Cheniere Energy, Inc. (AMEX:LNG) Q3 2023 Earnings Call Transcript
Cheniere Energy, Inc. (AMEX:LNG) Q3 2023 Earnings Call Transcript November 2, 2023
Cheniere Energy, Inc. beats earnings expectations. Reported EPS is $7.03, expectations were $2.55.
Operator: Good day, and welcome to the Cheniere Energy Third Quarter 2023 Earnings Call and Webcast. Today's conference is being recorded. At this time, I'd like to turn the conference over to Randy Bhatia. Please go ahead.
Randy Bhatia: Thank you, operator. Good morning, everyone, and welcome to Cheniere's Third Quarter 2023 Earnings Conference Call. The slide presentation and access to the webcast for today's call are available at cheniere.com. Joining me this morning are Jack Fusco, Cheniere's President and CEO; Anatol Feygin, Executive Vice President and Chief Commercial Officer; Zach Davis, Executive Vice President and CFO; and other members of the Cheniere senior management team. 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. A reconciliation of these measures to the most comparable GAAP measure can be found in the appendix of the slide presentation. As part of our discussion of Cheniere's results, today's call may also include selected financial information and results for Cheniere Energy Partners LP, or CQP. We do not intend to cover CQP's results separately from those of Cheniere Energy, Inc. The call agenda is shown on Slide 3. 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 2023 guidance. After prepared remarks, we will open the call for Q&A.
I'll now turn the call over to Jack Fusco, Cheniere's President and CEO.
Jack Fusco: Thank you, Randy, and good morning, everyone. Thanks for joining us today as we review our third quarter results and improved full year 2023 outlook. Before we get started, I would like to acknowledge the tragedies of war taking place around the world. Our thoughts and prayers are with those whose lives have been and continue to be impacted by these devastating and heartbreaking events. These events are contributing to disruptions, risk, uncertainty and volatility in the energy markets around the world. International gas supply sources and the critical infrastructure, enabling cross-border trade have become focal points with risk to this supply and its access increasingly reflected in price and volatility across international gas benchmarks in recent weeks.
As the operator of the second largest LNG platform in the world, stable and reliable operations at our facilities have arguably never been more critical than it is today. As you all know, ensuring stable and reliable operations at our facilities with safety as a foundation has been my central focus since becoming CEO in 2016. When I joined Cheniere just begun LNG operations, producing its first LNG cargo that February. Today, we produce about two cargoes every single day. And during the third quarter, we produced our 3,000th cargo of LNG becoming the fastest LNG producer in history to achieve that milestone. I'm extremely proud of the work we do at Cheniere as a result of that work are providing tangible benefits in the lives of millions of people around the world.
Our customers can take comfort knowing that my focus and the focus of my approximately 1,600 Cheniere colleagues remains on maintaining best-in-class operations to help ensure energy security for our 30-plus customers throughout five continents. Turn now to Slide 5, where I'll review key operational and financial highlights from the third quarter 2023, as well as cover another long-term SBA we announced this morning. We achieved successes across the Cheniere platform during the third quarter, generating consolidated adjusted EBITDA of approximately $1.7 billion, distributable cash flow of approximately $1.2 billion and net income of approximately $1.7 billion. We exported a total of 152 cargoes, an increase relative to the second quarter as we had lower maintenance in the third quarter.
As I just mentioned, we also produced our 3,000th cargo during the quarter and maintained our perfect track record of foundation customer cargo deliveries. These operational milestones are a tremendous source of pride for Cheniere and serve to further distance our reputation from the competition. Looking ahead to the balance of 2023, our forecast has improved slightly. And while we aren't raising our full year guidance to date, we are currently tracking to the high end of the $8.3 billion to $8.8 billion of consolidated adjusted EBITDA and $5.8 billion to $6.3 billion of DCF ranges. The improvement to our outlook is mainly driven by portfolio optimization activities the timing of some expenses to a lesser extent, from higher marketing margins than previously forecasted.
