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We are all very impressed with the increase in demand, especially in Asia. And I don’t think any of the consultants have anticipated the demand increases that we’re starting to witness – Jack Fusco

The U.S.A.’s first operational LNG exporting business–Cheniere Energy (ticker: LNG)–reported Q1 earnings yesterday.

43 Cargoes Shipped by Cheniere Add Up to Revenue, Earnings

Source: Cheniere Energy

On revenues of $1.1 billion during the quarter, Cheniere chalked up net income of $54 million, or $0.23 per share (basic and diluted) for Q1 2017, compared to a net loss of $321 million, or ($1.41) per share (basic and diluted), for Q1 2016.

During the conference call Q&A, Cheniere CEO Jack Fusco gave some background on the company’s business model.

“We’re a full-service shop. So, a lot of the utilities around the world do not like the tolling model and they don’t like the FOB model necessarily, because they don’t want to deal with shipping. So, if you’re utility and you need reliable supply, you’d rather have that thing delivered directly to your dock, right? And that’s what we offer. So, we offer more flexibility, more customer options, if you will. And quite honestly, I’m very pleased with our – reputationally – that we’re being recognized as a company that we can actually deliver what it says it can deliver. So, that’s why I feel good about our positioning relative to some of the newer facilities, or wannabes, if you will,” Fusco said on the call.

It’s all about shipping LNG out

43 Cargoes Shipped by Cheniere Add Up to Revenue, Earnings

Source: Cheniere Energy

Cheniere said a total of 43 LNG cargoes were loaded from its Sabine Pass project in the 2017 first quarter, seven of which were commissioning cargoes. In the call, Cheniere said, “proceeds from the sales of commissioning cargoes are recorded as an offset to construction in progress on the balance sheet, because these amounts are earned prior to our taking over care, custody and control of the respective train.”

Cheniere said the increase in net income was primarily due to increased income from operations and decreased derivative loss. Cheniere reported EBITDA of $483 million compared to a loss of $45 million for Q1 of 2016, again attributing the performance to increased income from operations.

Capturing gas from the Permian: Cheniere in discussions with 10 Permian pipeline project developers

Cheniere announced in March that it had commitments from E&Ps Devon, Marathon and Gulfport for a STACK/SCOOP to Gulf coast 36-inch diameter new mainline pipeline called Midship.

43 Cargoes Shipped by Cheniere Add Up to Revenue, Earnings

Proposed Cheniere STACK/SCOOP pipe project Midship. Source: Cheniere Energy

The Midship project targets pipeline capacity of up to 1,400,000 Dekatherms per day (or approximately 1.4 Bcf/day) of firm transportation to connect production from the emerging STACK and SCOOP plays in Oklahome to Gulf Coast and Southeast markets.

On the Q1 call, the question came out about gas pipe deals in the Permian.

Question from Jeremy B. Tonet: I just wanted to touch base with Midship, it seems like you’ve developed a really good project to source gas at attractive basis. Just wondering if you had any updated thoughts as far as the Permian and Waha there, because the basis continues to gap out even further from where it was at Analyst Day.

It seems like that could be a really interesting opportunity for you guys as far as participating in a pipe solution or sourcing really cheap gas. Just wondering if you could share any thoughts there.

Cheniere’s Anatol Feygin: Thanks for your kind comments on Midship. We’re clearly very excited about that, especially given what we’re seeing in the SCOOP and the STACK from the producer success standpoint.

And from a gas supply standpoint, we do think this is a key structural competitive advantage of ours, given our scale and given our early-mover advantage on that front. But recall, we approach all of this from a best economic value proposition standpoint on buy versus build.

You can trust that we are involved in all of the discussions with – I believe it’s now 10 pipeline projects that are proposed out of the Permian. We get involved from an investment standpoint if we think that that’s the best option for us from a holistic kind of sourcing and supply standpoint. So we’ll continue to monitor the situation.

Question from Jean Ann Salisbury: Is there a point at which the Midship Pipeline would hit a delay if we don’t have FERC quorum by then?

Cheniere’s Jack A. Fusco: It’s well over a year from now. Recall that we pre-filed Midship in November, so the clock has been running. And from an interstate pipeline standpoint, this is as down the center of the fairway a project as you get. The build is all in Oklahoma, and it is co-located with the existing pipeline right-of-way for the vast majority of the project. So we don’t anticipate, of course, any delays, but we’ve got a lot of time to resolve these issues. And we certainly don’t expect to be held up by lack of a quorum at the FERC currently.

Jean Ann Salisbury: So a year from now before that starts to become a constraint?

Jack A. Fusco: Over a year. Yeah.

Question from Theodore Durbin: The $500 to $600 a ton for your next expansions…can you just talk about additional storage you might need or berthing or other things associated with those costs, other than those costs, and how that might differ between if you were to do Corpus 3 versus Sabine 6?


