Q4 2019 Earnings Call
[music].
Please standby.
Good day, and welcome to the Shinier energy fourth quarter, and full year 2019 earnings call and webcast.
Today's conference is being recorded at this time I'd like to turn the conference over to Randy Bhatia VP of Investor Relations. Please go ahead.
Thanks, operator, good morning, everyone and welcome to Shamir's fourth quarter and full year 2019 earnings conference call.
My presentation and access to the webcast for today's call or available extra near dotcom.
Joining me today or got Cusco, seniors, President and CEO, and it'll Fagan executive Vice President and Chief Commercial Officer, and Michael <unk> 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 two 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.
Reconciliation of these matters the most comparable GAAP financial measure can be found in the appendix for the slide presentation.
That's part of our discussion of Engineers result, today's call May also include selected financial information and results first generic energy partners LP or CQ Pete.
We do not intend to cover CEQP. These results separately from those auctioneer Energy Inc.
Call agenda as shown on slide three Jack will begin with operating and financial highlights NFL 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 QNX I'll now turn the call over to Jack Fusco generics President and CEO.
Thank you Randy good morning, everyone I'm pleased to be here today to review our results from 2019, a year marked with significant achievement and milestones across every phase of our business in operations and.
And to share my continued optimism that the opportunities ahead of us.
Slide five shows key financial and operating highlights from the fourth quarter and full year 2019, I'd like to highlight a couple of key achievements here.
In the fourth quarter of 2019, we generated consolidated adjusted EBITDA of 987 million in distributable cash flow of approximately 270 million on revenue or just over $3 billion.
We generated net income attributable to common stock holders of 939 million, which benefited from the release of a significant portion of evaluation allowance previously recorded against our deferred tax assets.
Operationally, we produced an export a record 130 cargoes during the quarter for almost one and a half LNG cargoes per day across our two facilities.
For full year 2019, we generated net income of 648 million consolidated adjusted EBITDA of 2.95 billion and distributable cash flow of approximately 780 million on revenue of 9.7 billion.
We produced an export over 1.5 for drilling in BT years of LNG from Sabine pass in Corpus Christi and delivered financial results within the guidance ranges, we provided for the year.
Our vision is to provide clean secure and affordable energy to the world.
2020, we're off to a great start.
As we recently celebrated the production of our 1000 LNG cargo.
She near employees worldwide.
Commemorated this landmark operating milestones, which we achieved faster than any other LNG producer in history.
As we look ahead to the balance of 2020 short term market headwinds notwithstanding today, we're reconfirming, our full year guidance of 3.8 $4.1 billion of consolidated adjusted EBITDA.
And distributable cash flow of 1 billion to 1.3 billion.
Turning now to slide six.
2019 was an extraordinary year.
Filled with accomplishments that helped to elevate shinier as a standard against which other operating companies in this industry will be measured.
I want to leave some time for culinary so I can't go through everything we accomplished in 2019.
But I'll touch on a few of the most impactful achievement.
In 2019, we placed three trains into service all on budget and on an average of nine months ahead of schedule.
There have been many examples of shinier developing and reinforcing our reputation for excellence in execution I guess, maybe the most notable one yet.
This unprecedented result would not have been possible without the focus we have on execution through all phases of our projects in the application of that focus in our relationships with our APC partner backfill in our technology providers Conoco Phillips and Baker Hughes.
In addition to completing new trains.
We onboarded seven long term customers in 2019, the most recent of which were related to the contracts associated with train five at Sabine pass which commenced in September.
Through year end 2019, we had onboarded 13 of our long term credit worthy customers and a 2020, we expect to onboard several more including those with contracts associated with train two at Corpus Christi, which are expected to commence in may.
Continuing with the execution team in 2019, we successfully executed two major turnarounds at SPL.
These turnarounds involved over 500000 man hours and were completed on time within budget and most importantly safely.
In securing our growth during 2019, we made a positive EPS I'd on train six at Sabine pass our ninth liquefaction trains and achieve significant project milestones related to Corpus Christi stage three.
The addition of our ninth train coupled with increased run rate production guidance resulted in an increase in our run rate consolidated adjusted EBITDA guidance of $5.2 billion to $5.6 billion.
At Corpus Christi, we continue to leverage our platform and site location to deliver innovative solutions.
Signing our first ever integrated production.
Marketing transactions with two domestic gas producers.
These commercially innovative agreements enable domestic producers to access international prices for their gas, while providing chenier with gas supply visibility and additional long term investment grade take or pay style cash flows, which will help support our future expansion.
In late 2019 Corpus Christi stage, three cleared a major regulatory hurdle when the project received FERC authorization.
We expect to finalize CPC contracting with backfill for stage three in the near future and are pursuing the additional commercial support required in order for us staff I'd.
And finally, one of our key priorities entering 2019, which to deliver a comprehensive cap allocation plan, which we did in June.
That plan prioritizes accretive growth projects puts the company on a path to enterprise wide investment grade metrics and allocates excess capital in a flexible and responsible way.
And Michael will give you an update on the progress we've made in his comments in a few minutes.
Now turn to slide seven where our spend a few minutes on our sustainability NSG efforts.
She is a topic of growing importance, among our stakeholders, including investors lenders advisers rating agencies operating partners employees and many others.
The primary focus of our stakeholders is on that he.
As there is an increasing call for energy infrastructure companies to demonstrate that business has done and I'm responsible environmentally conscious manner.
Juniors business certainly is.
And you'll hear from us telling our positive he SG story more vocally starting this year.
