Q2 2021 Cheniere Energy Inc Earnings Call
Okay.
Mhm.
Yes.
[music].
Good day and welcome to the Cheniere Energy, Inc. Second quarter 2021earnings call webcast. Today's conference is being recorded at this time I would try to cut it goes over to Randy Bhatia, Vice President of Investor Relations.
Please go ahead.
Thank you operator, good morning, everyone and welcome to Cheniere second quarter 2021 earnings conference call. The slide presentation and access to the webcast for today's call are available at Cheniere Dot com.
Joining me. This morning are Jack Fusco, Cheniere, as president and CEO and a total Fagan executive Vice President and Chief Commercial Officer, and Zach Davis, Senior Vice President and CFO.
Before we begin I would like to remind all listeners that our remarks, including answers to your questions may contain forward looking statements and actual results could differ materially from what is described in these statements.
Slide 2 of our presentation contains a discussion of those forward looking statements and associated risks. In addition, we may include references to certain non-GAAP financial measures such as consolidated adjusted EBITDA and distributable cash flow are.
A reconciliation of these measures to the most comparable GAAP measure can be found on the appendix to the slide presentation.
As part of our discussion of Cheniere as results. Today's call May also include selected financial information and results for Cheniere Energy partners L. P or <unk>, we do not intend to cover <unk> results separately from those of Cheniere Energy Inc.
The call agenda is shown on slide 3 Jack will begin with operating and financial highlights.
And if so what will then provide an update on the LNG market and Zach will review our financial results and guidance. After prepared remarks, we will open the call for Q&A I.
I will now turn the call over to Jack Fusco, Cheniere as president and CEO.
Thank you Randy and good morning, everyone. Thanks for joining us today and thank you for your continued support of Cheniere.
I'm pleased to be here. This morning to review our results from the second quarter and our increased financial guidance for the full year 2021.
Please turn to slide 5.
And I will review, some key operational and financial highlights from the second quarter.
The second quarter was an extremely productive 1 for us as we achieved milestones across the enterprise and origination marketing operations and engineering and construction just to name a few.
Global LNG market fundamentals continue to be extremely constructive and we've begun to see the return of long term LNG contracts and support of the construction of new liquefaction capacity.
For the second quarter, we generated consolidated adjusted EBITDA of $1.3 billion and distributable cash flow of approximately $340 million on revenue of over $3 billion.
We generated a net loss of approximately $329 million due primarily to the unrealized derivative accounting treatment.
Wired on our hedges.
And on our integrated production marketing, our IPM transactions, which <unk> will discuss in more detail and a few minutes.
For the third consecutive quarter, we're raising our full year 2021 financial guidance.
We now forecast 2021 consolidated adjusted EBITDA for 6 to $4.9 billion.
And distributable cash flow of 1.8 to $2.1 billion.
This increase in guidance is being driven by a number of factors for.
First the continued strengthening of the LNG market is yielding higher net backs on open volumes.
For context since our first quarter earnings call on May spot margins for 2021 doubled and our portfolio optimization team has been able to capitalize on that with our open volumes.
In addition, we've been able to further unlock some additional production for the second half of the year, primarily through maintenance optimization, which has contributed to an upwardly revised production forecast.
And lastly, with Henry hub, moving higher over the past quarter we.
We make some additional lifting margin.
So our outlook for the balance of 2021 has improved again based on a very strong LNG market and our very strong operational performance.
The fundamentals present, and the LNG market are as good or better and at any time since I've been at Cheniere.
Anatol will cover the market and more detail on a few minutes, but market dynamics on both the supply side and demand side continue to move in our favor and support our conviction and the long term growth prospects for natural gas worldwide.
Just after the quarter ended we signed our third IPM agreement and support of Corpus Christi stage III. This time with Terminalling, the largest natural gas producer in Canada.
And this transaction progresses, our commercialization efforts on a shovel ready stage III expansion project and helps validate our view of a constructive macro backdrop for long term contracts.
In addition, it reinforces cheniere as record of executing collaborative innovative solutions to meet the needs of our customers.
We will continue to leverage our infrastructure platform and.
And commercial advantages to further progress stage III towards FID.
And during the second quarter, we continue to have meaningful success under our midterm strategy.
And <unk> portfolio volumes into the market under various commercial agreements and increase in the percentage of our total volume that is contracted.
So far and 2021, we've entered into fixed fee sales agreements for portfolio and volumes with multiple counterparties aggregating approximately 12 million tonnes of LNG volume between this year and 2032 and addition to the IPM deal with Terminalling.
The success of this mid term strategy underscores the strength and the LNG market today, and the strategic competitive advantage of our portfolio of volumes.
We will continue to place these flexible volumes in the market tailoring solutions to meet the growing requirements of LNG customers worldwide.
On the production side the record, we set and the first quarter for LNG exports and stand very long as we broke that record and the second quarter with 139 cargoes of LNG exported from our 2 facilities year to date Asia destination of Cheniere cargoes with approximately 45% of our cargoes exported have.
And landed in Asia, followed by Europe, with roughly 35% and Latin America, with about 20%, South Korea, and China and the top 2 countries importing our LNG. So far this year and those 2 alone accounts for over a quarter of all cargo deliveries.
Our operations and maintenance teams at both Sabine pass and Corpus Christi have done an exceptional job, thus far and 2021, managing our operating plans to maximize asset availability and LNG production and our facilities, enabling us to increase our production forecast for the year, all while ramping and corpus.
Christi train 3 to full rates and stable operations quickly and safely.
We look forward to the same performance with the addition of Sabine pass train 6 early next year.
Speaking of train 6 a significant milestone was met last month with the introduction of fuel gas into the train.
And the start of early commissioning activities.
At the site 17 systems were turned over to the startup team and June another 12 and July.
With the project approximately 90% complete Bechtel continues to progress this project against and accelerated schedule.
Turn now to slide 6 and I'll provide a brief review of stage III and the Corpus Christi site overall as the stage 3 project comes into focus with our recent commercial momentum and the constructive market where and.
As a reminder, our stage III project at Corpus Christi is fully permitted and and fully constructed would have over 10 million tonnes of LNG capacity per year.