Zach will provide more color on the guidance, but we have excellent visibility into the balance for the year and are confident in our ability to finish the year at the high end of the ranges. On the commercial front, Anatol and his team continue to build momentum for the SPL expansion project as we signed a long-term contract with BASF in August, early volumes under the offtake agreement will begin in 2026, ramping to the full 0.8 million tons with commercial start of the first train 7 of the SPL expansion project and extending until 2043. This contract illustrates the rapid evolution of LNG into Europe as it's a long-term contract executed directly with an industrial consumer in Germany, which only a year ago, didn't have a single LNG import terminal.
And I hope you saw earlier this morning, we announced our second 20-year agreement with Foran, building upon the SBA we executed with it in late 2021, that commenced earlier this year. Of the almost 6 million tons of long-term offtake executed year-to-date, over 75% of that annual total is contracted with repeat customers who clearly value their long-term partnership with Cheniere. Testament to the reputation and trust we have earned with our long-term customers. This foreign contract is for approximately 0.9 million tons will extend until 2050 and notably marks the first SBA tied to the second train of the SPL expansion, Train 8 as commercialization on the first train has effectively been completed. We are extremely excited about the market's response to the SPL expansion project and demand for additional capacity from Cheniere.
Since announcing the project in February, we have signed nearly 6 million tons per annum of long-term contracts in support of the project and our best-in-class long-term contracted portfolio, all with investment-grade counterparties, and I'm confident we have more to do this year. As always, we remain laser focused on developing that project to meet or exceed our disciplined capital investment parameters in order to deliver the world-class contracted infrastructure returns that our shareholders are accustomed to. While on the topic of return, Zach and his team continued to progress on our comprehensive 2020 vision capital allocation plan. During the third quarter, we paid down another $50 million of long-term debt. We bought back approximately 2.2 million shares for $357 million and we increased our quarterly dividend by 10% to $0.435 for the third quarter.
On Stage 3, we continue to equity fund that project, investing over $300 million during the quarter with a total of over $2.5 billion invested to date. Speaking of Stage 3, now turn to Slide 6, where I'm pleased to provide an update on the accelerated progress we are seeing. Since activities on the project moved more heavily into the construction phase a few quarters ago, we've indicated that certain of these construction activities were taking place ahead of plan as we are now over 44% complete overall across engineering, procurement and construction. While we remain in single digits in terms of percentage completion of construction for the overall project, it's becoming increasingly clear that the project is tracking month ahead of the guaranteed schedule.
I'm optimistic we'll be commissioning on Train 1 with first LNG production by the end of 2024 and forecast all 7 trains to achieve substantial completion by the end of 2026. We are extremely excited about the progress Spectra was making on State Street, we look forward to maintaining our accelerating progress in order to again deliver LNG to the market, well ahead of schedule, increasing our operating capacity again starting in 2025. On the earnings call in August, I mentioned Stage 3 was beginning to take shape, as the first structural still was erected in our Train 1 coal boxes that arrived on site. One can certainly appreciate the progress that's been made since then from the photos on this slide. All Train 1 coal boxes have been set in place structural steel installation is advancing and piping and electrical installation has commenced.
With the excellent progress made to date, head count of over 1,500 personnel on site each day, and the One Team culture firmly established between Cheniere and Bechtel. I'm confident in the team's ability to maintain focus continue on the accelerated schedule to deliver Corpus Christi Stage 3 safely and ahead of schedule. With that, I'll hand it over to Anatol to discuss the LNG market. Thank you again for your continued support of Cheniere.
Anatol Feygin: Thanks, Jack, and good morning, everyone. While the LNG market kicked off the third quarter with prices reflecting the relatively subdued demand of the shoulder season, unprecedented early winter gas procurement in Europe, coupled with threats of potential supply disruptions globally, resulted in increased volatility and higher pricing throughout August and September. Prices remain elevated relative to pre '21 as the market is still precariously balanced, sensitive to any sign of disruption given the lack of spare supply capacity in the system, which is expected to continue for the next few years. The proposed strikes at the Australian LNG export facilities, representing approximately 10% of the global LNG market, garnering significant coverage during the quarter as the market tried to gauge the scale and length of any potential disruption to global flows.
