Cheniere Energy Inc. has big plans for growing its extensive liquefaction capabilities, with further brownfield expansions being considered at the Corpus Christi liquefied natural gas (LNG) terminal, which management said is an “ideal location to match new gas supply with global LNG demand over the long term.”
Speaking on a call to discuss third quarter earnings, Cheniere CEO Jack Fusco said reaching a final investment decision (FID) on the Corpus Christi Stage 3 expansion is one of three key priorities in 2020. The Houston-based developer is in the process of evaluating engineering, procurement and construction (EPC) bids and intends to have “a cost competitive fully ramped lump sum turnkey EPC contract in place over the next few months,” according to Fusco.
Cheniere expects to have full regulatory approvals for Stage 3 by the end of the year, with significant commercial progress already made through integrated production marketing deals with both Apache Corp. and EOG Resources Inc. It plans to complete “the remaining steps of commercialization and financing ahead of a fall FID,” Fusco said.
Another key priority for 2020 will be to continue pursuing additional development opportunities to maintain Cheniere’s growth momentum, according to the company chief. He touted Cheniere’s “incredible infrastructure and land position” at Corpus Christi, “which we expect to enable further brownfield expansion economics for future liquefaction projects.
“In addition to our own infrastructure, this location is proximate to significant new pipeline development and natural gas resources. Our Corpus Christi project is by far the closest LNG project either in operation or development for the Permian Basin, so our site is an ideal location to match new gas supply with global LNG demand over the long term,” Fusco said. “Our project development focus in 2020 is on leveraging those advantages to expand our LNG footprint and Corpus Christi beyond Stage 3.”
Those are some ambitious plans considering the global gas glut that has emerged over the last several months. After adding a record 12 million metric tons (mmt) of supply in the second quarter of 2019, another 10 mmt was added in the third quarter, according to Cheniere’s chief operations officer, Anatol Feygin.
Cheniere produced and exported 108 LNG cargoes during 3Q2019, a new quarterly record. Volumes exported totaled 383 trillion Btu, up 68% from the year-ago period. To date, the developer has loaded and exported more than 850 cargoes from its Sabine Pass and Corpus Christi terminals, or roughly 60 mmt of LNG.
Meanwhile, full year 2019 is on pace to add about 40 mmt of supply around the world, which would be a new yearly record.
“At 40 million tons, the LNG supply growth this year has been unprecedented,” Feygin said.
“However, this wave is well over 80% behind us, with only 24 million tons, or about 17% of incremental supply, forecast to come on line between now and the end of next year.”
Incremental supply during 3Q2019 was absorbed primarily by Europe as the region continued its global balancing role, importing a record 18.4 mmt during the quarter, which was nearly double the import level compared to a year ago, according to Feygin. Nevertheless, European LNG imports were lower quarter/quarter amid strong storage levels and low gas prices in Europe, as well as an increase in imports into traditional counter-seasonal markets and emerging Asian markets.
Even as European storage inventories have been reported close to full, Cheniere remains comfortable with supply and demand dynamics heading into the winter withdrawal season, with production from the Netherlands’ Groningen field continuing to decline as it nears the scheduled end of operations in 2022 and a lack of progress on the Ukraine transit agreement during the quarter.
Low gas prices and strong LNG imports have also incentivized increased gas for power generation, according to Feygin. Spain has had the most noticeable response increasing its gas power generation by 58% in the third quarter as compared to last year, while Germany has boosted its gas power generation by 39% year/year in the third quarter.
Asian LNG imports were slightly higher during 3Q2019 compared to the same period in 2018 and continued to trend above the five-year range, Feygin said. Strong nuclear generation from legacy LNG consumers in Japan, South Korea and Taiwan has placed downward pressure on LNG imports this year.
“Lower imports from Japan and South Korea were offset by strong imports in the third quarter from China, India, Bangladesh, Pakistan and Malaysia, all of which have experienced double-digit growth from last year,” Feygin said.
Management continues to monitor other developments that would favor Asian LNG demand growth, including challenges in complying with anti-terrorism retrofits on time at nuclear facilities that puts 12 gigawatts of nuclear capacity at risk of shutting down. In South Korea, there are plans for more temporary closures of coal-fired power plants during winter, with a proposal submitted to close 14 coal-fired plants from December to February and another 22 in March. This is in addition to the five currently scheduled to be closed from March to June.
China also continues to implement environmentally driven policies, “which should incentivize stronger gas demand going forward,” according to Feygin.
“We continue to expect that the prospects for global natural gas demand growth, our commercial momentum and our advantaged position of U.S. Gulf Coast LNG exports will enable us to capture significant additional term economics,” he said.
On the financial front, Cheniere expects its full year 2019 consolidated adjusted earnings to be in the range of $2.9-$3.2 billion and distributable cash flow (DCF) to be between $600 million and $800 million. The company increased its earnings guidance for 2020 by about 30% to $3.8-4.1 billion and its DCF by more than 60% to $1.0-1.3 billion.
Citing the financial goals as the number one priority for what is expected to be a “record-setting” 2020, Fusco said, “We have good visibility into next year that 2020 should feature less volatility than 2019 given that much more of our overall production next year will be under long-term contracts, and there are no new trains scheduled to enter service next year.”
Cheniere reported a net loss of $318 million ($1.25/share) in 3Q2019, compared to net income of $65 million in 3Q2018 (26 cents). Part of the loss was attributed to increased total operating costs and expenses primarily as a result of additional trains in operation and certain maintenance and related activities at the Sabine Pass facility.
The company also repurchased about 2.5 million shares in the third quarter. “We have now repurchased approximately 1% of our outstanding shares since the program commenced in late June,” Fusco said.
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