Cheniere Energy Inc

NYSE:LNG

Earnings Call Transcript 2020-Q1

[Operator]

Good day and welcome to the Cheniere Energy Incorporated 1Q 2020 Earnings Call and Webcast. At this time, I’d like to turn the conference over to Mr. Randy Bhatia, VP of Investor Relations. Please go ahead, sir.

[Randy Bhatia, Vice President-Investor Relations]

Thanks operator, good morning everyone, and welcome to Cheniere's first quarter 2020 earnings conference call. The slide presentation and access to the webcast for today's call are available at cheniere.com. Joining me today 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 certain non-GAAP financial measures such as consolidated adjusted EBITDA and distributable cash flow. A reconciliation of these measures to the most comparable GAAP financial measure can be found in the appendix of the slide presentation.

As part of our discussion of Cheniere's results, today's call may also include selected financial information and results for Cheniere Energy Partners LP or CQP. We do not intend to cover CQP's results separately from those of Cheniere Energy Inc. The call agenda is shown on Slide 3. Jack will begin with operating and financial highlights, Anatol will then provide an update on the LNG market and Michael will review our financial results and guidance. 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.

[Jack Fusco, President and Chief Executive Officer]

Thank you, Randy. Good morning, everyone. I'm pleased to be here today in downtown Huston to review our results from the first quarter of 2020. While, we usually host these earnings calls with a room full of executives and an office building full of employees, today, it's just the four of us in a large conference room as we're complying with the CDC recommended guidelines and our headquarter professionals are telecommuting.

The first quarter of 2020 was a historic period and the global outbreak of COVID-19 has impacted our personal and professional lives in many ways. Our daily routines from commuting to work, educating our children, interfacing with colleagues, to visiting with friends and family, and everything in between has been offended, and we've all been forced to embrace a new reality.

Watching this pandemic spread with lethal force across the globe has been an unbelievable experience, likewise, the response for stop the spread and focus on ultimately finding a solution to eradicate this virus has been unprecedented. I want to personally thank all of the medical professionals, who care for us in the first responders to test us, feed us, and provide for our safety for their tireless efforts, and we pray for their good health.

Turning now to Slide 5. As Cheniere, we have built a strong resilient customer focused business, which is capable of weathering volatility in both the energy and financial markets. While skeptics may question this at time, we find ourselves in this historic volatility and uncertainty in both of these markets and the resilience of our business model is on full display. For the first quarter of 2020, we generated a record amount of consolidated adjusted EBITDA of $1.04 billion and distributable cash flow of approximately 250 million on revenues of $2.7 billion, and we generate a net income attributable to common stockholders of $375 million.

Despite both supply and demand driven near-term weakness in the LNG market, I am pleased today to reconfirm our 2020 full year guidance ranges of $3.8 to $4.1 billion in consolidated adjusted EBITDA and $1.0 billion to $1.3 billion of distributable cash flow. The highly contracted nature of our business, the proactive risk management of our market exposure and our maniacal focus on operational excellence are key enablers of these results in a weak market environment.

Our first quarter financial results and the reconfirmation of our full year 2020 guidance are testament to the resilience of our operational, contractual and financial foundations. We repurchased a $155 million of stock under a repurchase program during the quarter, and as we disclosed in our previous earnings call, we paid down $300 million of the CCH HoldCo convertible notes with cash. Michael will address our financial results in guidance and more detail in a few minutes.

During the first quarter, we produced an export at 128 cargoes of LNG, including 100 cargo from Corpus Christi and the thousands of cumulative cargo. Since the start up of operations, we have produced and exported more than 75 million tons of LNG from our projects, which has reached 35 countries and regions worldwide. Looking ahead, the long-term SPAs tied to train to our Corpus Christi are set to commence tomorrow.

We have been in the process of on-boarding those customers and we welcome them to the Cheniere complex. Instruction on Corpus Christi Train 3 and being past Train 6 continue to progress on accelerated schedules. Corpus Christi Train 3 is approximately 84% project completion. It's being past Train 6 is around 54% project completion. And both Trains are forecast to be significantly ahead of their guaranteed completion dates.

Now turn to Slide 6, where I will spend a few moments describing Cheniere response to COVID-19 as it has been significant. We recognize the rest of COVID-19 and began implementing response measures early prior to many government imposed requirements. We have activated various emergency response teams including an executive management team and business support team, and a site management team.

All of whom are focused on employee safety and welfare business continuity and maintaining operations at our liquefaction sites. These teams monitor status, develop and implement policies and protocols specific each office, location and site. In addition, they enforced protective measures. And most importantly regularly communicate with all the relevant personnel.

In early March, we began consulting with a medical advisor and implemented social distancing to revise shift schedules, isolating work groups, work from home policies and restricted non-essential business travel, just to mention a few proactive items. In addition, we instituted minimum staffing levels at our sites, isolated our critical operating personnel, and began utilizing temporary onsite housing for our workforce at our sites. I'm extremely grateful and proud of our employees and their performance throughout this pandemic.

On the engineering and construction side, we and our EPC partner, Bechtel, have implemented significant safety and emergency response protocols at both Sabine Pass in Corpus Christi to ensure workplace safety and business continuity. We've implemented many changes at the sites and pursuit of these priorities. That said we do not currently expect these measures or COVID-19 have a material impact on our project cost or schedule for either Corpus Christi Train 3 or Sabine Pass Train 6.

I applaud our engineering and construction team and the Bechtel group for their swift and effective implementation of these protocols to ensure a flawless execution. The impact of COVID-19 to our country communities in those countries of our foundation customers has been unprecedented. As a company, community involvement and paying it forward is in our DNA. To-day, Cheniere has pledged over a million dollars to global COVID-19 release efforts.

