Cheniere Energy Inc. executives are focusing on the next steps necessary to sanction Train 6 at the Sabine Pass, LA, natural gas export facility to maintain the momentum achieved in 2018 when the developer exported 273 cargoes carrying 976 trillion Btu of super-chilled fuel.
“Strategically, 2018 was an incredible success as we made a positive final investment decision on Train 3 at Corpus Christi and originated over 7 million metric tons/year (mmty) of new long-term sale and purchase agreements (SPA), giving us sufficient visibility on Train 6 at Sabine Pass that enabled us to finalize the engineering, procurement and construction (EPC) contract and issue limited notices to proceed on that project late last year,” CEO Jack Fusco said Tuesday on a call to discuss 2018 earnings. He discussed how the company is advancing the two liquefied natural gas (LNG) export terminals on the Gulf Coast.
The limited notice to proceed on Train 6 is viewed as “strategically important” for Cheniere, as it secured cost and date certainty ahead of a formal final investment decision (FID), which is expected to occur “over the coming months,” Fusco said. EPC partner Bechtel Oil, Gas and Chemicals Inc. estimates that Train 6 is about 14% complete.
The EPC contract for Train 6 is coming in more than $2 billion below costs for Train 5, which Fusco credited to synergies, as the workforce rolled off that train to Train 6. In addition, equipment was already in place for the sixth train, allowing the company to use some of the existing infrastructure at the brownfield site.
Separately, Fusco noted that the Sabine Pass facility would be undergoing higher-than-average expected maintenance this year.
Before an FID on the sixth train is approved, management plans to see what additional contracts are secured and determine the best portfolio for financing purposes. In December, Cheniere signed a 20-year SPA with Petronas LNG Ltd. (PLL), a subsidiary of Malaysia’s state-owned Petroliam Nasional Berhad, aka Petronas, for 1.1 mmty.
As for future contract pricing options, Cheniere’s Anatol Feygin, chief commercial officer, said most of the contracts executed in 2018 were Henry Hub-linked as “the world has gotten comfortable with this as an attractive model” as it offers liquidity, price transparency and relatively low volatility.
While there have been a number of times when Henry Hub moved above $3/MMBtu, “it comes down very rapidly and continues to be very competitive with Brent-linked and other contracts,” Feygin said. “We continue to think that that is the right flag to fly.”
As for other U.S. pricing options, including the Agua Dulce hub in South Texas, which some competitors are offering, Feygin said “in our view, the world isn't ready to price meaningful volumes at Agua Dulce.” The U.S. gas market knows the pricing hub well, but “it just does not have the liquidity, transparency, term structure that would make it marketable internationally.”
Meanwhile, substantial completion on Train 1 at Cheniere’s Corpus Christi LNG export project in South Texas is expected “in the next few days” following a successful performance test. The developer is set to bring a total of three trains into commercial operations this year -- the fifth train at Sabine Pass and the first two trains at Corpus Christi.
Cheniere is also progressing Corpus Christi “Stage 3” through the permitting process, which would be for about 9.5 mmty of additional capacity. The project is “moving through the process very well” and management expects to have all the required regulatory approvals in place by the end of this year, Fusco said.
Beyond its export projects, another priority for Cheniere is a capital allocation policy, expected in the coming months. Management is working with its advisers and board “to ensure we develop a durable, flexible policy that enables us to allocate capital in the most effective, impactful way for our shareholders,” the company chief said.
As for operations, Cheniere said it exported 80 cargoes in 4Q2018, 10 more than in 4Q2017. During 2018, it exported 273 cargoes, a 33% increase over 2017.
As of Feb. 20, more than 575 cumulative LNG cargoes have been produced, loaded and exported from the Sabine Pass and Corpus Christi projects to 32 countries and regions worldwide, the company said. Twenty countries imported record LNG volumes in 2018, including China, South Korea and Pakistan. Europe also set an import record in December after recording lower volumes year/year in the first nine months.
Even with a brief spike in Henry Hub cash prices in December because of the early season cold, the U.S. benchmark continued to trade at a heavy discount to other global indices, Feygin said. Despite a mild winter and a reduction in the storage deficit seen earlier in the year, Title Transfer Facility prices -- the European benchmark -- traded more than $1.50 higher than levels seen during the same time a year ago. Similarly, fourth quarter Asian spot prices settled at more than $3 higher on average year/year.”
Feygin said the structural shift occurring in Europe’s gas market makes it an increasingly attractive region for Cheniere’s long-term and shorter-term LNG strategies.
“There is a debate in Europe heightened in recent weeks about limiting coal use and achieving climate targets that could have a significant positive impact on Europe's appetite for LNG in the longer term. In the near term, a number of the issues that were in play in the fourth quarter could remain in 2019 potentially resulting in continued robust European LNG imports again this year.”
Cheniere reported 4Q2018 net income of $67 million (26 cents/share), compared with $127 million (54 cents) in 4Q2017. In 2018, net income was $471 million ($1.92/share), versus a net loss of $393 million (minus $1.68) in 2017.
Distributable cash flow (DCF) was $130 million in 4Q2018 and $600 million for the full year. DCF guidance for 2019 is set at $800 million.
Tellurian Eyeing FID as Company Posts Loss
While Cheniere, after reporting years’ worth of significant losses of its own, has moved back to the positive side of the ledger in the last couple of years, the company co-founded by its former CEO found itself in the red for 2018. Tellurian Inc. reported a net loss of $125.7 million (59 cents/share) for the full year 2018.
Still, the company ended the year with about $133.7 million in cash and cash equivalents and about $57 million in debt. It also has “a strong balance sheet” consisting of $408.5 million in assets.
Tellurian, which completed its second year as a public company, is looking to reach FID on its Driftwood LNG facility in the first half of the year after receiving its final environmental impact statement from federal regulators in January. It expects to deliver first LNG from the roughly 27.6 mmty facility in 2023.
“Tellurian distinguished itself in the market through our innovative equity interest investment strategy, and by introducing a new pricing benchmark for LNG agreements,” CEO Meg Gentle said.
Tellurian in December entered into a memorandum of understanding (MOU) with Vitol S.A. to supply 1.5 mmty, with the price based on the Platts Japan Korea Marker for a minimum term of 15 years. It also entered into an MOU with Petronet LNG Limited INDIA for Petronet to explore equity investment in the Driftwood project.