Cheniere Energy Inc

NYSE:LNG

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen. Welcome to the Cheniere Energy Second Quarter 2018 Earnings Call and Webcast. Today's conference is being recorded.

And at this time, I'd like to turn the call over to Randy Bhatia, VP of Investor Relations. Please go ahead.

[Randy Bhatia, Cheniere Energy Partners LP]

Thanks, operator. Good morning and welcome to Cheniere Energy's second quarter 2018 earnings conference call. A slide presentation and access to the webcast for today's call are available at cheniere.com. Joining me for today's call are Jack Fusco, Cheniere's President and Chief Executive Officer; Anatol Feygin, Executive Vice President and Chief Commercial Officer; and Michael Wortley, Executive Vice President and Chief Financial Officer.

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 risk.

In addition, we may include references to non-GAAP 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.

Also, please note that today's call is neither an offering of securities nor solicitation of a written consent in connection with the announced transaction between Cheniere and Cheniere Energy Partners LP Holdings, LLC or CQH. The information discussed today is qualified in its entirety by the registration statement and consent solicitation that Cheniere and CQH have filed with the SEC in connection with our proposed transaction. The shareholders of Cheniere and CQH are urged to read these filings carefully, because they contain important information about the proposed transaction between Cheniere and CQH.

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 L.P., or CQP, and CQH. We do not intend to cover CQP or CQH's results separately from those of Cheniere Energy, Inc.

The call agenda is shown on slide 4. Jack will begin with an overview of the quarter and give an update on progress at our liquefaction projects. Following Jack's comments, we will hear from Anatol on our commercial activities, and then from Michael, who will review our financial results. After prepared remarks, we will open the call for Q&A.

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

[Jack A. Fusco, Cheniere Energy, Inc.]

Thank you, Randy, and good morning, everyone. Thanks for joining us this morning as we review Cheniere's results for the second quarter 2018. This was another great quarter for the company and a good start to the full year of 2018.

Our strong financial and operating performance in the first quarter continued in the second quarter. We generated revenue of over $1.5 billion and consolidated adjusted EBITDA of $530 million for the quarter. In the first half of 2018, we have generated almost $4 billion in revenue, over $1.4 billion in EBITDA, and over $350 million in distributable cash flow.

Michael will discuss our financial results in more detail, but our results in the second quarter give us tremendous confidence heading into the balance of the year. And today, we are reconfirming our full year 2018 consolidated adjusted EBITDA guidance of $2.3 billion to $2.5 billion and are revising our distributable cash flow guidance upwards to $400 million to $550 million.

Operationally, during the second quarter, we produced and exported 61 cargoes from Sabine Pass, and our year-to-date total is now over 150 cargoes loaded and exported. In 2Q, LNG from Sabine Pass reached several new countries for the first time, that's Colombia, Israel and Panama, bringing the total countries and regions across the globe where our LNG has reached to 28. We've continued to see robust and durable pricing in the LNG market even during the second quarter, which is typically impacted by seasonality and can be a trough period for LNG prices.

We have been talking about a structural shift in natural gas in key demand centers around the world which has been a meaningful driver in the LNG markets for some time now. And we continue to see evidence that this is playing out as we expected and in some instances, faster than we anticipated. You'll hear more detail on the LNG market from Anatol in a few minutes.

The highlight of the second quarter was the achievement of a positive FID on Train 3 at Corpus Christi which we announced in May. The FID of Corpus Christi Train 3 reinforces Cheniere's position as the leader in U.S. LNG. And the addition of the project is expected to grow our run rate distributable cash flow per share by approximately 20%, a tremendous benefit for our shareholders.

The financing of Corpus Christi Train 3 was backstopped by long-term contracts from three counterparties, Electricidade de Portugal, Trafigura and PetroChina. And I will address my views on the U.S.-China relationship in a moment.

As I just mentioned, the market continues to move in our favor and our origination team is progressing commercial efforts on multiple fronts and in multiple geographies as we look at both term our open LNG position and continue to underpin our expansion with Sabine Pass Train 6, a very cost-competitive, fully-permitted expansion project.

We recently signed a non-binding Heads of Agreement with the Taiwanese state-owned oil and gas company, CPC, for approximately 2 million tonnes per year over a 25-year period. We are actively progressing this HOA to a binding SPA. We hope to be able to communicate progress on this prospective long-term customer and others we are pursuing in the near term.

Turning now to slide 7 where I've summarized construction progress at both Sabine Pass and Corpus Christi. At first sight, execution continues to be the central narrative, with Train 5 at Sabine Pass over 95% complete, Trains 1 and 2 at Corpus Christi at 90% complete. Train 5 and Train 1 at Corpus are now both in the commissioning process with Bechtel continuing to progress efforts against accelerated schedules. On the current timeline, we expect both Train 5 and Train 1 to achieve first LNG during the fourth quarter of this year.

You will notice Corpus Christi Train 3 is now included in our construction update. Train 3 benefited from early works under the Limited Notice to Proceed, so that project is off to a very good start, with foundations for the ethylene refrigeration compressors recently poured.