Page 3 enjoys brownfield project economics as it will utilize a significant amount of shared infrastructure constructed as part of trains 1 through 3 which we believe make stage 3 very cost competitive.
LNG capacity addition.
As for the path to <unk>.
We have said this before we will maintain our discipline and to help ensure that the risk and return profile of stage 3 is consistent with that of the first 9 trains we build.
To that and our origination team is focused on commercializing and additional capacity from the project and we are working closely with bechtel on finalizing the EPC contract, we remain committed to our growth capital investment parameters, which help ensure discipline and our capital investment decisions and the sanctioning of projects only when they.
The high standard we have set for all of <unk> to date.
Our excitement around the potential investment opportunities at the Corpus Christi site doesn't end with stage III as you may recall, we have acquired approximately 500 acres adjacent to our existing site.
Which provides us with a platform for major future development potential.
Any future capacity developed at this site may be designed to leverage the infrastructure already in place to provide substantial cost advantages.
As you can see from the Arrow and view of the land position and Corpus Christi. The site possesses substantial running room for growth well beyond stage III and we may develop additional infrastructure there over time, especially as stage 3 moves closer to <unk>.
Turn now to slide 7.
Last month, we were proud to publish our second annual corporate responsibility report entitled built for the challenge.
This report the product of a deep cross functional effort across the entire company provides insight into key actions taken by Cheniere to ensure business resiliency and 2020 and beyond and is the latest example of our transparency on ESG related issues and how we are building sustainability.
And to our business model.
Built for the challenge is the latest milestone and our ESG journey, which has seen tremendous progress in 2021.
Highlights of achievements reached thus far through 2021 include the announcement of our cargo and emission tags and <unk>.
Climate scenario analysis, we published our first carbon neutral LNG cargo, we announced last quarter, our participation and the first ever studied to measure methane emissions on and LNG carrier and our collaboration with leading academic institutions and several of our upstream natural gas suppliers to implement.
Q MRV of greenhouse gas emissions performance and natural gas production sites across several basis.
And finally earlier today, we announced the publication of our peer reviewed greenhouse gas lifecycle assessment.
Our LCA, which utilizes greenhouse gas emissions data specific to our LNG supply and will be the foundational analytical tool to estimate greenhouse gas emissions to be included in our CE tags that we provide our customers.
The items highlighted on this slide are all steps on a continuous path and we look forward to leading our industry forward in this area, helping to ensure the long term sustainability of natural gas and helping all participants along the LNG value chain realized the full environmental.
<unk> of our LNG.
With that I'll turn the call over to Anatol, who will provide some more details on recent LNG market development.
Thanks, Jack and good morning, everyone. Please turn to slide 9.
Globally, the pace of recovery and LNG markets from the Covid related Loews has exceeded most expectations, especially when looking at demand growth and the fourth quarter of 2020 through the first quarter of 'twenty..1 this trend continued in the second quarter with not only meaningful growth over the same period and 2020, but also notably well above the 5 year range.
Supporting our constructive market views on 'twenty, 1 and subsequent years, we continued to see a fundamentally tight market over the next several years breaking the trend for seasonal demand norms, even with rebounding LNG supply and.
As reflected by the historically high LNG prices and both Europe and Asia markets remain tight through this past winter with global LNG demand growing by 9% year over year, and the second quarter slightly surpassing the fourth quarter demand levels. Despite the second quarter, historically being a shoulder period and the market.
Asia, and Europe exited spring with sizable storage deficits as the cold winter and Asia, and the colder than normal spring and Europe intensified the intra basin competition for LNG supply.
Asia and Europe robust demand caused spreads between the 2 regions to narrow with European net backs, even surpassing those and Asia in order to attract imports to meet insufficient LNG supply availability and Q2.
Global LNG production and rebound at 8% year over year, and Q2, primarily on U S volume growing 80% compared to last year when customers were exercising their cargo cancellation rates through.
And through the first half of the year U S. LNG production is up 43% year over year, approximately 35 million tons. However, non U S volumes have lagged more than expected during most of 'twenty..1 so far and remained below 2020 levels and June these non U S volumes were impacted by feed gas constraints and Trinidad.
And maintenance and outages in North Africa, and other LNG producing regions.
Consequently, less LNG flow to Europe year over year is it competed for cargoes with Asia and Latin America.
Overall U S. LNG flows to Asia increased over 10% in the first half of 'twenty, 1% to 48% of total U S exports compared to 38% and the first half of 2020 <unk>.
Meanwhile, flows to Europe dropped over 15 percentage points from 51% to 34% year over year, coinciding with natural gas storage inventories again at multiyear lows.
Please turn to slide 10, where I'll provide additional insight into the regional dynamics of the market.
And Europe weather, driven demand supported the gas market well into the injection season.
Carbon prices and low wind generation and June further lifted European gas demand for power generation, However, upstream maintenance across northwest Europe flat rush from gas pipeline flows and lower LNG imports kept the market tight and storage inventories at a significant deficit relative to historic norms.
LNG flows into Europe were 9% or roughly $2.1 million tons lower year on year and Q2 as a result of tight global LNG supply balances.
European inventories currently stand at record low levels with a 16 Bcf deficit to the 5 year average, which is equivalent to roughly 170 LNG cargoes <unk>.
These supply and demand dynamics were reflected in European gas prices during the second quarter with Dutch TTS settlement averages increasing by over $6 and then <unk> to $7.82, and then on Btu and almost 350% increase year over year. This.
And this average was higher than Jae Kim is the basins competed for import volumes.
Similarly, and Asia. The continued call on LNG imports to satisfy growing natural gas demand was driven by an early start for the summer Ah surge and economic recovery and industrial activity and China, along with heavy nuclear maintenance and Korea.
Jack mentioned, a moment ago, the Korea, and China alone imported over 25% of all our LNG production year to date.
Asia imported 65 million tonnes of LNG, and the second quarter and increase of 8 million tons or 14% year on year the.
The <unk> region contributed over 20% of that growth, despite higher nuclear availability and Japan.
And then nuclear units have restarted and in Japan as of July 21, the highest number of operating units since the Fukushima disaster over a decade ago Japan.
