time.
To conclude, solid supply growth over the fourth quarter of 2018 and the first quarter of this year exerted some downward pricing pressure on the spot market as it coincided with mild winter temperatures and lower import needs from key Asian buyers. We expect supply to continue to trend upwards this year and anticipate Europe will absorb the significant portion of that supply growth. However, we expect the recent softening in spot LNG prices to generate a demand response and incentivize gas and LNG demand growth in Europe and Asia when storage levels normalize.
I will now turn the call over to Michael to review our financial results.
Thanks Anatol. Good morning everyone. Turning now to Slide 11, for the first we generated net income of $141 million, consolidated adjusted EBITDA of $650 million and distributable cash flow of over $200 million, exported 310 TBtu of LNG from our liquefaction project during the first quarter of which 25 TBtu were commissioning volumes. Total volumes exported were 25 TBtu higher than exports in the fourth quarter of 2018 due to additional commissioning and post completion production volumes from Sabine Pass Train 5 and Corpus Christi Train 1 partially offset by the planned maintenance turnaround at Trains 1 and 2 at Sabine Pass which began in March, a small impact from seasonal fog.
For the first quarter, we have recognized an income of 282 TBtu of LNG produced at our liquefaction project consisting of 284 TBtu loaded during the quarter plus 25 TBtu or 7 cargos loaded in the prior quarter, but delivered and recognized in the current quarter plus 27 TBtu or 7 cargos on a delivered basis that were in transit as of the end of the first quarter. We also recognized an income 18 TBtu or 5 cargos of LNG that were sourced from third-party. Approximately 80% of the 300 TBtu recognized in income during the quarter were 239 TBtu were sold under long-term FTA and remaining 61 TBtu were sold by our marketing function under short-term and medium-term contracts. Volume flows under long-term FTAs increased from the prior quarter primarily due to increased volumes under certain FTAs sold by our marketing affiliates. Short-term marketing volumes also increased due to increased production volumes primarily driven by Sabine Pass Train 5 and Corpus Christi Train 1. Eight commissioning cargos from Sabine Pass Train 5 and Corpus Christi Train 1 totaling 28 TBtu of LNG were recognized on our balance sheet as an offset of 202 million to LNG terminal construction in process during the first quarter.
Operating income for the first quarter was $606 million, an increase of approximately $90 million compared to the fourth quarter of 2018. The increase in operating income was driven primarily by increase in net gain from changes in the fair value of commodity derivatives, ore pricing of natural gas feedstock and third-party sourced LNG and an increase in LNG volumes sold, partially offset by increased volume in natural gas feedstock, lower LNG market pricing and increased total operating cost and expenses as a result of additional trains in operation and increased services and maintenance costs from certain maintenance and related activities at Sabine Pass. Net income attributable to common stockholders for the first quarter was $141 million or $0.54 per share on a diluted basis, an increase of more than $70 million compared to the fourth quarter of 2018. The increase in net income was primarily due to increased operating income and decreased derivative loss related to interest rate swamp, partially offset by increases in interest expense and attributable to non-controlling interest.
Turning now to Slide 12, Jack mentioned earlier our first quarter financial results were in line with our expectations and today we are reconfirming our full year consolidated adjusted EBITDA guidance of $2.9 billion to $3.2 billion, distributable cash flow guidance of $0.6 billion to $0.8 billion. As we look towards the reminder of the year as Anatol discussed we are seeing lower prices in the market and that is expected to impact the margin, but that impact is mitigated by an increase in our production forecast for the reminder of the year as a result of maintenance optimization and better than expected performance.
As Jack mentioned earlier, we have previously discussed [indiscernible] communicating the capital allocation framework within the first half of this year, an effort that has been underway since late 2018 and continues to remain the high priority for my self and the Cheniere team. We are also focused on finalizing the financing for Sabine Pass Train 6 and the continued development, commercialization of Corpus Christi Stage 3. We plan to finalize the capital allocation framework in the coming weeks and we will be hosting some investor meetings in early June to provide more information regarding capital allocation to Sabine Pass Train 6, Corpus Christi Stage 3 and how these items impact our run rate guidance. We will have more detail for you regarding those meetings in the very near future.
