Q2 2022 Cheniere Energy Inc Earnings Call
Please standby good day and welcome to the Cheniere Energy, Inc. Q2, 2022 earnings call webcast today's conference is being recorded.
At this time I would like to turn the conference over to Randy Potts here. Please go ahead Sir.
Thanks, operator, good morning, everyone and welcome to <unk> second quarter 2022 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, <unk>, President and CEO , Anatol Vegan executive Vice President and Chief Commercial Officer, and Zach Davis 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.
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 measure can be found in 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 LP or <unk>, we do not intend to cover <unk> results separately from those of Cheniere Energy Inc.
The call agenda is shown on slide three Jack will begin with operating and financial highlights Anatol 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 will now turn the call over to Jack Fusco, <unk>, President and CEO .
Thank you Randy good morning, everyone. Thanks for joining us today and thank you all for your continued support of Cheniere.
I am pleased to be here. This morning to review, our second quarter 2022 achievements and discuss our 2020 to positive outlook.
Second quarter achievements were highlighted by the positive that idea of Corpus Christi stage III earlier. This summer in June we issued a full notice to proceed tobacco, which had already commenced early construction under a limited notice to proceed earlier this year the strategy of releasing Bachtel under limited notice to proceed ahead of our full.
<unk> continues to pay dividends.
Is it locks in schedule and cost, which is especially important in today's inflationary environment.
We are excited to move forward on this highly economic growth project, which will strengthen our market, leading LNG infrastructure platform and provide much needed LNG to the global market.
Stage three is a milestone the entire cheniere workforce should be proud of as.
As it was made possible by everyone's dedicated and tireless efforts to bring this project to fruition.
Over the last decade, Cheniere has set the bar on safety and project execution, and we look forward to continuing those results with stage III.
Please turn to slide five where I will review some of the key operational financial and strategic highlights from what was a very busy and successful quarter as well as introduce our upwardly revised financial guidance ranges for the full year.
For the second quarter, we generated consolidated adjusted EBITDA of approximately $2 5 billion and distributable cash flow of approximately $1 9 billion.
As margins in the LNG market remains significantly above historical norms and our focus on operational excellence continue to be rewarded.
Our EBITDA and cash flow metrics for the second quarter, both exceeded what we achieved in the first half of 2021, a powerful illustration of the impact.
A world class execution, it's safe reliable operations, which have become synonymous with the Cheniere brand.
The energy crisis in Europe continues to evolve and it is at the center of a tragic and devastating more.
The United States is blessed with an abundance of low cost natural gas and I am proud that our collective efforts at Cheniere are having a direct and positive impact on the lives of so many people around the world.
We produced loaded and exported a 156 cargoes in the second quarter as our operations benefited from the full quarter of operations of train six at Sabine pass.
As of the end of the second quarter, nearly 225 cargoes of LNG, which is over 70% of the cargoes produced at our facilities. So far this year have landed in Europe .
By comparison in the first half of last year less than 40% of the cargoes produced by Cheniere landed in Europe .
Clearly the benefit of the flexibility inherent in the commercial structures of our contracts are on display that is enabling the LNG, we produce to reach the market with the greatest need.
For the third quarter in a row, our guidance ranges for 2022 are moving higher by over $1 billion.
We now forecast consolidated adjusted EBITDA of nine eight to $10 3 billion.
And distributable cash flow of six 9% to seven 4 billion.
Thanks to the expected lump sum payment by Chevron under the termination of the Regasification to UA and marketing margins moving higher compared to our prior forecast.
Zach will address guidance in more detail in his comments in a few minutes.
On the marketing and origination front Anatol and his team have been racking up frequent flyer miles and bringing home more long term contracts with customers around the world looking to secure long term reliable supplies of LNG in support of energy security and energy transition.
Just since the start of the second quarter and through July we have entered into long term contracts aggregating approximately 140 million tons through 2015.
Since our first quarter earnings call, we announced long term SBA.
Posco International Ecuador, Chevron, Petro, China, and PTT all of these contracts extended beyond 2040, and the Petro China SBA is our first LNG contract that extends into the second half of this century.
Over the last 12 months, we have signed to SBA is an IPM deals aggregating up to approximately 15 million tonnes per annum and up to over 240 million tons in aggregate.
The contracts with Ecuador, Chevron and Petro China, each contained a provision for the long term contracted firm volume will double either once we make a positive.
On liquefaction capacity expansion at Corpus Christi beyond stage III.
Or.
Unilaterally commit to the volume.
So after reaching RFID on stage III only weeks ago we've.
We've already sold an incremental almost 3 million tons per annum of volume beyond stage three.
Those contracts clearly demonstrate the demand in the market and my leadership team and I are very focused on <unk> next phase of growth.
The investments we made at Sabine pass and Corpus Christi over the last decade provide both of those sites with significant brownfield expansion opportunities.
And you can be certain we're pursuing growth at both facilities.
At Corpus Christi, we see a number of potential ways to leverage the infrastructure, we've built or are building Chad economically advantage LNG capacity from a smaller scale edition that could conceivably be done faster all the way to a very large expansion on the land adjacent to stage three we've shown.
You in the past.
At Sabine pass with our third berth nearing completion infrastructure hurdles to expanding SPL are being cleared and we are currently developing plans for a potentially significant expansion of that facility as well.