Japan's nuclear availability was offset by low nuclear output and Korea and Taiwan.
<unk> and out Taiwan retired 25% of its nuclear fleet and the second quarter and has a stated goal to become nuclear free by 2025. So this should continue to support the LNG market and the region for years to come.
The majority of growth and Asia LNG demand, however came from mainland China imports and China surged, 22% to 20 million tonnes and the second quarter, making China, the largest LNG importer on a global basis, surpassing Japan LNG.
LNG imports were supported by hotter than normal weather and South China, rising industrial gas demand and increased power sector demand amid low hydro levels.
In addition to Asia and Europe, we saw a notable uptick and Latin American demand is Brazil's imports reached multiyear highs due to severe drought conditions and the resulting lack of hydropower.
Latin America's imports increased more than 70% year on year and the second quarter with Cheniere produced cargo speaking up nearly 40% of total imports.
Flows into Latin America represented 17% of total U S exports, increasing over 5% from the comparable 2020 period.
Clearly, both near term and long term dynamics and the LNG market provide a highly constructive backdrop for us to execute on our short medium and long term LNG origination strategies.
And with highly flexible portfolio volumes available today and cost competitive brownfield incremental capacity that we are actively commercializing we possess an ideal platform to meet the growing and evolving needs of LNG customers worldwide.
And I will turn to slide 11.
This natural gas solidifies its place as a foundational fuel and the global transition to lower carbon energy sources, LNG consumers and producers are seeking to optimize the environmental performance of LNG throughout the value chain.
Jack reviewed some of the recent steps we at Cheniere have taken and will continue to take as part of a broader strategy focused on data and transparency through the LNG lifecycle with the ultimate goal of emissions abatement in order to maximize the climate benefits of our LNG for all the.
The growing focus on environmental stewardship and performance is beginning to be reflected in pricing mechanics for energy and the European Union carbon prices reached all time highs and the second quarter, reaching over 55 euros per tonne during the quarter and continuing higher to nearly 60 euros per ton or roughly $3.50, and <unk> and Btu equivalent and early July and.
History commentators view of the growth and increased liquidity and the emissions trading market to be and enduring trend as demand for allowances and offsets grow across the globe driven by de carbonization effort.
While Europe is by far the most active market for exchange traded carbon allowances were seeing increased activity and other parts of the world as well, especially <unk>.
<unk> recently launched its own national emissions trading market, making it the largest carbon market and the world and its onset.
We believe other markets will follow this trend as progress on climate action will continue to buoy demand for cleaner burning fuels.
This is relevant to cheniere and the LNG market is the appetite for carbon neutral LNG is increasing and carbon offsets are a necessary tool and certify and cargoes as carbon neutral.
And this market is nascent today as of mid July there were 12 carbon neutral LNG cargoes in 2021 globally. There are significant interest and these offerings among both buyers and sellers.
Given our size scale and progress to date, leading on data driven and environmental transparency and performance and some of the other efforts Jack highlighted cheniere expects to play a prominent role in this regard from our lifecycle analysis and the cargo mission tags and our Q MRV collaboration we aim to offer increased environmental transparency, while providing low.
In mission solutions and competitively structured products for our buyers.
Thank you all for your time I'll now turn the call over to Zack who will review our financial results and guidance.
Thanks, Anatol and good morning, everyone.
And I'm pleased to be here today to review, our second quarter financial results and our increased full year 2021 guidance.
Turning to slide 13.
For the second quarter, we generated revenue of approximately $3 billion.
<unk> adjusted EBITDA of approximately $1 billion and.
And distributable cash flow of approximately $340 million.
And a net loss of $329 million.
As Jack mentioned, our results for the quarter were negatively impacted by the accounting treatment for our derivative instruments, which includes our IPM agreements as we have discussed in prior quarters, our IPM agreements certain gas supply agreements and certain forward sales of LNG.
Qualifies derivatives and require and mark to market accounting, meaning debt from period to period, we will experience gains and losses as movements occur and the underlying forward commodity curves.
This accounting treatment, coupled with significant volumes long term duration and volatility and price basis for certain contracts, most notably our IPM agreements will result in fluctuations and fair market value from period to period, while operationally, we seek to eliminate commodity risk by matching our natural gas purchases.
<unk> and LNG sales on the same pricing index or long term LNG Sba's do not currently qualify for mark to market accounting, meaning that the fair market value impact of only 1 side of the transaction is often recognized on our financial statements until the sale of LNG occurs.
Unfavorable pre tax impact from changes and the fair value of our commodity and FX derivatives. During second quarter 2021 was approximately $672 million most of which was noncash but was the primary driver of our recognized net loss for the second quarter.
For the second quarter, we recognized an income for 522 <unk> of physical LNG.
Adding 500, ATV to you from our projects and <unk> <unk> from third parties.
Approximately 80% of these LNG volumes recognized in income were sold under long term SBA or from volumes procured under our IPM agreements.
We received no cargo cancellations and had no impact to revenue recognition timing related to cargo cancellations and the second quarter.
We received $36 million related to sales of commissioning cargoes and the second quarter from LNG, which was in transit at the end of the first quarter corresponding to 6 <unk> of LNG.
As a reminder amounts received from the sale of commissioning cargoes are offset against LNG terminal construction and process net of the cost associated with production and delivery of those cargoes.
As you May recall, we established an initial on debt reduction for 2021 to pay down at least $500 million.
On the outstanding debt.
During the second quarter, we fully repaid the remaining outstanding borrowings under Cheniere is term loan and fully repaid Cheniere is convertible notes due may 2021, with $500 million of cash on hand, and the remainder about $130 million from borrowings under the revolver.
And so as of June 30, we have already achieved our minimum full year goal of $500 million and debt reduction.
And with our cash flow profile, only improving and the back half of the year, we are poised to exceed that amount this year, along with broadening out our capital allocation plans.
Continuing to balance sheet management since our last call. We have locked in a further $200 million of long term amortizing fixed rate notes at SPL on a private placement basis with multiple counterparties.
Year to date, we have locked in approximately $347 million and such notes, which will fund on a delayed draw basis and late 2021, and while economically refinance a portion of Spl's outstanding 6.25% notes due 2022.