Sure there is on the right side of the discussion around the environment.
As one of the most.
Impactful ways to reduce greenhouse gas emissions worldwide through coal to gas switching for power generation, especially in large emerging markets like China, and India, where small percentage changes in energy consumption can make a significant difference in total carbon emissions.
As one of the largest operators are liquefaction capacity worldwide Shinier is a leading global enabler of that transition to a sustainable lower carbon future.
To put the environmental benefits of LNG into perspective.
As I mentioned, a moment ago, we recently celebrated our 1000 LNG cargo.
If all 1000 LNG cargoes had been utilized for gas fired power generation in place us coal and would equate to a reduction of an estimated over 200 million metric tons of C. O two admissions.
We have made significant investments in resources focus exclusively on our SG efforts.
With supported the executive leadership team and our board of directors, we adopted our climate and sustainability principles as part of our long term sustainability strategy.
Our principles science transparency operational excellence and supply chain guide, our sustainability efforts and help reinforce the strength of our business model in a new energy economy with natural gas, leading a lower carbon energy transition.
Our climate and sustainability team is leading the development of our inaugural corporate responsibility report, which we expect to publish in the next few months.
This report, which is a cross functional effort involving in putting coordination from across the Shinier workforce.
We'll cover six things and approximately 70 key disclosures.
We intend to update this report annually and it will serve as a cornerstone of our iasci related disclosures.
Before turning the call over to Anatole, who will discuss the LNG market in more detail I would like to say a few words regarding current LNG market dynamics.
There is obviously, some weakness which has been cost and compounded by a number of factors, including weather supply additions and more recently the public health situation in China.
And this has been a focal point in our investor discussions over the past few months.
Due to the highly contracted nature of our liquefaction projects volatility in the short term LNG market.
As limited impact on our business.
This is especially true in 2020, we have pre sold over 95% of the expected production.
Thereby limiting our exposure in short term market prices.
This company is designed to build highly contracted long lived infrastructure that enables us to deliver long term energy solutions to customers worldwide.
Got to be overly exposed to the short term markets.
Our business model is not based on speculating on global commodity markets, rather on risk management framework that is positioned shinier such that short term market volatility has limited impact to our economics.
We do not view, our marketing volumes a speculative.
We view it as strategic to our long term growth.
Shinier isn't infrastructure business, that's to exceed teen growth with excellence in project development and operations and with contracted project returns secured prior to construction.
The fundamentals of our long term business remain extremely strong.
From 2016, when I joined Shinier through the end of 2019, the LNG market demand has grown by about 100 million tons.
That demand is forecast to grow another 100 million tons by 2025.
And a further.
Hundred million tons by 2030.
But this growth will be cyclical that's a necessary infrastructure is required to be built.
The LNG market is a dynamic one undergoing significant growth in evolution.
And she near is ideally positioned to leverage our world class platform to enable growth at very attractive returns as well as manage the volatility that may appear in the short term market from time to time.
But that being said, we find ourselves in a unique time in the LNG market.
And we do acknowledge market headwinds in our customers' needs.
Well LNG market prices are at historic lows don't have a material impact on.
On our short term economics.
It can impact long term project development and long term customer urgency.
Also while the phase one trade agreement with China, and subsequent opportunity for short term LNG carrier flavors are positive steps.
We await clarity on implementation and enforcement, especially in light of the Corona virus.
And what impact that may have on our Chinese foreign trade in the near term.
And now I'll turn the call over to Anatol, who will give additional insight on the market.
Thanks, Jack and good morning, everyone.
Please turn to slide 10.
Over 24 million tons per annum of new LNG capacity came into service in 2019 globally, adding to the over 40 Mtpa that came online in 2018.
This newly operational capacity resulted in nearly 40 million tons of incremental LNG in the market in 2019 as compared to 2018, which is roughly on par with the industry's previous largest single year growth recorded in 2010.
The significant increase in LNG supply occurred not only in mid warmer than normal weather across most of the LNG importing world.
But also limited some growing concern about economic growth in Asia as key economies and ongoing trade discussions.
In addition increased nuclear availability within eases key LNG importers contributed further downward pressure on total gas and LNG demand.
The combination of warm weather economic concerns and competing fuel factors resulted in lower than expected LNG growth in Asia, which increased less than 7 million tons in 2019.
Europe has continued the market balancing rolled has played since the second half of 2018.
Europe absorbed most of the incremental LNG supply in 2019 with the majority of incremental volumes go into the continents, most liquid markets in the northwest and to the Iberian market.
So if market conditions persisted into the fourth quarter led to record levels of destination flexible us LNG flowing to Europe.
US LNG flows to Europe in the fourth quarter were almost 6 million tons more than twice the previous peak in the first quarter of 2019 and approximately half of all U.S. LNG volumes in the fourth quarter flowed to Europe.
Strong inflows of LNG meant that gas prices in Europe remained muted and well below the same period in 2018.
TTF drops to an average of just under $4 in 50 cents and MB to you in the fourth quarter versus over $8 in 50 cents in the fourth quarter of 2018.
Similarly, Jay Cam prices for LNG in Asia decrease to an average of $5 in 50 cents in RMB to you in fourth quarter 19 versus $10.70 in the previous year.
The strong supply growth warm weather and slowing economic growth that we saw in the fourth quarter of 2019 have continued into early 2020 and have recently been compounded by the impact of the novel Corona virus outbreak.