As you may know, during the quarter, we conducted numerous maintenance outages. You should expect us to perform these outages during the shoulder months when possible. Train 3 at Sabine Pass required the longest maintenance outage during the second quarter, which resulted in several weeks of downtime for that Train. Our teams in gas supply, commercial operations, terminal operations, asset optimization and shipping worked together to minimize the impact of the downtime and the product of their efforts are in the financial results we released today.

Delivering on our growth plans has been one of my top priorities in 2018, and thus far, we have delivered with the FID at Corpus Christi Train 3. Looking ahead, a decisively positive LNG macro backdrop continues to fuel my confidence in our ability to grow our world-class LNG infrastructure platform through value-creating incremental liquefaction capacity projects. To that end, our marketing origination efforts today are focused on the commercialization of Train 6 at Sabine Pass.

In addition, we recently filed our FERC application on an expansion of the Corpus site of approximately 9.5 million tonnes of expected nominal annual capacity. And we have a full team eagerly developing additional incremental liquefaction capacity at the additional land we acquired adjacent to the Corpus site, which we will provide more information in due course.

There's a long growth runway at Cheniere and our global teams are leveraging every competitive advantage we have in order to maintain our position of leadership in U.S. LNG and deliver long-term shareholder value creation through growth.

Turn now to slide 8, where I'll address some recent developments in the U.S.-China relationship and how it relates to Cheniere. In the ongoing trade dispute, China recently added U.S. LNG to the list of prospective products which are being considered for a 25% import tariff. We are awaiting details of the proposed tariffs and are hopeful that the U.S. and China can resolve the trade dispute without these tariffs being implemented. That said, we don't foresee any economic impact to Cheniere as it relates to our existing long-term contracts with PetroChina, which helps support the financing of Train 3.

From a high level, our business is a very long-term one, and it is well understood that China needs more LNG over the long term. We view U.S. LNG as an important variable to help resolve trade issues as U.S. LNG into China is beneficial to both nations. Cheniere, along with our partners and stakeholders, have seen the economic benefits of U.S. LNG into China, thus represented over a $3 billion investment, Corpus Christi, and thousands of direct and indirect jobs that project is expected to create.

China is an important growth market for Cheniere, and we continue to build and solidify relationships with key Chinese counterparties as we expect to sell meaningful amounts of LNG into China over the long term.

I'll turn the call over to Anatol who'll provide some additional insight into what we see in the LNG markets today.

[Anatol Feygin, Cheniere Energy, Inc.]

Thanks, Jack, and good morning, everyone. The strength in LNG demand that we saw in the winter season continued virtually unabated through the second quarter. The net vol on LNG grew by approximately 12 million tonnes in the first half of 2018, with nearly all demand growth concentrated in Asia.

Chinese LNG demand alone grew by more than 8 million tonnes in the first half, exceeding 24 million tonnes, an increase of more than 50% from the first half of 2017. After a very strong winter, the country's demand held firm in the second quarter as it continued implementation of and compliance with environmental policies. China continues to increase gas and LNG imports and became the world's largest importer for the first time in May, with about 10.5 Bcf a day of total LNG and piped gas receipts.

In South Korea, continued economic expansion, coupled with limits on coal burn, have led to increased gas consumption resulting in an 18% year-on-year growth in LNG demand, with Mackenzie forecast that South Korea will retire 4 gigawatts of coal and 5 gigawatts of nuclear capacity between 2024 and 2031, which makes us believe LNG will play an increasingly critical role in the country.

India's growth in 2018 has also been impressive. Refineries have been the key sector supporting recent growth as there has been a drive to replace fuel oil. Fuel oil has historically been used as both a refinery fuel and as a feedstock for electricity generation, but gas is taking market share away from liquid fuels in that sector.

With at least an additional 40 million tonnes per annum of regas capacity planned by the early 2020s, India will have the infrastructure needed to continue growing well into the next decade. This will be especially critical for total Indian gas supply as gas production in India has been flat for over two years, unable to meet additional demand.

Similarly, a strong call in LNG during the first half of the year has resulted in a year-on-year increase of 1.3 million tonnes and nearly 1 million tonnes of LNG imports in Pakistan and Taiwan, respectively. A commitment by Taiwan to remove nuclear generation from the power mix by 2025 and plans to add about 11 gigawatts of new gas fired power plants by 2024-2025 are expected to support LNG demand going forward, with our HOA with CPC serving as a recent evidence of that demand.

We expect these new policies being implemented throughout Southeast Asia to drive the transition from coal to gas in the region, significantly reduce pollution and create meaningful incremental global LNG demand.

Turning now to slide 11, the graph on the left highlights the strength in prices we have seen this year in Asia, which has been driven by the demand growth I just discussed. JKM prices during the first half averaged $9.26, more than $2 higher than prices in the same time last year.

After the winter a year ago, prices in the shoulder season fell significantly. February of 2017, JKM settled at $9.45, but dropped to $5.75 by April. This year, the decline in prices hasn't been as pronounced as February JKM settled at $11.23 and decreased to $8.39 in April. While prices softened during the shoulder period, they have quickly rebounded back to levels seen last winter, approaching a price level nearing oil parity in the middle of the summer as demand growth has outpaced supply additions.