Our commitments and contributions are focused on the communities where we live and work Texas, Louisiana, Oklahoma, Washington, D.C., London, Singapore and China. We're proud to do our part during this global outbreak to help reduce the food insecurity for those most in need and provide provisions and equipment for first responders and frontline healthcare workers. I'm extremely proud of our success of the personal protective equipment drive and partnership with Houston, the Astros Foundation and Project Care.

Now turn to Slide 7, before the call over to Anatol, I want to quickly discuss certain aspects of our long-term contracts. In the wake of the dislocations we've seen in both the financial and energy markets over these last few weeks, we've received countless investor inquiries regarding our long-term contracts. First, regarding our contract sanctity, I remind you that our long-term contracts do not include provisions for renegotiations. We intend to meet all of our contractual obligations, and in return, we expect our customers to do the same.

Second, regarding cargo lifting elections, as I mentioned on our call in February, we won't make it a practice describe the details of ordinary interactions with our customers to the market, including their decisions regarding lifting of cargoes. But as you all know, one of the primary flexibilities granted to our long-term customers within their contracts is their right to cancel or suspend cargoes with appropriate notice. In instances where that occur, the fixed liquefaction fee is still paid to us and our marketing is selling as the option to market the volume into the global marketplace.

As global markets remain weak, we have had customers elect to cancel some additional cargoes. We won't quantify the amount, but we reiterate that our customers value the flexibility inherent in the contract structure and our visibility to achieving our financial guidance for the year is unchanged.

Similarly regarding speculation and confusion around force majeure or FM, which we addressed in our prior call as well, FM clauses in our FOB contracts specifically exclude such events as the unavailability of or any event affecting downstream LNG facilities, changes in the customer's market factors or other commercial, financial or economic conditions. As such, depressed gas prices globally or economic fallout or decrease gas demand from COVID-19 do not provide a valid legal basis on which a counterpart can claim FM.

And now, I'll turn the call over to Anatol, who will provide an update on the LNG market.

[Anatol Feygin]

Thanks, Jack, and good morning everyone. Please turn to Slide 9. We'll start with an overview of the global LNG markets during the first quarter, which was quite eventful before looking in more detail at ongoing trends in Europe and Asia. The LNG market continues to grow during the first quarter with output at a record level of almost a 100 million tons, about 10 million tons of new LNG supply were added in Q1, was about 70% coming from the U.S. This came on the heels of the approximately 40 million tons of new LNG supply in 2019.

While some new trains started up in the first quarter, Cameron Train 2 and two units at Elba, much of the capacity added last year is also now fully ramped up and contributing to higher supply. The continued supply surge entered an already amply supplied global market, which is now also trying to cope with the pandemic. The coronavirus affected several LNG importing countries sequentially during the first quarter. It temporarily reduced demand for LNG in China and will ultimately impact demand in other countries in similar ways.

Amid reports of lockdowns and delays in cargo deliveries in China, the year-on-year reduction in imports was relatively benign at less than 1 million tons in Q1. However, the total impact on demand in Europe and South Asian countries is still uncertain. We observed a quick recovery in China in March and return to demand growth in the JKT area during the quarter led by South Korea and Taiwan.

We also observed a marked increase in demand in South Asian markets as a result of attractive price levels with India leading the charge during the quarter. In total, Asia's LNG imports increased 7% or over 4 million tons year-on-year. Meanwhile, Europe continue to import record quantities of LNG 25% higher year-on-year as supply growth provided ample residual LNG to flow to Europe. Europe absorbed most of the quarterly incremental LNG deliveries from the U.S., while flows to Asia remain flat quarter-on-quarter.

U.S. deliveries to Europe increased more than 40% quarter-on-quarter to over 8 million tons during Q1. These LNG supply and demand dynamics, the coronavirus and a precipitous drop in oil prices since early March, have continued to exert pressure on global gas prices. TTF average $3.35 during the first quarter, over 50% lower year-on-year. Similarly, JKM averaged 482 in Q1 more than 40% lower than the first quarter of 2019.

After a $58 a barrel settlement in March, Brent futures tumbled to below $25 in the days following a lack of agreement by OPEC+ on March 6th. Henry Hub's March contract settled at $1.82, significantly lower than the $2.86 March 2019 settlement. This confluence of various factors and uncertainty about economic growth has led many companies to rationalize capital spend, and for several developers to reconsider the viability of their planned LNG projects, both domestically and abroad.

We've already seen announcements of FID delays and cancellations from projects totaling over 100 million tons per annum of capacity. The chart on the far right of this slide shows our perspective on projects thought to be most likely to reach FID in 2020 and '21.In early 2019, we expect the projects totaling approximately 100 million tons per annum of capacity to have a reasonable chance of FID in 2020, and another 30 million tons of capacity in 2021.

After the demand and supply shocks, which began during the first quarter, we anticipate that FIDs in 2020 will be much lower totaling under 15 million tons per annum of capacity, with some projects shifting to the 2021 FID and others delayed even further. We now expect up FIDs for the two year periods to total approximately 65 million tons are about half of our previous forecast.

Supply and demand dynamics are tightening the competitive landscape driving some LNG projects with higher breakeven thresholds out of the probable FID stack. We do include our Corpus Christi Stage 3 expansion in these expected FIDs which will be dependent upon, among other things, obtaining sufficient commercial agreements to support the project. We remain confident in our competitive position and ability to leverage existing infrastructure and other competitive advantages to provide cost effective supplies to the market to satisfy growing long term LNG demand.