Fortunately, these risks were largely inverted and LNG exports continued to flow through the end of the quarter. Nevertheless, even the threat of disruption led to significant volatility in LNG prices, which was further exacerbated by the about 48% decline in Norwegian piped gas to Europe in September following extensive maintenance at the brownfield and the [indiscernible] gas processing plant. As a result, despite elevated storage inventories throughout the region, volatility persisted as TTF spot price has experienced some fairly significant swings throughout the quarter. The maintenance in Norway supported prices from early June, with July settling at $11.30 in MMBtu, while August settled over 25% lower at $830 an M, as Norwegian volumes returned only to rebound in September, which settled at $11.5 amid concerns around the Australian strikes as well as additional unplanned Norwegian maintenance.
Still TTF prices remained at pre-Russian-Ukraine war levels during the quarter and continued to edge higher with futures settling October above $12 an M. Meanwhile, JKM prices largely tracked TTF throughout the third quarter, ultimately settling September slightly below TTF at $11.20. However, more recently, JKM futures settled October higher at $13.30 due to the uncertainty around the potential industrial action in Australia as well as increased demand from China and India. Prices have since climbed further as indications of winter demand started to emerge towards the end of the quarter with JKM November trading around $14 to $15 an M. This is in stark contrast to Henry Hub prices, which averaged $2.55 an M during the quarter as inventories held above the 5-year average.
These price levels continue to support the attractiveness of U.S. LNG globally. Unfortunately, threats of further disruptions in global gas markets remain ongoing, exposing key risks to an increasingly susceptible market that already lost 12 Bs a day of Russian last year. Furthermore, the recent lease at the Baltic Connector add to market apprehension highlighting the critical need for the development of sufficient capacity globally in order to meet elastic demand and ensure the security of supply globally for the long term. Let's address the regional dynamics on the next page. During the third quarter and for the first time in 2 years, Europe's LNG imports were lower year-over-year. Imports were near 7% or 1.8 million tons lower in the third quarter due largely to the same fundamental reasons we discussed previously, including high storage levels, reduced gas use across sectors due to price elasticity as well as conservation efforts, plus increased renewables generation.
EU gas storage levels continue to grow nearing full as of early October, while lower economic activity put downward pressure on both industrial demand and electricity generation. Demand for gas fired power dropped by nearly 20% in Europe's key markets amid renewable power generation, which was 12% higher year-on-year. As a result, the reduced gas storage fill requirements coupled with the lower gas demand year-on-year, more than compensated for the further reduction in Russian pipe supply and the extended maintenance in Norway, allowing Asia to reenter the market and pull some additional LNG cargoes from the Atlantic Basin, as shown in the upper middle and right charts. However, the cross base on price spreads throughout the quarter were not wide enough to drive meaningful volume away from Europe towards Asia.
Total LNG imports in Asia grew over 4% or 2.7 million tons year-on-year in the third quarter, driven by a rebound in imports to China and India as prices softened and high summer temperatures boosted spot purchases. However, lower imports across the JKT market largely offset the significant gains seen in China and other emerging Asian markets, as shown in the lower left chart. In fact, imports into the key growth markets of China and India were 21% and 27% higher in Q3, respectively. In China, gas demand picked up during the quarter, primarily due to the year-on-year recovery in gas-fired power generation, following a drought that reduced hydro generation. Despite the higher demand, gas demand recovery in the industrial sector remains subdued, with consumption still below 2021 levels.
Long-term fundamentals remain bullish for the Chinese market due to favorable policy targets and a massive gas infrastructure build-out as we described in previous calls. This year alone, China has added 9 million tons of regas capacity across three new terminals, bringing the total to 110 MTPA with another 95 MTPA under construction. Similarly, the country continues to expand its gas-fired power generation fleet with 46 gigawatts currently under construction on top of the existing 121 gigawatts. In India, it prolonged the heat wave and below average rainfall during the annual monsoon season increased the region's call in LNG. India reported 6 million tons in the third quarter. 1.3 million tons higher year-on-year as spot LNG prices moderated, incentivizing downstream gas use in the fertilizer and power sectors.
