Earnings Call: Q2 2019

Aug 8, 2019

Good morning, and welcome to the 2Q 2019 Cheniere Energy, Inc. Earnings Call and Webcast. Today's conference is being recorded. At this time, I'd like to turn the call over to Randy Batya, VP of Investor Relations. Later, and good morning, everyone. Welcome to Cheniere Energy's Q2 2019 earnings conference call. Slide presentation and access to the webcast for today's call are available at cheniere.com. Joining me today are Jack Fusco, Cheniere's President and Chief Executive Officer Anatol Fagan, Executive Vice President and Chief Commercial Officer and Michael Wortley, Executive Vice President and Chief Financial Officer. 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 non GAAP measures such as consolidated adjusted EBITDA and distributable cash flow. A reconciliation of these non GAAP measures to the most comparable GAAP measure can be found in the appendix of the slide presentation. As part of our discussion of Cheniere Energy Inc. 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 provide an update on the LNG market, and Michael will review our financial results and guidance. After prepared remarks, we will open the call for Q and A. I will now turn the call over to Jack Fusco, Cheniere's President and CEO. Thank you, Randy, and good morning, everyone. I'm pleased to be here this morning to discuss our results for the Q2 of 2019, which was a very busy quarter for us strategically, operationally and commercially. During the Q2, we completed the financing of and made a positive FID on Train 6 at Sabine Pass and we successfully onboarded 3 new long term customers as we achieved the date of first commercial delivery under our long term contracts with Endesa and Portaminia tied to Corpus Christi Train 1 and started bridging volumes under the Iberdrola SBA tied to Corpus Christi Train 2. We also signed our 1st integrated production marketing or IPM transaction with Apache Corporation, which will support our Corpus Christi expansion project. We increased run rate production guidance for our trains at Sabine Pass and Corpus Christi. And finally, we laid out a capital allocation framework, which prioritizes our investment in our growth platform, puts Cheniere on a path to investment grade credit ratings and returns excess capital to shareholders via a 3 year $1,000,000,000 share repurchase program. I'll touch on a few of these significant achievements more in a few minutes. Slide 5 represents a summary of key results from the Q2. We reported consolidated EBITDA of 6 $15,000,000 and distributable cash flow of approximately $120,000,000 on revenue of almost $2,300,000,000 for the 2nd quarter. Looking forward to the balance of 2019, today we are reconfirming our full year consolidated adjusted EBITDA guidance of $2,900,000,000 to $3,200,000,000 and a distributable cash flow guidance of $600,000,000 to 800,000,000 dollars Michael will cover our financial results and outlook in more detail later in the call. Before covering some of the operational results in the quarter, I'd like to say a few words on the current LNG pricing environment and our full year guidance. LNG prices in short term market remain at multi year lows as the worldwide LNG industry has brought on a significant amount of supply. Cheniere's spot volumes in our portfolio this year are increased due to our success in construction execution and excellent operating performance at our facilities, which has resulted in trains entering service ahead of schedule, volumes ramping up ahead of schedule and better than expected production. We are starting to see a light at the end of the short term market tunnel with some attractive winter spreads in the market, though our results and our outlook for the rest of the year have been impacted by the lower pricing environment. In the Q2, we produced and exported 104 cargoes, a new record number. And during the quarter, we onboarded 3 new long term customers at Corpus Christi, Indesa, Perdomena and Iberdrola. Additionally, we recently delivered our first cargo to Poland under our long term contract with a Polish oil and gas company. And to date, we have onboarded 11 of our long term customers. And later this year, we'll onboard Total and Centrica when DFCDs are achieved on the contracts linked Train 5 at Sabine Pass. We also continued on our track record of commercial innovation during the quarter with our inaugural IPM transaction with Apache Corporation for 140,000 MMBtus per day, for which Apache will receive a price based on international LNG indices for a term of approximately 15 years from Corpus Christi. The LNG associated with this gas supply, approximately 0.85000000 tons per year, will be marketed and sold by our marketing affiliate. This first of a kind transaction enables the gas producer to access global LNG pricing indices, while receiving flow assurances for their gas and ensures reliable delivery of gas to Cheniere while supporting our growth through the fixed fee structure of the contract. This is truly a win win deal for Apache and Cheniere and we are busy pursuing other IPM transactions. Finally, I'll briefly touch on our capital allocation framework, which we laid out to the investment community in early June. This framework prioritizes the reinvestment of available cash in accretive growth projects, the achievement of investment grade credit metrics and the return of excess capital to shareholders. Our LNG growth platform provides us with significant and accretive investment opportunities, such as Sabine Pass Train 6 and the Corpus Christi expansion, which enables us to simultaneously grow and delever by investing in these projects with a minimum of 50% equity. Strengthening our balance sheet is vital to our sustained growth and we plan to proactively improve debt metrics and achieve an investment grade consolidated debt to EBITDA ratio over time. We also commenced our $1,000,000,000 share repurchase program in June. As of the end of the quarter, we'd repurchased about 45,000 shares for approximately $3,000,000 As of early August, we've repurchased over $100,000,000 of shares in total. The share buyback program provides us with a platform to return a meaningful amount of capital to our shareholders while retaining capital flexibility. Turn now to Slide 6. With Sabine Pass Train 5 and Corpus Christi Train 1 complete, we are focused on completing Corpus Christi Train 2, which began LNG production in early June and the first commissioning cargo was exported in late June. Commissioning and testing on Train 2 continues with the 72 hour performance test recently completed successfully. We expect substantial completion to be achieved over the next few weeks, which would further our track