This continued progress on prudently managing the balance sheets through the Cheniere structure, which goes hand in hand, with our efforts on execution and operational performance was once again recognized by the credit rating agencies during the second quarter as S&P global ratings changed the outlook on the credit ratings of both Cheniere and <unk> to positive from negative.
As we mentioned on the May call SMB.
S&P cited the EBITDA and cash flow growth, resulting from the successful completion of trains the accelerated schedule of train 6 and the expectation of significant improvement and leverage levels over the next 2 years as we execute on our stated deleveraging plans.
Jack and Anatol have both discussed the success, we've had so far and 2021 on marketing and origination with 12 million tons of midterm deals done as well as the recent 15 year Terminalling IPM transaction.
The execution of these transactions not only brings stage III integrator focused but also supports our long term balance sheet management priorities by bringing significantly increased cash flow visibility out into the 2000 and <unk> given the fixed fees that have always been the bedrock of our commercial strategy.
Aggregating the midterm and IPM transactions, we've completed year to date, we have sold approximately 25 million tonnes of LNG, which will generate over $3 billion and fixed fees into the next decade, which clearly has de risked our cash flows further.
Turning now to slide 14, as previously mentioned today, we are increasing our guidance ranges for full year 2021, consolidated adjusted EBITDA and distributable cash flow by $300 million and $200 million respectively.
Bringing total increases to $700 million and $600 million, respectively above the original ranges we provided in November of last year.
Our revised guidance ranges are for 6 to $4.9 billion and consolidated adjusted EBITDA and $1.8 to $2.1 billion and distributable cash flow.
Today's increase in guidance is largely driven by the continued improvement and global LNG market pricing and our ability to capture higher net backs on our open portfolio volume our production forecast, we have again revised upward due primarily to maintenance optimization and lastly, some added lifting margin due to higher Henry hub prices.
DCF guidance isn't moving up quite as much as EBITDA guidance due to some incremental EBITDA accruing at <unk> and SPM, where we have accelerated capital spend at Sabine since train 6 is ahead of schedule. So we expect to realize the benefits over time and DCF and CQ piece distributions increased further in the coming years once fully operational.
When we updated guidance on the last call 1 of the primary drivers, what's and improvement in market margins from approximately $2 and February to approximately $3 and made since then that margin has gone up by another over $3 and our production forecast has increased and as well.
And the incremental volume Thats been added to the production forecast, it's all on the third and fourth quarters and although it's single digit number of cargoes in terms of quantity the impact on the financial forecast is meaningful with net backs where they are.
We currently forecast the dollar change and market margin would impact EBITDA by less than $25 million for the rest of the full year 2021.
As we have now sold almost all of our production for the remainder of the year, we would only provide another update if that were to change materially.
As well given the little and remaining exposure to the market. We have we are confident and our ability to deliver results within these upwardly revised guidance ranges for the full year.
While we don't guide to free cash flow for over a year now and we've described 2021 engineers free cash flow inflection point and that is certainly materializing and the results. We've generated so far this year and and our forecast for the balance of the year.
Entering 2021, we forecasted free cash flow and around $1 billion for the year.
As DCF guidance has moved up $600 million and the subsequent 6 months, it's reasonable to think our FCS forecast has moved up largely in lock step with DCF. So over 1.5 billion.
This incremental cash flow puts us and a great position from a capital allocation perspective, especially as we work to finalize our comprehensive capital allocation strategy and framework.
With that process nearing completion, we expect to be able to provide that to you and the coming months and before the <unk> earnings call and early November where we will provide you with a first look at 2022 guidance.
That concludes our prepared remarks. Thank you for your time and your interest and Cheniere operator, we are ready to open the line for questions.
Thank you.
If you wish to ask a question. Please signal by pressing star 1 on the telephone keypad Acu and your speaker phone. Please ensure that you need function is turned on again press star 1 for a question also please limit yourself to asking 1 question and 1 follow up.
Additional questions you may reenter the queue and we'll now pause for just 1 moment.
Our first question comes from Michael <unk> from Goldman Sachs. Please go ahead.
Hey, guys. Thank you for taking my question Congrats on a really good first half for the year so far.
On this 1 may be for Anatol, just 2 things 1 how are you thinking about the changes and contract structures that you're seeing and the market, meaning we've seen some other north American LNG players announced deals that are that are priced at basically a sliding scale tied to J J M.
Just curious when you're thinking about what the market is going to do for new contracts is your thought that its still and SBA day, rather than kind of fixed fee driven type of market or do you think it's going to go to more of a variable type fee structure for future deals.
Thanks, Michael Good morning, Yes, and <unk>.
Sure the market is growing maturing and we expect to see all of the above in greater quantities were and the camp that the traditional sba's long term are part and parcel of this business and is required for US for example to commit capital and and we think that our commercial creativity.
Is is 1 of our main calling cards right, we introduced the IPM business.
Now over 2 years ago, and that's a business where the producer gets exposure to those international indices, we collect our fixed fee and and.
And the producer passes allows for that for that commodity exposure to fast moving their to their underlying resource. So we think all of this stuff is part and parcel of the business going forward Youll see traditional SBA and Youll see is as we mentioned a lot more midterm business from us debt that we've been so successful with.
We launched at less than a year ago.
Got it and then 1 quick follow up on on stage 3 just curious how much more do you think you need to contract before you think you are getting close to half.
Okay.
And Michael I, just wanted to add a little bit to Anatol <unk> answer to your question and then we'll talk about stage 3 so.
I would say.
We're in the cat for its fee, we have a great position.
We're able to offer solutions for customers, we've been very successful on offering.
Short term mid term.
On tracks to those customers that want those that we don't use too.
<unk>.
Grow the business.
And we're not and the business, where and then making money business. So we are staying extremely financially disciplined on our next expansion project just like we have on the first first 9 but I'll turn it over to Zach to talk and.
And more specifics on stage, III, Sharon and Hey, Michael.
So I'll just start off by saying last November Jack.
Jack mentioned that we are around 85% contracted.
And at this point, we're 90%.
With all the work that the marketing team has done.
And when you think about 90% on a 45 million ton book, that's a little over 40 million ton.