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?
Yes, thank you. [Operator Instructions] And we will take our first question from Jeremy Tonet with JPMorgan. Please go ahead.
Good morning. There has been a lot of news out there with regards to China trade with the U.S. and I was just wondering if this uncertainty, does this kind of impact the timing that you guys have had with your communication of the capital allocation policy over the SPL 6 FID and if China trade issues kind of lead to the LNG market being at a point where it doesn’t make sense to FID CCL3 in the near-term, what would you do with your extra cash at that point?
So Jeremy thanks and thanks for the question. So, I think I continue to look forward to resolution right of the current trade tensions between the two countries. I don’t think the trade tensions – or I think that trade tensions in the tariffs are unproductive and creates some added cost to our Chinese consumers, but as a company, we are relatively insulated from the current future tariffs and we don’t expect any material impacts, it has had no impact on us at all on FID of Train 6 or on capital allocation or any of that as you know. Out of the 18 foundation customers, we were blessed to have Petrochina as one of them, but they are 1.2 million tons. So it’s relatively small in the portfolio and we continue to deliver to that customer and they continue to pay us. So it hasn’t had an impact on us. I don’t expect it to have impact on us either today or going forward.
That’s helpful. Thanks for that. And just a quick one with regards to the CMI sensitivity that you guys have provided before, is that still accurate at 1.30 number or as the years progress that number is smaller and is 2020 at similar level of sensitivity or is it smaller, because you have greater contracted capacity at that point?
Hi, Jeremy, it’s Michael. So yes, with regard to that obviously margin has been a pretty significant headwind for us this year. So as your call in November we said we had about $5 of margin in our plan for 2019. On our last call, we said that it come down to probably $3. And today it’s come down a little bit more it’s probably more like $2 with Q2 and Q3 below that number and Q4 probably above that number, but averaging at about $2. S, that’s the headwind. As I mentioned in the remarks, we had a pretty significant tailwind on the production side, so we don’t control margin, we couldn’t really pre-sale these volumes, because they were a lot tied to trains coming online which has been uncertain, but we do control production. And so we said we had about 6 million tons in the CMI book this year. It looks like that number is probably more like 8.5 given where our production forecast has gone for the balance of the year as really coming from four areas. We think Corpus Christi, the first one Corpus Christi Train 2 is looking like it’s going to come in a little bit earlier relative to what we had in our plan that we laid out in November, so still a second half event, but a little bit earlier that’s driving some production. Second, there are couple de-bottlenecking things, we told you one was nameplate capacity we run Corpus a little bit and now feel like that there is some nameplate gains that are going to be above 100% that we put in the plan for the balance of this year. The third bucket driving production is maintenance optimization which has been one of our pieces of de-bottlenecking we have talked about made some pretty significant strides in that area in terms of how we operate the plan which has taken out a lot of downtime days for the balance of the year and for the rest of the life of the plant. So, that’s driving increased production. And then finally, we have seen as the fourth piece better ramp up at the two trains that came on early this year, so Train 5 at Sabine and the Train 1 at Corpus have both really hit their stride sooner than we thought. So this is where things are driving a big production tailwind for us, which has made up for much of the – a lot of the margin erosion not all of it that’s allowed us to stay within our guidance range. So really back to your question that you said $1 move is $130 million, yes, I would have expected that to erode over the year as we produced, but since we have added so much production for the balance of the year that number is still about the same, maybe even a little bit higher given the production we have added. So we are busily putting those volumes away in the market right now and expect that to erode from here now, but it’s still about for every dollar move from here but plus or minus $140 million against EBITDA. And then you asked about 2020, I don’t know that, I don’t have that sensitivity in front of me, I would expect volumes of course of the marketing business to be significantly lower given the FCD is on Trains 1 and 2 this – 1 and 5 this year and Train 2 next year, but we can give you that number later.
