Cheniere Energy, Inc. Q1 FY2020 Earnings Call

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.

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.

Thank you, Randy. Good morning, everyone. I'm pleased to be here today in downtown Houston 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 headquarters 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 altered, 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 to 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 and the first responders who test us, feed us, and provide for our safety for their tireless efforts. We pray for their good health. Turning now to Slide 5. At Cheniere, we have built a strong, resilient, customer-focused business capable of weathering volatility in both the energy and financial markets. While skeptics may question this at times, we find ourselves in this historic volatility and uncertainty in both 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 generated 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 $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 and guidance in more detail in a few minutes. During the first quarter, we produced and exported a record 128 cargoes of LNG, including 100 cargo from Corpus Christi and a total 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 2 at Corpus Christi are set to commence tomorrow. We have been in the process of onboarding those customers and we welcome them to the Cheniere complex. Construction on Corpus Christi Train 3 and Sabine Pass Train 6 continues to progress on accelerated schedules. Corpus Christi Train 3 is approximately 84% complete, and Sabine Pass Train 6 is around 54% complete. Both Trains are forecast to be significantly ahead of their guaranteed completion dates. Now let’s turn to Slide 6, where I will spend a few moments describing Cheniere's response to COVID-19 as it has been significant. We recognized the risks 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 the status, develop and implement policies and protocols specific to each office, location, and site. In addition, they enforced protective measures, and most importantly, regularly communicate with all 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 and Corpus Christi to ensure workplace safety and business continuity. We've implemented many changes at the sites in pursuit of these priorities. That said, we do not currently expect these measures or COVID-19 to 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 flawless execution. The impact of COVID-19 on our country, communities, and those countries of our foundation customers has been unprecedented. As a company, community involvement and paying it forward is in our DNA. Today, Cheniere has pledged over a million dollars to global COVID-19 relief 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 food insecurity for those most in need and provide provisions and equipment for first responders and frontline healthcare workers. I'm extremely proud of the success of the personal protective equipment drive and partnership with the Houston Astros Foundation and Project Care. Now let’s turn to Slide 7, before I turn it 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 to describe the details of ordinary interactions with our customers to the market, including their decisions regarding the 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 occurs, 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 decreased 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.

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 100 million tons. About 10 million tons of new LNG supply were added in Q1, with about 70% coming from the U.S. This came on the heels of 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 a 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 by 7% or over 4 million tons year-on-year. Meanwhile, Europe continues 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 averaged $3.35 during the first quarter, over 50% lower year-on-year. Similarly, JKM averaged $4.82 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 2021. In early 2019, we expected 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 total FIDs for the two-year period to total approximately 65 million tons, 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, or over 8 million tons, flowed 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 store inventories, which, in the absence of a cold winter, retained 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's 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 with domestic infrastructure bottlenecks have caused 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 decline in 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, reducing 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 in imports was reversed as both South Korea and Taiwan continue to take a tough stance on coal, offering support to gas-fired power generation demand. South Korea has mandated maintenance which caused coal plants to decrease coal-fired power generation in January and February by 15% versus last year. Taiwan's coal-fired power generation dropped 4.5% year-on-year. In Japan, weak power demand and mild temperatures reduced 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 anti-terrorism requirements, in addition to the Sendai No. 1 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 LNG demand as a result of various stimulus packages 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 regasification projects and gas-fired power generation projects, which would contribute more firmly to expectations of China doubling its 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 the country seeks to reach peak CO2 emissions by 2030. To conclude, the market is currently experiencing extremely unusual conditions that are creating bearish pressures across the entire commodity complex. Gas storage levels in Europe are high, and gas prices there are likely to remain weak until storage levels normalize. While 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 resumes. 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, are 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.

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 exported 453 TBtu of LNG, or 128 cargoes from our liquefaction projects during the first quarter. LNG production levels were relatively flat as compared to the fourth quarter of 2019. For the first quarter, we recognized an income of 459 TBtu of LNG produced from our liquefaction projects and 14 TBtu of LNG sourced from third parties. Approximately 79% of the 473 TBtu of LNG recognized as 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 SPAs 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 we recognized upon notice of cancellation. Volumes of LNG recognized as income are materially consistent for the first quarter as compared to the fourth quarter of 2019, and realized 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 from the fourth quarter of 2019. Net income in the fourth quarter of 2019 was positively impacted by a 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 of 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 in 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. Turning 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 and strong cash flow generation capability for the remainder of this year and into future years. We also have 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 refinanced the prior working capital facility, lowered the interest rate, improved flexibility under certain covenants, and pushed out the maturity date from 2020 to 2025. The undrawn capacity under this facility, as well as 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 have any external financing needs for the completion of construction of Corpus Train 3 or Sabine Pass Train 6. Those trains were financed approximately 50-50 debt-equity, and the debt financing of both Trains has 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 the market disruptions began. 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 were volatile in March but have 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 have multiple options to redeem or refinance these convertible notes. We’re also considering financing options to redeem the remaining outstanding balance of the Corpus Christi HoldCo convertible notes due 2025 I mentioned a moment ago, depending on market conditions. Jack mentioned that despite headwinds and weakness in the global LNG market, we 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 guidance is $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% of our LNG production for 2020, leaving our financial results less exposed to fluctuations in market pricing this year. Since the last call, we have 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 that 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.