Later this year I look forward to providing more detail on our growth plans at both Sabine pass and Corpus Christi as we move into the regulatory process and communicating our enhanced capital allocation plans for the coming years.
Turn now to slide six.
On these calls you've heard me talk about our operational excellence program that program establishes the key operating philosophy of Cheniere of which safety reliability and efficiency form the foundation.
That program ensures safe operations and maintenance of our facilities, while maximizing production and efficiency.
I always one of my key priorities operational reliability has become a key focus of those outside cheniere as well, especially with high LNG market prices in Europe in the midst of an energy crisis.
First and foremost with respect to safety.
We are a safety first culture at Cheniere and I am extremely proud that our safety record demonstrates that.
On the bottom of slide six the graph shows our total recordable incident rate the preeminent safety metrics of an operating facility and a metric that is part of the compensation calculation for each and every <unk> employee.
You can see that not only have we exhibited consistent improvement over the course of last year during which we commissioned and started commercial operations of train six but also that <unk> performance in this metric is comfortably within our industry's top quartile.
Strong safety metric and operations typically leads to reliable operation of the facility.
Our utilization is consistently above 90% compares favorably to the 2021 global average of about 80% and demonstrates the value of our operational excellence program.
I tell our operations leadership team that safety is an investment not an expense and the return on that safety investment is clearly in the results. We reported this morning.
Turn now to slide seven will highlight two significant milestones recently achieved.
First during the second quarter, we commence providing our cargo emission tags or CE taxed our long term customers. These tags are the first of its kind innovation in our industry and provide our customers with the estimated greenhouse gas emission profile of each LNG cargo from the wellhead to the cargo delivery point.
The data on the tax is calculated utilizing our proprietary lifecycle analysis, improving the accuracy of the emissions data relative to industry estimates.
<unk> are a tangible result.
Of our prioritization of data driven environmental transparency, we expect the tags will help identify opportunities to quantify and improve environmental performance throughout the LNG supply chain.
In addition in June we published our third annual corporate responsibility report entitled acting today securing tomorrow.
I am proud of the continued progress we.
We're able to detail in these annual reports as Cheniere is emerging as a leader in ESG for natural gas companies with a focus on being actionable not aspiration.
On that note I want to take a moment to address some of the recent news and speculation regarding cheniere, the EPA and the national emission standards for hazardous air pollutants are niche approval.
The EPA recently lifted a near two decades stay of that rule covering the types of turbines, which we utilized at both Sabine pass and Corpus Christi.
At Cheniere regulatory compliance is a strategic priority consistent with our ESG focus on being actionable our company values and our commitment as a responsible operator.
We work constructively with federal state and local regulatory authorities to ensure prudent operations in compliance with current regulatory requirements.
We value. The fact that we operate under a regulatory regime in this country that seeks and values input from industry and we have been in touch with the EPA regarding our concerns with respect to the world.
Currently we are working diligently at our facilities to perform the initial testing required by the new shaft.
While we don't believe our turbine should be subject to the rule as they use an LNG operations was not contemplated by EPA in the original 2003 rulemaking, we will work with the EPA and the relevant state agencies to develop an acceptable path forward to compliance if applicable.
At this time it is too early to discuss what if any specific changes would be needed. However, we are confident that if necessary, we'd be able to develop a solution that would enable compliance without a material financial or production impact.
My conviction engineers LNG platform has never been stronger we look forward to continuing to lead the LNG industry in terms of safety operational excellence and environmental transparency in order to provide the world with a cleaner more secure and reliable energy solution.
Thank you all again for your continued support of Cheniere.
I will now 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.
As everyone is aware the energy World has been caught in the maelstrom of geopolitical and macroeconomic events that are feeding volatility and heightened uncertainty in the market all of which have had consequential impacts on supply trade patterns and consumer behavior across energy commodities amid.
Amid this volatility total LNG demand continued to grow, albeit constrained by lack of new supply and sustained elevated prices undoubtedly contributed to the record amount of promotional activity in the second quarter.
After a brief pullback in LNG spot prices in the second quarter, we have some concerns over the dependability of Russian pipeline supply plus numerous LNG supply issues pushed JK mttf forward curves back into the 40 to $50 and then might btu range through the coming winter pushing European electricity prices to record highs.
JJ I'm prompt month futures continues to trade at a discount to TGF during the quarter as Europe priced cargoes away from Asia and this discount has widened as a result of further cuts to gas flows into Europe in recent weeks.
During the quarter, we saw pipeline imports from Russia into Europe , excluding Turkey continued to fall, reaching modern era lows of just over five five Bcf a day in June prior to Nordstrom's annual maintenance period.
U S LNG imports into Europe , excluding Turkey, again surpassed Russia pipeline volumes for the first time in June and again in July .
On the LNG side, there have also been several supply disruptions as well as seasonal maintenance activities, which have also acted to tighten the market.
The outage at Freeport LNG as it removes the equivalent of approximately two Bcf a day of LNG from the market.
Industrial action at shelf payload beginning June 10th slowed production and resulted in a shutdown beginning around July 11th which remains idled as of early August and the restart of Norway's Hammer first LNG, which had been off line. Since September of 2020 was delayed to early June .
Several other projects in Angola, the U S and Indonesia also underwent routine planned maintenance as expected in the shoulder months tightening the market further.
