Q1 2020 Earnings Call
[music].
Good day and welcome to traditional industries incorporated once you 2020 earnings call and webcast.
At this time I would love to turn the conference over to Mr., Randy Bhatia VP of Investor Relations. Please go ahead Sir.
Thank you operator, good morning, everyone and welcome to Shiners first quarter 2020 earnings Conference call.
Slide presentation and access to the webcast for today's call or available engineered dotcom.
Joining me today, our Jack Fusco, Oceaneering, President and CEO, NFL, Fagan Executive Vice President and Chief Commercial Officer, and Michael Whitely, 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.
A reconciliation of these measures to the most comparable GAAP financial measures can be found in the appendix slide presentation.
As part of our discussion of Engineers results. Today's call May also include selected financial information and results for Shinier Energy partners LP or CQ Pete.
We do not intend to cover CEQP. These results separately from those of Shinier Energy Inc.
The call agenda as shown on slide three Jack will begin with operating and financial highlights.
Anitole 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 will now turn the call over to Jack Fusco, Shiners, 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 2020.
While we usually host these earnings calls.
With a room full of executives in an office building full of employees.
Today, it's just the four of us in a large conference room.
As we are complying with the CDC recommended guidelines and our headquarter professionals are telecommuting.
The first quarter of 2020 was a store Harris.
And the global outbreak of covered 19 has impacted our personal and professional lives in many ways.
Daily routines from committing to work educating our children interfaces with colleagues to visiting with friends and family and everything in between has been up ended.
And we've all been forced embracing new reality.
Watching this pandemic Sprague 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 in the first responders, who test us feed us and provide for our safety for their tireless efforts.
And we pray for their good health.
Turning now to slide five.
At Shinier, we've built a strong resilient customer focused business, which is capable of weathering volatility in both the energy in financial markets.
Skeptics may question this at times.
We find ourselves in this historic volatility and uncertainty in both of these markets and the resilience of our business model is on full display.
For the first quarter of 2020 regenerated 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 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 billion to $4.1 billion and 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 in our maniacal focus on operational excellence, our key enablers of these results and a weak market environment.
Our first quarter financial results in the reconfirmation of our full year 2020 guidance are testament to the resilience of our operational contractual and financial Foundation.
We've repurchased $155 million of stock under our repurchase program during the quarter and as we disclosed in our previous earnings call, we pay down $300 million of the CCH Holdco convertible notes with cash.
Michael will address our financial results and guidance in more detail on a few minutes.
During the first quarter, we produced and export at 128 cargoes of LNG, including a 100 cargo from Corpus Christi and that thousand 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 or regions worldwide.
Looking ahead to long term SBH tied to train to Corpus Christi are set to commence tomorrow.
We have been in the process of Onboarding those customers and we welcome them to this year complex.
Construction, our Corpus Christi train three and being passed train six continues to progress on accelerated schedule.
Corpus Christi train three is approximately 84%.
Project completion, and Sabine pass train six is around 54% project completion.
Both trains are forecast to be significantly ahead of their guaranteed completion dates.
Now turning to slide six.
Where I will spend a few moments describing engineers response to cover 19.
As it has been significant.
We recognize the risk of covert 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 a business support team and a site management team.
All of whom are focused on employee safety and welfare.
Business continuity in maintaining operations at our liquefaction sites.
These teams monitor status develop and implement policies and protocols specific each office location and site.
In addition, they enforce protective measures.
The most importantly regularly communicate with all the relevant personnel.
In early March we began consulting with the medical advisor and implemented social distancing to revise shift schedules isolating work groups work from home policies and restricted non essential business travel just mentioned a few proactive items.
In addition, we instituted minimum staffing levels at our sites isolated are critical operating personnel and began utilizing temporary onsite housing for our workforce at our sites.
I am extremely grateful and proud of our employees and their performance throughout this pandemic.
On the engineering and construction side.
We in our APC partner backdoor have implemented significant safety and emergency response protocols.