And we'll go to our first question from Shneur Gershuni of 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 does 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 the market will just re-price accordingly, and the spreads will go back to normal once COVID and inventory bounce clear out?

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.

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, which 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 an effect, and we fully expect to see a relatively stable NYMEX going forward between $2.5 and $3, which is where the curves are today. Even in these unprecedented times, I'll just point out that the realized volatility on NYMEX has been substantially lower than on crude or even JKM. We do expect 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.

Yes, appreciate the color, thank you for that. And maybe it's just some quick follow-ups here. Are 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?

Yes, it's Michael. I'll address the second question and then let Anatol tackle the first one. As mentioned, we have two maturities, one related to the SPL, and we do not have any maturity this year; the first one is in February of next year. The entire SPL market is currently above par and trading well below 5%. We believe that market is certainly accessible to us, and we plan to engage with it over the remainder of the year. Regarding the CEI, we are exploring various options to manage that convertible, which isn't due until the summer of next year. As I stated earlier, we have been considering this matter. I think a mix of the bank market, the bond market, current liquidity, and projected cash flow will enable us to address those converts. While I'm not certain about the convert market's accessibility, we are examining many options. I believe the bank market is available to us; it's really about the amount we're looking for. We are actively working through this to handle the convert next summer. Ideally, if we can secure the right amount to address the EIG notes of Corpus Christi HoldCo, while they don't have an immediate maturity, they do represent the highest cost debt in the complex. We'll monitor how this develops in the coming months and proactively select combinations of alternatives to resolve it.

Sure. To the first part of your question, NYMEX has been less volatile, but all sides as you know have been quite volatile. I just want to thank the teams that we haven't seen in a couple of 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.

We'll go to our next question from Jeremy Tonet from 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. Are 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?

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, prior to the pandemic, and to 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 who are willing to sacrifice with their 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 come back into the worldwide market. Hopefully, we're seeing some signs of green shoots there, but no, there have been no surprises.

Thanks, Jack. Just to add to 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, has been exceptional. The teams haven't missed a beat, and our customers are appreciative and obviously respectful of those notices, so far so good. Thank you.

And then maybe just, if I could on kind of longer-term strategy, if any thoughts you could share with regard 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 there's been any shift in your overall strategy taking into account the broader changes we've seen in the market and the macro backdrop?

Now, I think we like our position. Last November when we gave you all guidance, I told you we were materially hedged for the year prior. You should expect us to manage the business conservatively and not want to take a lot of market risk. I have complete confidence that when we convert that market risk to operating risk, 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 has been a little bit rough these days, as you can imagine.

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

First one, Jack, it's for you, and maybe Anatol as well. But Jack, you mentioned, and you kind of addressed some of the FM buzz that comes up anytime there's a market disruption and that the notion of cancelling a cargo versus interrupting a 20-year contract is a very different thing. The market has already litigated this degree for 14 years. But I'm curious, if you look at this across the entire industry, 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 as yours? Do you think this is something that 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 being 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 could percolate elsewhere?

So, Michael, as you know, I'm relatively new in this industry. So, I'll take the first part of it, and I'll hand it over to Anatol to help with a 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 entities and other projects, I'll let Anatol address that part.

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

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 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 stepping into, it's kind of a greenfield, shelving it for a couple of 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?

Michael, we have not enough organic growth to satisfy our needs for many, many years to come, both at Corpus Christi and at Sabine Pass. We have the existing infrastructure there. 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. These are associations for long-term energy contracts that require a face-to-face meeting, 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, it looks like it's a little ways away for us. But I don't know, Michael, do you have anything to add?

I mean, we have a team that 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's sentiments in that regard.

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

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?

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

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

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?

The Sabine plant has some seasonality in production. The SPAs are generally consistent, but there are additional winter volumes included. This means there are slightly more contractual third-party sales in the winter, and production may be a bit higher, although it's not significantly different throughout the year. A major change will occur on May 1 with the DFCDs for Corpus Train 2, leading to a further adjustment in the contracted volume to fully realize our 7 train platform.