Despite the supply challenges in LNG, a recovery from below average production during the same period in 'twenty, one contributed to a 7% year over year increase in global LNG exports, which.
Which reached 100 million tons in the second quarter consistent with the previous two quarters.
The U S alone export of $19 6 million tons in the second quarter up 12% or $2 1 million tonnes year on year due in large parts to additional capacity online at SPL train six.
While the U S was the largest LNG exporter in the first half of the year total export volume declined modestly in the second quarter due primarily to planned maintenance and freeport's outage.
Finally in the U S market, although Henry hub prices have also recently touched new multiyear highs domestic prices are still well below the relative spikes in both <unk> and DTF.
The July contract settled at $6 55 down 26% relative to the June contract a supply increase in demand moderated in early June loosening in the U S gas balance.
Since then prices have moved up again on an unprecedented early summer heat, we're seeing a response to the price signal in the rig count is gas directed rigs in the U S are up approximately 50% year over year. So 157 rigs. So we would expect gas production to increase from current levels in the near future.
Please turn to slide 10 for more detail on gas and LNG supply and demand in Europe and Asia.
As discussed the global LNG market remained tight in the second quarter, Despite winter coming to an end and a notable decline in Chinese imports.
<unk> continues to endure high spot prices for natural gas, especially in Europe , given the reduction in Russia and gas flows.
During the quarter LNG deliveries to Europe climbed 40% year on year with volumes from the U S increasing by nearly 130% year on year, including flows from Cheniere, which also increased by over 130%.
Nevertheless risks of further cuts to Russian flows continued to rise maintaining upward pressure on prices.
In mid June Nordstream flows were reduced to approximately 40% of the capacity and following the end of the quarter. The scheduled maintenance reduced close to zero from July 11th to 20th.
Clothes, initially resumed to pre maintenance levels, but have since fallen to 20% of capacity.
Amid these risks and high prices, Germany raised its gas emergency plan to alert level, while the European Commission proposed measures to reduce gas used in Europe by 15% until next spring in the meantime, Europe continues to fast track plans to increase LNG import capacity by over 50% to approximately.
280 million tons per annum and has already sanctioned 11, new re gas terminals, representing approximately 40 million tons per annum just in the first half of this year.
In Asia LNG demand declined about 5% in the second quarter, most of which was attributable to economic headwinds in China, the country's GDP growth rates decelerated to Europe , 4% in the second quarter from four 8% in the first.
Shanghai, the largest financial hub in the country endured strict COVID-19 lockdowns, which was a contributing factor to our year over year decline in China's absolute GDP during Q2.
Gas demand in the country fell 8% as a result of city gas and power sector consumption contracted.
Elsewhere in Asia overall demand growth was somewhat flat, although we observed improved demand in <unk> and Thailand.
Clean power generation in Japan was down year on year, which led to a 9% increase in LNG imports, while maintenance of coal fired power plants in Korea sustained existing LNG import levels.
Thailand continued to exhibit LNG demand strength as higher consumption requirements offset it's dwindling domestic production.
The relative weakness in Asia year to date has counterbalanced the heightened demand in Europe , but we expect this to be a transient phenomenon with near term whether longer term organic growth confirming that long term fundamentals in Asia remains strong with ample upside potential.
This view is underscored by the demonstrated appetite for long term LNG volumes exhibited by Asian customers this quarter, including our recently announced long term contracts with Posco Petro China and.
PTT.
Please turn to slide 11.
Needless to say the impact of Europe's energy crisis have already been far reaching with significant consequences observed across multiple sectors of the economy, including food and commodities.
As backdrop has exposed some vulnerabilities within gas and LNG markets around the world not just in Europe and has accelerated the impetus for gas consumers to secure reliable long term LNG supply.
In the first half of 2022 buyers around the world signed nearly 38 million tonnes per annum of firm long term contracts globally, the highest level since at least 2016.
Most of these firm contracts or 28, MTA were signed with U S sellers potential underpinning a new round of LNG infrastructure investment in the U S.
In just the first seven months of 'twenty two we have already had our most productive year for long term contracting since 2011.
Continuing to successfully grow our portfolio of diverse creditworthy customers.
The long term deals we concluded completed the commercialization of stage three and as Jack mentioned LNG buyers have already begun to contract for our next phase of growth.
Our commercial success further cements our position as the LNG provider of choice for buyers worldwide.
Since just the start of the second quarter, we executed long term transactions with Fob.
Yes, and IPM structures with credit worthy Counterparties from Asia, Europe , Canada, and the U S Supermajor.
This geographic and structural diversity is a prime illustration of the value of the Cheniere brand that Jack referenced and what's what sets cheniere apart the certainty on execution.
<unk> and reliable operations and our unrivaled ability to structure long term energy solutions tailored to fit the needs and preferences of a diverse global customer base.
On the buyer side, you can see from the Middle chart that a greater variety of buyer types are contracting for U S. LNG, given the stability and flexibility Gulf Coast Fob volumes can provide for their portfolios.
While portfolio players still represent a significant portion of U S. LNG buyers or perspective buyers. We observed that the end user segment has also been growth, including those potentially servicing Europe .
Finally, while Europe's target to displace Russian gas certainly creates a near term increase in LNG demand.