Well, it’s great. Thank you.
We will take our next question from Christine Cho with Barclays.
Good morning everyone. I wanted to start on the capital allocation policy, maybe I know you are going to give some more color on the specifics, but from a high level, can you talk about how your thought is on the priorities of reinvestment, stock buyback, debt pay down and dividends have changed with the kind of how shareholder preferences have changed, the weaker stock market, the number of projects that [indiscernible] in the U.S. and abroad versus what you may have thought a year ago?
Christine, I will start with that, this is Jack. And thank you and good morning. So the capital allocation process as you know our first and foremost is to fund our growth. We have some excellent growth opportunities and we need to fund that growth near-term and hopefully we can continue to fund the growth for the long-term. But so growth is always our number one priority, the next one will be our balance sheet. I think it’s imperative that we strengthen our balance sheet throughout the capital structure. And then the last – our last priority would be capital return. We don’t intend to hold the money. We intend to give it back to our shareholders in the most tax efficient and effective way that we can. And we are going to talk a lot more about our capital allocation strategy going forward in early June. But I will turn it over to Michael to see if he has anything to add.
And I guess the other part of your question not only market conditions have really changed our thoughts around this over the past year. As Jack said growth is number one, we have Stage 3 in our model, it’s happening sometime next year [indiscernible] asked what happens if it doesn’t happen next year, what we can do with the money, I think that’s the decision for next year. But right now our plan is to continue invest in growth.
Okay, great. And then we thought period of time where the spot LNG price had actually been maybe covered the variable costs of picking up LNG from the U.S. and in the event that we have short periods of this kind of volatility over the near-term, can you just remind us how much in advance the customer have to let you know whether or not they are coming to pick up a cargo and what kind of penalties there are if they decide to cancel something that was scheduled?
So there will be – just for clarity there hasn’t been any spot cargos that haven’t cleared the U.S. and made a margin. So I just want to make – alleviate that fear that was a fear that you all have had. The spot prices have been extremely a dollar fell, but to answer the question about the customers and the SPAs, it’s a 60 day notice period, but we don’t anticipate ever having to use that option, especially with where our free cash and our long-term forecast for natural gas here in America seems to be fairly range bound in the mid-2 to high-2s.
Okay. So just to clarify, you haven’t seen any customers say not pickup cargos or do any cancellation in the first quarter…?
Not at all, we wouldn’t expect that at all which – where the current gas prices are here in America.
Okay. And then the last one for me, can you give us an idea of how much of the marketing portfolio it hedged over the next couple of years, maybe how we should think about the cadence or a multiyear average. And then Michael I think you confirmed – talked about this with Jeremy’s question, but just to confirm we shouldn’t think that any of the early cargoes are hedged, right?
What do you mean by early cargoes, you should talk about it?
So the cargos that you guys are producing after it’s been commissioned but before the customer contracts start?
Yes right. As I said those are hard to pre-sell right, because you never exactly share when the plant is going to come online. We don’t want to get caught really short and a rising market. So yes, those were – are more driving our spot book right now. We are putting those right now. We actually had made a lot of progress on that and then we added a lot of production given the four things I talked about earlier. So we are back in the long position. As I have said in the past, I think we generally want to shy away from getting into the status of our book. I will always give you guys sensitivities at eye level, but certainly not in the current year. And on the multi-year, it’s always CMI’s goal to ultimately term up and then regrow that book and term up. So I guess that’s all I would say on that.
Is there maybe like a target that you would like to be in?
In terms of what contracted?
Like percentage contracted?
We said in the past 5% to 20% in the marketing book just given where we are on construction and DFCDs and all of that. So I think we will continue to be in that range over time.
Great. Thank you.
Yes, Christine, I think we have been extremely successful at using those early marketing volumes to sign up long-term contracts right, I mean, that lead to 7.5 million tons of long-term contractual deals last year and you should expect us to continue to do that and lock in those margins. And I would expect that it’s going to be rocky as far as the CMI volumes just because of the DFCDs that are starting up and the fact that our construction team has done since a great job and has brought these trains in so early that we have had all these cargos to dispose of in the market, but that’s not the long-term strategy for the company.