Gas-fired generation was up 48% year-on-year in July and August, leading domestic players to issue tenders for cargoes to feed power demand. Furthermore, the new 6.5 MTPA Dhamra LNG terminal, the first in India East Coast ramped up to import 10 cargoes since starting commercial operations in May, ending to total imports in the quarter. The terminal which raised the country's regas capacity to 44 MTPA should enhance gas availability in Northeastern India, as connections to the grid improved, making gas more accessible to city gas distributors as well as refineries and fertilizer facilities. India's regas capacity is expected to reach 63 million tons, and that, along with the additional 11,000 kilometers of pipelines under development could make the country a top 3 LNG importer before 2040.
In contrast, JKT imports dropped 11% or 3.7 million tons during the quarter, following previous declines and offsetting much of the gains in Asia. Year-to-date, JKT imports are 7.5 million tons lower versus last year, due largely to increased nuclear availability in Japan and Korea. Structural factor we have discussed previously. Japan's nuclear availability reached its highest level since the Fukushima disaster, and we expect this to present headwinds for gas power generation and LNG demand growth going forward. Accordingly, Japan's long-term gas demand is expected to decline gradually through 2040. Let's now elaborate on our updated expectations for long-term supply and demand on the next slide. As noted previously, the energy trilemma, especially with the market's heightened focus on long-term energy security has led to significant long-term LNG contracting in the past 18 or so months.
These contracts signal the need for further investment in liquefaction capacity and serve to underpin some of the recent project FIDs. As a result, we now see a significant amount of new capacity currently under construction. While this is expected to help reverse the systemic market tightening that has resulted from the curtailment of Russian volumes over the last 2 years, we believe that further LNG supply is needed to fully meet demand in 2028 and beyond which we expect to be fulfilled with some of the proposed pre-FID export projects, of course, including our own expansion plans at Sabine Pass and Corpus Christi. The concentration of FID is taking place this year next along with the start of delayed projects in East and West Africa, should help make LNG more accessible to price-sensitive markets while also making the industry more resilient in the fact base of supply disruptions or major geopolitical upsets, such as those threatening the market balances today.
And just as liquefaction development has been active this year, the same is true for the regas side of the business. Market players continue to develop import capacity across Europe and Asia which in total is expected to increase by 50% by 2030. We continue to forecast healthy demand for LNG over the coming decades with Europe sustaining its growth through the midterm and Asia driving future growth over the long term. As we've discussed before, we expect South and Southeast Asia as well as China to drive future demand growth as LNG plays a critical role in the economic prosperity, energy availability and decarbonization efforts in these regions. Overall, we estimate that by 2040, more than 130 MTPA of additional supplies needed beyond what is under construction today, which is due in part to the decline in production from legacy projects where feedstock availability and upstream developments appear limited going forward.
For all these reasons, we believe overall market conditions remain constructive for Gulf Coast LNG and at Cheniere, we remain resolute in building on the commercial successes of recent years to support our capacity growth. In 2023 alone, we have signed almost 6 million tonnes per annum with customers across Europe and Asia including today's announcement of our second 20-year SBA with Foran. This contract could very well extend into the second half of this century. Further evidencing our customers and the market's conviction in the long-term role of natural gas in the global energy mix and the need for further development of LNG capacity globally. With that, I'll turn the call over to Zach to review our financial results and guidance.
Zach Davis: Thanks, Anatol, and good morning, everyone. I'm pleased to be here today to review our third quarter 2023 results and key financial accomplishments, which are the result of our team's commitment to operational excellence and financial discipline, the long-term outlook as we continue to deliver upon our stated objectives of supplying the world with much needed LNG, while creating long-term value for our stakeholders. Turn to Slide 12. For the third quarter, we generated net income of approximately $1.7 billion, consolidated adjusted EBITDA of approximately $1.7 billion and distributable cash flow of approximately $1.2 billion. Our third quarter results continue to reflect a higher proportion of our LNG being sold under long-term contracts with less volumes being sold into short-term markets as well as the further moderation of international gas prices relative to last year.