You can see from the chart on the right that credible commentators are forecasting this heightened demand to persist despite expectations for the region to reduce its overall gas demand over that same period.
This uncertainty highlights Europe , and the world's need for flexibility and reliability of supply to highly valued attributes of the long term products we offer our.
Our conviction in the long term global market fundamentals for our product remains as strong as ever and our demonstrated ability to construct LNG solutions tailored to customers across the globe places cheniere in an ideal position to continue to win business and grow our market, leading LNG platform for many years to come.
And now I'll turn the call over to Zach to review, our financial results and guidance.
Thanks, Anatol and good morning, everyone.
I am pleased to be here today to review, our second quarter 2022 financial results, our key financial accomplishments and our increased 2022 guidance all of which reflects the hard work and dedication of the Cheniere team the reliability of our platform and the volatile state of the global energy markets and until just described.
Turning to slide 13.
During the second quarter, we generated adjusted EBITDA of $2 5 billion.
Distributable cash flow of approximately $1 9 billion.
And net income of over $700 million.
Our second quarter results. Once again were driven by the sustained higher margin environment across global LNG market, coupled with higher lifting margins due to higher Henry hub prices.
We recognized an income 570 <unk> of physical LNG during the second quarter, including 570, <unk> from our projects and <unk> sourced from third parties.
Approximately 85% of these LNG volumes recognized in income were sold under long term SBA or IPM agreements.
We are pleased to announce that we generated positive net income of $741 million in the second quarter. However.
However, the net income line continues to be impacted by the unrealized noncash derivative impact related to our long term IPM agreements as we have discussed on prior earnings calls in fact, we recognized $1 3 billion of these unrealized noncash derivative losses in the second quarter alone as Gulf Coast Netback curve.
<unk> continued to rise in Q2.
As a reminder, because GAAP requires mark to market accounting of these long term gas supply agreements, but does that does not permit the mark to market of the associated sale of LNG <unk>.
<unk> and a mismatch of accounting methodology for the purchase of natural gas and the corresponding sale of LNG, which drives this quarterly variability in net income from period to period.
As Jack noted.
During the quarter, we launched and closed on a widely syndicated financing for Corpus Christi stage, III, raising approximately $4 billion of new capital, which was the final step needed for us to reach FID.
As part of the financing, we amended and restated the CCH credit facility with 36 financial institutions, increasing total commitments by $3 7 billion.
Approximately $4 billion.
Extending the maturity by multiple years and reset the borrowing rate to sofa plus $1 50.
Approximately $300 million of outstanding borrowings were rolled over from the previous facility and since closing in June a little over $400 million.
Was incrementally drawn as of the end of the quarter.
In addition to the credit facility, we amended and restated the working capital facility at CCH, increasing commitments by $300 million to $1 5 billion <unk>.
Extending the maturity to 2027 and reset our borrowing rate to sofa plus $1 25.
The working capital facility remains Undrawn.
We are appreciative of long term partnership with a global Bank group that has consistently supported us through the years, including on stage, three which further highlighted <unk> ability to continue to develop and structure world class infrastructure projects with brownfield economics underpinned by lump sum turnkey EPC arrangements with bechtel and our diverse mix of <unk>.
Long term creditworthy take or pay commercial contracts.
Thanks to our financial results so far this year and the expected proceeds from the early termination of our <unk> with Chevron, we continue to make progress on our comprehensive long term capital allocation plan on a significantly accelerated schedule.
Not only has our prioritization on debt Paydown accelerated the deleveraging of our consolidated balance sheet, but also we are more than halfway through our three year $1 billion share repurchase authorization in less than a year.
During the quarter, we prepaid $1 1 billion of outstanding indebtedness.
Bringing our total debt repaid or redeemed to just over $3 billion under our capital allocation plan. So we are more than three quarters of the way through our four year deleveraging goal in about a year and a half.
The expected proceeds from the Chevron prepayment will likely further accelerate the pace of our deleveraging by the end of the year.
In the second quarter alone, we repurchased $4 1 million shares for approximately $540 million, including approximately $2 7 million shares from Icahn enterprises for approximately $350 million, which brought its shareholdings in cheniere below the threshold for board representation, establishing the nomination and standstill.
That has been in place since 2015.
We've also continued to declare and pay a quarterly dividend of <unk> 33, which.
Which we plan to grow over time now that we've completed or announced the first four quarterly payments and.
And finally in terms of allocating capital to accretive growth projects, we reached <unk> Corpus Christi stage, three and issued Bechtel full notice to proceed in June .
Given this accelerated progress in our approximately $7 billion of forecasted DCF in 2022, our plans for our revised capital allocation plan have also accelerated and we anticipate coming to the street with an updated plans for the future before the end of the year.
While robust while robust deleveraging and reaching investment grade in the next year or so will remain a priority you can likely expect a recalibration of allocation between debt paydown shareholder returns and future growth on a relative basis, particularly as we continue to develop and commercialize this future growth.
Turn now to slide 14, where I will provide some more detail on our third consecutive significant increase to 2022 guidance.
We are increasing the midpoint of our guidance ranges for full year 2022, consolidated adjusted EBITDA and distributable cash flow each by over $1 billion.
Bringing expected consolidated adjusted EBITDA to nine 8% to $10 3 billion.
Distributable cash flows of six 9% to $7 4 billion.