Right. Thank you.
We will take our next question from Michael Weber with Wells Fargo.
Hi, good morning guys. How are you?
Hi Michael.
Jack I wanted to start first on China trade tariffs and maybe kind of combining your answer to the first question was something Michael referenced a bit earlier, but it seems like the existing portfolio Sabine 6 capital returns obviously insulated from what’s happening in China and if anything it seems like you probably have some businesses probably on the goal line ready to go I guess once resumed, but if we think about what maybe what it could impact? And just to be specific if I think about Corpus Stage 3 and then Michael your answer about it being in your model for some time next year, is it realistic to think – I guess do you have enough non-Chinese based business that you could realistically green light Stage 3 next year if I guess the current scenario just kind of sits through for the next 24 months to kind of stay with the status quo?
Yes. So Michael I will start first. China’s demand for net gas and for LNG continues to grow significantly year-over-year. They haven’t even begun to pierce the power generation side of natural gas. So, as you and I talked about when we were in Shanghai and I saw you on the hallway there that their demand is going to continue to grow. It’s going to get filled by somebody right. Preferably it’s coming from the U.S. if not it’s going to come somewhere else, but there is a whole other opportunity if that LNG flows away from the rest of Asia and Europe for us to continue to commercialize. I think we have the best commercial team in the industry and it’s not going to slow us down on the commercializing our Stage 3 and I don’t know Anatol if you have anything else to add?
Sure, Jack. Well, thanks. Clearly we have said before that China is a focus for us. It is as Jack said the rapidly growing market and a market that is learning everyday that it’s legacy Brent linked contracts are less attractive than it’s potential Henry Hub-linked contracts. So we are not shying away from the opportunity that is China, we continue to pursue that as you know, but as Jack said we have robust level of engagement and we are comfortable that Stage 3 is a 2020 event with or without China.
Got it. Now, that’s helpful and just to remind us around Stage 3 just given that we are going to be a bit more flexible I guess in some of the previous trains in terms of I guess parcel size if you will. What’s the first realistic commercialization hurdle you have for green lighting I guess part of Stage 3 or would you think to do all at once?
No, we can do it in stages and in fact we are currently working with a couple of different EPC contractors to see what the options are ultimately, but the permit is for the entire project or at least the regulatory filings are for the entire project which is around 9.5 million tons.
Got it. Then how should we think about I guess the first realistic commercialization hurdle even if it’s just kind of a ballpark figure, is it 3, is it 5.5, 6, I mean, are they larger?
Yes, Michael, it’s Michael. Still working through that, it’s probably not one-seventh it’s probably more like half.
Okay, that’s fair. And just one more for me if you will just on the broader industry, as we said in the U.S., it seems like there is a bit of a bifurcated market at least for the last couple of years where you had some buyers maybe kind of entertaining cheaper, extremely low cost gas, almost as kind of optionality and then you have got buyers kind of willing to pay more for investment grade quality if you will. I am just curious when you look at your mix of buyers over the last 3 to 6 months, have you noticed any shifts with maybe not a flight to quality, but maybe a bit of a shift from buyers that were willing to entertain that kind of extremely cheap optionality starting to dig in a bit deeper with you all or more established options?
Well okay, so we had a shift in our strategy that I don’t think many people picked up and that was that we started delivering directly to end use consumers. So we noticed that the utilities, internationally utilities weren’t being served directly and that’s what led to CMPC or PetroChina deals, what led to CPC in Taiwan, it’s what led PGNiG in Poland, it’s our ability to be a full service provider to those utilities needs and that’s opened up a whole another opportunity for us as far as creditworthy customer base that are looking for long-term, reliable affordable supply. And I think so every U.S. LNG either there is not many of us in operations, but everyone that’s being proposed has a different business model and our business model is to be flexible with what the customers needs are and get close to the customer and deliver whatever aspect they want in it, in most cases here, recently it’s been the full service provider and I don’t know Anatol if you have anything to add to that if you are seeing the shift.