Similarly, in the Atlantic Basin, NBP prices have been stronger this year averaging $7.26 in the first half, about $1.56 higher than first half of 2017. The price differential between Asia and Europe has been unusually wide for the summer, and hence, we're seeing an uptick of Atlantic supplies delivered into the Pacific market.

Today's prices stand out when compared to four-year historical ranges, but what has really surprised some observers is the sustained high prices amidst substantial new LNG supply that has come online in 2018. Australia and the United States have again been the key drivers. Australian exports increased 20% in the first half of 2018 to a little over 32 million tonnes, and U.S. volumes increased 65% to just over 10.3 million tonnes. After exporting just over 6 million tonnes during the first half of 2017, Sabine Pass exported more than 9 million tonnes during the first half of 2018. Combined with the new volumes from Cove Point, the United States is now the fifth largest LNG supplier.

In conclusion, despite more than 11 million tonnes of new supply added to the market in the first half of the year, we're seeing extremely strong demand, mostly in Asia, keeping the market tight. As a result, prices this summer have sustained three-year highs at levels equivalent to winter-like prices. These price signals provide further evidence the market is calling for additional investment in LNG liquefaction infrastructure and Cheniere approaches the market with advantages on cost and flexibility which enables us to tailor solutions for customers around the world.

Turning now to slide 12, the case for U.S. Henry Hub linked LNG has not only been supported recently by strong LNG demand and pricing, but also by low sustained Henry Hub pricing, driven by increased domestic gas production. Domestic dry gas production has averaged almost 80 Bcf a day year-to-date. That's an increase of 6 Bcf a day to 7 Bcf a day year-over-year at any given point in time, and it is expected to add more than 7 Bcf from here by the end of 2019.

Year-to-date increases have been led by the Utica and the Marcellus and to a lesser extent Haynesville and Permian basins. Gas production growth in the Permian Basin is expected to outpace growth in the Utica/Marcellus region by 2020. With anticipated continued increases in gas production in the U.S., we are as confident as ever about lower for longer Henry Hub pricing.

The chart on the lower right of this slide illustrates the drop in the Henry hub forward curve over the past few months to a year. The first calendar year forward above $3 is now 2028. Anticipated increases in domestic dry gas production and continued decreases in Henry Hub prices and sustained low relative volatility compared to competing fuels and pricing structures continue to strengthen the overall thesis for U.S. LNG and provide significant tailwinds for our efforts to commercialize additional liquefaction capacity.

And now I will turn the call over to Michael, who will review our financial results.

[Michael J. Wortley, Cheniere Energy, Inc.]

Thanks, Anatol, and good morning, everyone. First, I will go over some highlights from our second quarter financial results, and then provide an update on our recent financing activity and our guidance.

Turn now to slide 14. For the second quarter, we generated consolidated revenue of $1.5 billion, operating income of $336 million, and consolidated adjusted EBITDA of $531 million. Second quarter results were supported by robust and resilient marketing margins through the shoulder season as Jack and Anatol discussed. Our performance in the second quarter was in line with our forecast and expectations, and we remain on target to meet our reiterated full year EBITDA guidance, which I will discuss more in a few minutes.

Year-to-date, we have generated consolidated revenue of almost $3.8 billion, consolidated adjusted EBITDA of over $1.4 billion, and distributable cash flow of over $350 million. We exported 219 TBtu of LNG from Sabine Pass during the quarter, none of which were commissioning volumes. These volumes were approximately 25 TBtu lower than during the first quarter, due primarily to timing of plant maintenance and some seasonality impact to production.

Approximately 85% of the volumes exported during the quarter or 186 TBtu were lifted by our third-party long-term SPA customers, and the remaining 33 TBtu were lifted by our marketing function. With the primary SPAs now in effect for all four trains in operation, we anticipate that volumes available through our marketing function will remain relatively stable for the remainder of this year and in early 2019 until the completion of Sabine Train 5 and Corpus Trains 1 and 2.

For the second quarter, we recognized in income 230 TBtu of LNG produced at Sabine Pass, consisting of 222 TBtu loaded during the quarter, plus 11 TBtu or three cargoes loaded in the prior quarter that delivered and recognized in the current quarter, less 3 TBtu or one cargo sold on a delivered basis that was in transit as of the end of the second quarter. We also recognized in income 10 TBtu or three cargoes of LNG sold by our marketing function sourced from third parties.

Net loss attributable to common stockholders for the second quarter was $18 million or $0.07 per share on a basic and diluted basis, a decrease of approximately $350 million compared to the first quarter 2018. The decrease in net income as compared to prior quarter was primarily driven by decreased income from operations due to lower pricing on marketing cargoes, downtime at the plant, and a large pickup from cargoes on the water at year-end 2017 that impacted the first quarter of this year.

Our reported second quarter results were in line with our expectations for the quarter, and today, we are reiterating our full-year 2018 consolidated adjusted EBITDA guidance of $2.3 billion to $2.5 billion, and are revising distributable cash flow guidance upward to $400 million to $550 million. With the expectation of relatively stable LNG volumes available to our marketing function for the remainder of the year, we anticipate consolidated adjusted EBITDA to be fairly ratable for 3Q and 4Q.