And our contracted at this point.
So we're actually pretty darn close.
Considering and and <unk> stage, 3 and why we're so confident about.
And doing that next year.
But as noted as Jack mentioned, it's all about our disciplined approach to it.
Just major capital investments, meaning it's not just about the volume, but about the returns on both Levered and unlevered basis from a highly can contracted cash flow. So that when we sanction a project its value and credit accretive and the very very best use of our cash.
But with that all and mine it is around let's say for us So MTA of additional contracting to underpin all of stage III and for a run rate contracted capacity remains and that 80% to 90% range, even at <unk> and.
And of course, all the investment parameters are met.
So again, we're pretty confident that 2022 could be a big year for us.
Got it thank you guys much appreciated.
Michael.
Okay and next question comes from Brian <unk> from UBS. Please go ahead.
Hi, good morning, everyone and Brian on for Shneur I appreciate all the color on the $300 million guidance range, just curious and you can provide a little bit more color on the changes between <unk> and <unk> guidance and your prepared remarks, you talked about the maintenance optimization and was just kind of curious how much capacity cheniere was actually able to free up at EBIT.
Jack and spot margins I know you talk about $1 change and marketing margin equals 25, and EBITDA impact book was kind of curious if you can provide a little bit more color behind all the drivers and the guidance range of $300 million.
Thanks, Brian and I have to say I am so pleased with our operations and maintenance personnel and our ability to optimize our maintenance schedules and.
And it take advantage of.
It seems to be.
Very high prices.
LNG market right now.
But as far as the details of how it breaks down and I'll turn that over to Zac, Sheraton, Hey, Brian So the $300 million upward move in our guidance is pretty simple. It's 3 things, it's higher net backs are bit more production and better lifting margin.
But to be clear higher margins on the open capacity and some additional and production where the vast majority of the guidance range.
So with the dramatic rise and CMI net backs sincerely may from literally just under 3 bucks to over $6 today for the rest of the year and with that 40 Btu previously open that added almost $150 million of that raise.
And combine that with another let's say for US no cargoes from Opportunistically managing maintenance for the rest of the year.
Take advantage of these current market conditions and that added alone another $100 million.
And the rest with just higher Henry hub prices for the rest of the year as we expect to literally lift every last drop of LNG.
Lifting margin made up most of the rest and.
Net simply get the $300 million or so.
Great appreciate all that color maybe to pivot capital allocation and just a follow up on CCL stage 3.
It seems to suggest that you are close to <unk> at this point, if you can get eaten on necessary contracts.
And the overall scheme of things and desire to become <unk> and with the recent positive outlooks and the credit agencies, how does growth and leverage reduction and effectively impacts your desire around buybacks and dividend.
Dividend initiation and at this point thanks.
Sure I mean put it this way we're going to have $3 billion of DCF per year, and now with how the markets have improved and the curves have improved around $13 billion of available cash through 2025.
And the equity check for something like stage, 3 which let's say it's around the mid $3 billion range for the whole thing is only about $800 million per year. Once funded 50, 50 with debt and equity pro rata over time.
And so as you can see and the results were pretty much on appointed and our lifecycle, where we can undertake a project for the scale of stage 3 and not be limited whatsoever from also meeting all of our balance sheet and shareholder capital return goals over the coming years. So so nothing is really holding us back at this point.
Great appreciate the color and congrats on the quarter and have a good day.
Brian.
Our next question comes from Jeremy Tonet from Jpmorgan. Please go ahead.
Hi, good morning.
Good morning, Jeremy.
Just wanted to pick up with the market outlook, a little bit more.
The second quarter last year spot LNG couple box now LNG prices comfortably trading above high teens for winter and.
And seasonally high spot rates right now and I'm, just kind of wondering based on carbon prices and structural demand shift how do you think about I guess.
Pricing dynamic.
Today and.
As it change where do you see us and the cycle and I guess.
And how that could impact I guess on appetite for contracting.
Well on.
I'll start and I'll hand, it over to Anatol.
The increased volatility and the higher prices.
Bring bring more and more customers to want to lock in.
There are energy and cost naturally and reduce that volatility to their customer base. So as you know Jeremy we focused on selling to end users we sell most of our product to utilities around the world and the <unk>.
They need it and as more and more of these countries.
Try to meet their climate goals and cleanup, there are especially in and around Asia.
Youre seeing the demand for Nat gas and the demand for LNG rise.
<unk> fairly significantly and much greater than what was and any of our models.
Initially, but I'll turn it over to Anatol, Thanks, Jack Thanks, Jeremy.
We have been.
Fairly bullish on the market and the first half of this decade and saw 21 is a transition year as we've touched on on previous calls transitioned faster than we expected kind of across the board Asia's rebound and demand growth and all of this all of this investment that we saw on gas and.
Infrastructure, and and LNG infrastructure and demand is playing out arguably faster than we expected and.
In the aggregate U S came to the rescue second half of last year and the first half of this year with additional volumes, but now everything is online obviously.
We and everyone else are trying as hard as possible to bring this volume to market and on the market is still tight demand exceeded supply and in Q2, which is why you saw the storage dynamics and the pricing dynamics that you mentioned and we are only entering this phase of the market as Jack said. This is the first time debt and his tenure at <unk>.
Year that he has and the bold part of the cycle for for the sellers and.
And long term and mid term commitments are accelerating as a result, right it's not.
It's not a surprise to anyone that this is playing out but it is playing out a little bit faster and as Jack mentioned, our comfort level with the with 22 is that much higher the other important component that you touched on on the carbon side and this is why the journey to get this LCA products out of that that we.
This morning was so important and we are highly confident that we have a very low profile low emissions profile product that will be a major contributor to emissions reductions and Europe, Asia, and and everywhere that debt.
We structurally deliver our product into so.
There is a mention of a case study and there that shows that our product reduces emissions by about 50% on displacing coal and China and and that is a great starting point on this journey that.
And that we've announced this morning, so I'm very optimistic about the structure of the market and our ability to offer these solutions, both economically and environmentally.
Got it so it seems like price on carbon could lift the LNG market, maybe and and Erin.