Please turn to Slide 10 to review the European market in more detail. I mentioned earlier the tough market conditions through the first quarter led to record levels of U.S. LNG flowing into Europe. Over 55% of U.S. LNG deliveries in the first quarter are over 8 million tons flow to Europe. In total, over 27 million tons of LNG landed in Europe during the quarter, an increase of approximately 25% year-on-year. The growth in LNG imports was partially accommodated by year-on-year declines in indigenous gas production and lower imports from pipeline gas.

Pipeline gas flows declined by about 6 Bcf a day during the quarter equivalent to approximately 165 LNG cargoes. However, power generation from wind, solar and other renewables was up approximately 20% year-on-year in Q1 keeping some pressure on European stores inventories, which in the absence of a cold winter retain their surplus, ending March over 0.5 trillion cubic feet higher than the prior year. While it remains too early to gauge and isolate the impact of the coronavirus on European balances, we're seeing its impact on overall gas demand in some of the continent's major gas markets, as gas demand in Europe, six main gas markets declined year-on-year in Q1.

However, longer term, we continue to be constructive on gas demand in Europe as the energy landscape changes due to the region's decarbonization goals. Countries in Europe plan to either retire, decommission and/or cut approximately 100 gigawatts of coal and nuclear capacity in aggregate by 2030. We believe that gas will be an important part of the transition away from solid fuels and will continue to play a role in ensuring Europe is in a good position to manage grid reliability needs.

Please turn from Slide 11 to look at LNG market dynamics in Asia. Despite the coronavirus pandemic, LNG imports in Asia increased by about 7% year-on-year to 68 million tons in the first quarter. While this growth is not insignificant, the demand response to lower LNG prices would have likely been more pronounced, if not for the impact of the virus. Soft prices along domestic infrastructure, the bottlenecking a lot of price sensitive buyers in South and Southeast Asia to offer support to the market, when Chinese demand was soft.

However, as we've seen in China, lockdowns and the resulting the flying and economic activity could place a limit on demand growth in the coming months. Strict virus containment measures resulted in a steep economic contraction in China in February. This resulted in reduced imports of LNG and central Asian gas by 0.9 million tons and half a Bcf a day respectively, year-on-year.

However, as most large industrial enterprises resumed work across the nation, Chinese LNG imports started recovering in March. In the JKT region, a year long decline and imports was reversed as both South Korea and Taiwan continues to take a tough stance on Colburn offering support to gas fired power generation demand. South Korea has mandated maintenance could coal plants decreased coal fired power generation in January and February by 15% versus last year. And Taiwan's coal fired power generation dropped 4.5% year-on-yea.

In Japan weak power demand and mild temperatures reduce the need for LNG imports, despite lower nuclear availability compared to last year. In the coming few months, we do expect three nuclear reactors to go offline as a result of not meeting antiterrorism requirements. In addition to the Sendai number one nuclear reactor that was taken offline recently. These outages are expected to offer some upside for LNG demand in the coming weeks and months.

Fundamentally, we could also see upside to LND demand as a result of various stimulus packages that are being rolled out. In China for example, several provinces announced 2020 infrastructure expansion plans as the nation reopens the economy. Some of these plans include LNG, we gasification projects and gas fired power generation projects, which would contribute more firmly to expectations of China to double his current gas fired power generation fleet by 2030.

China's gas fired power capacity is expected to reach 200 gigawatts in the coming decade more than doubling from about 90 gigawatts currently. as a country seeks to reach peak CO2 emissions by 2030. To conclude, the market is currently experiencing extremely unusual conditions that are hurting bearish pressures across the entire commodity complex. Guest stories levels in Europe were high, costs prices there are likely to remain weak until stories levels normalized.

Well, the demand impact of the coronavirus remains uncertain in the near-term. We expect that many concerns will be alleviated in the coming months as the world recovers from the pandemic, lockdowns are lifted and economic activity resumed. Looking beyond the current market events, we believe that long-term fundamentals have not changed and that LNG remains a reliable, competitive and flexible solution for the energy needs of both Asia and Europe. And finally, we believe that the current market and economic conditions, although challenging and improving our competitive position over the medium to longer term.

Thank you for your time and attention. I'll now turn the call over to Michael.

[Michael Wortley]

Thanks, Anatole, and good morning everyone. Turning to Slide 13. For the first quarter, we generated net income of 375 million consolidated adjusted EBITDA of 1.04 billion and distributable cash flow of approximately 250 million. We explored 453 TBtu of LNG or 128 cargoes from our liquefaction projects during the first quarter. LNG production levels were relatively flat as compared to fourth quarter 2019.

For first quarter, we recognized an income 459 TBtu to LNG produced that our liquefaction projects and 14 TBtu of LNG source from third parties. Approximately 79% of the 473 Tbtu of LNG recognized and income during the first quarter was sold under either long-term SPA or IPM agreements, and the remaining 21% was sold by our marketing affiliates, either into the spot market or under short and medium term contracts.

Volume sold under SPAs or IPM agreements increased by approximately 20 Tbtu compared to the fourth quarter of 2019, driven primarily by seasonality of volumes under certain SPA, and by the commencement of our IPM arrangements with EOG which occurred in January.

Income from operations for the first quarter was approximately $1.3 billion, an increase of over $300 million compared to the fourth quarter. This increase was primarily due to increased net mark to market gains from changes in fair value of commodity derivatives. Income from operations for the first quarter also includes revenues of approximately $50 million associated with cancelled LNG cargoes, which recognized upon notice of cancellation.

Volumes of LNG recognized and income are materially consistent for the first quarter as compared to fourth quarter 2019 and realize margins per MMbtu of LNG decreased only slightly approximately 2% quarter-over-quarter.