Both Sabine pass in 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 are co that 19, Devon material impact on our project cost or schedule for either Corpus Christi train three or Sabine pass train six.
I applaud, our engineering and construction team and the Bachtel group for their Swift and effective implementation of these protocols to ensure flawless execution.
The impact of covered 19 to our country communities in those countries of our foundation customers has been unprecedented.
As a company community involvement and painted forward is in our DNA.
To date generic pledged over $1 million to global covert 19 relief efforts.
Our commitments and contributions are focused on the communities, where we live and work, Texas, Louisiana, Oklahoma, Washington, DC, London, Singapore in China.
We are 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.
Im extremely proud of our success of the personal protective equipment drive.
In partnership with Houston, The Astros Foundation and project care.
Now turn to slide seven.
Before I turn the call over to and its call I want to quickly discuss certain aspects of our long term contracts.
In the wake of the dislocation as we've seen in both the financial and energy markets over these last few weeks.
We have received countless investor inquiries regarding our long term contracts.
One.
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 described the details of ordinary interactions with our customers to the market.
Including their decisions regarding lifting of cargos.
But as you all know one of the primary flexibilities granted to our long term customers within their contracts as their right to cancel or suspend kardos with appropriate notice.
And instances where that occurs the fixed liquefaction fee is still paid to us and our marketing affiliate has 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 us well FM clauses in our Fob contracts, specifically excludes such events as the unavailability of or any event affecting downstream LNG facilities.
Changes in the customers market tractors, or other commercial financial or economic conditions.
As such depressed gas prices globally, or economic fallout or decrease gas demand from coven 19, do not provide a valid legal basis on which account apart 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 nine.
Well 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.
LNG market continued 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 US. This came on the heels of the approximately 40 million tons of new LNG supply in 2019.
While some you train started up in the first quarter Cameron train two 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 supply global market, which is now also trying to cope with the pandemic.
The Corona virus affected several LNG importing countries sequentially during the first quarter.
Temporarily reduced demand for LNG in China, and will ultimately impact demand in other countries in similar ways.
And then 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 JK T. 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 ages, LNG imports increased 7% or over 4 million tons year on year.
Meanwhile, Europe continue to import record quantities of LNG, 25% higher year on year as supply growth provided ample residual LNG to flow to Europe.
Europe absorbed most of the quarterly incremental LNG deliveries from the US well flows to Asia remained flat quarter on quarter.
Unit deliveries to Europe increased more than 40% quarter on quarter to over 8 million tons during Q1.
LNG supply and demand dynamics, the Corona virus and a precipitous drop in oil prices since early March a continued to exert pressure on global gas prices.
TTF average $3.35 during the first quarter over 50% lower year on year.
Similarly, JPM averaged 482 in Q1 more than 40% lower than the first quarter of 2019.
After a $50 barrel settlement in March Brent futures tumbled to below $25 in the days following a lack of agreement by OPEC plus on March six.
Henry hubs March contracts settled at $1.82 significantly lower than the $2 of 86 cents March 2019 settlement.
As 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 if I'd 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 if I'd in 2020 and 21.
In early 2019, we expected projects totaling approximately 100 million tons per annum of capacity you have a reasonable chance of up I'd in 2020, and another 30 million tons of capacity in 2021.
After the demand and supply shock, which began during the first quarter, we anticipate that f. ideas in 2020 will be much lower.
Falling under 15 million tons per annum of capacity with some project shifting to a 2021, if I'd and others delayed even further.
We now expect of ideas for the two year period to total approximately 65 million tons or about half of our previous forecast.
Supply demand dynamics are tightening the competitive landscape driving some LNG projects with higher breakeven thresholds out of the probable if I'd stack.
We do include our Corpus Christi stage three expansion in these expected f. ideas, 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 that soft market conditions through the first quarter led to record levels of us LNG flowing into Europe.
Over 55% of us LNG deliveries in the first quarter or over 8 million tons flow to Europe.
In total over 27 million tons of LNG landed in Europe during the quarter increase of approximately 25% year on year.