We're also reiterating our CQP distribution guidance of $2.20 per unit to $2.30 per unit for 2018 and our CQH dividend guidance of $2.25 per share to $2.35 per share for 2018. Note that the CQH dividend guidance has not been adjusted for the previously announced merger transaction with CEI, which is expected to close before the end of the third quarter.

Turn now to slide 15. In May, after we announced FID of Corpus Christi Train 3, we provided an investor update with details of the transaction and revised run rate guidance inclusive of Train 3, and I'd like to reiterate some of the key points from that update.

On a run rate basis, we anticipate Corpus Train 3 to add approximately $500 million of consolidated adjusted EBITDA and $300 million to $400 million of distributable cash flow, bringing our revised 8-train run rate guidance to $4.3 billion to $4.6 billion as consolidated adjusted EBITDA and $2 billion to $2.3 billion of distributable cash flow, or $7 to $8 per share.

Total cost to Train 3 is expected to be approximately $3.2 billion on a fully levered basis, of which approximately 50% has been financed with debt. We completed an amendment and upsize of our Corpus credit facilities in May to fund the debt portion of the project and will draw on those facilities over the life of the project. The remaining is anticipated to come from equity contributions from Cheniere and reinvestment of operating cash flows generated by Corpus Trains 1 and 2. Financing Train 3 with 50/50 debt/equity enables us to significantly grow run rate EBITDA and distributable cash flow, while delevering the overall Cheniere complex.

We expect to deploy the same strategy for commercializing and financings Sabine Pass Train 6 and we anticipate its incremental EBITDA to be similar to Corpus Train 3, adding an additional $400 million to $600 million of consolidated adjusted EBITDA and $200 million to $400 million of distributable cash flow. With our 8-train platform, we expect to generate almost $6 billion of available free cash from 2018 through 2022 that we expect will give us significant capacity, continue to invest in incremental liquefaction capacity and other accretive growth projects with attractive returns and to return capital to shareholders over time.

That concludes our prepared remarks. Thank you for your time and your interest in Cheniere. Operator, we're ready to open the line for questions.

[Operator]

Thank you. And we will begin our Q&A with Christine Cho from Barclays.

[Christine Cho, Barclays Capital, Inc.]

Thanks for all the color this quarter. With all of the Permian gas pipeline projects that are supposed to deliver gas near your neck of the woods in Corpus Christi, can you just remind us where you stand with gas procurement for Corpus Christi, and how you could potentially take advantage of that spread similar to what you're doing in the Mid-Con with your Midship pipeline?

[Jack A. Fusco, Cheniere Energy, Inc.]

Of course, Christine. Thank you. We feel very good about the quarter and about our execution for the first half of this year. I'll ask Anatol to address your question directly on the gas supply for Corpus.

[Anatol Feygin, Cheniere Energy, Inc.]

Thanks, Christine. We are, as you know, a very large player in gas procurement, and Midship was a bit of a unique situation where we didn't feel like there was a great solution that allowed us to access SCOOP and STACK, and so we got involved and wired that in an optimal way for our access.

In the case of the Permian, as you pointed out, there is a tremendous amount of effort to develop the infrastructure that heads southeast, and we are involved, as you would imagine, in all of these projects and all of these discussions and are working on what is optimal for us to ensure that Corpus Christi remains very well-advantaged and very well supplied. So, in terms of the leading projects, I can say that we're very close to all of those and are engaged with both the producers and the sponsors of the projects.

[Christine Cho, Barclays Capital, Inc.]

How much more gas are you looking to procure for Corpus? Can you provide...

[Anatol Feygin, Cheniere Energy, Inc.]

I'm not sure – so we have a plan that ensures that we have not just the capacity but also the molecules that we will need and that the molecule aspect of it is a range over the coming five-year or so period. And we, again, work with the – with our producer partners to ensure that we have secured those supplies on the capacity that we have to access the facility.

[Jack A. Fusco, Cheniere Energy, Inc.]

But strategically, we're very focused on Corpus Christi. We think there's a huge opportunity for us to significantly grow that site and that's what we filed at FERC.

[Christine Cho, Barclays Capital, Inc.]

I guess my question is more around have you already procured gas for Corpus? I'm assuming you have.

[Jack A. Fusco, Cheniere Energy, Inc.]

Of course. Of course.

[Anatol Feygin, Cheniere Energy, Inc.]

Yeah. Of course, we have. We're supplying Corpus today, right? So we have procured various amounts of just – it's a question of at what point in time are you asking about, we don't have molecules secured for year 12, but we have all of the gas that we will need for the near and medium term, and that is a sliding scale as you move further out in time.

[Christine Cho, Barclays Capital, Inc.]

Okay. And then can you give us some idea of when and what we can expect for the Train 6 EPC? And would you do a Limited Notice to Proceed, similar to what you did on Corpus Train 3? And when would you feel comfortable starting that?

[Jack A. Fusco, Cheniere Energy, Inc.]

Well, first off, I think our relationship with Bechtel continues to get stronger, and I think that's evidenced by our ability to execute on our trains and bring them in kind of significantly earlier than what was – even was guaranteed and even on the accelerated schedules that we have published before.