Well, just to build a little bit on what Jack said quarter back in 1980s, there are only three ways to compete in the commodity market and that’s low cost differentiation and niche was too small, low cost is the business that at this point we are not pursuing. And as Jack said, every one of our deals last year was differentiated. You didn’t see us do the same plain vanilla FOB deals, they had more than half had bridging volumes, which we spoke to earlier out of the CMI portfolio, more than half were on a deliberate basis as Jack said. So they all had components that the team came up with that’s optimally met the customers’ needs and those are offerings that today nobody else can come to the table. So, that has proved a very successful formula last year and will continue to innovate and be commercially creative as we continue to grow.
Got it. That’s helpful. I will save my any questions after the call. Appreciate it guys.
Thanks Michael.
[Operator Instructions] We will now take our next question from Shneur Gershuni with UBS. Please go ahead.
Hi good morning everyone. Lot of my questions have been asked and answered, but just a few questions here. With respect to CMI, a lot of focus seems to be on LNG pricing until you gave a lot of great color about the market and so forth. And it sort of seems that a lot of investor focus is there, but should we not be thinking about it from a netback perspective? And I was wondering, if you can sort of talk about how the netbacks have changed relative to headline LNG pricing globally?
Sure, and it’s Michael. My comments earlier were all netback based, so, yes, the $5 that we had in our plan for this year in November was a netback that was reflective of much higher LNG prices, high single-digits, probably $10 in the winters. And that netbacks move down for us the balance of the year at probably more like $2, which as I said, is lower than that in the summer months and likely to be higher than that in the winter months. So, that’s the terminology we use also.
Can you sort of discuss how it’s changed relative to the headline price like, is it been shrinking faster than the headline price or expanding faster during different seasonal changes? Just wondering, if – is it a one-for-one change percentage wise or have you seen different changes?
No, thanks, Shneur, it’s Anatol, no, I mean, it’s – the big component is shipping. As you probably know, shipping went to 200,000 a day over the winter that was driven in part by the steep contango we saw in the fall and over 30 vessels that were used short-term as floating storage that, that delivered their cargo and then came back to the market and in the shoulder, we saw shipping rates drop down into the 30,000 range and they’ve moved up somewhat from that point. As Michael said, winters on the forward curve are firmer as is shipping in the winter. So, those are the two big components and add them up, add a little bit of noise and that gives you the netback.
Great, fair enough.
In Henry Hub, it’s been relatively flat.
Right, okay, that makes sense. In – just in terms of your O&M performance, obviously, that was related to the debottlenecking and some of the turnarounds and so forth. Do you have a sense of the schedule for turnarounds? Is it something that should happen every 18 months, 36 months? Just kind of wondering, how we should be thinking about them on a go-forward basis?
Yes, go ahead.
Yes, this is Michael, I mean, they are planned many months, if not years in advance. So, there was some commentary around us taking down 1 and 2 opportunistically, that wasn’t the case, that turnaround have been planned when it happened for a long period of time. So, that they are in varying degrees over time. I think the majors are more like 6 years. So, we’re not – we’re obviously not there yet. The ones we just had are a little bit more significant, but not a major turnaround relative to the 6-year schedule, but, yes, they are scheduled long in advance and I don’t think we’ll get specific on when the plants are going to be going down, we’ll just build that into our guidance for you.
Great. And just one final question. There’s likely going to be a large energy company exiting the S&P 500 this year due to an acquisition. In your opinion, do you feel that LNG hits all the metric that S&P requires for in that conclusion?
Go ahead, Randy.
Hey Shneur, this is Randy. Yes, I mean, as we interpret the requirements for inclusion, we do meet them all. So, it’s – in our view, it’s a matter of when, not if, but we don’t control the timing. So, it will be up to the committee that makes those determinations.
Great, thank you very much, guys. Really appreciate the color today.