The growth in LNG imports was partially accommodated by year on year declines in addition, as gas production and lower imports from pipeline gas.
I find gas flows declined by about six 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 storage inventories, which in the absence of a cold winter retained their surplus ending march over half a trillion cubic feet higher than the prior year.
While it remains too early to gauge and isolate the impact of the Corona virus on European balances were seeing its impact on overall gas demand in some of the continents major gas markets as gas demand in Europe, six mean 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 de carbonization goals.
Countries in Europe plan to either retire decommission and our cut approximately 100 gigawatts of coal and nuclear capacity in aggregate by 2030.
We believe the gas will be an important part of the transition away from salt fuels and we'll continue to play a role in ensuring Europe is in a good position to manage grid reliability needs.
Please turn to slide 11 to look at LNG market dynamics in Asia.
Despite the growth of ours pandemic LNG imports in Asia increased by about 7% year on year to 68 million tons in the first quarter.
While this growth has not insignificant the demand response to lower LNG prices would have likely been more pronounced if not for the impact of the buyers.
Soft prices along domestic infrastructure de bottlenecking allowed 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 buyers containment measures resulted in a steep economic contraction in China. In February this resulted in reduced imports of LNG and Central Asian gas by <unk> point 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 GTT region, a yearlong decline in imports was reversed as both South Korea, and Taiwan continue to take a tough stance on coal burn offering support to gas fired power generation demand.
South Korea's mandated maintenance at coal plants decreased coal fired power generation in January and February by 15% versus last year anti wants 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 Antiterrorism requirements. In addition to the Sunday number one nuclear reactor that was taken offline recently.
These outages are expected to offer some upside for LNG demand in the coming weeks and months.
Fundamentally we could also see upside to LNG demand as a result of various stimulus packages that are being rolled out in.
In China for example, several provinces announced 2020 infrastructure expansion plans as a 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 could double its current gas fired power generation fleet by 2030.
China's gas fired power capacity is expected to reach 200 gigawatts in the coming decades more than doubling from about 90 Gigawatts currently as a country seeks to reach peak cotwo emissions by 2030.
To conclude the market is currently experiencing extremely unusual conditions that are exerting bearish pressures across the entire commodity complex.
Gas storage levels in Europe, our high spot prices, there are likely to remain weak until storage levels normalized while the demand impact of the Corona virus remains uncertain in the near term, we expect to many concerns will be alleviated in 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 in 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 an economic conditions, although challenging.
Proving 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, Anatol 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 cargos from our liquefaction projects during the first quarter LNG production levels were relatively flat as compared to fourth quarter 2019.
For the first quarter, we recognized an income 459 PBT of LNG produced at our liquefaction projects and 14 Tbtu of LNG source from third parties.
Separately, 79% of the 473 Tbtu you have LNG recognized an income during the first quarter was sold under either long term sta dry PM agreements and the remaining 21% with sold by our marketing affiliate either into the spot market are under short and medium term contracts.
Volume sold under SPJ or IBM agreement increased by approximately 20, tbtu compared to the fourth quarter 2019, driven primarily by seasonality of volumes under certain SBS.
And by the commencement of our IPO, Jim arrangements with LG, 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 increase 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 canceled LNG cargoes, which are recognized upon notice of cancellation.
Volumes of LNG recognize an income were materially consistent for the first quarter as compared to fourth quarter 2019, and realized margins Bremby to you have LNG decreased only slightly approximately 2% quarter over quarter.
Net income attributable to common stockholders for the first quarter were 375 million or $1.48 per share basic and dollar 43 per share diluted a decrease of over 500 million from fourth quarter 2019 net income in the fourth quarter 2019 was positively impacted by it.
Tax valuation allowance release of over 500 million, which did not recur in the first quarter.
Net income for the first quarter also decreased as compared to the fourth quarter 2019, due to losses on derivatives related to our interest rate swaps, partially offset by increased operating income.