Since the start of 2020, we've seen GKN spot prices decreased by approximately 50% with prices for March falling below the previous record low of 3065 cents recorded in May of 2009.
What's currently too early to gauge the potential impact of the Corona virus on the near term market balance decreased short term LNG demand in China is putting additional pressure on the markets still working to absorb the ways of incremental supply into the market over the past two years I'll speak more about our 2020 outlook in a few moments.
Please turn to slide 11 for additional details regarding LNG demand in Asia.
As I mentioned, a moment ago Asia saw only modest demand growth in 2019 overall Asia is LNG demand grew roughly 3% in 2019, gaining approximately 7 million tons well below the growth figures seem in the previous two years.
Weaker total electricity demand and stronger nuclear availability in 2019 in Japan, South Korea, and Taiwan, The GTT region place downward pressure on thermal generation that region, particularly on gas fired power.
Nuclear generation in the GTT region increased by nearly 20% year on year in 2019, while LNG demand in these markets dropped by over 7% or approximately 10 million tons.
Teekay LNG imports as a percentage of overall Asian LNG demand has continued to decrease falling by 6% over the past year to 54%.
Growth markets in South and southeast Asia compensated for most of the market share loss by GTT with the regions, representing about a 15 or 21% of total Asian LNG demand in 2019.
LNG imports into the region surpassed 50 million tons in aggregate, increasing by about 22% or over 9 million tons year on year.
All but one market, India within the South and Southeast Asian region registered double digit growth rates in 2019.
The rising supply demand gap depleting domestic reserves rapid infrastructure build outs and emerging price sensitive buyers all help provide supports to LNG demand in the south and southeast Asian regions.
As you can see on the top right as LNG spot prices dropped in the second and third quarters of 2019.
Imports in South and Southeast Asia hit new seasonal highs as a result of improved LNG affordability.
In China slower economic growth and higher year on year domestic gas production in 2019 reduce the growth rate of LNG imports to 14% compared to 41% in 2018.
Pipe Ferguson imports into China were flat compared to 2018, well LNG imports continue to expand albeit at a slower pace.
LNG imports into the country reached 62, and a half million tons in 2019, adding nearly 8 million tons year on year.
Market sentiment in China was lifted at the beginning of this year as a result of improved economic indicators and the phase one trade yield reached in mid January.
The recent actions by China's Ministry of Finance to provide short term exemptions to the tariffs on US LNG is also positive steps.
That being said, we weighed clarity on the impact of grown of ours on Chinese economic and foreign trade priorities.
While the impact of the outbreak on China's economic growth is uncertain, we see potential for Chinese gas demand to decrease in the near term followed by a rebound with the resumption of normal industrial activity and as a result of stimulus measures already being implemented by the Chinese government.
Longer term, we believe that to us and China, our natural partners on energy trade and are hopeful that the tariffs can be remove permanently to facilitate new long term agreements.
For Asia overall, despite near term challenges, we remain optimistic about long term gas and LNG demand growth underpinned by growing economies rising prosperity to drive toward policies for cleaner air and better energy access and a growing focus on sustainability within its energy mix.
Please turn to slide 12.
European LNG import levels continue to increase in the fourth quarter, despite record seasonal amounts of volume in underground storage.
Imports reached a record nine and a half million tons for more than 145 cargoes of LNG in December.
European imports for the total year grew by 74%, surpassing 87 million tons and exceeding the previous records of 67 million tons set in both 2010 in 2011.
The incremental LNG flows into Europe were enabled by a combination of additional gas being placed into underground storage coal to gas switching and a reduction in other gas supply sources.
Preliminary estimates suggest that a production declined in the Netherlands of about six DCM and have dropped and pipe gas supplies of a combined 19 bcm helped accommodate approximately 50% of the increased LNG receipts.
The push of LNG into the European market, and resulting drop in spot gas prices and taste gas burn in power generation, an important factor that help balance to market and that we believe we'll continue to be important in the European power markets over the medium term.
Gas fired power generation in the EU increased by 12% in 2019, while coal fired power generation decreased by 24%.
This trend alongside strong renewable generation it resulted in a 12% reduction in carbon dioxide emissions from the power sector in 2019.
Reduction of 120 million tons year on year.
We believe the decline in the envision as gas production and the commitment to environmental targets are structural elements that will likely provide upside European gas demand and thus LNG imports in the near to medium term.
In the next few years Europe plans closure of over 44, Gigawatts of coal capacity and almost 18 gigawatts of nuclear capacity.
In Germany alone 11, Gigawatts of nuclear and lignite capacity has been scheduled to close by 2022.
We expect these closures to increase gas demand in the power stack in Europe and drive LNG demand growth during that period.
To put it in context, if all of the solid fuel capacity would to be replaced with gas fired generation. It could be equivalent to approximately 40 million tons per annum of potential LNG demand.
As Jack mentioned, we have received an increasing number of questions regarding short term LNG market pricing and supply demand balancing dynamics, particularly given the warmer than average winter weather additional LNG supply is scheduled to come online in the first half of the year and the recent near term market uncertainty in China.
While much attention is given to the possibility of supply curtailments, particularly in the US there are a number of factors, which could help balance to markets, including faisel acid demand response, whether maintenance intervals and changes in supply levels of competing fuels and sources of gas.
While we acknowledge that some LNG on the margin may not be lifted from the us. This year, we do not use significant or prolong curtailment of us LNG production as a likely scenario.
Thank you for your time and attention I will now turn the call over to Michael who will review our financial results.