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 a little bit. Okay. And then a clarification question, Michael. I think in your commentary, did you say that you booked revenue tied to a cancellation cargo when you receive the cancellation notice?

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.

And isn't it true that cancellation orders must be given about two months in advance? Does that suggest we could possibly see some accelerated revenue recognition in the second quarter related to cancellation pickups?

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…

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

That's right.

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

Good morning. I've got three quick ones here. So, just a 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?

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

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

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

Yes, the projected spending for Train 3 in Q2 is around $600 million, mostly allocated for this year, not including contingencies, so it could be a bit more depending on circumstances. For SPL, we’re looking at approximately $1.4 billion for SPL Train 6 through 2030, also excluding contingencies. Margins have been tight, which means we have a limit on losses, so we won't be lifting production beyond those thresholds. That’s why I mentioned the metric, with a potential downside of 30 million and an upside of 60 million. Therefore, I believe we will remain within our guidance range despite marketing efforts. I think that’s a reasonable assessment.

We'll move to our next question from Spiro Dounis of 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 widely reported cancellations have come, not just from your guys, but just generally in the industry. It seems like it has a lot of potential to back up 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 market does open up, I guess, how nimble can CMI be to lift a cargo effectively immediately or capture that stock price if it opens up? And then second, do you even agree with the premise that it could help actually get a lot of pressure because of their reporting cancellations?

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

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 has 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 steps down dramatically as of tomorrow once we hand over Train 2 to those foundation customers. So it's possible given the volatility that we discussed 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.

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 Henry Hub could actually be under a lot of pressure in June? Just given the fact that I think there's over 20 reported cancellations out there, which seems like a fairly large number on a daily basis. Just curious. The futures are not reflecting that yet, but is that something that you see potentially happening?

Yes, if I knew the answer to that and what's priced in and what's anticipated at the Henry Hub, not Anatol Feygin. The market you said has a fair amount of the estimate and information. So, it's anybody's guess between the declines of associated gas production and 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 from LNG facilities is already in the market.

And then just a second question, just around some of the economics of idling some of these trains and running fewer trains at a higher utilization rate. I'm not saying we're there yet, but just asking me in the context of these cancellations. Just curious if that would make sense, and what environment it would look like to get there.

Hey, it's Michael. We can operate our trains at half capacity while maintaining the same efficiency as at full capacity, so this does not significantly impact us. When we evaluate lifting economics, we earn some income from lifting and its margins. However, the loss of that revenue is mostly balanced out by reduced variable costs at the plant. We have fixed costs, and we pay GE under the CSA, which we don't incur when our trains are not in operation, aside from consumables like chemicals and refrigerants. Therefore, it’s mostly balanced until we experience a minor headwind, but I don’t believe it will be noticeable for us.

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

Hey, good morning team. In fact, let me just pick it up where Spiro left off. So just a high-level first question, how should we think about the ability to scale down OpEx and SG&A? And then thinking about that, A, in the context of 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?

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've got to keep our people in the plants ready to operate even in a lifting scenario. And as I said, our savings on variable costs 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.

I also wanted to mention that there are only 1,600 employees across the entire Cheniere global operation, which sets us apart from many other energy companies. Our selling, general, and administrative expenses are modest and will remain low since we have shifted to virtual meetings for contract negotiations and customer visits. As Michael pointed out, we are focused on running the business as effectively and efficiently as possible.

Okay. And just to 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.

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. For one, I 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.

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

I guess starting off, obviously globally we're seeing countrywide shutdowns, 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 with Cheniere?

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 interest. And then April preliminary numbers 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 going 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. 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.

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 3 sitting in there?

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. As I mentioned, over 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. In terms of where Corpus Christi Stage 3 sits in there, I'll just say that we continue to find it a very attractive project. As Jack mentioned, we have these organic growth opportunities that leverage a lot of our footprint and skill sets. It is a project that we believe will be dispatched in that timeframe.

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

Hi, good afternoon or morning. I have a question about marketing. Considering global net backs, is there an opportunity or willingness to pursue a number of third-party deals to capture more local spot opportunities? How significant is that in the overall portfolio? My second question is about the uncertainty surrounding other U.S. LNG projects. Is there a way to potentially tap into that demand, especially if some of those contracts or projects are only partially contracted? Could this demand possibly shift to some of your own projects?

Do you want to go with the first one, Mike?

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 and there is volatility in local indices. 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 for everybody to enter into optimizations. We're taking advantage of those as the teams capture that. There's never a dull moment these days, and some of that presents opportunities for us, if that's what you were asking.

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. 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 in Cheniere. Thank you all.

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