During the first quarter, we repurchased an aggregate of 2.9 million shares of common stock for a total of 155 million under our share repurchase program as of the ended 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 or the outstanding balance with cash and allowing us the option to pay down the remaining outstanding balancing 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 disruption in the global financial and energy markets generics and a strong financial position.
With more than adequate liquidity strong cash flow generation capability through the remainder of this year and into future years and multiple options to address our upcoming debt maturities the earliest of which doesnt 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 under the CQ be revolver corpus working capital facility.
And parent level revolver provides liquidity backstop should lung 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 three or Sabine pass train six.
Both trains refinanced 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 as the 2 billion outstanding SPL 2021 notes, which mature in February of next year.
Our team has been working on addressing that maturity since before recent market disruptions and as we have said previously we expect to use some combination of both SPL.
The investment grade market and seek you'd be in the high yield market to refinance these notes.
Sizing and timing of course will be dependent upon bond market conditions with dislocated in March but.
With a sense stabilize 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 SPL bonds, we began strategizing on addressing these converged earlier this year and evaluating options to redeem the those nodes, including refinancing options.
It's too early in the process to discuss specifics, but we expect to have multiple options to redeem refinance. These convertible notes were 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.
As Jack mentioned, despite headwinds and weakness in the global LNG market remain confident in our ability to generate financial results within our guidance ranges. This year and today, we're reconfirming. Our 2020 full year guidance of consolidated adjusted EBITDA of 3.8 to 4.1 billion and distributable cash flow of one to one point.
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 onetime costs associated with our code at 19 response efforts the 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 and market pricing this year.
Since the last call. We've continued to put a landfill volumes for the remainder of 2020.
And today, a one dollar move in market margin was would result in approximately 60 million dollar 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 our capital allocation framework to provide us with flexibility.
With both energy markets and financial markets recently Dislocating.
And considering the debt and convert maturities next year I, just discussed will likely take advantage of that flexibility and take a more conservative approach with respect our capital allocation decisions.
At least until those markets stabilize.
And visibility improves.
That concludes our prepared remarks. Thank you for your time and your interest engineer operator, we are ready to open the line for questions.
Thank you.
If you'd like to ask a question we signaled by pressing star one on your telephone keypad and if you're using speakerphone. Please make sure. We assumption is turned off to allow your signal to reach our equipment.
Please limit yourself to one question and one follow up and then if you have additional questions. We ask that you get back in the Q.
In press Star one to ask a question.
And we'll go to our first question from Shneur.
Yes.
Hi, Good morning, everyone. Thank you for today's update maybe just a couple of quick questions here.
First off.
We're kind of Seaney.
Clearly an atypical pricing environment right now.
When thinking about international spreads with respect to usage in Europe, and so forth.
Obviously, it's a function of of inventory imbalances and so forth flight.
The one big each school ish that has occurred is the associated gas issue in the United States Henry hub is now higher.
What does your analysis, telling you about whether there'll be a long term market structure change due to the higher us pricing.
Or at the end of the day will always be a call for us LNG.
And as the marketable just from price accordingly, and the spreads will go back to normal once covidien inventory balances clear out.
Well thank you.
Thanks for the question I think we'll have Anatol address a long term is the or the long term gas markets.
Good morning here. Thanks for the question Yeah. We obviously, we've had a large decline in 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 terms out that will be modest and as prices normalize in north.
America, you've already seen the big response in Cal 21 trading over 2070 cents 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 Buildout for phase one of LNG facility so that.
Large demand driver will have and we fully expect to see a relatively stable.
Nymex going forward between two and a half in $3 is whether curves are today, even in these unprecedented times I'll just point out that the volatility realized volatility on Nymex has been substantially lower than on crude or or even JPM and we do expect that that north American gas production.
And pricing will be attractive relative to global levels and the opportunity over the medium to longer term to safely reliably and economically supplier customers will be very attractive.
Yes, I appreciate the color. Thank you for that and maybe it's just one quick follow ups year.