Thanks, Anthony and good morning, everyone turning to slide 14 for the fourth quarter. We generated net income of 939 million consolidated adjusted EBITDA of 987 million and distributable cash flow of approximately 270 million.
For the full year, we generated net income of 648 million consolidated adjusted EBITDA of 2.95 billion in distributable cash flow of approximately 780 million.
As Jack mentioned, both consolidated adjusted EBITDA and distributable cash flow within our full year guidance ranges.
During the fourth quarter net income was positively impacted by releasing a significant portion 542 million of the valuation allowance. We previously recorded against our deferred tax assets, resulting in a tax benefit at a $517 million for the fourth quarter and full year 2019.
We exported 462 TV to you have LNG from our liquefaction projects during the fourth quarter, an increase of 79, TV to you or 21% over the third quarter.
Primarily due to a full quarter of volumes from Corpus Christi train two which was placed into service in late August and higher seasonal production at Sabine pass.
Full year, we exported over 1500 TV to you.
Currently 29 million tons of LNG from Sabine pass in Corpus Christi.
For the fourth quarter, we recognized an income 460 tbtu of LNG produced at our liquefaction projects and nine Tbtu of LNG sort from third parties for the full year. We recognized an income 1458, tbtu EU of LNG produce at or liquefaction projects and 40 Tbtu of LNG source from third parties.
Approximately 72% of the 469 Tbtu you recognized in income during the fourth quarter was sold under long term agreements and the remaining 28% with sold our marketing affiliate either into the spot market, we're under short and medium term contracts.
Volume sold under long term agreement increased by 73, tbtu compared to the third quarter.
Primarily by a full quarter of volumes under the FPGA is related to Sabine pass train five which we FCD in September.
For the full year, 71% of the volumes recognized an income were sold under long term agreements.
For the full year 51, Tbtu you have commissioning related volumes from our liquefaction projects were recognized on our balance sheet as offsets of 301 million to LNG terminal construction and process.
No commissioning volumes were export a recognized in the fourth quarter.
Income from operations in the fourth quarter was approximately 1 billion.
An increase of over 700 million compared to the third quarter.
The increase in income from operations was primarily due to increased total margins, partially offset by an increase in total operating costs and expenses primarily related to a full quarters impact of Corpus Christi train two.
Total margins or revenues less cost of sales increased by almost 800 million in the fourth quarter as compared to the third quarter due to increased volumes of LNG recognized an income increased margins per MBT, you have LNG, recognizing income and net mark to market gains from changes in fair value of commodity and FX derivatives.
Primarily related to agreements for the future purchase of natural gas and future sale of LNG.
Income from operations for full year 2019 was approximately 2.4 billion an increase of over 300 million compared to 2018.
And then primarily by increased volumes of LNG recognizing income as a result of additional trains in operation and that Mark to market gains from changes in fair value of commodity derivatives, partially offset by decreased margins for and then B to you have LNG recognize an income.
An increase operating costs and expenses as a result of additional trains in operation and certain maintenance and related activities at SPL project.
Net income attributable to common stockholders for the fourth quarter was 939 million on $3 70 per share basic and three dollarsthirty four per share diluted compared to a net loss of 318 million or $1.25 per share and basic and diluted for the third quarter.
The increase in net income was driven primarily by increased income from operations the tax valuation allowance release mentioned previously.
Net gains related interest rate derivatives and increase in other income.
Partially offset by increased interest expense and increased net income attributable to non controlling interest.
Net income attributable to non controlling interest increase due to an increase in net income recognized by CTP in which the non controlling interest are held.
For the full year 2019, we generated net income attributable to common stockholders of $648 million or $2 53 per share basic and $2 51 per share diluted compared to $471 million were $1.92 per share basic and $1.90 per share diluted for the full year 2018.
The increase in net income was driven primarily by increased income from operations. The tax valuation allowance release and decreased net income attributable noncontrolling interest, partially offset by increased interest expense increased net loss related to interest rate derivatives and increased other expense primarily related to an image.
Payment of our equity method investments in mid ship.
Finally in support of our capital allocation framework.
For full year 2019, we repurchased in aggregate 4 million shares of common stock for a total of $249 million under our share repurchase program.
Pre paid 153 million of outstanding borrowings under the Corpus credit facility.
Please turn to slide 15 for 2020 financial outlook.
As Jack mentioned today, we're reconfirming, our full year 2020 guidance ranges for consolidated adjusted EBITDA of 3.8, 4.1 billion distributable cash flow of $1 billion to $1.3 billion in the CTP distribution of $2 55, Dollarssixty five per unit.
However, given the drop in LNG market prices since our Q3 call in November we are currently tracking to the lower end debris that Don guidance range.
That call. We noted that we had sold approximately 95% of our production for 2020, leaving us with full year EBITDA variability of approximately 100 million for every one dollar change in market margins.
We've continued to sell forward marketing volumes into the physical in financial markets in today that EBITDA variability to approximately 80 million per $1 change in market margin.
Given the limited amount of volumes, which were unsold for the remainder of 2020 relative to our forecast total production for the year, we remain confident in the guidance ranges. Despite the soft short term LNG market environment.
We'll take or pay nature of our long term contracts along with the sale and a significant portion of marketing volumes for the year leaves limited risk to the achievement of results within our guidance ranges, even if the scenario with decrease LNG liftings were to occur.
With respect to the Corpus Christi Holdco converts we have entered into an agreement with the AG to redeem 300 million of the outstanding balance of the Corpus Christi Holdco convertible notes due 2025 for cash the outcome of this transaction is reduction of notional debt.