I think and I believe that the Limited Notice to Proceed strategy that we invoked on Corpus Christi Train 3 was extremely successful. Not only did it give us a head start on Train 3 as far as a full FID, but it also ensured that we locked down our pricing with Bechtel as we were negotiating our SPAs with our customers so we can ensure that we locked in our margins for our shareholders. And you should expect us to invoke that again with Train 6, and then continue with our additional growth plans. So, today, though, we're not ready to announce anything on Train 6.

[Christine Cho, Barclays Capital, Inc.]

Okay. And then last one for me, can you give us an update with the midscale permit timeline? There's just been a lot of headlines around FERC. They're going to be delayed. They're not going to be delayed. They're understaffed. They're hiring consultants. So, any insight based on your own interaction with FERC would be helpful.

[Jack A. Fusco, Cheniere Energy, Inc.]

I'll tell you, Christine, as you know, I have a very long relationship with FERC, having been in the power industry for most of my career and life for that matter. And it's a little bit in flux right now. I was sorry to see Commissioner Powelson resign. I think time will tell. When he gets replaced, we'll see what transpires there. But I would expect FERC to be extremely focused on processing permits and allowing construction projects and jobs in America to continue as rapidly as possible. But right now, I think it's a little uncertain as far as the exact timeline – approval timelines coming out of FERC.

[Christine Cho, Barclays Capital, Inc.]

Thank you.

[Jack A. Fusco, Cheniere Energy, Inc.]

Yes.

[Operator]

Okay. And we'll move on to our next question from Jeremy Tonet with JPMorgan.

[Jeremy Bryan Tonet, JPMorgan Securities LLC]

Good morning.

[Jack A. Fusco, Cheniere Energy, Inc.]

Good morning, Jeremy.

[Jeremy Bryan Tonet, JPMorgan Securities LLC]

Thanks. I wanted to start off with guidance here and just make sure I understood everything that was happening. If I take the midpoint of your guide and I see what's achieved this year, it seems like there's going to be a decline in 3Q and 4Q EBITDA relative to 2Q. And so, I was just wondering if you see any kind of headwinds or maintenance in the business that would be impacting it, especially since the fourth quarter presumably should have some better margins that can be recognized in CMI there?

[Michael J. Wortley, Cheniere Energy, Inc.]

Hey, Jeremy. It's Michael. No, we don't really see an impact, I mean, going forward, we're at a little north of $1.4 billion. As Randy said and I said, expect performance to be pretty ratable over the year. We're only at 10 – about 10 marketing cargoes a quarter, so marketing margins, while impactful, don't have the impact they had in the first quarter. So, yeah, I mean, I think we see a pretty steady 3Q and 4Q. Next year will be a totally different story once the next trains come on, but for now, pretty ratable.

[Jeremy Bryan Tonet, JPMorgan Securities LLC]

That's helpful. Thanks. And just wanted to go back if the commissioning cargoes you're talking about are in 4Q this year, would that tend to make us think that the – fully coming online is going to be early in 2019 – is there any reason that there's more of a 1Q bent versus a 2Q bent given this development?

[Jack A. Fusco, Cheniere Energy, Inc.]

Yeah. I'd say, Jeremy, we are working very closely with Bechtel to make sure that we conduct the commissioning safely and rapidly, and I'm guardedly optimistic that we'll continue to outperform. So, our strategy is to under-promise and over-deliver.

[Jeremy Bryan Tonet, JPMorgan Securities LLC]

Sounds good. That's it for me. Thanks for taking my questions.

[Jack A. Fusco, Cheniere Energy, Inc.]

Thanks.

[Operator]

And we'll take our next question from Michael Webber with Wells Fargo.

[Michael Webber, Wells Fargo Securities LLC]

Hey. Good morning, guys. How are you?

[Jack A. Fusco, Cheniere Energy, Inc.]

Good morning.

[Michael Webber, Wells Fargo Securities LLC]

Jack, just to start off with – I guess with the tariffs. I know it's pretty recent. There's not a lot known now, but do you have a sense yet around implementation, around whether that would actually impact FOB cargoes or swaps? And then I guess within that context, if it's still unclear, how do you proceed at CMI in terms of the dynamic books there? I know you guys came in for 10 vessels earlier in the summer, kind of starting that program a bit earlier. Does this give you pause around continuing that as you kind of ramp up into a seasonal period? I'm just curious if there's no color around that yet, how do you foresee it in terms of positioning CMI for peak season?

[Jack A. Fusco, Cheniere Energy, Inc.]

Well, no, I mean, Michael, that's a – it's a very good question – but I have to assure you, from Anatol's slide, you see demand for LNG is extremely strong and growing worldwide. So, it will find a home. And we talked with – Jeremy had asked the questions on the commissioning cargoes – we need ships if we're going to commission two trains at the same time which we are, Train 5 at Sabine and Corpus Christi Train 1. So we need access to shipping to get those molecules from the site around the world.

We're working extremely closely with our Chinese customers and counterparties to just make sure that we continue to build on our relationship and we solidify that relationship. The early contracts of PetroChina are heavily weighted towards the winter. We're hopeful that the U.S. and China can come to some resolution quickly. I've come out publicly. I was on CNBC and I said I don't believe in trade wars and I think tariffs are not productive, and I hope the two countries can come to a resolution. But we have a good product. We have a product that's in demand and it's a flexible product that can be sent anywhere, and we're going to be prepared to do that.