Maybe just kind of building on that last point a bit more you announced this collaboration with natural gas suppliers and academic institutions to improve emissions monitoring.
Wondering what Youre learning here and thank you touched on some of the points here, but just wondering it seems like the market is going and this direction do you see any other kind of low hanging fruit for cheniere here.
Some.
And some that are looking to compete with you have introduced <unk> strategies do you think that's where the market's going overall.
And look I think the pathway to the energy transition is a very very long road and it's going to need some of everything a lot of everything.
And that we can develop today and and 20 years from now.
On the.
We embarked upon that journey back in 2018.
We've spent.
Well over the last 3 years working on a company specific lifecycle analysis and LCA that we published.
Recently with American Society of chemical engineers, but it's not where our.
Graham has been very thoughtful and very forward thinking and we're hoping to lead the industry into ensuring that our product is viewed as a sustainable provider of cleaner energy for the world.
So that's what that's what it's all it's all leading to the lifecycle analysis is extremely important.
For us to be able to produce our cargo emission tags of our carbon footprint per cargo for for our customers. So we can we can help them strategize on whether or not what type of offsets.
They would like to procure and.
And the quantity of those offsets.
And.
And you have anything to add on.
Jeremy as you mentioned, we are taking this this leading role in and developing these technologies and and collaborating and creating the baseline from which improvements will be made over over time, we're starting off.
At a great point, that's much better than than what had been assumed and what is the national average debt that is.
And out there and with all of these efforts with our producer partners and our downstream partners and of course and our own facility.
Jack said, we will continue to be laser focused on continuing to improve our emissions profile and we think that thats. A key success factor is as we compete and in.
And the energy transition.
Got it that's helpful I'll leave it there thanks.
Our next question comes from March 10 from Tudor, Pickering, Holt and Nicole. Please go ahead.
Yes. Thanks for taking my question here I wanted that taking point on that and LCA team there.
My question is going to focus on on the cost what are you guys seeing on our cost for them and continue basis for offering. These cargo missions tags, and then sort of a follow on comment to that and do you see this being more of a day nishi type product where customers are willing to pay a premium for those those cargoes and on.
Offset those additional costs or EBIT being the trend is of where the market's going.
On the first 1 on the costs. So we're doing a lot of other work in house.
Matt So.
The costs are born with our overall SG&A budgets and there is a slight amount of.
And a little bit of capital dollars, but it's insignificant.
It's more of the of.
And just the in house expertise on each of the different.
And the different areas and our ability to help influence the market and on.
I'm actually looking at Korea Grendel's on the supplier side to make sure that that were getting good data debt.
And we can quantify monitor validate and report on that data and.
And feel good that there is and Auditable trail.
We can stand behind both from our supplier side from the midstream and processing folks.
Through our own our own liquefaction treatment, and then and shipping.
To our customers dogs.
Do think that.
Carbon emission tags are necessary.
For.
For most of our European counterparts.
Dave Dave applauded us for for doing it they have been by and offset themselves and in most cases, there are over buying those offsets so so.
So we.
It's just a part of.
Doing business there.
We need to be able to.
To quantify.
What the carbon footprint is are those.
Each and every 1 of those tankers.
For our customer base, whether or not eventually we get paid a premium for having.
On a clean clean cargo, we will see how that market develops.
Right now.
Theres just a lot of a lot of work a lot of spade work that has to get done before we felt comfortable with actually marketing and selling a product like that.
Thanks for those comments, Jack and then to finish off here I know you don't have formal guidance for 'twenty 2 yet, but that's just how attractive margins like youre, saying Zack has become and on train 6 already starting commissioning activity here in July and you guys be able to provide some and preliminary commentary on how you see earnings trending and <unk>.
Thousand 22 versus your run rate guidance.
Sure I'll give you a little bit, but we plan to present that to you.
And.
On the next call in November after we go through the 2022 budget process, but.
It's really going to come down to where margins are going to be for the winter and then just timing with how train 6 commissioning comes along and the first half of the year, but at the rate SPL construction is going and with margins for 2022, right now above $6 for the winter and over $3 for the rest of the next year.
It is looking likely that EBITDA should be over $5 billion for 2022, if things don't move too much from here. So, we're obviously getting closer and closer to run rate.
That's it for me.
Okay.
Next question comes from Mike Webber from Webber Research. Please go ahead.
Hey, good morning, guys how are you.
Michael how are you.
Good.
Jack I'll, let you quote earlier now that youre on the business of making money not on the business which is.
Relatively appropriate so.
Along those lines and then maybe that's a better question for Anatol and I'm curious.
How.
On pricing, we're taking the netback deals kind of aside and because there is actually some and some term pricing deals that are getting done.
And have you seen any kind of lifts in terms of term pricing dynamics right now.
Given the ramps out of Covid and the kind of on.
On the genius degree of supply slippage, we've been saying are you getting any support in terms of where that net long term SBA level actually ships.
Yes, I would say thanks Michael.
We have a lot more appetite engagement traction and is only 6 to 9 months ago, where when there was a I would say a cadre of the industry that was thinking about remaining open for for its sort of fundamental requirements and relying on the spot market that started to.
Paid a quarter after that and and I think that that strategy is has now been largely forgotten and so now it's about portfolio management and engaging and structuring our portfolio of midterm and long term volumes and and as a result.
For those conversations.
Economics are are stabilizing and firming and you've seen that.
Relatively openly in the slopes that you see on the Brent side, that's an easier 1 to track what's going on.
And those those very low.
Levels and and obviously the economics are are stabilizing now for for term commitments out of out of the Nymex market as well.
Got you.
And I were to think about that.
And I'm sorry go ahead.
And as on when its going to begin also so.
So when I think about a term.
Is it CPE and if.
And if its the peak on a Greenfield project and it's going to begin 5 years from now is probably price at the marginal cost of.
Of the next investment or and the next train right and.
And like for like Cheniere.
Portfolio contract that can begin now or next year or anytime for that matter and.
And you should expect it to be priced at a higher level for more certainty.
Got you and I guess my follow up and how uniform you think that is over the broader market. So if I think about maybe the way you guys are price term business.
And kind of IAG pricing for.