Thanks.
We’ll take our next question from Craig Shere with Tuohy Brothers.
Good morning, and congratulations on the great quarter and the great color that you’re providing so far. Michael, how does the better operating results this year feed into the planned upsizing of Legacy Trains and the $300 ton cost to make that happen? And can you specifically comment on what additional benefits we might see going into 2020 and maybe the timing of that spend?
Sure. So, we have – we’re out with a 4.4 [ph] to 4.9 [ph] range for the Trains. I think on the last call, Jack said, we were aiming for the high-end of that range. I think the results today and what we’ve talked about earlier show progress to the top end of that range. We won’t be there this year obviously. So, we’re making good progress and would look to update this whole thing for you when we come out in June. As I said earlier, the two best parts of debottlenecking are getting more out of the plant on a nameplate basis that’s happening as I said cost no money. And then just running the plant more, which is what’s really driving the upgraded numbers for this year.
And then finally, as I said, the third one involves capital. We haven’t – have not seen results from that yet, but we’re getting some pretty good planning now for that to start to have an impact over the next year or 2. And so, yes, I think the number you quoted is still a good number for the investment side of it, which will help us to climb higher and higher in that 4.4 [ph] to 4.9 [ph]. So, that’s what I’d say now. I think in a couple of few weeks when we’re out, we’ll put some more meat on that bone for you.
Wonderful color. And Michael, one more for you. If I’m doing the numbers right, all the foundation customers were obviously the STL, so we can kind of back in the $19 million of Corpus Christi equity cargo sales hitting the income statement in the quarter, but LNG C-Corp operating cash flow excluding CQP and working capital changes was a positive $100 million. I remind you that’s the first positive number versus negative numbers 2Q to 4Q last year.
If I do the math then that’s 5.25 [ph] in margin just dividing the $100 million by the $19 million. It just seems implausible that equity cargo margins of Corpus Christi are explaining that robust cash flow at the C-Corp? And I guess, I’m thinking there is 2 other possible explanations, which includes those third-party sourced volumes you mentioned or possibly advantaged feedstock pricing in Southeast Texas? Can you provide any more color?
You lost me on some of those numbers, I think I can confirm it. It’s none of those 3 things, right. Clearly, we didn’t make 5.25 at Corpus, but we did have some hedges on and all that, but we did not make those kind of margins. Third-party, we wouldn’t have done it either, and I think – and that’s all I can talk about our sourcing margins, but we didn’t have any blow-outs there on the positive. So, I think you’ll have to get on the phone with Randy afterwards and figure that out for you.
Fair enough. No other thoughts about the sourcing?
Yes. We keep going back and forth on this. There’s nothing meaningfully different from our run rate. We buy from over 100 producers. We don’t have spec pipeline capacity. And we are pretty good about having a lot of resources. We have a great team that balances the plants every day. But as you know, that is done at the project level. And at CCL, it was very early days, a lot of volatility, the market is volatile, production is volatile. So that was not a meaningful contribution on the CCL side, but we do think that the tremendous effort we have on that side of the plant is a financial and a very important strategic advantage for us going forward. But, no, we’re not getting our hands on $9 in the whole molecules.
Understood. Thanks, Anatol, and congrats for the team.
Thanks, Craig.
We’ll take our next question from Jean Ann Salisbury with Bernstein. Please go ahead.
Hi, good morning. It seems like recently FID-ed LNG projects, I’m kind of thinking Golden Pass and LNG Canada, lessors been definitively sold to real downstream buyers and more to portfolios or not yet sold? I think that’s raising some concerns among investors I’ve talked to that this could drive LNG over-builds in the next wave? Is that something that concerns you or do you think it’s too early to say that that’s a trend?
Well, I think it’s too early to say that’s a trend. I mean, those are very specific sites and projects that have been working – either working on are in the hopper for an extremely long period of time. LNG Canada actually has off-takers, equity off-takers that are really utilities associated with that, there’s a sliver there that shows hanging on to, which is a portfolio sliver, but not much of it. And then Golden Pass with the Qataris and Exxon, they can basically do whatever they want to do, but that’s a relatively small project right at 14 million or 15 million tons in the grand scheme of things in the whole LNG market worldwide. But Anatol, I don’t know if you have anything to add?