With our recent distribution announcement for <unk>. We're also tracking to the high end of the $4 to 425 guidance range.
As Jack mentioned about half of the $1 $6 billion increase in EBITDA is attributable to the expected proceeds from the early termination of the <unk> with Chevron set to be paid to SPL LNG prior to year end.
<unk>.
With respect to the EBITDA sensitivity from here, we have sold much of our total expected production for this year and have approximately 40 <unk> unsold remaining.
We currently forecast that a dollar change in market margin would impact EBITDA by approximately $20 million for the rest of 2022 as we continue to reserve some unsold volume for long term origination in Q4.
2022 continues to prove the power of the Cheniere platform and what can be achieved when operational excellence and seamless execution, our combined during an elevated commodity backdrop.
Thanks to our team's relentless focus on safety and reliability at both of our facilities. We continue to outperform expectations with respect to operational performance and financial results, which brings an even stronger balance sheet increased shareholder returns and further accretive growth into focus.
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.
I would like to ask a question. Please take note by pressing star one on your telephone keypad.
If you are using a speaker phone please make sure your mute button.
Is turned off to allow you to take note to a retire equipment again. Please press star one to ask a question.
I'll take just a moment to allow everyone an opportunity to signal for question.
We will take one question and one follow up.
Carnival, Jeremy Tonet with JP Morgan.
Hi, good morning.
Good morning, Jeremy.
It seems like Cheniere has been quite successful in signing up new contracts as of late particularly with Asian buyers.
Some of those contractual terms of showed that part of it is contingent on expansion beyond CCL stage three and so was just wondering.
What's the pace of new contracts could be do you see more of these coming in the near term and are they going to be contingent on our further expansion and if so when might we hear more about that.
Jeremy Thanks.
I can give you a little bit of color right now if you'd like so as you all know strategically.
We have a track record of capitalizing on all the infrastructure and the sites that we've built.
We have executed on that strategy and expanded our portfolio by over 20 million tonnes, so far over 60% and thats.
Corpus three Sabine six and now stage III.
So I still view, both site as being excellent for major brownfield LNG.
<unk> expansion.
At Corpus, specifically and since you asked about the contracts.
Corpus is growing to just over 25 million tonnes with the addition of stage III.
We have a clear line of sight to get corpus over 30 million tonnes on par with Sabine pass.
With the addition of a few more mid scale trains.
As an expansion of stage III as well as some debottlenecking and tuning efforts.
And so in terms of growth plans, we believe that that's the lowest hanging fruit.
And it is expected to be extremely cost effective and potentially seamless with back door already on site.
Additionally, both at Sabine and Corpus.
Both of those sites are.
Are ripe and ready for a much larger expansion.
We're currently working on early stage development of over 30 million tonnes between those two sites.
As you highlighted.
The energy crisis abroad has brought reliability and energy security and really <unk>.
<unk> ability of Cheniere LNG into sharp focus around the world.
And that includes Washington.
So.
In the U S. LNG is rightly seen.
As a logical long term.
Balance.
Long term solution how balances shortages.
In Europe and.
I believe that the permitting.
Reform that is currently being talked about in D. C is a very positive development.
It should enhance the regulatory tailwind for.
Or well developed <unk>.
Commercially sound brownfield projects like ours.
And what we're about to propose longer term on our growth forecast.
So I hope that helps.
Yes.
That's very helpful.
And just wanted to pivot to capital allocation, if I could and I know there's.
Figure update coming towards the end of the year here.
But it seems like at this point Cheniere is clear line of sight to hitting targeted leverage and reach full investment grade in the not too distant future here.
And so just wanted to know process wise, when you're thinking about buybacks, where do you think of buybacks in terms of balance sheet capacity or stock price or think of it more in a.
Holistic manner, a certain return of capital to shareholders that would be a combination of dividends and buybacks as a certain percentage of free cash flow or such.
Hey, Jeremy Zack and thanks for the question.
I mean, it was less than a year ago, we came out with capital allocation, we thought we'd have $10 billion available cash through 'twenty four.
Yes.
Maybe it's double at this point, just where the curves are and how how much earlier.
<unk> six came online.
So yes.
We're going to everyone our capital allocation plan.
With much bigger numbers this year, because it's just been so much more accelerated.
So as we think about it there's this this pile of money and how do we break it out.
And we will definitely recalibrate to an extent the debt paydown to shareholder returns.
No need for the four to one ratio of debt Paydown.
To buybacks going forward, so theres going to be quite a bit of money allocated to share buybacks over time and as you can see.
We did over half a billion.
Just in Q2 and you saw some of the dislocation there and we were really opportunistic. So you can assume that that's going to happen there'll be a regular cadence quarterly that will always be buying back stock, but it will be extra aggressive whenever we see things like what happened in June .
Got it that's very helpful. Thank you.
Thank you and once again, we will be taking one question and one follow up we'll now move on to <unk>.
Mark <unk> Szeto with Barclays.
Hi, good morning.
Maybe just following up on the longer term growth outlook with respect to the expansion beyond the stage III wanted to get your latest thoughts around what the next iteration of that to look like after factoring in the recent contracts you've signed it seems like you could potentially move forward with a larger scale train at this point or even a larger expansion with a couple more contracts. So just curious.