[Michael Webber, Wells Fargo Securities LLC]

Okay. That's helpful. And then, just as we think about Sabine 6 and you think about the potential subset of buyer there, I know there's probably – if you look at it today probably oversubscribed in terms people who are digging into it. What percentage of that group would you say are Chinese? And then even just a range – just a broad range in terms of the list of potential buyers. And then, maybe what are they saying in your conversations around the tariffs? Is it impacting the way they think about their timelines?

[Jack A. Fusco, Cheniere Energy, Inc.]

No. And, well, I'll tell you, Sabine 6 is going to be an extremely competitive LNG project and I feel – and it should be in all rights the next Gulf Coast project to FID expansion because there's just a lot of benefits that we have on that site and on that train. I'm not going to divulge who our prospective clients are. I think Ramsey who runs our origination staff worldwide would cut my head off for doing that. So, I'm not going to say who we're talking to, but I would expect and I'll just say I would expect there to be a good contingency of Asian clients.

[Michael Webber, Wells Fargo Securities LLC]

Okay. That's helpful. And then just one more quick one if you'll indulge me, and I apologize if I missed this, but in terms of SP3, it's only down for a couple of weeks. But can you guys quantify the volumes and the additional costs associated with that couple of weeks of downtime in the quarter?

[Jack A. Fusco, Cheniere Energy, Inc.]

There wasn't any real impact of foundation customers, but...

[Anatol Feygin, Cheniere Energy, Inc.]

Yeah. I mean, marketing lost a few cargoes, we'll say, and on the cost side, not material.

[Michael Webber, Wells Fargo Securities LLC]

Okay, great. All right. Thanks for the time, guys.

[Operator]

And we'll take our next question from Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis, Morgan Stanley & Co. LLC]

Yes. Good morning and thank you. Jack, I would like to follow-up on the previous question about the tariffs. And I'm just trying to understand what would be the impact on future growth of Cheniere and other U.S. projects. Is there – will this tariff make the U.S. volume less flexible? Would they add any additional cost if they are implemented?

[Jack A. Fusco, Cheniere Energy, Inc.]

The tariffs, whether you look at it from a long-run perspective or a short-run perspective, right, you could see that the tariffs are imposed by China are really – shouldn't impact U.S. exports, right, because it's a tax on the Chinese consumer rather than an obstacle for us, right, to sell LNG worldwide. So, while it may slow down discussions with other Chinese counterparts for additional growth, it's not going to have any impact on Cheniere or on the long-term contracts that we currently have entered into.

Does that help, Fotis? I don't know if I've quite...

[Fotis Giannakoulis, Morgan Stanley & Co. LLC]

Yes. I'm trying to understand that if the traders or the BGs of the world, they are buying U.S. volume, they will have a difficulty or additional cost in selling U.S. volume after they buy it. Obviously, they are not going affect your current contracts, but I'm wondering if your customers, they will have any impact.

[Jack A. Fusco, Cheniere Energy, Inc.]

It's probably best addressed to Shell than it is to us, but I don't know, Anatol, do you have anything?

[Anatol Feygin, Cheniere Energy, Inc.]

No. Thanks, Jack, and thanks, Fotis. The flexibility of the business model and the ability of these cargoes to respond to these changing conditions I think is one great aspect of sourcing volumes from the U.S., right? Whatever happens, as Jack said, to the Chinese consumer and to the importer of record, the growth in demand for LNG globally is helping absorb all of this incremental volume. So, how it is optimized again globally, that's where we and our business model and our marketing function and our offtakers can make sure that it goes to the best highest value added market. How China will resolve these issues on its side is TBD.

[Fotis Giannakoulis, Morgan Stanley & Co. LLC]

Thank you, Anatol. I'm trying to understand, do you – are you aware that if Chinese are considering trying to back more strongly in non-U.S. projects like Russia or Mozambique? And if you can also comment about the proposed U.S. sanctions to Russia and how that will impact the potential expansion of competitive products in Arctic?

[Jack A. Fusco, Cheniere Energy, Inc.]

Do you want to?

[Anatol Feygin, Cheniere Energy, Inc.]

Yeah. So, Fotis, I guess, we have very good productive discussions, as Jack said, with lots of counterparties all over the world, including Asia, including China, and those discussions are ongoing. If you look at the value proposition of sub-$3 Henry Hub delivered into China, it is extremely competitive with current pricing and even forward pricing. So, that unquestionably is a huge advantage to our hand.

Now, there are, as you know, very worthy global competitors. No one can compete with Qataris upstream costs. So, we fully expect to be competing with those projects, with pipeline projects, et cetera, and we think we'll win more than our fair share because of the value proposition and the flexibility that our commercial offering has.

[Fotis Giannakoulis, Morgan Stanley & Co. LLC]

And can you talk a little bit about the U.S. sanctions or potential sanctions on Russia and the investments in energy projects that was released this morning?

[Jack A. Fusco, Cheniere Energy, Inc.]

No.

[Anatol Feygin, Cheniere Energy, Inc.]

No.

[Jack A. Fusco, Cheniere Energy, Inc.]

No. Sorry, Fotis.

[Fotis Giannakoulis, Morgan Stanley & Co. LLC]

Thank you very much, both.