Net income attributable to common stockholders for the first quarter was $375 million, or $1.48 per share basic and $1.43 per share diluted, a decrease of over $500 million for fourth quarter 2019. Net income in the fourth quarter of 2019 was positively impacted my Tax Valuation allowance release of over $500 million, which did not occur in the first quarter.

Net income for the first quarter also decreased as compared to the fourth quarter 2019 due to losses on derivatives related to our interest rate swaps partially offset by increased operating income.

During the first quarter, we repurchased an aggregate of 2.9 million shares of common stock for a total of $155 million under our share repurchase program. As of the end of the first quarter, we had approximately $600 million of remaining capacity under the share repurchase program.

Additionally, as we disclosed on a previous earnings call, in March, we amended the note purchase agreement for the Corpus Christi HoldCo convertible notes, enabling us to pay down $300 million of the outstanding balance of cash and allowing us the option to pay down the remaining outstanding balance in cash until September. This transaction reduced our total notional debt and prevented equity dilution of over 6 million shares.

Turn now to Slide 14. Liquidity and financing related questions have been central topics among our investor base recently and understandably so, given recent disruptions in the global financial and energy markets. Cheniere is in a strong financial position with more than adequate liquidity, strong cash flow generation capability for the remainder of this year and into future years, and multiple options to address our upcoming debt maturities, the earliest of which doesn't occur until next year.

We had approximately $4 billion of liquidity available for general corporate purposes as of the end of the first quarter, including cash on hand and undrawn balances under the working capital facilities and revolvers across our structure.

In March, SPL entered into a new $1.2 billion working capital facility, which effectively refinance the prior working capital facility, lowered the interest rate, improve flexibility under certain covenants, and pushed out the maturity date from 2020 to 2025. The undrawn capacity under this facility, as well as under the CQP revolver, Corpus working capital facility, and parent level revolver provides a liquidity backstop should one become necessary.

That said, we do not anticipate the need to draw on our facilities as a result of recent market conditions. Additionally, we do not currently have any concerns regarding our ability to comply with our debt covenants. We do not any external financing needs for the completion of construction of Corpus Train 3 or Sabine Pass Train 3. Those trains were financed approximately 50-50 debt equity and the debt financing of both Trains have been completed. Remaining equity commitments are expected to be funded using cash on hand and cash flow generated through the completion of construction.

The nearest term debt maturity across our corporate structure is the 2 billion outstanding SBL 2021 notes, which mature in February of next year. Our team has been working on addressing that maturity since before we sent market disruptions. And as we have said previously, we expect to use some combination of both SBL and the investment grade market and CQP in the high yield market to refinance these notes.

Sizing and timing of course will be dependent upon bond market conditions which located in March, but a since stabilized considerably. Also in 2021 at the LNG level, we have approximately 1.4 billion of outstanding convertible notes, which mature in May and have a conversion share price of approximately $94.

As with the SBL bonds, we began strategizing on addressing these converts earlier this year and are evaluating options to redeem those notes including refinancing options. It's too early in the process to discuss specifics, but we expect to add multiple options to redeem or refinance these convertible notes. We’re also considering financing options to redeem the remaining outstanding balance as a Corpus Christi HoldCo convertible notes due 2025 I mentioned a moment ago depending on market conditions.

Jack mentioned despite headwinds and weakness in the global LNG market, remain confident in our ability to generate financial results within our guidance ranges this year, and today we are reconfirming our 2024 full year guidance. Our consolidated adjusted EBITDA of 3.8 billion to 4.1 billion and distributable cash flow of 1 billion to 1.3 billion. So, we continue to track to the lower end of the EBITDA guidance range. Adjusted EBITDA and DCF guidance exclude the impact of one-time costs associated with our COVID-19 response efforts that Jack summarized.

As we mentioned on the last call, we have pre-sold the large majority over 95% or LNG production for 2020, leaving our financial results less exposed to fluctuations in market pricing this year. Since the last call, we continued to put away unsold volumes for the remainder of 2020 and today a $1 move in market margin would result in approximately $60 million change in consolidated adjusted EBITDA, with that sensitivity weighted to the upside given today's market margins.

With regard to capital allocation for the balance of the year, we designed the capital allocation framework to provide us with flexibility. With both energy markets and financial markets recently dislocating and considering the debt and convert maturities next year, I just discussed, we'll likely take advantage of that flexibility and take a more conservative approach with respect to our capital allocation decisions, at least until those markets stabilized and visibility improves.

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]

[Operator Instructions] And we'll go to our first question from Shneur Gershuni of UBS.

[Shneur Gershuni, UBS]

Maybe for today's update, maybe just a couple of quick questions here, first off, we're kind of seeing clearly an atypical pricing environment right now. When thinking about international spreads with respect to U.S., Asia and Europe and so forth, obviously, it's a function of inventory imbalances and so forth, but the one big change that has occurred is the associated gas issue in the United States, Henry Hub, which is now higher. What is your analysis tell you about whether there will be a long-term market structure change due to the higher U.S. pricing? Or at the end of the day, will there always be a call for U.S. LNG, and as the market will just re-price accordingly, and the spreads will go back to normal once COVID and inventory bounces clear out?

[Jack Fusco, President and Chief Executive Officer]

Well thank you. Thanks for the question. I think we'll have Anatol address a long-term, his view over the long term gas market.

[Anatol Feygin]

Good morning, Shneur, and thanks for the question. Obviously, we've had a large decline and we think we'll continue to see a decline in oil directed drilling activity that will have an effect on associated gas production. We think that over the medium term that will be modest, and as prices normalize in North America, you've already seen the big response in Cal 21 trading over $2.70 will be very attractive for gas directed drilling and the production that will come from that.