Extent, you could comment on how youre thinking about that versus modular expansions.
Mark Hi, it's Jack.
Right.
The way I'm thinking about it is I want to do what whatever expansion I can do quickly and in a financially disciplined way.
And right now for us.
It looks like adding to the.
Mid scale trains, we can do very quickly with.
And economically hit all of our financial metrics.
<unk>.
Rather than get caught up in a long term regulatory review of a large scale expansion.
So my first goal is to just grab all the low hanging fruit that we possibly can right now today.
And then and then make sure we're filing is being respectful in those filings of what what the longer term expansion plans are for both for both sites.
And Thats near term also.
But I just think.
We have an opportunity.
To add to our growth plans.
And a very effective way and we need to take advantage of it.
Thanks, that's very helpful. And then with respect to Europe , I'm curious, how your discussions with customers customers that have gone and whether it's the most recent.
Curtailment of volumes on Nord stream and re escalation in gas prices is that at all change some of the discussions over the past month or so.
Yes. Thanks, Mark this is anatol checking in.
The discussions have been very robust for the better part of a year really sort of in the market broadly in Europe obviously.
Tragic events that played out at the beginning of the year and continued to play out does add a sense of urgency you've seen us do transactions with Ecuador, LNG those are transactions that.
We think probably would've gotten done anyway, but perhaps were done sooner and then of course on the Europe front. There is a tremendous push to add infrastructure to debottleneck re gas infrastructure running well over 80% and now will grow most likely by about 50% and even given our <unk>.
Model and the transactions, we enter into again was the <unk> the chevron's of the world et cetera.
All serve European demand so kind.
Kind of like a lot of the things you hear from US. It's all of the above and we continue to be very well engaged in to Jeremy's question. We do see kind of continued great opportunity to support Asia as growth not just to help rebalance Europe .
Got it thanks for your time.
Thank you and next we'll move on to Erinn.
<unk> with Bernstein.
Hi, Good morning, and I will now ask any detailed questions about the EPA thing I know it kind of.
Sensitive situation, but I am just wondering if we should expect a resolution on it 10 before the 180 day, Mark which is kind of an epithelium.
Maybe Jean Ann.
Because.
And I just wanted to say look I've worked in and around the EPA for.
Well over my 40 year career.
I'm very familiar with.
The EPA their processes and what their expectations are.
As I talked about Amit.
Speaking remarks.
We've been testing the turbines with Baker Hughes at our side Bakers our turbine OEM.
Try to make sure that we provide the data that they want by September .
September 5th date.
I have to say.
Being an old performance engineer from my days at <unk> back in the 19 eighties.
The testing procedure in itself is very difficult it relies heavily on correlations and calculations.
<unk> and guesstimate of the formation of formaldehyde.
So we're working closely with the EPA as we.
As we're talking just working on what an accessible test program looks like and what the shortcomings are from that program in and of itself.
As you know from your comments.
91 parts per 1 billion is an awful small number and.
Very difficult to <unk>.
Measure.
With today's technology.
But we will continue to work closely with the EPA.
I think ultimately the.
The situation is manageable.
I think the solutions will be immaterial.
<unk>, both from an operational perspective, and a financial perspective.
Great. Thank you and then as a follow up what do you view as the maximum amount of U S. LNG liquefaction that you can't realistically build concurrently over the next four or five years.
That limitation.
Alright, Im talking client and the market right now and you guys know more than pretty much anyone interested in your opinion.
And the next four or five years and at all what's the maximum amount of the U S can build GNL.
Janet I will admit that the answer to that question has changed modestly over last six months and it is probably higher today than than we would have.
Put it into our base case, but the constraints have changed and the constraints are very different today.
<unk>.
As we said the way we prosecute these projects with lump sum turnkey commercial support.
Gas supply solutions all of those boxes checked on.
On a on a disciplined and attractive risk adjusted basis.
Those boxes are getting more difficult to chat right. The commercialization issue, which was a key gating factor two or three years ago, obviously year to date less so with well over 30 million tons of SBA signed by U S projects and other 20 plus million tons of HOS.
That is not the gating factor, but running the gauntlet on all these other pieces and having the EPC economics that support that commercialization.
<unk> prowess in financing these things is is.
It is not that widely distributed and the gas supply solutions that our guys come up with are becoming more and more difficult. So all of those issues are going to be the limiting factor.
Great. Thank you.
Thank you next we'll move on to Brian <unk> with UBS.
Okay.
Hi, good morning, everyone.
Looking at looking at 'twenty, two guidance seems like $10 billion is roughly the right number to end the year for EBITDA, but when looking ahead at 2023, it seems like the CMI margin opportunity has expanded.
Given the roll forward and hedging.
And shrink in prices relative to 'twenty two EBITDA. So was kind of just wondering if you could talk high level about some of the moving pieces when considering what's changing in terms of spot in terms of stock contract CMI capacity as we look ahead into 2023 versus 22.
Sure this is <unk>.
<unk>.
You know full well, we don't really give guidance on 2023 until the November call. So that's coming in a couple of months, but what I can say is that we're comfortably over 90% contracted on our nine trains plus stage III at this point through the mid 2000, <unk> and for the next decade, we're on average 95% contracted across.
Everything.