[Operator]

And our next question comes from Craig Shere with Tuohy Brothers.

[Craig K. Shere, Tuohy Brothers Investment Research, Inc.]

Good morning.

[Jack A. Fusco, Cheniere Energy, Inc.]

Good morning, Craig.

[Craig K. Shere, Tuohy Brothers Investment Research, Inc.]

Recognizing it's a balance sheet issue, not an income statement one, during perhaps three to five months of commissioning process for Corpus Train 1 and Sabine 5 through the winter, can you opine on perhaps through commissioning what kind of average project utilization against the 4.5 mtpa nameplate we might see over a three to five month commissioning process?

[Michael J. Wortley, Cheniere Energy, Inc.]

Yeah. Hey, Craig. It's Michael. I think it's easier to just think about the commissioning process as kind of five, six, seven cargoes per train, maybe a little more, maybe a little less. Utilization is all over the place obviously. So, you can just put those cargoes into the winter market and calculate the margins and should be a very nice cash windfall for the company, but no P&L impact.

[Craig K. Shere, Tuohy Brothers Investment Research, Inc.]

Sure. Okay. I mean, if we're limited to that kind of mid to slightly higher single-digit cargoes, that certainly suggests you can have these things on very early fully commissioned. Fair enough?

[Michael J. Wortley, Cheniere Energy, Inc.]

Well, no. It takes a while to make the first cargo, so utilization is low. So, I mean, the commissioning process is going to be multi-month period.

[Craig K. Shere, Tuohy Brothers Investment Research, Inc.]

Okay. Understood. I just want to ask, tell me if I'm wrong, I want to kind of simplify this whole tariff issue, obviously it's not good, but is it fair to say that if it doesn't impact the underlying economies, this is just rearranging the deck chairs, and to a degree, it's most efficient to deliver American LNG to China, and now that doesn't happen.

And you're talking about some inefficiencies of maybe $0.10, $0.20 that the Chinese consumer net pays, and maybe some U.S. spot exporters losing margin to the benefit of exporters from Australia, Qatar and elsewhere? I mean, is it fair to describe it that way?

[Anatol Feygin, Cheniere Energy, Inc.]

I think that's a reasonable stab. Again, it's very early on. How exactly it impacts the U.S. exporter to the tune of a $0.10, I'm not sure, right? There are lots of different ways that the Chinese entities can handle this. And it's entirely possible that it is – that it does not actually reverberate into the LNG supply chain.

But you're absolutely right that I think, as Michael asked, there are lots of credible competitors in the world, and you should fully expect them to go into Beijing offices and say, hey, we don't have this issue, right? So, it is clearly something that we will be working with. And as Jack said, we're fundamentally against the tariffs. We're fundamentally pro-free trade. And we think that the U.S. LNG product offering is a win-win for both sides and fortunately embedded in it is the flexibility and the economic viability that has made us successful so far.

[Craig K. Shere, Tuohy Brothers Investment Research, Inc.]

Great. And Anatol, one last follow-up for you. I don't want to use up all my ammunition for tomorrow, but I asked last quarter about the trends in overseas investments and new storage, particularly China, and we're hearing more and more about that now. And I'm wondering if you're starting to believe that this may have moderating prospects for wintertime price spikes relative to the last two years.

[Anatol Feygin, Cheniere Energy, Inc.]

Yes. So, China, of course, just like India and Asia overall, continues to grow its gas business pretty dramatically. To your point, there is a directive in China to increase the amount of storage to 10% of their domestic market. We don't see that 10% level being reached anytime soon, right, because they're – developing storage there is very challenging, expensive, time consuming and the market is growing so rapidly.

So, they're about 10 BCM today, plan is to roughly double that by the end of this decade and increase it to 30 BCM by 2025. That's still – that's a Tbtu of working gas capacity in a rapidly growing market. It will help PetroChina and others smooth out their seasonality which in the main coastal cities can be as high as a 5:1 ratio of winter demand to summer demand, but we think that they'll still continue to have a very peaky winter requirement.

[Craig K. Shere, Tuohy Brothers Investment Research, Inc.]

Great. I appreciate the help. Look forward to seeing you.

[Anatol Feygin, Cheniere Energy, Inc.]

Likewise. Thanks.

[Operator]

We do ask that in the interest of time, you limit yourself to one question and one follow-up question. We will move on to Ryan Levine from Citi.

[Ryan Levine, Citigroup Global Markets, Inc.]

Good morning.

[Jack A. Fusco, Cheniere Energy, Inc.]

Good morning.

[Ryan Levine, Citigroup Global Markets, Inc.]

What are the key milestones to launch the LNG futures contract, and what impact do you see this having on Cheniere's marketing business at Sabine?

[Anatol Feygin, Cheniere Energy, Inc.]

Well, that's really a question for the CME, right? It's their product, their launch. There are lots and lots of steps to go through for a product launch. And as you saw, to the extent that it is successful, we are, under certain conditions comfortable with Sabine Pass being used as a physical delivery point. But again, that's a question best asked of the CME, and it would provide another vehicle for liquidity and price transparency in the LNG market, obviously.

[Ryan Levine, Citigroup Global Markets, Inc.]