43 Cargoes Shipped by Cheniere Add Up to Revenue, Earnings

Cheniere’s Corpus Christi LNG export project – Source Cheniere Energy

Cheniere’s Jack A. Fusco: We think Corpus 3 will be the lowest cost LNG expansion project on the Gulf Coast. So, in that number is what it would take for use to not only to build the train, but also low the shifts and process the LNG. So, we’re not trying to hide anything from the market. If we further expand Corpus beyond Train 3, then we’ll have to look at what our needs would be if we need an additional berth or if we need additional tankage.

43 Cargoes Shipped by Cheniere Add Up to Revenue, Earnings

Source: Cheniere Energy

Sabine 6, as you know, Ted, we’re just getting 4 up. We’ll have 5 about a year after 4, and then – Train 5. And then for Sabine 6, that will give us a lot of operating information on those two berths, on those loading arms. There are probably incremental improvements we can make on our ability to load faster. But as far as tankage is concerned, I’m pretty sure the 17 Bcf of LNG over there should be sufficient for us.

Is LNG demand stronger in Asia or Latin America?

Question from Fotis Giannakoulis: I want to go back on the demand picture, and you mentioned about the strong growth of demand in Asia. I want to ask more particularly for Latin America, where it seems that you have sold most of your volumes until now. How do you view the demand there? And also, if you can make a comment about the El Campesino project, where does this stand? And if you are looking other similar projects that they can provide some additional long-term selling opportunities?

Cheniere’s Anatol Feygin: Again, we’re advertising amongst other things the flexibility and the responsiveness of this business model and Cheniere’s volumes. As you clearly see from us and from all the other sources, the market raises a flag and the supply response, that is going to continue to be a seasonal issue.

We just spent a lot of time kind of blanketing Asia. And it’s pretty clear that not only is demand rising there, but winter peaking demand is rising even faster, and that’s going to continue to drive this kind of seasonality. We think that, again, the pie continues to grow and that the flexibility and the diversion optionality is the right business model for the LNG market going forward, and we’re going to be there to fill that.

In terms of your question on El Campesino in Chile in particular, we are very supportive of this project as are our partners, EDF and AME. We continue to push forward. We are very well-engaged in the permitting process, which has resumed. We have good dialog with the indigenous groups and are optimistic that we’ll get that squared away this year.

In terms of the broader question, are we interested in continuing to do that in the Southern Cone and elsewhere, absolutely. We’re looking to continue to grow the value chain downstream of the plant. We have skills. We have resources. We have an E&C group that’s 100 people strong that can help those new to this business understand what the issues are, how to put this infrastructure in place. And again, to the extent that there’s a modest amount of capital that we can commit to that, we would look to do that to the extent that it helps us supply those types of projects.

So we absolutely continue to view the El Campesino project not only as a project that we like and continue to support, but also a model that we can replicate along various dimensions, along various geographies.


Question from Alex S. Kania: Just curious what you’re hearing in the market on these most recent Australian proposals to restrict the LNG exports. Is that kind of changing any demand dynamics you’re seeing for kind of marketing cargos maybe for the back half of the year?

Cheniere’s Anatol Feygin: No. It’s not changing current marketing dynamics or plans. But it is causing quite a ripple in discussions, and there’s a lot of interest in participating in AGL’s process for the East Coast FSRU. And that kind of – I think to your broader question, this issue of how does the market continue to rebalance, it’s continuing to have kind of negative supply surprises and positive demand surprises as you’d expect in this kind of pricing environment and East Coast of Australia is just the latest salvo in that.

Question from Pavel Molchanov: You mentioned that marketing margins in Q2 are going to be meaningfully down versus the prior quarter. Is that a function of just oil prices coming down or are there other dynamics there?

Cheniere’s Anatol Feygin: In the short run, it’s purely an issue of what’s in the market today and really just short-term market LNG prices, not crude.

Question from Pavel S. Molchanov: Is there a sense of seasonality in what your cargoes will look like, just given the fact that you’re shipping to customers in Southern Hemisphere as well as Northern Hemisphere with different demand profiles?

Anatol Feygin: There is certainly seasonality in Sabine Pass’ production and that’s something we touched on at Analysts Day. There is no question that refrigerators run better when it’s cool and dry, and Sabine is going to be kind of the poster child for that volume. Fortunately, for us, as I mentioned earlier, the LNG market and the global gas market is continuing to grow and continuing to exhibit this increased Northern Hemisphere winter demand profile.

So, we’re nicely positioned from that standpoint and we’re comfortable that we can continue to supply Sabine Pass with the challenges of logistics and procurement in the winter.

In terms of the overall magnitude, recall that this will be our first summer operating multiple trains. And we’re going to have a much better feel for what the kind of steady-state numbers that you refer to look like after we’re done with the production testing over this multi-train summer period.

Jack A. Fusco: And I would just say, Pavel, that we don’t expect that as foundation customers to have any real seasonality in the shipping. We may have some seasonality in our excess cargoes that are based on, what Anatol said, just weather and the technology that’s at Sabine versus Corpus for that matter.


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