Cheniere advances construction of remaining US LNG trains as fees help results

Houston — Cheniere Energy has nearly completed the third train at its Texas export terminal and expects the sixth train at its Louisiana facility to start up months ahead of schedule, as the pace of US LNG cargo cancellations abates, company executives said Aug. 6.

The company's ability to accelerate construction during a time of significant challenges exacerbated by the coronavirus pandemic, turn a profit in the second quarter and reconfirm its full-year earnings outlook gives it the chance to boost market share as prices and demand recover.

Fixed fees it gets when customers choose not to lift have helped. It also has been sourcing cargoes from third parties that it otherwise would have produced itself, and delivering them to buyers, giving it optionality.

Signs of improving Asian consumption, particularly from China, India and Thailand, point to further upside potential. In the meantime, it has been pulling forward maintenance as it sharply reduced production.

"We have seen a significant number of our competitors either delay or cancel their liquefaction plans," CEO Jack Fusco said during an investor conference call. "It puts us on much stronger footing in the marketplace than we were pre-COVID."

At least 157 LNG cargoes that were scheduled to be loaded in the US between April and September were said to have been canceled by customers, according to an S&P Global Platts tally based on reports from market sources. As the biggest US LNG exporter, Cheniere has borne the brunt of the cancellations.

In the most clarity the company has provided to date, CFO Zach Davis said on the call that about 30 cargoes that were scheduled to be loaded at Cheniere's two facilities during the second quarter under long-term contracts were canceled.

Davis replaced Michael Wortley, who stepped down effective Aug. 6 and plans to leave the company at the end of the month, according to a US regulatory filing.

"You had a warm winter first, and you had the pandemic, and then you follow that up with the shoulder months, and things looked a little bleak," Fusco said. "I'm cautiously optimistic that we're beyond that. And, we're starting to ramp up."

Feedgas flows to the six major US liquefaction facilities fell to a 17-month low in July, before picking up heading into August.

Contango in the Dutch TTF forward curve and improving netbacks are incentivizing US LNG cargoes back on the water by late summer or early fall, according to S&P Global Platts Analytics data.

However, with East Asian demand continuing to underperform this summer, the risk to winter demand appears to still be biased to the downside. If spot buying on the Platts JKM does not pick up substantially, there's further risk that much of the ramp in US LNG exports will again push back into Europe by mid-winter and pinch spreads in spring 2021.

Train 3 at Corpus Christi Liquefaction is over 90% complete and is expected to begin full commercial operations in the first half of next year. Train 6 at Sabine Pass is about 64% complete and is now expected to enter commercial service in the second half of 2022, ahead of the previous target of during the first half of 2023, Cheniere said.

Once both trains are online, Cheniere will have nine liquefaction units in operation at the two facilities. A proposal for an up to 10 million mt/year expansion at the Corpus Christi facility using smaller trains has been delayed and is dependent on Cheniere's ability to obtain sufficient long-term offtake contracts.

As the spread of the virus has sharply restricted or eliminated travel, Cheniere's commercial team has continued to engage remotely with customers and potential customers, though new contracting has remained elusive.

A level of normalcy in pricing and the ability to engage face to face with customers is necessary before seeing an uptick, chief commercial officer Anatol Feygin said on the call.

"To get over the finish line, the precise timing is anybody's guess," Feygin said.

Market outlook

For the April-June quarter, Cheniere reported net income of $197 million, or 78 cents/share, compared with a loss of $114 million, or 44 cents/share, in the second quarter of 2019. Revenue rose 4.8% to $2.4 billion in the second quarter from the same period a year ago.

Because Cheniere recognizes the fees it receives from canceled cargoes when the notifications are made, a substantial amount of revenue was pulled forward into the second quarter that relates to cargoes that were scheduled to be loaded in the third quarter. As a result, Cheniere expects revenue to fluctuate in the third and fourth quarters.

"While the environment in the spot LNG market remains relatively weak, I'm encouraged that dynamics in the LNG market are improving and unfolding as we have expected," Fusco said.

"As worldwide economies have begun to recover from the pandemic, we are beginning to see short-term gas prices stabilize, and spreads are beginning to improve as we look into the winter months and beyond."