Well, Jack, I mean, we are concerned. It’s a very competitive market, as Wood Mackenzie says this LNG market isn’t getting any easier. So, that’s why we continue to innovate, continue to come up with solutions that allow us to maintain this very highly contracted posture. We will not invest or grow our platform without it, but we think we will have it and we’ll continue to grow on that basis. So, we’re not competing in the merchant LNG space anytime soon.
That makes sense. And then as a follow-up, it seems like Midship Pipeline has been successful so far. Would Cheniere have any interest in building or operating a pipe connecting the Permian to Gulf Coast LNG demand or is there a turn on that just not competitive versus Cheniere’s other options?
Yes, it’s Michael. I mean, we always look at that kind of stuff. We have an active pipeline group, but when there are 20 other people trying to do it, we’ll just focus on our core businesses, which is liquefaction. I mean, Midship was a unique opportunity and it’s a great project and it’s well underway, but we didn’t see that same kind of opportunity coming out of Permian. We make a build or buy decision on all these things and right now it’s much easier for us to just contract with the kinders of the world, who do a fine job on that.
Makes sense. That’s all for me. Thank you.
Thanks.
We’ll take our next question from Danilo Juvane with BMO Capital Markets.
Hi, good morning. Thank you. One quick one from me with respect to capital allocation. I appreciate that there are three buckets that you’re considering, but did I get correctly that capital efficiencies what you’re going to prioritize for the capital return buckets?
I think we said we’re going to prioritize growth. Yes.
No, I get that, but within the capital return component, with capital efficiency paramount with respect to the options confined to just shareholder returns?
Not sure.
I’m sorry, was tax efficiency –
Tax efficiency. Yes, so in regard – tax efficiency in regards to giving back to our shareholders on the shareholder return, absolutely.
That’s my only question. Thank you.
Yes.
We’ll take our next question from Michael Lapides with Goldman Sachs.
Hey guys, thanks for taking my question. Just a follow-up on capital allocation. I went back and looked at your proxy and the reality is, you guys probably don’t really have true peers. Like, if you look at the peer groups and your proxy, it’s got a mix of purely regulated utilities to pipeline companies that have gone through multiple years of kind of quasi-force deleveraging. How should investors as we walk into the June meeting think about how you and how the Board are looking around and saying, what are your real true peers from a leverage standpoint, from a potential cash flow generating standpoint and from just a broader business structure standpoint?
Yes. So, Michael, that’s a good question. So, when you say the frustration that I have is – there’s a couple of different peer groups, so ISS uses one peer group, that is heavily loaded with regulated utilities, Glass Lewis uses a different peer group and then we have our own peer group. And in our peer group and our proxy, we try to get a lot of the regulated utilities out of there, because those are the folks who we’re competing with day-in and day-out and it’s not the way we compare ourselves to it. So, there aren’t many true peers that have our long-term contracts with credit-worthy entity. So, when you look at Midstream, that’s not a quite a good fit with us in most cases. And we ended lean towards larger energy companies that we compete with day-in and day-out as our peer. But I don’t know Michael you have anything to add.
No, I mean, it is difficult. I think there is not another – we’re not in anybody else’s peer group by the way. So, it is something we struggle with. The agencies are going to compare us to very high quality midstream and infrastructure companies. So –
Got it. Thank you, guys. Much appreciated.
Okay. Thanks, Michael.
We’ll take our next question from Fotis Giannakoulis with Morgan Stanley.
Yes, hello, and thank you for taking my question. I would like to ask you about the competitive landscape particularly here in the U.S. We’ve been hearing that some of the Asian buyers they might be over-contracted Henry Hub volume and we see at the same time some of the new comers in the space trying to position themselves offering index-linked volume or Brent-linked volume. Can you give us comment about your potential interest in taking this type of contracts and if you can hedge this contracts and what kind of difficulty this part is avail for this contracts which are not linked to Henry Hub they might have in getting cementing further projects?