And the prevention of over 6 million shares of equity dilution pro forma for this transaction there will be approximately $1.3 billion of the CCH Holdco convertible notes outstanding and we will be prudent and managing the balance of these notes.
We maintain the option to utilize cash to further reduce the outstanding balances of the notes over the next six months.
Turning now to slide 16, as we progress toward a positive if I'd for Corpus Christi stage. Three we also remains dedicated to capital discipline into the capital allocation priorities, we announced last year.
We will remain disciplined in our investment decisions and are focused on securing sufficient long term fixed fee cash flow to support our required returns and the approximately $1 billion incremental EBITDA contribution stage three can provide which we showed you last June.
The investment parameters. We have previously shared with you have not changed regarding our approach to stage three year any future growth projects.
We are targeting a 20 20-F idea stage three based on the commercial opportunity set in the tools team is pursuing but we will remain disciplined and not move forward with the project until we have sufficient commercial support to meet or exceed our investment parameters.
Any potential shift in the timing of the stage III, if I'd would impact the amount of cash we've been applied to our other capital allocation priorities, achieving investment grade credit ratings across our corporate structure, reducing leverage to a target consolidated debt to EBITDA in the mid to high four times range and returning excess capital to our shareholders via our buyback program.
That concludes our prepared remarks. Thank you for your time and your interest engineer operator, we're ready to open the lines for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
Or using a speaker phone to make sure. Your mute function is turned off to like your signal to reach our equipment.
We request that you limit yourself to one primary and one follow up question only police and you may reenter the queue at any time again that is star one if you'd like to ask a question.
Our first question will come from Spiro Dounis with credit Suisse.
Hey, everyone. Good morning, it's John Mccain on for Spiro just wanted to start with a macro question like we knew 2020 was going to be hard front of Iris is kind of made a little worse, but I'm wondering if you could talk a little bit about whether you're seeing a pickup in demand elsewhere outside of China, giving although pricing and maybe whether that could drive a faster.
Our step back once we see a recovery.
Alright, Thanks, John Anatoly want to take that one thanks, John Good morning. Thanks, Jack Yes, we certainly are so the the main price elastic demand. We saw in 2019 as we've discussed was Europe northwestern Iberian Peninsula, we're continuing to see that continued to see further penetration of gas into.
Into those markets again, we think a lot of that is structural but we're also seeing other tiers of response one of the one of the more active markets.
Over the last couple of months has been India has shown very good appetite at at these price levels and yes, you can say hey.
These are levels at which have which demand to stimulated but again I would say that all of this builds a.
In the amount of muscle memory that will create structural demand that that we don't think will be transient and then you're seeing some very interesting responses, especially in southeast Asia, where you're seeing.
Active decisions to curtail domestic production and import LNG at the margin. So youre seeing a lot of the the issues that weve that we've kind of anticipated, especially in these what we call displacement markets, where you have good regional gas economies with challenging.
Domestic production profiles, perhaps shifting and increase being LNG imports more rapidly now that the price signal is in place. So yes, there's certainly a there's certainly a lot of room for optimism.
That's great. Thanks, and then just switching gears quickly on the edge units and repurchase coming in March does that take away from maybe buyback capacity or thinking about in 2020 or those two separate conversations for you.
Hey, it's Michael Yes, you can we calculate total liquidity for the year and this would come out of that we've said, we're going to pay down debt and buyback stock and this really accomplishes both of those things for us. So it doesn't count against our billion dollars authorization, but it's certainly draws down some of our liquidity.
Got it thanks Ron.
Your next question will come from Michael the Peters with Goldman Sachs.
Hey, guys. Just curious this may be in Anatole question. How are you thinking about we in the LNG market globally comes back into balance, meaning some folks thinks that starts to happen in about 2023. Other folks are looking at it saying it's beyond 2025, just curious for your macro view and then tie that.
Two if I think about your nine train run rate assumption, what's embedded for kind of the commodity margin on contracted sales for the nine train run rate.
Thanks, Michael Yeah I.
So as Jack mentioned in his remarks, the LNG market has had and has experienced very healthy growth a ballpark doubling every every decade, where at 400 million tons and nobody not not even us with relatively optimistic outlook have a doubling over the coming decade, which may prove conservative.
Whatever the cases, we know that supply this supply wave is over now effectively we have a couple of more trains out of the U.S. left to come on and then in 21 20 to 23, the amount of volume coming into the market is less per annum than it has been per quarter since late 2018. So.
We're in the camp that are that the market will rebalance much sooner than that then once he gets to the back half of this decade, you will have the result of VF ideas that we saw last year and expect to see this year. So you will have another supply wave, but we think this very much rhymes with what we saw in the 2010 2011 period, where you had the big could.
Sorry Bush of supply.
Hold with financial crisis, and U.S. shale production you kind of have the same triple whammy playing out now with you asked an Australian supply wave two winters that didnt didnt exhibit strong demand and of course Corona virus, adding on top of that but we think today the market is.
Let's say imbalanced by single digit millions of tons per annum run rates. So in a 400 million ton market, that's a pretty small number and and we think that to the previous question as we see this supply.
Matt with include net incremental demand functions globally.
There is there's again very very good reason to be optimistic over the next six to 12 months in terms of the.
The assumptions in run rate once we get up to the 85% contracted nine train case, we have to 50 as the as the assumption for the CMO piece.