Once again, these impacts were partially offset by certain portfolio optimization activities, upstream and downstream of our facilities. During the third quarter, we recognized an income 555 TBtu of physical LNG, including 545 TBtu from our projects and 10 TBtu sourced from third parties. Approximately 89% of these LNG volumes recognized in income were sold under long-term SPA or IPM agreements with initial terms greater than 10 years. As a reminder, our reported net income is impacted by the unrealized noncash derivative impacts to our revenue and cost of sales line items, which are primarily related to the mismatch of accounting methodology for the purchase of natural gas and the corresponding sale of LNG under our long-term IPM agreements.
The decline in international gas price curves quarter-over-quarter led to a lower mark-to-market valuation of the future liabilities associated with these agreements, increasing our net income. With today's results, we have earned cumulative net income of approximately $12.4 billion for the trailing 12 months and have now reported positive net income on a quarterly and cumulative trailing 4-quarter basis, four quarters in a row. Throughout the quarter, we continued to deploy capital pursuant to our comprehensive capital allocation plan, our 2020 vision. Increasing shareholder returns, strengthening our balance sheet and investing in accretive growth. During the quarter, we repaid $50 million of long-term indebtedness redeeming a portion of the senior secured notes due in 2024 at SPL.
As a reminder, in July, we used the proceeds from our inaugural investment-grade offering at CQP to refinance and redeem $1.4 billion of the SPL 2024 notes. We plan to address the remaining balance of the SPL 2024 notes with cash on hand in 4Q and into the first half of next year, after which point, we will have addressed all maturities in the complex through early 2025 with currently no refinancing needs across our complex until then. Since rolling out our revised capital allocation plan last year, we have received 14 distinct rating upgrades throughout our structure. A result of our operational track record and capital allocation plans to opportunistically delever and efficiently refinance in the short amount of time, which has not only strengthened our balance sheet for through-cycle resilience but has also positioned Cheniere for our next phase of growth.
Most recently, S&P upgraded CCH to BBB in mid-October. And in August, Moody's upgraded CEI to Baa3 and CCH to Baa2, while Fitch upgraded SBL to BBB+. With the Moody's upgrade, our parent entity is now investment grade across all three agencies. A major milestone for Cheniere considering where it started financially on this LNG export journey over a decade ago. As we've previously discussed, now that we have achieved investment-grade ratings across our corporate structure we are targeting a 1:1 ratio of deleveraging and share buybacks on an aggregate basis through 2026. During the third quarter, we repurchased approximately 2.2 million shares of common stock for approximately $357 million, which reinforces our intent for the catch-up of buybacks compared to the amount of capital deployed towards deleveraging going forward.
We expect to continue to work towards achieving that 1:1 ratio over the next year as we continue to initially target buying back approximately 10% of our market cap over time. We expect to deploy the remaining just under $2.5 billion of the repurchase authorization ahead of the 3-year plan, but recognize there may be variability quarter-to-quarter as we aim to be opportunistic and are subject to the parameters of our 10b5-1 program. For the third quarter, we followed through earlier this week by announcing an increase of our quarterly dividend by 10% to $0.435 per common share or $1.74 annualized, which is consistent with our 2020 plan of growing our dividend by approximately 10% annually into the mid-2020s through the construction of Stage 3.
We intend to steadily increase our payout ratio over time while maintaining financial flexibility with a balanced capital allocation plan and the ability to fund brownfield growth with internally generated cash flow. And for the final pillar of our comprehensive capital allocation plan, disciplined growth. We funded approximately $312 million of CapEx at our Stage 3 project during the quarter, with cash on hand. We still have over $3 billion available on our CCH term loan that we plan to utilize beginning in the second half of 2024 as the project progresses and the total capital spent to date continues to grow. By primarily funding the 50% equity component of the project ahead of the drawing down on the construction loan, we have saved considerably on interest expense while retaining all of our liquidity flexibility for the coming years to complete funding of the full project by 2026.