We obviously are at the very tail end in terms of the infrastructure build out for Phase 1 of LNG facilities. So that large demand driver will have and we fully expect to see a relatively stable NYMEX going forward between $2.5 and $3 is where the curves are today. Even in these unprecedented times, I'll just point out that the volatility -- realized volatility on NYMEX has been substantially lower than on crude or even JKM.

And we do expect that, that North American gas production and pricing will be attractive relative to global levels and the opportunity over the medium to longer term to safely reliably and economically supply our customers will be very attractive.

[Shneur Gershuni, UBS]

Yes, appreciate the color, thank you for that. And maybe it's just some quick follow ups here. Is there any opportunities just given the structure in the market right now for CMI or Cheniere to actually benefit from that? And I know that in terms of financing, you can't make too many comments, but could you comment on what do you think the market is open or not for the convertible notes?

[Michael Wortley]

Yes, it's Michael. I'll take the second question and then let Anatol handle the first one. But as we said, we have two maturities, the SPL maturity. And we have no maturity this year, but the first one is in February of next year. If you look at SPL complex that entire market -- that entire complex is above par and trading well below 5%. So, that market is we think certainly open to us and we'll deal with that sometime over the balance of the year.

In terms of CEI, we're working on several options to deal with that convert, which, again, is not until the summer of next year. But as I said in the prepared remarks, we've been thinking about that already. And I think some combination of the bank market, the bond market, current liquidity and prospective cash flow, or some combination thereof will allow us to deal with those converts. So, I wouldn't speak specifically is the convert market open to us. I mean, we're looking at a lot a lot of options.

I'm fairly certain the bang market is open to us. It's just a question of quantum. And so, we're working through that right now to deal with that convert in the summer next year. And ideally, if we can get the right quantum to go ahead and deal with the EIG notes of Corpus Christi HoldCo to which aren't pending maturity, but it is highest cost paper in the complex. So, we'll see how that plays out here over the coming months and be pretty proactive in picking some combination of those alternatives to sort that out.

[Anatol Feygin]

Sure. To the first part of your question, NYMEX has been less volatile, but all sides as you know have been quite volatile and just want to thank the teams that we haven't seen in a couple months, but talk through on a regular basis for their tireless efforts in that, taking advantage of some of those opportunities. So, no one is sitting on their hands, and as market opportunities present themselves as you would expect, Cheniere marketing is taking advantage of those, but clearly we won't give you any specific details around that.

[Operator]

We'll go to our next question from Jeremy Tonet from JP Morgan.

[Jeremy Tonet, JP Morgan]

Just wanted to touch base with regards to how everything's working out. I guess this is the first time the business model has seen a number of cancellations and non-lifts. And just want to see, if everything is kind of functioning the way that you guys expected. Is there any kind of unexpected surprises there? If there's a large quantum, would that stress anything in your network as far as putting the gas back into the market or any thoughts you can share on that process?

[Jack Fusco, President and Chief Executive Officer]

Jeremy, this is Jack. Thanks for the question and thanks for your support and involvement here at Cheniere. I just have to say, I'm extremely proud of the organization. Our ability even when we're separated to communicate and coordinate has been fantastic. Their ability to actually assemble during the, prior to the pandemic and put policies and procedures in place to ensure that our employees were safe and that our business continuity continued has been incredible. Randy gave you some nice pictures in the slides of the camps.

I'm so grateful for the employees that we're willing to sacrificing with her families to live in those camps and ensure that our operations were stable. So I would say that, it's an unprecedented time, as Anatol said, it's extremely volatile out there. Our customers still need gas. We're hopeful for the day when industrial and commercial demand can you come back into the worldwide market. And hopefully, we're seeing some signs of green shoots there, but no, there's been no surprises.

[Anatol Feygin]

Thanks Jack. Just, Jeremy said on top of that, as you know, we have obviously very good relationships with our now 20-ish or so counterparties, they value the flexibility in these contracts too to cancel. They give us substantial notice and as Jack said, the coordination between all of the functions including our gas procurement team and that notice has been exceptional. And the teams haven't missed a beat, and our customers are appreciative and obviously respectful of those notices, so far so good. Thank you.

[Jeremy Tonet, JP Morgan]

And then maybe just, if I could on kind of longer term strategy, if any thoughts you could share with regards to how far out you're able to hedge, looking to hedge at this point to de-risk cash flows? And I think Michael was talking about capital allocation. It seems like the market has a bit more emphasis on free cash flow as opposed to growth. So I don't know if it's kind of been any shift in your overall strategy taking kind of broader changes we've seen in the market in the macro backdrop?

[Jack Fusco, President and Chief Executive Officer]

Now, I think we'd like our position. Last November when we gave you all guidance, I told you we were materially hedge for the year prior. You should expect us to manage the business conservatively and not want to take a lot of market risk. And I have complete confidence when we convert that market risk to operating risk and my operating staff will be ready willing and able to provide. So, I don't want to get into our book or the market. Liquidity in this market, it's been a little bit rough these days, as you can imagine.

[Operator]

And we'll move to our next question from Michael Webber of Webber Research.

[Michael Webber, Webber Research]

First one, Jack, it's for you and maybe Anatol as well. But Jack you mentioned and you kind of addressed kind of some of the FM buzz that kind of comes up anytime. There's a market disruption and that the notion of cancelling a cargo versus interrupting a 20-year contract is very different things and the markets already litigated this degree for 14-year. But I'm curious, if you kind of looks if we just assume that Cheniere going to get insulated and we kind of look at the broader market. Do you think you've got other counterparties or peers, if you think about contracts that might not be papered up to the same degree that the years are? Do you think this is something where we could see from that, that endpoints on long-term contracts elsewhere, kind of bubbled to the surface? I know, you preemptively declared FM on a project in Mauritania on the back of 2022 market conditions. Obviously, it's a very, very different scenario than to be in Corpus. But just curious, obviously, you guys don't like dealing with those questions because the answer has been the same for as long as I've covered the Company. But I'm just curious whether if you look at this across the entire industry, do you think this is something that kind of percolates elsewhere?