Got it and so is that assumption a hey, you think the futures market will come back into some sort of balanced by the time and and I recognize this is multiple years out its 2023 and beyond is that assumption is that spreads will widen relative to what the 12 or 24 month kind of futures curve implies.
Well again by definition. The answer is yes, I would just like to point out that in late 18 of the forward markets do you want to the extent that there was a liquidity sort of three four years out was pricing in the mid $3 range. So these things change as you know relatively rapidly certainly for the.
For the short to medium term portion of the curve.
Got it thanks, guys much appreciated.
Thanks, Michael.
Next question will come from Jeremy Tonet with JP Morgan.
Hi, good morning.
Just want to come back to Corpus Christi stage, three here and as that relates to your capital allocation framework.
You've said growth comes first in the past, but just wondering if.
It makes sense to kind of delay a decision here given where the share price range right now and maybe allocate but a bit more incremental capital towards buybacks as opposed to capex. There just wondering if anything on the margin has changed there if you could share with us.
Yes, thanks, Jeremy So just on on stage three.
As Michael said in his comments that it's our intent and it always has been to make sure that we fully meet our investment criteria before we go forward with the F. I'd. So that the implication there that we continue to get long term contracts to support the investment in.
Facility.
I do think.
That the market because of a whole host of issues that and the call mentioned, whether it be their corona virus or a warm winter.
The whole sense of urgency from the customers. The sign long term contracts has has dropped and.
So I do think that market will be tougher for us too.
To go to continue to get our fair share those contracts and be able to commercialize stage three at this point.
But.
We're our capital allocation framework it is not based off of.
Stage three per se, it's based off of our available liquidity and what we feel comfortable putting to work at any given time, so it's a little in living active.
Capital allocation.
So you should expect us to modify that as we see the market either get faster or slower on the long term contracts.
Got it that's helpful. Thank you.
And just wanted to touch on the topic of potential cancellations here, if I could real quick and.
If they were to be cancellations would that be something you might let the market known advance without identifying the customer and just if you can walk us through kind of the mechanics of how much noticed they have to give you and how you handle that that would all be helpful. Thank you.
Yes, so it's not our intent.
First off the beauty of U.S. LNG is the fact that we give our customers a lot of optionality. So they have the option to pickup there LNG.
Fob out our docs and delivered anywhere in the world No other places like that other than the U.S.
The other aspect of it as we do allow our customers to cancel physical cargoes.
After they have been 80 paid in schedule with appropriate notice the notice ranges.
Somewhere between 40, and 70 days, we always say 60 days, because that's kind of the average notice.
And it will not be our practice.
Two.
Described to the market, what our customers books are or what individual customers are thinking.
Having said that there's been a lot of debate and conversation in the media lately on customer cancellations.
So.
I'll tell you this onetime that.
We had two customers I'd like to cancel white cargo each.
One cargo from Sabine pass and one cargo from Corpus Christi in the month of April.
So out of the 40 cargoes that we are forecast to produce.
It's a pretty insignificant number that gives us a great option.
For samurai.
My.
Elects to two Silva physical cargo back into the market and also they have to pay our fixed fees.
The customers so.
But that's that's the magnitude of it.
Jeremy.
That's helpful. Thank you.
This question will come from Michael Webber with Weber research.
Hi, Good morning, guys how are you.
And Michael how are you.
Good.
What a lot of macro headwinds right now.
Im assuming that the second you're able to reiterate your guide and kind of a stable and frankly boring results kind of stands out in a pretty positive way right now.
But I did want to follow up on on the last question around.
Around.
Customer cancellations.
Specifically is maybe a question for anatol, but when that happens and the notion of retrading that cargo back into the market.
Is that how does that slide ending with the rest of the on committed capacity and see a my issue because you've got a captive freight both your variable cost share just going to the port costs, and maybe some ancillary fuel or them year, ngs, you're going to use floating storage for it.
In the margin there into Europe, which still be about a buck on those on those costs right now so it would still be wide open I'm, just curious where does that cargo then slot enrollment of the rest of your you're seeing Michael I'll kick. It does get if its customer chooses not to watch it.
Thanks, Michael Yeah, So as Jack said.
It is at our option clearly these are cargoes.
As you know semi plans on lifting its share.
Which was substantially higher before the Dfc de of May one for the Corpus Christi train two contracts and there is some ability to lift those additional volumes, which would be additional volumes foresee a mine.
Sort of a free option. If you will if the stars aligned but you're absolutely right. The stars aligning means that we need to have shipping in place and we need to have the ability to take that so market profit profitably considering the full range of of costs and and margins that we would incur upstream of the plant.
Downstream of the plan. So that's that's the option that we now have four as Jack said those two additional cargoes and when when the time comes we'll we'll see if we can make a little bit more money on it but in the Grand scheme of things it it will not be a needle mover.
Fair enough.
Maybe just at the bigger picture question.
On on that kind of business you when you look at.
95% of 2020 is already booked up.
Can you give us some sense of what 2021 and 2022 look like right now.
No that math is a little bit fuzzy because your denominator is going to be moving around a little bit, but how you think about adding coverage to that 2021, and 2022 number and then maybe specifically and it's all to go back to the demand response to answer you gave a bit earlier.
What kind of demand response are you seeing right now to low commodity price I would imagine easy immediate cargos kind of evaporate, but you did interest in.
18 to 24 months commitments recaptured maybe even to peak seasons, which ratchet up some maybe kind of speaks to what that semi backlog looks like for 2021 in 2022, if it's if it's kind of intermediate term business. So just just curious how you think about covering 2021, and 22, and we to where they stand and what that business probably locally.
