Tariffs on U.S. LNG cargoes in a brewing U.S.-China trade war will not affect LNG exporter Cheniere Energy Inc.'s long-term contracts with Petrochina Co. Ltd., executives said.
The impact on short-term spot cargoes out of Cheniere's Sabine Pass and Corpus Christi terminals on the U.S. Gulf Coast will be minimal, CEO Jack Fusco told analysts in a second-quarter earnings conference call Aug. 9. Those cargoes will simply find another buyer as worldwide demand for LNG grows, Fusco said.
U.S. LNG cargoes could face a 25% tariff if China squeezes a list of $60 billion of U.S. products in response to the Trump administration's announcement of proposed tariffs on a list of $200 billion of Chinese imports. China's Ministry of Finance announced the potential measure Aug. 3. According to analysts at CreditSights, Chinese customers account for 9% of Cheniere's contracted revenue.
"We are awaiting details of the proposed tariffs and are hopeful that the U.S. and China can resolve the trade dispute without these tariffs being implemented," Fusco said. "We don't foresee an economic impact to Cheniere as it relates to our existing long-term contracts with PetroChina, which helped support the financing of [Corpus Christi] Train 3. From a high level, our business is a very long-term one, and it is well understood that China needs more LNG over the long term."
Fusco and Chief Commercial Officer Anatol Feygin said Cheniere's ability to get natural gas for a price of under $3/MMBtu is one of Cheniere's competitive advantages. The addition of a tariff in China has no effect on U.S. LNG spot cargoes, which remain competitive in markets outside of China, executives said.
"If you look at the value proposition of the sub-$3 Henry Hub delivered into China, it is extremely competitive with current pricing and even forward pricing," Feygin said. "No one can compete with [us on] upstream cost. So we fully expect to be competing with those projects, with pipeline projects, et cetera, and we think we'll win more than our fair share."
Although Cheniere executives had few specifics on the impacts of the trade dispute, they said they were not hiding their heads in the sand.
"There are lots of different ways that the Chinese entities can handle this, and yes, it's entirely possible that it [will] not actually reverberate into the LNG supply chain," Feygin said. "There are lots of credible competitors in the world, and we should fully expect them to go into Beijing offices and say, 'Hey, we don't have this issue, right?' So it is clearly something that we will be working with."
The Cheniere comments appeared to soothe any market jitters. Investors added less than 1% to the company's stock value on moderate trading by midday Aug. 9, despite the company missing earnings expectations.
Cheniere cut its losses to $18 million in the quarter, or 7 cents/share, compared to losses of $285 million, or $1.23/share, in the second quarter of 2017, but those earnings fell well short of Wall Street's expectations of 26 cents/share of profits, according to the S&P Global Market Intelligence analyst consensus.
Nonetheless, Cheniere said it increased the volume of LNG exported by 33% to 222 trillion Btu compared to a year ago, growing its EBITDA 43% to $531 million. The S&P Global Market Intelligence consensus adjusted EBITDA estimate was $553.5 million.
China might not target LNG because of energy security concerns, Washington, D.C.-based research firm ClearView Energy Partners LLC said in an Aug. 8 note, citing China's removal of U.S. crude oil from the country's list of tariffs starting Aug. 23.
"Simply put, crude may have been a bluff — and LNG could be too — and energy scarcity may have led China to retreat from its threat posture," ClearView said.