[Jack Fusco, President and Chief Executive Officer]

So, Michael, as you know, I'm relatively young in this industry. So, I'll take the first part of it, and I'll hand it over to Anatol to help with a more longer term on some of the other SPAs that you highlighted. We feel very comfortable with our customer base and with our SPAs that our customers have been given the flexibility to cancel the cargoes with as Anatol said long term notice, and lets us plan around what we need to do. It gives them a good option, they value that option. And we're seeing them utilize it the way they would utilize it. We don't see the risk of FM portfolio for Cheniere. As far as other entity other projects, I'll let Anatol to address that part.

[Anatol Feygin]

Thanks Michael. Obviously, we can't comment on others and what's embedded in the SPAs. But clearly there has to be some ability to vanish some kind of a relief valve. In our case it is it is those cancellations in other cases where there are fixed volumes to fixed destinations other tools apply. And it's not surprising that, that FM is a path to manage that exposure. I can't obviously comment on anyone in particular. But clearly, the FOB SPA is a very different animal than something you would traditionally see that has a lot less flexibility embedded.

[Michael Webber, Webber Research]

Jack, another one that I think, I and other people kind of asked before, but the market conditions are obviously different now and you guys have been hyper focused on building out your existing footprint in the past several years. You obviously still in kind of an extended commercialization process for Corpus Phase 3. But if I kind of look around at some of the greenfields around, you are starting to flounder, you're seeing people pull back from the market, and all things considered, you guys are in a pretty advantageous and strong position. I'm just curious, what would you need to see for you to take a serious look at adding some particularly cheap optionality by kind of stepping into, it's kind of a greenfields shelving it for a couple years and saying, what is there if we want to expand at some point, maybe adding some geographical diversity or something that's not in your portfolio now? I'm just curious, how close are you to seriously looking at something like that?

[Jack Fusco, President and Chief Executive Officer]

Michael, we have a not enough organic growth to satisfy our needs for many, many years to come both at Corpus Christi and at Sabine Pass. And we have the existing infrastructure there. And as you mentioned, we already have permitted expansions at Corpus that we're ready, willing and able to do. I think, the first thing I would need to see is the airlines open back up. And that's to be able to travel. These are associations for long-term energy contracts that require a face-to-face combat, for lack of a better word. I mean you have to get close to the customer and look each other in the eye and for the foreseeable future now, or at least initially that looks like it's a little ways away for us. But I don't know, Michael, do you have anything to add.

[Michael Wortley]

I mean, we have a team that kind of spends a lot of time looking at what's going on around us and around the world, and we've looked at a lot of things. But as Jack said, everything's got to come back and compete with our own organic projects, not only economically, but from an execution standpoint and certainty of execution. I've not really found anything that was any better than what we have. So, I would just echo Jack sentiments in that regard.

[Operator]

We'll go to a question from Christine Cho of Barclays.

[Christine Cho]

So maybe just operationally, when we think about the full year, how would you characterize the SPA listings over the fourth quarter when all the trains are up and running? How has the listing in 1Q and 4Q relative to 2Q and 3Q under a normal scenario?

[Anatol Feygin]

Hey Christine, it's Anatol. So in terms of…

[Jack Fusco, President and Chief Executive Officer]

If I could first, Christine, are you not asking me to give you quarterly guidance, are you on this call?

[Christine Cho]

No, no, no. I'm just trying to think like maybe like percentages, because I mean I've noticed that the SPA listings seem to be higher in 1Q and 4Q. I'm just trying to get a sense of like, how we should be thinking about that on like under normal scenario, like longer?

[Jack Fusco, President and Chief Executive Officer]

So, as you know the plant, Sabine especially has a little bit of seasonality from the standpoint of production. In terms of the SPAs, they are fundamental ratable, but we do have some additional volumes that are, in accordance with the SPAs that are that are winter loaded. So you do have -- in terms of the SPAs, you have a little bit more contractual third-party sales in the winter. And in terms of plant production, you have a little bit more, but it's not very meaningful across the year. The big step function change of course, as you know, is the May 1 DFCDs of Corpus Train 2. So in terms of SPA'ed volume if you will, as of May 1, there's another step function change to get our full 7 train platform contracted.

[Christine Cho]

Right, but I was just talking, under a scenario where all the trains are offering, I'm not necessarily looking for like this year. But I mean, it does seem like the SPA customers do have flexibility to few more pickups in 1Q and 4Q. I know you said, it's overall just little bit. Okay. And then a clarification question, Michael. I think in your elementary, did you say that you book revenue tied to a cancellation cargo when you receive the cancellation notice?

[Michael Wortley]

That's right. So, the accounting rules say that, when our obligations are satisfied under the contract, we recognize the revenue. The payment terms are still the same. We don't get paid until we booked the revenue because we have no other obligations on a contract once we get the cancellation notice. So, that's right.

[Christine Cho]

And isn't the cancellation -- doesn't cancellation orders have to be given like two months in advance? So does that mean there's like some accelerated revenue recognition that we could probably be in 2Q at the level of cancellation pickup?

[Michael Wortley]

Yes, you got it. I mean, to the extent it swaps over into the next quarter, we're recognizing it in the current quarter, so…

[Christine Cho]

Okay, yes. And then for 1Q you said it was $50 million.