However, considering a few of the remaining contracts arent going to stand up or start until 2023 or even early 2024. There is actually a reasonable amount of open capacity next year, especially in the first half of for most of these contracts that still haven't started yet related to the first nine trains big.
Again.
But that's not to say, we're not still comfortably over 90% even next year.
But if you look at the curves and on average for the rest of this year next year high <unk>, if not better.
We're comfortably.
Confident that.
We can beat the $5 5 million of run rate EBITDA on nine trains.
Again next year, so it could be a really strong year before 2024. So we're we're almost fully contracted on the nine trains.
Until stage III ramps up in 'twenty five 'twenty six and then we have a little more open capacity again.
Great I appreciate all the incremental color maybe as a follow up on the CCL stage three I know you've gotten a few questions on this already but just kind of curious if you can talk about brownfield expansion site with mid scale add existing CCL stage, three and Sabine.
That would.
Limit the.
Regulatory approval versus like permitting a whole new site and going back to FERC, which is seems like the long term plan at this point, but is there anything in the interim on the mid scale perspective at CCL stage three at Sabine that could potentially be brought online earlier, just given that you already have almost three MTA contract signed.
Yes, no we are a FERC regulated site. So it doesn't matter what technology and in fact, it doesn't matter what we do.
We always go back to FERC, and then <unk> and now the EPA.
So.
I didn't want to mislead you on that aspect of it.
Yes.
The.
A degree of difficulty.
In my opinion is different.
Doing a modular expansion to a whole new.
Large scale large train.
Construction program as far as getting through FERC and the engineering required.
So since we've already.
Engineered and got fully permitted.
Even trains Mitsui.
Mid scale trains it should be significantly easier to just add to those.
Seven trains.
And punch them out, but it still requires FERC approval.
Great I appreciate the color Greg good morning.
Thank you and next we'll move on to Matt Taylor with Tudor, Pickering, Holt and company.
Yes, thanks for taking my questions here.
I wanted to go back to take your call in terms of behavior there.
A lot of those western European countries can be really focused on getting through the winter here. So I guess the.
Question here is have you seen structural change in that behavior, meaning should we expect to see interest.
You said, it's already picked out that interest picking up even once we get through next year or are you still seeing LNG imports in Munich in a short term measure to backfill Russian gas before turning back to.
Mothballed Baseload generation.
So that they can support renewable development.
Yes, Thanks, Matt.
The first step.
Jeff in solving this crisis that Europe has.
Has pursued very aggressively is the infrastructure solutions.
The issue of lining up contractual long term molecules for those infrastructure solutions is is something that that has been yes.
Yes, somewhat successful, let's say and something that will we think be largely intermediate it so the.
<unk> supports the <unk>.
Market will get from the Ioc's intermediate Ing. These issues is clearly what you're seeing in the Chevron Exxon, even Ecuador transactions that have been executed lately as.
As well as some some European customers again.
<unk> and <unk>.
MPW for example that was done was another project falls into that bucket, but you really can't get away from the fact that <unk>.
Demand growth and real.
The underlying increase for.
For LNG imports is going to be driven by Asia into the <unk> and <unk>.
The fact that we now have deals that go into the late <unk> and into the early fifties from that theater.
Really support that so that's the balancing act, but of course, the flexibility and reliability of our products will go to the market of most need as it has for over 70% of our volume to date.
Great. Thanks for that and maybe as a follow up to that then.
We're starting to see longer term contracting on those re gas terminal so.
Is that something that acquiring or building those types of assets that fit your risk reward preferences.
Do you guys get involved on the Debottlenecking of <unk>.
Infrastructure in Europe .
He was previously an important facility.
Well I guess to the.
The short answer to that is we'll have at least 60, if not 90, and maybe even more million tons of additional European import capacity.
Without our involvement so we're happy to look at things, we obviously are in the market but.
To date that hasn't that hasn't required our participation.
We don't expect it to going forward.
Has it slowed us down at all in on our growth plans.
Great. Thanks for taking my question.
Thank you and next we'll move on to Michael.
Hello, Brian with Goldman Sachs.
Nice try hey, guys. Thanks for taking my question.
Have a couple.
Jack just curious actually.
First one for Jack second one is probably for a combo of jacking Anatol. The first one just on the niche App issue is there anything that your team is saying to you that would keep you and the EPA both state and federal from entering consent decrees that gives you a lot of time to come into compliance is coming.
In the compliance is required.
Yes, I mean that would that would be the logical next step if we could not get a subcategory and get a stay on our turbines, which which is what we believe is would be the correct thing for the EPA to do this.
This rule was in place and really O three or four and our facility was approved in 2011.
That.
That we think it makes sense for them to put us in a subcategory, but if not we would we would go into negotiations.
Some type of consent degree most logically with the state agency, which in our case would be Louisiana LD Q.
And we would go from there just like we have.
Many times before.
Like I said, Michael I have in my career, many many times.
Got it Okay, and then a long term question.
This is just when you are talking of Counterparties, and especially the utilities in Asia.
What are they saying to you. These days just given what's happened to global gas prices about the future of their coal generation fleets.
Well I'll give you my perspective first and then Anatol can chime in like Anatol says we track.
All of the natural gas infrastructure being built around the world and I think the last time. The last thing I saw from Amatol scheme was around $1 three trillion of Nat gas infrastructure that is currently being built.