And the more aggressive pricing, we've seen out of some greenfields b net.
Back or not.
Do you think that spread between <unk>.
Term pricing and Greenfield is wider today than it was maybe this time last year or 6 months ago.
Or is it and theyre relatively consistent with.
I hate the dramatic changes and that market and that spread played out probably 2 or 3 years ago.
Honestly don't have enough precision to tell you if thats moved around a bit but.
That said there is there is a premium that the market will pay for certainty and our track record and history.
And as well as for early volumes that are included in that that obviously greenfield can't provide.
No.
And I just don't have enough enough precision to give you a good answer on that.
Fair enough and then my follow Up's for Zach actually just along the lines of.
Some of that debt.
And were variable rate deals and we've seen and the market.
<unk> net back deals or not when you're talking to your lenders about those kind of deals.
What kind of guidance that you get in terms of the makeup of our portfolio really financeable portfolio.
And how should we think about.
What.
How should we think about the concentration of those kind of deals and then within our portfolio of business day is this actually financeable.
I think I'd just go back to what Jack said.
First lymphoma, most where we're here to create maximum value for LNG shareholders period.
It's not just about the next step.
And our signing a contract for the sake of and to win some race for the lowest price debt or the highest risk.
Im sorry heightened risks SBA.
So luckily with the funnel that Anatol and the team have we think we're just going to be clipping fixed fees for a vast majority of our volume that we will meet all of our investment parameters and it's going to be a mix of IPM DFS and fob deals with each and everyone with a credit worthy counterparties.
Artie and fixed fees for a long long time.
We can't really speak to other business models, that's our business model and we're sticking to it.
Yes, and I was curious whether you're getting any feedback from your lenders around that but I can take that offline alright. Thanks, guys appreciate that.
Thanks, Michael.
Our next question comes from Ben Nolan from Stifel. Please go ahead.
Yes. Thanks.
So I wanted to and we will.
<unk>, probably and easy 1.
You talked about the $12 million.
Tons of midterm volume that you have committed over the next 11 years or so can you maybe give a sense of sort of what the average contract duration is for that portion.
It's not that easy volume weighted I would say, it's just inside of 5 years would be my my guess.
Okay. That's helpful.
Sorry go ahead.
I was just going to add when we're talking about those mid term deals we did mention and all the deals we signed and is about $3 billion of fixed fees through.
The early 2000 and <unk>.
Just thinking about how much derisking of our cash flows has just occurred over the past quarter.
And we now have locked in this year fixed fees for about 400 million adjusted in 2022.
And comfortably over 1 billion 5 through 2025.
And just give you a perspective of how much is really been locked in and the past quarter.
So that's that's great color I appreciate that Jack.
And.
And maybe well boy I wish I had more than 1 we'll stick with this 1 and so as youre looking at stage III and Corpus Christi, obviously, a higher steel prices labor inflation is.
Happening all over the place.
Okay.
As it relates to Corpus Christi, 3 and maybe just in general expansion for you and anybody else.
Are you starting to see any.
Any inflation and the cost of projects that might.
<unk> acetate, pushing up margins a little bit in order to generate good returns.
Thanks, Ben and I have to say we have a.
Very strong relationship with backfill, having completed 9 trains and 45 million tons and lift.
For fashion already.
I have complete confidence and backfill that they can manage debt.
And that project to its lowest.
Capital cost.
Out there.
And we haven't seen any inflationary environment at this point.
And I'll turn it over to Zac and items.
Yes, and just to reiterate we don't we don't really see material and risk on the cost side and we're actively pursuing all opportunities through and really the end of this year.
To make it as price competitive as possible.
I will just say, we feel really good to meet all of those investment parameters based on the contracts. We are seeing and just the synergies we have with corpus train 1 and 2.3 and that let's say approximately 6 times multiple on.
On Capex to EBITDA is still the right 1 give or take for the full project.
Perfect and I appreciate it thank you.
Our next question comes from Julien Dumoulin Smith from Bank of America. Please go ahead.
Hey, guys I know I know, we're getting on top of the hour so I'll make credit.
If I could just come back to the carbon question, especially as you think about some of the advantage credits here can you talk a little bit more about the specifics structuring on how you would take advantage of the 45 to you otherwise from a carbon neutrality perspective for <unk>.
<unk>.
And then separately just how is relative to that position your expansion opportunities here for you to be alternatives again, I gathered that geography might be more amenable than others, but.
That's up net here.
And I would love to hear on that and then do you do you have any sensitivity you can speak to a little bit on the hedge position on 'twenty.
To clarify on last question there.
But I'll leave it there.
Okay. So.
Julian Let me, let me I think I heard your first part of your question was on carbon and carbon sequestration and.
Just on carbon and.
And so.
Yes, I had spent.
Weeks ago, I spent the Washington D C and <unk>.
And I'll tell anybody.
That debt of 45 to $50 a ton is not going to cut the mustard for especially for post combustion carbon sequestration, it's not going to work and there's nothing technically yet that is that.
Economical to make that debt to make that happen, we do sit on top of a very deep very large saline aquifer.
And that would be looks to be geologically.
A good spot to sequester carbon dioxide.
Doing it though is a whole another.
A whole another <unk>.
<unk>, so we're spending a lot of time and resources on.
<unk> everything that can possibly alright.
And a price tag to try and trying to see if for Q.
<unk> works and so far it doesn't.
And.
Im remiss to say that I don't know why if I'm able to sequester.
On a carbon that until I only get $50 a ton.
But if someone else uses direct air capture they get a 175, a ton or if I.
If I drive and <unk>.
And electric vehicle I guess 450, a ton none of that makes sense to me.
Price.
Our carbon molecules to be consistent.
And it should reward those of us that can do something to.
Put the world and a better position.
So.
And then you mentioned something about open capacity for 2022 and hedging.
Yes.
Sales of those mid term debt already locked in and around $400 million of fixed margin next year.
You can expect that the discipline and the year while already hedging.
Some of our capacity for 2022, and anticipation of giving you guidance full year guidance.
And in November with $6 and the.
And $3 for the rest of the year, yes, we're using some of our capital to the hedge out forward.
Yeah.