Is there any opportunities just given the structure in the market right now for for CN wire senior tax we.
Benefit from that and I know that.
In terms of financing you can't make too many comments, but could you comment on whether you want to market is open or not for the convertible notes.
Yes, Hey, it's Michael I'll take the second question on Atlantic line on the first one but.
We as we said we have to maturities. The SPL majority will have no maturities this year, but the first one is in February of next year.
If you look at SPL complex.
The entire mark that entire complexes above par and trading well below 5% site that market is we think certainly open to us and we'll deal with that sometime over the balance of the year.
In terms of CEO, we're working on.
Several options to deal with that convert which again is not until the summer of next year, but as I said in the prepared remarks, we've been thinking about that already.
And I think some combination of the bank market.
Bond market current liquidity and prospective cash flow or some combination of thereof.
I will allow us to deal with those converts.
I wouldn't speak specifically to is the convert market open to us and we were looking at a lot lot of options I'm fairly certain the bank market is open to us. It's just a question that quantum and so we're working through that right now.
Add to deal with that that convert in the summer of next year and ideally.
If we can get in the right quantum deal go ahead deal with the the AG notes at Corpus Christi hold co two which are pending maturity that is our highest cost paper in the complex. So we'll see how that plays out here over the coming months and ill be pretty proactive and picking some combination of those alternatives to sort that out.
Engineer to your through the first part of your question Nymex has been less volatile, but all sides as you know have been quite volatile and.
Just want to thank the teams that we haven't seen in a couple months, but but talked on a regular basis for their tireless efforts in not taking advantage of some of those opportunities. So no one is as.
Sitting on their hands and as as a market opportunities present themselves. As you would expect Shinier marketing is taking advantage of those but clearly we won't give you any specific details around that.
No I appreciate that guys. Thank you very much in long stay safe.
Thank you.
We'll go into our next question from Germany to me of JP Morgan.
Hi, good morning.
Just wanted to touch base with regards to how everything's working now I guess this is the first time the business model has seen a number of cancellations non watts and just wanted to see if everything is kind of.
Functioning the way that you guys expected.
Is there any kind of unexpected surprises there.
There's a large quantum would that stress anything in your network Argentina.
Putting the gas back into the market or any thoughts you can share on that process.
Jeremy This is Jack and thanks for the question and thanks for your support in involvement here were Shinier I just have to say I'm extremely proud of the organization our ability even even when were separated to communicate and coordinate has been.
Fantastic their ability to actually assembled during the.
Prior to the pandemic and put policies and procedures in place to ensure that our employees were safe and that our business continuity continued has been incredible.
Randy gave you some nice pictures in the slides of that camps.
Hi, I'm, so grateful for their employees that to that we're willing to.
Sacrificing with their families to live in those caps and ensure that our operations were stable. So I would say that.
It's an unprecedented time as Anatel said, it's extremely volatile out there.
Our customers still need gas, we're hopeful for the day when industrial commercial demand can can come back into the worldwide market.
And and hopefully we're seeing some signs of green shoots there, but no there's been no no surprises.
All right.
Thanks, Jack and just generally to add on top of that as you know we have obviously very good relationships with our now 20 ish or so counterparties they value the flexibility needs in these contracts to cancel they give us substantial notice and.
As Jack said, the coordination between all of the functions, including our gas procurement team and that notice has been has been exceptional and the team seven haven't missed a beat and our customers are appreciative and obviously respectful of those of those notices so so far so good. Thank you.
Great. Thanks involved and then maybe just if I could on kind of longer term strategy.
Any thoughts you could share with regard to how far out we're able to hedge looking to hedge at this point to de risk. The cash flows and I think Michael is talking about capital allocation philosophy, a bit there seems like a mark and as maybe more emphasis on free cash flow as opposed to growth a lot or no.
And then any shift in your overall strategy will be kind of fall under changes we've seen market macro backdrop.
No I think we like our positioning when we last November when we gave you all guidance. We had told you we were materially hedged for the year. Prior you should expect us to manage the business conservatively and does not want to take a lot of market risk and I have a complete confidence when we when we convert that market.