And most of that is in Asia, I think a very small amount of that is in Europe with the with the.
Fsrus that they are currently trying to build in the interconnections into their gas pipelines, but most of that trillion dollars.
In Asia.
Our conversations have gone very smoothly because of our reliability.
And.
It's not an accident that I touched upon it in the presentation. It has been in a competitive advantage for Anatol and his team to go sit across the table and say look we haven't missed a foundation customer cargo.
And if you are building this power plant.
Don't you want to have a reliable source of natural gas.
That combined cycle power plants and those conversations have went very well, which is why Amazon highlighted the fact that Petro China.
As already into the 2015 with us on their on their contracted amounts. So they really do see the value proposition of a long term Henry hub based contracts.
And just to build on that.
Unfortunately, the way Europe has set up its market.
The pain of these very high prices is very broadly felt the way that Asia. Most of Asia is setup its market as those prices are largely irrelevant.
Our friends at CPC.
Are largely immune from these prices and pay a long term contractual price that is much less volatile and much lower and that's really what Asia is relying on and as we look across and think about as you do about demand destruction and the implications of these high prices.
We're not seeing anything right the commitments to not build any more coal plants retire coal plants continue to import more LNG continued to develop more gas fired generation really haven't changed over the last couple of years and one of the large reasons for that as Jack said is we supply a fundamentally much less volatile very rely.
And these days much lower priced product and in the call alternative is is even economically not attractive much less environmentally. So so that's one of the many reasons why we're still still sanguine on Asian gas and LNG demand growth for for decades to come.
Got it.
Don't mind, one last one and this probably <unk> just curious when you think about any open capacity, whether it's in first half of 2023, our first half winter of 'twenty three 'twenty four.
How quickly to help deep is the market like if you wanted to go ahead and start locking in call. It winter of 'twenty three 'twenty four for four any open nor on contracted cargos can you actually go ahead and do that pretty easily right now or do you have to wait till you get closer to prop months prompt delivery fulfillment.
I mean, the team is selling what it can for.
For the rest of this year into the winter and in the first half of next year are physically.
And that's even trying at times with all the volatility that we're seeing but to put in perspective financially to hedge out over a year that is not really realistic to be done right now.
18 months ago early last year.
You might have to reserve I don't know 15, 20 $25 million to lock in a $3 margin on a cargo for the prompt month.
That is now $300 million.
With the volatility doubling since then.
If you even go out six months, you're almost talking about $1 billion. So financially hedging out that far is not really realistic or tenable. So we've been most successful on locking in on the Henry hub plus basis or just done on a fixed price basis, and what we're doing is really reducing.
Any liquidity risk in taking on <unk>.
Likely more credit risk, but that's why even on the short term book. These days. It's just is essentially working with IAG counterparties that are reliable or those that can post enhanced credit support upfront.
Got it. Thank you guys much appreciate it.
Thank you Michael.
Thank you.
We will now be taking our last question today from Michael Blum with Wells Fargo.
Thank you and good morning, everyone.
So youre clearly going to be adding a lot of capacity in the future here I'm curious your latest views on construction costs I know in the past I think you've talked about.
$700 per ton range, but is that does that still makes sense and I guess on a related note can you talk about the cadence of stage III capex over the next few years.
Yes, so I'll take part of that question and then I'll turn it over to Zack.
We have extremely strong relationships with vector.
Built our first nine trains we had early.
Meeting with backfill, we locked in on some of our major equipment.
With our major equipment suppliers.
With <unk> early to to.
To help manage the inflation and then backfill did a full wrap on stage three.
We saw some inflation, but it was manageable and a relatively small number.
On stage three a lot of that is the design.
Since its smaller trains uses a lot less nine nickel steel than some of the larger.
Trains 5 million ton trains.
Our stage three trains are one 5 million of train and.
That case, they use more aluminum less nine nickel and aluminum prices have escalated as much and we were able to lock in those prices and still get within that $700 a ton.
Range and with that I'll turn it over to Zack.
Alright, I think just locking in the contract and doing that limited notice to proceed work even in early March.
Huge advantage to us.
Probably set the stage III apart from most other projects that are trying to get done.
This year and as Jack mentioned that 6% to 700, a ton on an unlevered basis.
Thats correct, thats, including contingency the six times Capex to run rate EBITDA of let's say one one to one 2 billion.
That's good too and.
That's where we stand today and if you think about our our financing we raised 50% leverage on it. So it goes a little over $7 billion. When you add the interest costs and financing fees.
So for plus $150 or less than 4% funding, we're going to delay draw that over time with equity. So it's about $801 million a year for debt and equity on average through construction.
Got it very very helpful. And then just one other really quick one.
O&M expenses.
It was up I.
I think call it 12% sequentially.
This quarter I'm, assuming that's just train six being fully in service, but wanted to confirm that and also just ask if that's kind of a new run rate. Thanks.
Yes, I think you got it.
Train sticks for a full full quarter, there was a little extra maintenance. So it can go up and down.
Quarter to quarter, but that's about right and.
That's why you saw the O&M b.
Be up a bit.
This quarter.
Great. Thank you.
Well. Thank you everybody. Thank you.
Okay.
We appreciate your support.
Stay tuned.
Thank you, Mike and that does conclude today's teleconference. We do appreciate your participation at this time you may now disconnect.