Okay. I mean, do you think it would help you in marketing future trains out of Sabine or is it just more just supportive of the overall LNG market?

[Anatol Feygin, Cheniere Energy, Inc.]

Well, those two are linked, and we do expect to have some commercial benefits to the extent that this thing is launched, becomes liquid, and is something that will have the ability to enhance our commercial offering.

[Ryan Levine, Citigroup Global Markets, Inc.]

Okay. And then just one additional, just to confirm, in terms of the contractual provisions of your Chinese contract, am I correct in hearing that there's no provisions in that contract that would be altered by any tariff change between the two countries?

[Anatol Feygin, Cheniere Energy, Inc.]

That's correct.

[Jack A. Fusco, Cheniere Energy, Inc.]

That's correct, yeah.

[Ryan Levine, Citigroup Global Markets, Inc.]

Yeah, great. Thank you.

[Anatol Feygin, Cheniere Energy, Inc.]

Thanks, Ryan.

[Operator]

And we'll take our next question from Jean Ann Salisbury with Bernstein.

[Jean Ann Salisbury, Sanford C. Bernstein & Co. LLC]

Good morning. Have you seen any tick up in conversations from European buyers for contracting future trains? I know that it's been in the headlines a bit recently, but I wonder if it's too early to forecast whether it will materialize.

[Jack A. Fusco, Cheniere Energy, Inc.]

Good morning, Jean Ann. We are very blessed to have a full contingent of European buyers already that have helped us with getting Cheniere started. And our conversations there have been robust. But I don't know, Anatol, do you want to comment if we've seen an uptick on that...

[Anatol Feygin, Cheniere Energy, Inc.]

I guess it depends relative to where you measure. I couldn't say that the uptick in discussions with European buyers is meaningfully different than uptick in discussions with global buyers overall. Clearly, we are today and have been engaged in a number of discussions. There are a number of dynamics, as you know, playing out in the legacy markets like Europe with a substantial amount of existing long-term contracts expiring late this decade, early next. And that's been a driver of a lot of our conversations historically, and continues to be, now augmented with reasonable economic growth and a lot of the coal and nuclear dynamics that are playing out on the continent and in the UK.

[Jean Ann Salisbury, Sanford C. Bernstein & Co. LLC]

Okay. No, that's fair. And my other question is that Venture Global, which is using a little different mid-scale technology than your existing trains, has made a lot of sales recently. Should investors worry that they may have a structurally lower cost than others in the market and might be bringing down the price that customers are willing to contract for? Can you comment on if this is anything that you're seeing in the market?

[Jack A. Fusco, Cheniere Energy, Inc.]

I'll tell you, we are extremely pleased with our business strategy, our ability to execute our strategy, the results that we've gotten, have been able to achieve over the past few years for our shareholders. And having looked at our strategy very recently, we don't think we need to make any major changes. We think our runway to grow our business is long and big and deep, and our conversations with our customers have been very positive. So, we feel like our headwinds are down. So, we've tried to make it look easy. It's a very complicated business. These are extremely large engineering and construction projects, and we continue to hope to over-perform and outperform.

[Jean Ann Salisbury, Sanford C. Bernstein & Co. LLC]

Thank you. That's helpful. That's all from me.

[Operator]

And we'll take our next question from Pavel Molchanov with Raymond James.

[Pavel S. Molchanov, Raymond James & Associates, Inc.]

Thanks for taking the question. One more about China, if I may. Even before the latest tariffs came in, there was a statement by some of the crude oil buyers in China that they were being instructed to effectively curtail purchases of U.S. crude as a preemptive trade measure. Have you seen any evidence that there is political pressure on any of the LNG buyers in China to either curtail purchases of U.S. LNG or at least not to sign additional contracts for LNG?

[Anatol Feygin, Cheniere Energy, Inc.]

No. We haven't. I mean, it's a very important market for us. As you know, we've opened a Beijing office. So, our folks in Beijing are busier than ever, and we hope the two countries can work through the differences rapidly, and we think we're the solution, and we're going to continue to try to work towards that end.

[Pavel S. Molchanov, Raymond James & Associates, Inc.]

Okay. And then kind of a follow-up on the competitive landscape, supposing for a moment that the tariff does not go away in the foreseeable future and kind of becomes part of the industry landscape, what effect do you think this would have on greenfield LNG project development, whether in North America or some of the overseas projects that have been geared towards China as a customer?

[Jack A. Fusco, Cheniere Energy, Inc.]

Yeah. It won't affect Cheniere. I'm glad that we're through with the $30 billion construction effort, and now we can reap the rewards for that effort. But there's a lot of headwinds, right, on just infrastructure overall. You've got steel tariffs; you have rising interest rates, and these are very capital intensive projects. So, it's a big push. I don't know if I would focus just on China for that matter. But it won't – it's not going to impact our growth plans.

[Pavel S. Molchanov, Raymond James & Associates, Inc.]

All right. Appreciate it, guys.

[Operator]

And it appears we have no further questions in the queue at this time. I would like to turn the call back over to our speakers for any concluding remarks.

[Jack A. Fusco, Cheniere Energy, Inc.]

I just want to thank everybody for their support of Cheniere, and I wish you a safe rest of the summer. Thanks.

[Operator]

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.