Just to operating rests on my operating staff will be ready willing and able to prove to provide so but I don't want to get into our book curve.
Or the market liquidity in this market, it's been a little bit rock. These days as you can imagine.
Well move to our next question from Michael Webber of Weber Research.
Hi, Good morning, guys how are you.
Michael how are you.
Good.
First ones or Jack is for you in any needs and Paul as well.
Jack you mentioned and you kind of address.
Kind of some of the FM.
Was that that kind of.
Comes up anytime, there's there's a market disruption and.
And the notion of cancelling a cargo versus you know interrupting 20 year contracts are very different things and the markets already litigated, which to some degree for chenier, but.
I'm curious if you kind of look we just assume that seniors any insulated and we look at the broader market.
Yeah.
Do you think you've got other counterparties your peers. If you think about contracts it might not be papered up to the same degree. The Eurs are do you think this is something where we could see.
Some of them. That's I'm claims on long term contracts elsewhere kind of bubbles or the surface I know BT preemptively declared FM on a project in Mauritania on the back in 2022 market conditions, obviously, it's a very very different scenario than things to be near corpus, but I'm just curious.
Obviously, you guys don't like dealing with those questions. Because you did and had been the same for longer that cover 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 kind of percolate elsewhere.
So so Michael as you know I'm relatively young in this industry. So.
I'll take the first part of that and I'll hand, it over to Anatol to help with the more longer term on some of the other.
SP ASER that that that user youve idle.
We feel very comfortable with our customer base and with our Sta.
That.
That our customers have been given the flexibility to cancel the cargos with as Anatol said long term notice and and lets us plan around what we need to do it gives them a good option they value that option and and we're seeing them.
Utilize it the way they would utilize it.
We don't see that risk of.
And in the Port portfolio forces in there as far as other entity other projects outside Anatol address apart [laughter], Hey, hey, thanks.
Thanks, Michael.
Obviously, we can't comment on not on the others and and what's embedded in the prop and the SP age, but clearly.
There has to be some ability to manage some kind of a relief valve in our case. It is it is those cancellations in other cases, where there are fixed volumes to fix destinations other tools apply and it's not that it's not surprising that that FM is is a a path to to.
A managed that that exposure can obviously comments on anyone anyone in particular, but clearly the fob espitia is a very different animal then and something you would traditionally see that is that has a lot less flexibility embedded.
Okay, Alright, I appreciate you seeing in it that is divestiture.
That's helpful.
Jack another one that I did I think guiding other people going to ask before but the market conditions are obviously get right now.
Do you guys again hyper focused on building out your existing footprint best several years smelling yashi still in kind of extended commercialization process for.
For Copel phase three.
If I kind of look around at some of the some of the greenfields around youre starting to flounder non you're seeing people pull back from the market.
And all things considered you guys.
For the advantageous and strong position Im just curious what would you need to see three to take a serious look at adding some some particularly cheech optionality by kind of stepping into kind of.
The Greenfields shelving it for a couple of years and saying, we'll get there. If you want a lot one will expand at some point, maybe adding some geographical diversity year or.
And some other component this on your portfolio now I'm just curious how closely to be to just seriously looking at something like that.
Now what we all Michael we have.
Net organic growth to satisfy our needs for many many years to come both at Corpus Christi and at Sabine pass so.
And we have the existing infrastructure, there and as you mentioned we already have.
Permitted expansions at corpus that.
Yes.
That we're ready willing and able to do I think.
The first thing I would need to see is the airlines opened backup and that's to be able to travel. These yards zayo stations for long term energy contracts require face to face combat for lack of a better work when you have to get close to the customer and look each other in the high end and for.
The foreseeable future now at least.
Initially that looks like it's a little ways away for us, but I don't know Michael in everything that.