[Michael Wortley]

That's right.

[Christine Cho]

Okay, perfect. Thank you.

[Operator]

We'll go to our next question from Craig Shere of Toy Brothers.

[Craig Shere]

Good morning. I've got three quick ones here. So, just specific comment about or something about a temporary NGPL force majeure, is that a non-event as far as your inventories and keeping our business running in SPL? Outstanding CapEx that you envision through completion at this point for Corpus Train 3 and SPLT 6, and the comment, Michael, you said about the asymmetric upside, the spot market price changes. Presume that's us because there is a portion of equity cargoes that you assume won't ship this year. And does that effectively mean that there's no practical scenario where you're going to fall below the low end of guidance?

[Jack Fusco, President and Chief Executive Officer]

Let's start first one first, the NGPL force majeure from the lightning storm that blew through two nights ago.

[Michael Wortley]

Non-H2O has already been lifted, and I callously did say a couple of responses that pipelines use FM like popping tick takes. So, it's a blunt instrument that, that they have which has not been and we don't expect to be an issue for us.

[Craig Shere]

Okay, right. And then, Michael, outstanding our CapEx on trains?

[Michael Wortley]

Yes, Q2 forward for Train 3 is about $600 million largely spent this year that's before contingency, so maybe a little bit more depending on how that plays out. And SPL is about 1.4 billion, SPL Train 6 1.4 really through 20, 30 at this point again, excluding contingency. Well, I mean we just effectively -- margins were low, right. So at some point, we have a stop loss and we don't lift. So that's why I faced the metric and its 30 million to the downside and 60 million to the upside. So, yes, I mean, we won't miss our guidance range because of marketing. I think that's a fair statement.

[Operator]

We'll move to our next question from Spiro Dounis of Credit Suisse.

[Spiro Dounis, Credit Suisse]

Just want to follow up on. I want to share questions around potential benefits from CMI. Maybe focusing on June, just give where a lot of the sort of widely reported cancellations have come, not just for your guys, but just generally in the industry. It seems like has a lot of potential to backup yet into the system here in the U.S. and potentially Henry Hub. So two part question there, to the extent that does happen and the does open up. I guess, how nimble can CMIB to lift of cargo effectively immediately or capture that stock price, if it opens up? And then second, you even agree with the premise that it help could actually get a lot of pressure because of their reporting cancellations?

[Michael Wortley]

I got to slow you down just a second. So Anatol, do you pick that up?

[Anatol Feygin]

I think I got a chunk of it. So, as Michael said, we get cancellation notice our obligation to deliver that cargo to the foundation customer is alleviated. It's part of your question if the CMI have the option to lift that cargo? The answer is, yes. That is not something that is very easy to do. We as you know, control a fairly sizable shipping portfolio, but that's steps down dramatically as of tomorrow once we hand over a Train 2 to those foundation customers. So it's possible given the volatility that we discussed with share that some bites of that apple emerge as market volatility plays out on both legs of that. But that's not going to be a huge number for us over the balance of the year.

[Spiro Dounis, Credit Suisse]

Okay. Sorry, if I missed. It is most of me and I apologize, I was breaking up. The other part of that question was do you agree with the premise that that Henry Hub could actually be under a lot of pressure in June? Just given the fact that I think there's over reported 20 cancellations out there, which seems like a fairly large number on a daily basis. Just curious, the future is not reflecting that yet, but is that something that you see potentially happening?

[Jack Fusco, President and Chief Executive Officer]

Yes, if I knew the answer to that and what's priced in and what's anticipated at the John Arnold, not Anatol Feygin. So, it's, the market you said has a fair amount of the estimate and information. So, anybody's guess between the declines of associated gas production, how industrials come back. That balancing act is really what the market is trying to figure out. But if I was a gambling man, I'd say that at least some expectation of reduced flows LNG facilities is in the market already.

[Spiro Dounis, Credit Suisse]

And then just second question, just around some of the economics of idling some of these trains and running less trains at a higher utilization rate, and it's not saying we're there yet, but just asking me in the context of these cancellations. Just curious, if that would make sense, what environment it would look, take to get there, and so they carry a high cost to sort of shut down and I start backup?

[Michael Wortley]

Hey, it's Michael. We can run our trains at half rate sort of at the same efficiency as full rates basically. So that doesn't really affect us. As we looked at lifting economics, we make some money on lifting and lifting margin. But that's loss -- loss of that revenue is largely offset by the lower variable costs at the plant. So, we have fired outward costs. We paid a GE under the CSA, which we don't have to pay. We have trains are running and just other consumables, chemicals, refrigerants all of that. So, it's largely offset until we kind of -- it's a small headwind, but I don't think you'll notice it for us.

[Operator]

And we'll go next to Julien Dumoulin-Smith of Bank of America.

[Julien Dumoulin-Smith, Bank of America]

Hey good morning team. And in fact, let me just pick it up where's fear lifted off? So just a high level first question, how you should think about ability to scale down OpEx and SG&A? And then thinking about that, A, in the context to press optimizing either the assets themselves in light of market conditions, I understand that's CMI. Obviously, the flexible piece within, how you would think about optimizing your assets? And then related to that SG&A, and as time goes on, given the market conditions as they stand, presumably there should be some latitude to ease up on margin potentially on some of the development dollars as well when we think about the cost side of the ledger?

[Michael Wortley]

I think I caught that. We're looking at everything I would say, on the development side and some of the discretionary spending at the plant that's not part of Train 6 or Train 3. We've reworked those budgets and pushed out a couple hundred, if not several hundred million dollars in the next year just deferrals. I just talked about O&M, it's fairly inflexible. We got to keep our people in the plants ready to operate even in a lifting scenario. And as I said, our savings on variable cost offset the lifting margin that we forego when customers don't lift. So that's kind of a push. And then SG&A is a pretty small part of our overall cost structure.

