Cheniere cautious on liquefaction expansion plans after increase in Q1 profit

Houston — Cheniere Energy reported a higher first-quarter 2020 profit Thursday than in the year-ago period and said its full-year earnings were on track to come in at the lower end of the range of its previous expectations, while it suggested that a decision on expansion plans could be deferred until 2021.

Market disruptions from the coronavirus pandemic have made it more difficult to sign new long-term contracts with LNG buyers, while a wave of cargo cancellations due to low prices and weaker overall demand have weighed on the market. Prices could remain soft as storage fills up in Europe, a key market for absorbing incremental US supply.

The US' biggest individual physical consumer of natural gas and exporter of LNG has received additional cancellations beyond two for April that were previously disclosed, CEO Jack Fusco said during a conference call with investors. He declined to say how many. The company, which receives a fixed fee when cargoes are canceled, is reviewing different options for adjusting LNG operations if current market conditions persist. Asked whether Cheniere was assuming there would be a portion of its cargoes that will not ship this year, Chief Financial Officer Michael Wortley said that was a possibility.

"Margins are low, right? So at some point, we have a stop-loss and we don't lift," Wortley said. "So, yes, I mean, we won't miss our guidance range because of marketing. I think that's a fair statement."

As for growth, Fusco said Cheniere has enough opportunities to boost its earnings from existing infrastructure to satisfy its needs for years to come. It will need more long-term contracts with buyers in Europe and Asia to support new trains beyond the ones under construction, and that is hard to achieve in the face of stay-at-home orders across the world that are designed to limit the spread of the pandemic.

Long-term contracts

"The first thing I would need to see is the airlines open back up, and that's to be able to travel," Fusco said. "These are negotiations for long-term energy contracts that require face-to-face combat, for lack of a better word. I mean, you have to get close to the customer and look each other in the eye. And for the foreseeable future now, or at least initially, that looks like it's a little ways away for us."

Until earlier this year, Cheniere had been targeting a final investment decision by the end of June on an up to 9.5 million mt/year midscale liquefaction expansion at its export terminal near Corpus Christi, Texas. The timing was later adjusted to sometime in 2020.

In its earnings statement and an accompanying slide presentation Thursday, there was no mention of an FID timing target. Instead, Cheniere projected that global FIDs for new LNG capacity would shrink 85% to 14 million mt/year in 2020 from its expectations in early 2019. It now projects total FIDs totaling 51 million mt/year in 2021, versus 30 million mt/year before the coronavirus took hold.

Cheniere expects the Stage 3 expansion to be "dispatched in that timeframe," Chief Commercial Officer Anatol Feygin said, referring to the period between now and the end of next year.

Cheniere currently operates two trains at Corpus Christi and is building a third. Deliveries under long-term agreements tied to Train 2 were set to begin Friday. Cheniere operates five trains at its Sabine Pass export terminal in Louisiana and is building a sixth.

For the January-March quarter, Cheniere reported net income of $375 million, or $1.43 a share, compared with a profit of $141 million, or 54 cents a share, for the same period a year ago. Revenue rose about 20% to $2.71 billion from $2.26 billion in Q1 2019.

The company projected full-year adjusted earnings before certain expenses of $3.8 billion to $4.1 billion. That was the same range it forecast in February, although it now says its earnings are tracking toward the lower end of the range.

According to market sources, offtakers have canceled 10 to 20 cargoes for June loading from US LNG terminals, amid demand destruction exacerbated by the coronavirus. The number could grow as high as 25, according to shipbroker Poten & Partners. During the investor call, Fusco acknowledged Cheniere has been impacted.

"As global markets remain weak, we have had customers elect to cancel some additional cargoes," the CEO said. "We won't quantify the amount, but we reiterate that our customers value the flexibility inherent in the contract structure, and our visibility to achieving our financial guidance for the year is unchanged."

Price protection

The LNG that Cheniere produces this year is largely protected from the steep drop in international prices because it was presold under long-term offtake agreements, hedging and other financial transactions. Upside potential from the premium it gets on the feedgas used would be reduced on volumes it does not produce due to cancellations and other factors.

Fusco offered a vigorous defense of Cheniere's long-term contracts against any claims of force majeure citing impacts from the coronavirus, though he did not say whether Cheniere has received any such claims.

"FM clauses and our FOB contracts specifically exclude such events as the unavailability of or any event affecting downstream LNG facilities, changes in the customers' market factors or other commercial, financial or economic conditions," he said. "As such, depressed gas prices globally or economic fallout or decreased gas demand from COVID-19 do not provide a valid legal basis on which a counterpart can claim FM."