So Michael it's Jack so all start off so.
In February of 2020 were not.
Willing to give guidance for for 2021 or 2022. So I appreciate that your long term view of our markets and our and our business, but you'll probably an outlier as far as that is that's concerned but you are all we'll have to wait.
For our financial guidance in November of 2020.
Hopefully you see from our actions not necessarily or words that we tend to try to under promise and over deliver and were very conservative on how we run a book.
So with that context in mind safe and it's all of anything you want Fad.
The as Jack said, the boring is beautiful and we are as you would expect.
Managing those 21 22 exposures the the issue as the as you well know as the single biggest factor for 21 is the timing of Corpus Christi train three which is.
He said first half of 2020 business, but as that moves around by months here in there that.
That will add or take away volumes, which are difficult to manage but because you also know margins for 21 in 22 are much healthier than they are currently so.
So we are prudently engaged on on that front, but but wont give you any specifics until later this year.
Yeah, just maybe thinking from an industry perspective, any particular wrinkles you're seeing from like early in terms of the demand response, you know maybe to add people in any interesting wrinkles in terms of the Tommy or you're seeing give workforce.
Well I think it's very positively you read that India has lowered where they're going to charge at their city gate for natural gas.
At the city Gate you saw the same demand response at China, where theyre going to lower.
What they charge their industrial customers at the city gate those were all very very positive so unlike the us and the UK, which which you know those price signals happened daily.
And in China, and India, and most of the South.
Most of Asia. It happens every six months. So those are really positive positive signs.
And hopefully that will create more demand.
Got it.
Yeah, but instead of a lag on it now that's helpful. I appreciate the time guys.
Once again, we ask that you please limit yourself to one primary and one follow up question only.
Next we will hear from generic or sharing with you BS.
Hi, good morning, everyone.
I recognize that the viruses sort of overshadowing the progress that someone made in the U.S. trying to trade disputes, but I was wondering sort of given the macro backdrop, how do you think about Wayne.
Return profile of fighting CCL stage, three going for faster apps I'd versus delaying UNEV I'd sort of do you look at trading returns do you lower your return profile to to accelerate enough IP.
Versus delaying it and getting the benefits of de leveraging I'm just kind of wondering how you sort of think about that interplay just coded given the current backlog environment.
So first just to be clear right, we would not have idea until we got enough.
Commercial contracts to support a bank financing to make that investment in that facility.
So just.
Because the implication that we're going to accelerate it.
I don't quite understand it so I just want to make sure that we're all clear on that asset level, but Michael Warner.
No I mean, I don't think much sustains or if it meets our hurdles that we reiterated today, it's a great project.
You know.
Given where the stock is and all of that I mean, I think we would try UNEV I'd. It as late as possible and just give us free up as much interim cash flow to kind of take advantage of the situation today.
And I agree I think every six months or so that has delayed frees up at $1 billion. So.
I mean, the ideal scenario for us is to commercialize it but build it as late in the schedule as we can while maintaining our APC contract and on a cost certainty and all of that so.
Certainly it has an effect on on.
Look we move.
Okay. So it doesn't make makes total sense there would be no change in your hurdle rate to achieve the contract.
Okay. Maybe is there is a quick follow up here I was just wondering if you can talk about four cents your process.
Are there any scenarios, where customer can claim of course mature I realize you can claim for synergy because of operational issues at at year. Okay. Bye.
There are a scenario where a customer can claim of a force measure or C store just on their whole markets. What can we assume generally speaking you're pretty insulated from attempts by customers to force measure.
No I mean from in regards to force matures right, it's very very difficult for a customer to claim force because you're on an fob product right because they are picking it up from the Doc and they can stand at wherever they want to send it to the world. So even if there are full they still don't have a fourth the euro event against.
Lifting at one of our at one of our facilities.
At our Michael are analyzing that and the contractor Claire today, you can read them there on file its really at the customer has us an issue on an fob deal with it very specific ship coming in in that Thats really the only window for force majeure, but no other facility in the world apart from SPL or or CCL as the case may be.
Dan.
Caused the FM to be in vote on Fob contracts.
And just just at a total object set up the FM in the LNG business is a very serious events that is not entered into lightly you don't see you don't see many of them declared and as you know through all of the issues that that should near has faced whether it was freeze offs are fog events or cetera, we.
Not missed the foundation customer cargo.
So it is it is a very serious issue. Unlike in I think a fair amount of North American businesses FM is invoke relatively frequently as an operational management issue that is is.
It is really not a feature of the global LNG markets.
Okay. So if I can recap all of your responses here show no change to hurdle rates lot of deleveraging opportunity and low risk to affordable sure type of defense is that fair characterization.
I will note.
Yes. It is thank you very much.
Perfect. Thank you very much appreciate the color guys.
Our next question will come from Julien Dumoulin Smith with Bank of America.
Hey, this is on your filling in for Joanne.
So on your first question on.
Tony Tony EBITDA guidance Unifies, the census, 70 to 80 million impact to EBITDA Asinine, Sally Hansen I can imagine in USD 100 before.
Can you talk about some of the other drivers for this change aside fan selling Florida marketing volumes and you just mentioned.
And then could you also discuss assumptions are pricing that implied in guidance counselor taught me, saying in the fall right today.
Sure.
This is Michael so yeah in.
What brought it brought the sensitivity down significantly is just placing more physical business into the market either perspectively, mostly prospectively right rolling in February.