Turning now to Slide 13, where I'll provide additional detail around 2023 guidance and our open capacity for 2024. Today, we are reconfirming our full year 2023 guidance ranges of $83 billion to $8 billion in consolidated adjusted EBITDA and $5.8 billion to $6.3 billion in distributable cash flow. But as Jack noted, we are tracking to the high end of those ranges. The improved outlook is driven by portfolio optimization activities, primarily in gas procurement and vessel subchartering and, to a lesser extent, the timing of some expenses moving to 2024 and higher marketing margins on the minimal and the open capacity for CMI, we still had available to sales since the last call. With respect to our EBITDA sensitivity for the remainder of the year, we now have an immaterial amount of unsold LNG remaining.
So we're confident in our ability to deliver financial results at the high end of the ranges. As always, our results could be impacted by the timing of certain cargoes around year-end as well as incremental margin from further optimization, upstream and downstream of our facilities. Our distributable cash flow for 2023 could also be affected by any changes in the tax code under the IRA. However, the guidance provided today is based on the current IRA tax law guidance. in which we would not qualify for the minimum corporate tax of 15% this year. However, as noted previously, both of these dynamics would mainly affect timing and not materially impact our cumulative cash flow generation through the mid-2020s as we think about our overall capital allocation plan and our 2020 vision goals.
Looking ahead to next year, 2024 will be our most contracted year-to-date as all of the contracts underpinning the initial nine train platform will have commenced as well as some bridging volumes for contracts tied to our growth. Additionally, our team continues to put away the few remaining uncontracted volumes, leaving us with approximately 50 TBtu unsold for the full year as of today's call or about 2% of our 2024 production capacity. The open volume is based upon a production forecast of approximately 45 million tons, which is similar to our production this year and takes into account planned maintenance activities for the year. With such minimal open exposure to the market, 2024 is expected to look to most like a 9 train run rate year as any we will have.
with results that should largely reflect the economics of a long-term fixed fee, take-or-pay style cash flow business model. With that said, currently forecast that a $1 change in market margin would impact EBITDA by approximately $50 million for the full year, with market margins currently elevated through the next year compared to our run rate CMI assumption of $2.25 per MMBtu. We should be able to still beat the midpoint of our 9 train run rate of $5.5 billion of EBITDA and before any further volatility in commodity prices. 2024 results are expected to come down from this year as our open capacity narrows until Stage 3 starts ramping up our operational capacity again in 2025. Thanks to our cash flow visibility, 2024 was always assumed to be a heavily contracted year and consistently baked into our financial plans, including in our 2020 vision to generate over $20 billion of available cash through 2026 provided back in September 2022.
As Jack noted, given the progress made by the Bechtel and Cheniere teams on Stage 3, we remain optimistic and hope to be in commissioning with first LNG from Train 1 by the end of next year, which would provide additional LNG supply to the delicately balanced market Anatol discussed earlier and increased our operational LNG capacity again in 2025. However, as a reminder, commissioning volumes would not impact our revenues or EBITDA for the year and instead show up in our financials as a reduction in our capital costs. With the meaningful progress achieved to date, we expect to invest between $1.5 billion to $2 billion of CapEx towards Stage 3 in 2024, consistent with this year as we still expect to fund another approximately $0.5 billion of equity into the project this quarter.
While the last few years have proven Cheniere's ability to respond to market signals and optimize throughout our business, our conviction in our highly contracted business model rooted in longer duration fixed fee cash flows from creditworthy counterparties has only been reinforced as we look forward to internally funding further growth as well as even more meaningful shareholder returns that can be relied on over time. These dependable cash flows form the foundation of the $40 billion natural gas infrastructure platform we have developed over the last decade plus. We remain focused on maintaining reliable and safe operations to ensure we can continue delivering affordable LNG as well as meaningful long-term value to our stakeholders around the world for decades to come.
That concludes our prepared remarks. Thank you for your time and your interest in Cheniere. Operator, we are ready to open the line to questions.
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