[Jack Fusco, President and Chief Executive Officer]

And I was going to say that also. I mean there's only 1600 total employees and the whole Cheniere worldwide complex, so it's significantly different than I think the way other energy companies may have been talking about it. Our SG&A numbers are small. They're small expense overall. And they're going to continue to be smaller because a lot of our expenses from traveling around the world to negotiate contracts and visit our customers. And as we talked about earlier, none of that is going on and everything's been virtual and telecommuted. So -- but as Michael mentioned, we making sure we're running the business as effectively and efficiently as we possibly can.

[Julien Dumoulin-Smith, Bank of America]

Okay. And just to do that point, and perhaps this poses in the scale of LNG you intend to deploy. You are thinking about optimizing use down the specific trains, given the conditions as we've scale. Could you reroute all of your operations to certain trains not operating others to bring down OpEx? I think and I'd imagine I'm not we're not quite there yet, if you will in terms of market conditions.

[Michael Wortley]

No, we're not there yet in terms of market conditions, but you should rest assured that we are doing scenario planning with operations on every different configuration that you can imagine. And I, for one, like to keep the optionality available for CMI to make sure that we can respond quickly when or if this market turns around, but you should assume that we're doing all sorts of scenario planning.

[Operator]

We'll go to our next question from Alonso Guerra-Garcia of Scotiabank.

[Alonso Guerra-Garcia, Scotiabank]

I guess starting off, obviously globally we're seeing countrywide shutdown both China's reemergence and the recent purchase of U.S. LNG cargoes for the first time in a year. Are you seeing more interest for you as LNG to China? I guess as far as them taking more cargoes this year or even potentially entering into new long-term agreements to Cheniere?

[Anatol Feygin]

It's Anatol. Thanks for the question. As you said, it's been 13 months technically since China received a U.S. LNG cargo, so by definition, yes, there's more interests. And then April numbers preliminary are that China's up about 25% to 30% in terms of LNG imports. So, we fully expect to have more opportunities to transact and support our friends in China and continue to build our relationships there.

As Jack said, in terms of long-term agreements and transactions, it's something that is not now goes to be done over the phone, especially with counterparties like that. So, we would need to have the opportunity to get back in front of people, and we fully expect to have a very attractive medium-to long-term offering. And as our competitive position continues to improve, we fully expect that to be a market that bears fruit for us in the not too distant future.

[Alonso Guerra-Garcia, Scotiabank]

And Anatol, this follow-up is probably for you, too. I think this is the first time, I believe that you have put out your expectations for FID as shown on Slide 9. I wonder, if you could share your assumptions or the criteria you use behind the projects you still have moving forward and also where you have stage three sitting in there?

[Anatol Feygin]

Yes. So, we have a team, a cross functional team that evaluates these projects, as Michael mentioned in looking across the world at what else might be attractive, those kinds of economics and assessments are factored into that analysis. And we take all of the inputs that we have ourselves, as well as our friends that wouldn't have potent than others and incorporate them into what we think may make sense and what the dispatch curve of LNG looks like. That's how we make our informed decisions. So, we thought it's important to share that with you guys.

You can see very similar numbers out of Woodmac and others. We have some more differences of opinion here and there. But they're not heretical by any means. And as I mentioned, over a 100 million tons have been deferred. That's not the delta you see in this 2021 number, because a lot of that 100 million tons, neither we nor others included in that dispatch to begin with. So, in terms of where Corpus Christi Stage 3 sits in there, I'll just say that, we continue to find it very attractive project. As Jack mentioned, we have this organic growth opportunities that leverage is a lot of our footprint and skill sets. And it is a project that we believe will be dispatched in that timeframe.

[Operator]

And our last question that comes from Alex Kania of Wolfe Research.

[Alex Kania, Wolfe Research]

Hi, good afternoon or morning. I guess just a question on marketing. Looking at kind of global net backs, is there is there a ability or willingness to do a lot of sort of third-party deals, maybe capture more local spot opportunities, kind of how big of that? Would that -- would you think is playing into the portfolio? And the second question is, again, just with perspective more uncertainty on the other U.S. interface LNG projects. I mean, is there an ability ultimately to maybe try to find a way to -- than can maybe capture that potential demand to be extent to those -- some of those contracts or projects are partially contracted? Is there may be potentially demand that been shift to some of your own projects.

[Jack Fusco, President and Chief Executive Officer]

Do want to go with the first one, Mike?

[Michael Wortley]

Sure. I think this will be responsive to your question, but if not, please follow up. Again, we have a great team that is working remotely, but tirelessly. And there is volatility in shipping their volatility in local indices. And all of the teams in the LNG market globally remain very well engaged. And in the prompt market, there's fairly good liquidity and lots of opportunities to everybody -- for everybody to enter into optimizations. And we're taking advantage of those as the team's capture that. So, there's never a dull moment these days and some of that presents opportunities for us, if that's what you were asking.

[Jack Fusco, President and Chief Executive Officer]

And then part of that like I would say, yes. I mean, look, we offer bringing in products to our customers. We think we're going to come out of this pandemic stronger and we're going to try to capitalize on that.

[Jack Fusco, President and Chief Executive Officer]

Thank you and I want to thank all the participants. It was a record breaking number for us. It was over 945 participants this morning. We really appreciate the support and the interest of Cheniere Thank you all.

[Operator]

This does conclude the call. We would like to thank everyone for your participation. You may now disconnect.