So that brought it down what brought it up is production crept up a little bit our production forecast for the year, so that added to the to the variability.
And then as margins went negative inclusive of shipping we lifted some hedges and redeployed that hedge capacity.
Into 2021, where we see much faster margins and opportunity to lock in.
And so that affected the sensitivity a bit but those are really the moving pieces of that number.
In terms of implied.
[music].
[noise] what margins our implied I mean.
For semis book, I guess, you and keep in mind seem I've got a lot of term business in it now with the deal that done with details and traffic is in early cargos, so that term businesses, obviously well north of two.
But then the balance inclusive of hedging is still north of one dollar in our book just given how much we forward sold.
And how many how much financial hedges, we had in place. So those are the assumption there.
Okay. Thanks, and then a second you narrowed your estimate fair. It seems again now you're asking me if I contacted off thanks to 85%.
Found that 80 to 95 to 10 range that you had to find the last update.
Can you talk about some of the specifics that draw this change in guidance and unlike anything more confident that thinking.
Yes.
Thanks, Suzanne that's all I wouldn't characterize it that way, what we said youre, probably referring to the K is that were approximately 85% contracted that's on our existing platform that is.
That is distinct from the issue that we've been discussing about the contractual support we would need incrementally to move forward with corpus stage three so we haven't varied bar are.
Principles on investment whether that's yeah shares question on return hurdles.
Contracted volumes the tenor over which we expect to get our capital out of the project all that remains in place, but if you look at what we have contracted to date on the current nine trading portfolio Thats, the approximately 85% number.
Yes.
I would just say one more thing that I'm extremely proud of air It's David said in the operating team because a they continue to.
Two.
Work on and deliver operational excellence, which some of that is gonna be a little bit variable because our production numbers in our de bottleneck neck and efforts have gone so well at our existing facilities.
Okay. Thanks, a lot.
Your next question will come from to Nello, Juvane with BMO capital markets.
Well, thanks, and good morning, a one quick one from me.
But to the extent that youre seeing margins sort of thing out for both 2000 2021 and so forth.
Is there anyway that you can perhaps increase your volume metric capacity to offset that margin squeeze going forward.
No cycle I mean, it as Jack just alluded to in essence of performance I mean, the plants are you know scheduled to run full out and there is no really turning them up I mean, our production plan as our production plan.
No we had a huge tailwind last year, because we figured out some way the de bottlenecking facilities and our production came in much higher than we expected last year, which didnt make up for a lot of margin erosion that we saw last year.
But probably not an opportunity for that magnitude of move this year.
We'll see some a little bit of production increase probably like we've already seen but not not a huge magnitude at this stage.
Great. That's my only question. Thank you.
Thank you.
Your next question will come from Craig Shere with 12 brothers.
Good morning.
Congratulations on a strong quarter.
Michael You you mentioned the half billion dollar liquidity benefit for every half year delay and.
For for stage three.
Fully understand that the economics of the contracts applied to the project will dictate that if I'd.
But to the extent the upsize nine trained portfolio can support contracts signed.
This is there some local room.
Window by the even if the project could meet hurdle rates.
And final kind of question about the liquidity kick or since your June 19 guidance long range long.
Term run rate guidance.
We now have the early completion.
Corpus Christi train three coming up.
I Wonder if you can opine on how much flexibility that provides for the budget.
Well.
But not one in the bank just yet, but okay, yes, probably earlier than we thought but remember we're having marks the margin headwind to so there's a lot of things that go into that I think we're probably still generally comfortable with the numbers that we put out a year ago with some puts and takes right lower margins more volume like you mentioned.
So, we're probably and generally the same spot.
Yes. So your first question on contracting is is a good point you make a good point, it's how we it's how we look at it we look at the entire companies capacity to serve the contracts that we have not just.
Not ignoring the fact that we have some link from the nine train platform will just kind of put every new contract a stage three you're absolutely right.
And so we do look at it that way.
And we do have some wiggle room, and that's part of our ability to maybe delay UNEV I'd a little bit on the street project that is otherwise commercially successful.
Right. Thank you.
Last question will come from Ben Nolan with Stifel.
Yes, Hi, this is Frank bounty Entre Ben I wanted to focus on phase three Corpus Christi stage, three I know the focus to keep long term contracts at reasonable hurdle rates a with denied a key.
And I did get a bank financing of but which would you guys are you willing to take shorter duration somewhere around 10 years or a lower tier counterparty to underwrite a stationary.
No we don't see a net at necessity to change.
Any of our our terms or or counterparty metrics at this stage of the game.
It gets stage three across the finish line.
Yes.
Okay.
And then kind of second question on with lower Henry hub prices are in and lower gas prices generally have you.
I've been having more conversations seeing increased demand for producer push contracts.
Thanks, Frank this and it's all a job so as we've said in previous calls we have very good interest in the producer push.
Construct but it is a limited.
Sphere of of opportunities precisely because of your first question, we will not be will not be able to achieve our objectives. If we let the investment grade aspect of our of our counterparty slide in that as you well know is a very limiting factor in a in engaging with the producer community. So.
There's a tremendous amount of interest.
But by the time you filter through what we need to extract from that contract you get down into into a single digits opportunities and we are we are actively pursuing those and ER and expect that there will be more IP M type transactions that ultimately support stage three.
Great that's really helpful. Thanks very much.
Thank you and I want to thank everybody for all of your support of generic.
And ladies and gentlemen, this will conclude the conference for today. Thank you for your participation you may now disconnect.