So, I will just tell you Fotis, I will start and then I will hand it over to Anatol. So I was in Asia the last two weeks and traveling around Asia visiting with real customers, real utilities and I got to tell you it was pretty clear like Anatol said in his comments that they appreciate now what the Henry Hub-linked contract can deliver to them how gas prices in America and Henry Hub in particular are very flat and stable and could be hedged out for over 10 years in a very liquid market and they are filling the shock, the oil shock and the oil linked shock of LNG. So I got a warm reception that just the opposite of what you said that a lot of the Asian buyers now are looking for Henry Hub linked product not the other way around, but I will let Anatol handle the other indexes and what issues in the marketplace.
Yes, thanks for this. We have always said that we are sort of the Henry Ford, you can have our LNG very commercially creatively, but it’s always Henry Hub. We have also said that we are working on ways to change that. The challenges as you know is that nobody can hedge both sides of that in size for term. So you need to come up with a way to source based on the same index that you are then selling on. So, that’s the challenge. Of course we are all well aware of the transaction that has been announced, potential transactions that have been announced and will see if there is a path to find the other side of that.
A follow-up for me I would like to ask you about your volume that you have already pre-sold, I noticed that you reported 236 TBTU over long-term agreements, which is quite high even SPA, the 20-year SPA is that you have announced in detail. Can you give us some more color about your portfolio of contracts beyond the 20-year SPAs?
Well, as Michael said we do have a strategy to manage the risk that we are walking into for the year or two ahead. As you know 19 is an exceptional year where was new would be an exceptional year with 3 trains starting up. We have talked a lot about what the great job that team did at bringing them online early that the CMI portfolio and Michael gave me the numbers of that incremental volume in the portfolio. So whatever percentage we thought we had laid off going into the year clearly was much lower in reality because of the volumetric outperformance, but we do have some mid-term volumes and we do have some bridging volumes that are not part of the long-term deals and those are starting to feed into the book that it is outside of the long-term SPAs. So yes, there are other components in there, but they will be relatively lumpy and opportunistic again as we have mentioned before more than half of our long-term deals last year included these bridging volumes.
Thank you very much, Anatol.
Thanks, Fotis.
We will take our last question from Julien Dumoulin Smith with Bank of America.
Hey, good morning everyone.
Hi Julian.
Hey, I am just following up a couple of details. I know you already elaborated to a good extent on CMI marketing volumes for the year. With respect to 2Q just perhaps give a little bit of the puts and takes if you will. I know you affirmed ‘19, but what should we be expecting here, pretty good given the depressed JKM and global trends that we are talking about? And then maybe if I could fill the second question and just for the sake of time very quickly, Jack, you alluded to invest in great counterparties, what kind of metrics are they looking from you now in turn as you shift your contracting focus here if you can elaborate little bit?
First, Julien, as you know we give you an annual number and then we give you our run-rate numbers with our contracted portfolio as strong as it is. We are not going to give you quarterly numbers. So you all can do the math on a quarterly basis for guidance. And then lastly we are – as you know we are investment grade at Sabine Pass. We feel very comfortable that at Corpus with Train 2 that hopefully will get to investment grade relatively quickly and that’s where a lot of our trading happens either our long-term contracting with the SPAs or our gas supplies done at that level. I do think though it’s imperative that we look forward as part of our capital allocation strategy and we look to strengthen our balance sheet throughout the rest of our capital structure and that’s what Michael intends to talk in detail about in June.
Well, that’s a great place to end it. Thank you.
Thanks, Julien.
At this time, I would like to turn the conference back over to our management for any additional or closing remarks.
Look everybody, I am very appreciative of all the support that you have given Cheniere and thanks for your interest and we look forward to talking to you again in early June.
This concludes today’s call. Thank you for your participation. You may now disconnect.