It's not for lack of effort and we have a team that kind of since a lot of time looking at what's going on around us and around the world and that we've looked and a lot of things that as Jack said everything you've got to come back and compete with our own organic projects not only economically but from the execution standpoint, and certainty of execution I have not really found anything that was.
Any bad better than what we have so now we just tecogen sentiments in that regard.
Okay. That's helpful.
I'll turn it over thanks and congrats.
Then moving well go to a question from Christine Cho of Barclays.
Hi, Michael.
So I'll, let me just operationally will.
Well I spoke about for full year, how would you characterize the S.K. investing built at a four quarters. When all the trains are up and running meaning how are the listing.
In one queuing for acute relative to Q3 Q on during normal scenario.
Hey, Chris units its anatel.
So in terms of operating business, if I could forgotten Christina or you're not asking me to give you quarterly guidance are you on this call.
There are no I'm, just trying to think like maybe like Chris said percentages.
I've noticed that the at the FTC listing seem to be hiring one queuing for Q and just trying to get a sense of like.
How we should be thinking about that online.
And our normal scenario like.
Long term.
Yes. So as you know the is the plants Sabine, especially has a little bit of seasonality from the standpoint of production in terms of DSP A's they are fundamentally ratable, but we do have some additional volumes that are.
Accordance with Dsps that are that our winter loaded. So you do have in terms of the SP AIDS you have a little bit more contractual.
Third party sales in the winter Dan in terms of plant production, you have a little bit more but but it's not it's not very meaningful across the year. The big step function change of course as you know as the May Onest Dfc ease of Corpus train two.
So in terms of SP aid volumes, if you will as of May one theres another step function change to get our full seven trained platform contracted.
Right, but I was just talking you know under a scenario where all the change operating I'm not necessarily looking for like this year, but I mean, it does seem like the Sta cuts that you have flexibility to skew more more pick up saying one queuing for Q.
Just the way you said it yet at all just okay, just filling that okay.
And that and then a clarification question Michael I think in your commentary did you say that you book revenue tied to a cancellation cargo when you receive the cancellation notice.
That's right. So I guess, the accounting rules say that when when our obligations are satisfied under the contract we recognize the revenue.
The payment terms are still the same we don't get paid and Teva, we booked the revenue because we have no other obligations on a contract once we get the cancellation notice so thats right.
And the cancellation no it doesn't that cancellation on capacity given like you know two months in advance. So does that mean, there's like some accelerated revenue recognition.
That we could probably see into Q at the level of cancellations picks up.
Yes, you got it I mean to the extent it flops over into the next quarter, we're recognizing it in the current quarter. So.
Okay, Yes, and then for fall one key steadily 50 million.
That's right.
Okay perfect. Thank you.
Welcome to our next question from Craig Shere toll brothers.
Good morning.
I've got three quick ones here.
So just if you could comment about or is something about a temporary and GPL horse mature is that a non event as far as your inventories and keeping all our business running at SPL outstanding Capex that you envision through completion at this point for Corp.
As train three and SPL T six.
And.
The comment Michael you said about the asymmetric upside on the spot market price changes present thats because there is a portion of of equity cargoes that you assume won't ship this year.
And does that effectively mean that theres no practical scenario, where you've got fall below the low end of guidance.
Okay.
Let's start first with Onest, the and GTL force measure from the Lightning storm that blew through.
Two nights ago and on issue has already been lifted and.
I Callously did say in a couple of responses that pipeline to use SM like popping tick tax so it's a blunt instrument that that they have which.
Which is has not been and we don't expect to to be an issue for us.
Okay great.
And then Michael outstanding our flexible trains.
Yeah Q2 forward for train three is about 600 million largely spent this year that's before contingency so maybe a little bit more depending on how that plays out and an SPL is about 1.4 billion SPL train six 1.4.
You know really through 2003 at this point again, excluding contingency.
And then your line one less well.
Well I mean, we just effective margins are low right. So at some point, we have a stop loss and we don't left so thats why its asymmetric, hence 30 million to the downside and 60 million to the upside.