Alright, great ill leave it there it's noon. Thank you all very much have a great day.
Thanks Julien.
The next question comes from James Carreker from U S Capital Advisors. Please go ahead.
Okay.
Hi, guys. Thanks for the question.
I guess first off.
Really quickly is there a I.
And I guess, the useful guideline to think about margins when I.
Look at the winter LNG curve at 16 and and.
Henry hub for I kind of think of a number of potential margin much higher than 6.
And by doing some calculation for all margins.
And any quick high level calculation to think about how that gets to a 6 dollar margin.
Okay.
Shipping curves have come way up.
Also James that you have to GAAP to add.
And you can either you can either add or subtract the shipping cost for either you or jkf's $16, you subtract it or you added to the $4 for.
But shipping is not insignificant when margins get this high and everything is going to Asia that trip and <unk>.
Lot longer.
Yeah.
Okay.
So it's just.
Plus or minus $6 shipping costs.
Not quite that high, but yes and shipping also just like the curves themselves has a seasonality so winter shipping is higher than shoulder shipping.
Okay, and just seems like it would have moved to that much versus I guess, just kind of a standard <unk>.
Dollar estimate, but maybe it has.
The other question all right Jason.
James We're also talking about our current through next year, we're not talking about.
On a news blurb on Bloomberg today.
Like a trader.
Printing a cargo.
Right I understand that you talked about you talked about $6 margins and the winter and 3 for the for the balance of the year.
Yes, I was referring just to the gist and the winter months.
And then the other question was just now with the second quarter.
And our ROE, where you found additional production.
And does that imply anything maybe about upside to.
So the 5 MTA run rate per train.
Long term.
And not at this point on that for 9 to 5.1 MTA for training is the right 1 and on.
Honestly a lot of the outperformance this year thanks debt.
And really smooth ramp up of <unk>.
<unk> III.
So yes, we're still on that for 9 to 5 <unk> range.
Okay. Thank you.
Next question comes from Sean Morgan from Evercore. Please go ahead.
Thanks, guys.
I appreciate the creative creativity in terms of the commercial aspects for signing up IPM. So start to underpin some of the volumes to go and need for stage. III is there is there a possibility to to kind of back to back those IPM agreements with more traditional SBA and sort of double up on fixed fees there.
Well.
Michel and thanks, it's Anatol.
It's a large portfolio Zach mentioned, it's over 40 million tonnes now and there are a number of positions that are managed in the aggregate. So.
It is exposure that we have and we are managing on behalf of our.
Our producer partners and clearly there are synergies and.
And that business with the downstream exposure that we manage on a day to day basis. So so the short answer is it's part and parcel of the opportunity set that we have.
Okay, Great and then just really quick follow up and so those Ips and theory the banks the banking syndicate will be totally fine with you guys filling out that remaining for MTP and you had mentioned to get to with with essentially just supply side deals.
Technically they would but we think it's going to be a mix and keep in mind, we already have a few current.
Contracts that are sitting at CMI and not allocated to our project yet.
And then our DDS and so not everything will be IPM for sure, but again and all comes back to credit worthiness, and a fixed fee and the capability to either deliver rusty the gas on a pickup the LNG and past net fixed fee as a percent of their of their EBITDA and these cash.
And parties like Terminalling check all those boxes.
Okay. Thanks Jack.
Yes.
Our next question comes from Craig Shere Tuohy Brothers. Please go ahead.
Hi, Thanks for fitting me in on.
And doing the math on the disclosed fixed fees for the midterm contracts combined with their third IPM agreements.
It looks like Youre contracting at over 230, and the second quarter or a little above first quarter levels and low than more 2 and a quarter ish.
Given the current market tightness could that start approaching 2 and $5 for.
5 to 10 year agreements.
Thanks, Greg.
Have a spreadsheet in front of me that goes through that and even with that spreadsheet in front of me, it's it's pretty hard to summarize so look.
As Jack mentioned in the and the prompt.
For the next number of years.
Market prices right and that that obviously these <unk> and threes that we've mentioned on this call filter through into those mid term economics. So so it depends on on the tenor, but but you should expect us to capture and is that that market or better for the.
For that relatively prompt volumes and then our long term contract economics for the balance so.
Ken know sprint above 2.5 if it's a relatively short tenor deal of course, that's where the market is today.
Gotcha and all.
I understand the conversation.
Guys to clear the market has got to take everything.
Some some demand that used to be long term fixed and bilateral we'll go to the medium and spot.
It will be new long term SBA is.
And they will be variable rate contracts.
But in terms of the amount of new contracting I'm not talking about 10 years that is filling in for expiring contracts and at the low.
And any new capacity I am not talking about yourself and talk about maybe some of the Chinese law from the first quarter.
It just seems like in terms of real spa's or IPM debt.
And that can support truly new construction and project finance.
It's been pretty soon.
On do you see that starting to open up do you agree do you see it starting to open up more.
Could you see this and the future being a significant minority of the market, maybe a quarter of the new contracts.
Okay.
I think your view is skewed to U S Counterparties and those contracts I think if you look globally, Greg and you looked at the oil index contracts that are being signed.
Almost daily.
Youll see the market and the contracting market has been.
Very lively.
But if youre talking about just Henry hub.
Linked.
S style markets. Our contracts. Then then it's been it's been less but still pretty feel pretty strong, yes, and just a follow up on Jack's comments on 2020 was obviously an anomalous year, but even then you saw a fair amount of long term contracting and obviously <unk> 19 were big years.
And for the for the Nymex market and.
As we've discussed the <unk>.
Margin environment and the window is clearly open for more of that engagement now.
And I think we view that that piece of the market is going to be volume metrically roughly similar to what it has been historically.
And as the market grows it will be a smaller percentage of the total.
Okay.
Gotcha, Okay. Thank you very much.
Okay. So that appears and all we have time for questions for today I'll pass the call back over to management for any additional or closing remarks.
I just want to thank everybody for your supportive of generic.
And interesting time with the pandemic please be safe out there. Please get vaccinated and we'll talk to you and I guess and November.
Bye bye.
This concludes today's call. Thank you for your participation you may now disconnect.
Okay.
Yeah.
Yes.