So, yes, I mean, we well we won't Miss our guidance range because of marketing I think Thats fair statement.
Great. Thank you very much.
Thanks, Greg.
Welcome to our next question from Spiro Dounis of credit Suisse.
Hi, Good morning, everyone just want to follow up on I want to snares questions around potential benefits from CMS are you focusing on June just given where that's where a lot of the sort of widely reported cancellations have gone not just from you guys, but just generally in the industry. It seems like a has a lot of potential to backup gas into the system here in the U.S. and potentially pinch Henry hub so cheap.
A question there.
He said that does happen in New York does open up I guess, how nimble Ken.
Idealistic cargo effectively media there are capture that spot price if it opens up and then second you even agreed the premise that hub could actually a lot pressure in June because it is important cancellations.
Correct.
I got to slow you down just a second sparrows. So anecdotally you pick that up the thought okay got it.
I've 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 side. It's part of your question is the CMO I have the option to lift that cargo the answer is yes.
Yes that is not something that that is.
Very easy to do we as you know control a fairly sizeable shipping portfolio, but thats steps down dramatically as of tomorrow. Once we hand over train two to those foundation customers. So it's possible given the volatility that we discussed we share that.
That some bites at that Apple emerge as a as market volatility plays out on on both legs of that.
But thats not going to be a huge number for us over the balance of the year.
Okay got it and sorry at almost yeah, I know it and answered most of the and I apologize breaking up the other part of that question was do you agree with the premise that that Henry up could actually be under a lot of pressure in June just given the fact I think there's over reported 20 cancellations out there.
It seems like a fairly large number one on a daily basis, just curious futures is not reflecting not yet but is that something that you see actually happening.
Yes if.
If I knew the answer to that and whats placed in and what's anticipated I'd be John although not anatole fake it so it's.
The market you said has a fair amount of guesstimates and information so.
Anybody's guess between the declines of associated gas production, how industrials come back.
That balancing act is clearly what the market is trying to figure out but.
But.
If I was a gambling managed say that at least some.
Expectation of reduced flows to LNG facilities is in the market already.
Yeah, Okay. That's fair and then just second question just around some of the economics of idling. Some of these trains in any running less trains at a higher utilization rate not saying, we're there yet, but just asking in the context w.'s cancellations.
Just curious if that would make sense what environment, even look take to get there and I and the carry high cost to sort of shut down and then start back up.
Hey, it's Michael now you know we can run our trains at half rate set of at the same efficiency as full rates basically so that doesn't really affect us.
As we looked at no lifting economics, we make some money on lifting and lifting margin.
Thats.
Net loss loss of that revenue was largely offset by lower variable costs at the plant. So we have fired Howard costs, we paid at GE under the CFA, which we don't want the pay when after trains on running and just other consumables chemicals refrigerants all that so it largely offsets and so we're kind of it's a small.
Headwind, but I don't think you'll notice it.
For us.
And well go next until Endoglin Smith of Bank of America.
Hi, good morning team.
Let me just picking up worst year lifted off Phil.
So the high level first question, you're just how do you think about the ability to scale down Opex and SG nine and thinking about that hey in the context of perhaps optimizing words b assets themselves in light of market.
Conditions that they understand that CMO bye.
Obviously this flexible piece within our you would think about optimizing your assets.
And then related to that as Jna and as time goes on given the market conditions as they stand presumably there should be some latitude C E.
He's up on margin potentially on the development dollars as well, we think about the cost side of the larger.
I think I caught that Matt.
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 six or train three weve rework those budgets and pushed out a couple of hundred if not several hundred million dollars into next year just deferrals.
I just talked about I want to them.
It's fairly inflexible.
We've got to keep our people and the plants ready to operate even in an lifting scenario and as I said our savings on variable cost offset the lifting margin that we for go when customers don't lift so thats kind of a push.
And then SGN a is a pretty small part of our overall cost structure.
No.
I was going to say that also I mean, there's only 1600 total employees in the whole shinier worldwide complex.
So it's significantly different than I think their way.