record of trains being completed ahead of schedule and on budget. We spent some time on last quarter's call discussing the maintenance turnaround on Trains 12, which we successfully completed earlier this year on schedule and on budget and with 0 safety incidents. Last week, we started a similar maintenance turnaround for Trains 34 and we look forward to achieving the same flawless execution we had earlier this year. This turnaround is part of the higher than average maintenance at Sabine Pass that we talked about for 2019, which has been factored into our guidance ranges. Finally, we continue to progress Corpus Christi Stage 3 through the permitting process to maintain our expectation that we will have all the required regulatory approvals in place before year end. And now, I'll turn the call over to Anatol, who will provide an update on the LNG market. Thanks, Jack, and good morning, everyone. Please turn to Slide 8. The 2nd quarter was a noteworthy quarter in terms of supply growth for LNG and the resulting impact on market prices in the short term. LNG supply during the quarter was more than 12,000,000 tons higher than in Q2 of 2018. This is more than 3 times the year over year growth observed in Q2 of last year when just 4,000,000 tons were added compared to Q2 of 2017 level. Q2 continued a run of strong supply growth, started in late 2018 Q4. In total, nearly 32,000,000 tons of incremental supply were added globally across the 3 quarters as compared to the same period a year earlier. This was the strongest ever growth across 3 consecutive quarters. Cheniere has been a significant part of the recent global supply story and was active in Q2 with the 1st full quarter production from Corpus Train 1 and Sabine Pass Train 5 after substantial completion was achieved on both trains in the Q1. Additionally, as Jack mentioned, Train 2 at Corpus Christi began producing LNG during the quarter and substantial completion is expected in the near term. Other U. S. Projects also contributed to supply growth as the Cameron facility exported its 1st cargo in May and Kinder Morgan reported in July that the Elbow project has started producing LNG. Incremental supply over the past three quarters has been matched by an increase in European imports as the region continues in its global balancing role. Asia returned to year over year growth in Q2 after contracting in Q1. Although residual impacts of the mild winter season still seem to be weighing on imports into Asia as a whole, there are some positive demand stories. We saw import growth rebound in China and South Asia in Q2. I will discuss both Asia and Europe in more detail in a moment. Since the Q4 of 2018, new LNG supply coupled with warmer than average winter weather in both Asia and Europe have placed downward pressure on prompt LNG price. In Q2, weather in Asia was closer to average temperatures, but still a bit warmer than usual. Q2 weather in Europe was warmer than average, limiting the potential for heating demand in Northern Europe. As a result, both JKM and TTF have decreased significantly since the beginning of the year. Looking beyond the current shoulder season, however, Asian and European benchmarks are both trading in steep contango, indicating that demand is expected to pick up again going into the winter season. Please now turn to Slide 9. As Europe resumed its role as market balanced over the past 3 quarters, imports surged and reached record levels. LNG imports into Europe remained at historically high levels throughout the quarter. Q2 imports were nearly 23,000,000 tons, more than twice as much as Q2 of 2018. After reaching a high of 8,200,000 tons in April, volumes have declined modestly. Strong LNG receipts, moderate weather and high injections into underground storage have resulted in very high storage inventories. European storage levels were 73 percent full at the end of Q2, a much higher level compared to a year ago when Q2 2018 ended at 49% full. These patterns have placed downward pressure on European prices, incenting stronger European gas power generation in Q2 compared to the same time period a year ago. In Q2, French gas power generation more than doubled, Italian gas generation nearly doubled, and both Spain and Germany saw more than a 60% increase in gas power generation compared to the Q2 of 2018. The increase in gas use and power took place at the same time coal prices were falling. Q2 European coal settlement prices averaged $2.62 an MMBtu equivalent, 35% lower than the Q2 of 2018 and more than 25% lower than the Q1. However, another factor supporting gas power generation and limiting coal power generation in Europe is the strong carbon price, which averaged €25 per ton in the Q2. That was €10 a ton higher year over year. Prices have continued to climb in the 3rd quarter, trading above €29 a ton in July. A planned reduction in carbon allowances have offered support for these price levels. These structural dynamics will benefit natural gas demand in Europe for the long term as infrastructure should continue to be built to support a cleaner energy mix. We're excited about our ongoing prospects to work with our European customers to meet their future needs to reduce their carbon footprint. Turning to Slide 10, year over year demand growth in Asia returned in Q2. Asian imports for the first half of the year were 120,000,000 tons, slightly higher year on year despite meaningful and expected declines in Japan and South Korea. The first half of the year showed strong demand growth from China, which was up about 24% on the year and South and Southeast Asia, which was also up by about 3,000,000 tons or 14%. This demand growth more than made up for the decline in LNG demand from Japan, Korea and Taiwan, which was mostly a result of increased nuclear generation. In Q2, we also saw a demand response to low pricing as countries including Pakistan, India and others in South Asia took advantage of low prices and purchased more spot LNG. In closing, I'd like to offer some perspective on the supply cycle we're currently experiencing. Capacity additions over the 2018 through 2020 period are expected to be almost 85,000,000 tons per annum, an increase of almost 30% over 3 years into what was an approximately 290,000,000 tons per year demand market at the end of 2017. Almost half of the 3 year total, over 40,000,000 tons was added in 2018 alone and to date almost 55,000,000 tons or 65% of the total has come online. The pace of supply growth is expected to slow over the next year and a half and to slow even more dramatically into the 2021 2022 period. As less capacity enters the market over this time period, we expect the market to tighten and LNG prices to rebound. Our origination and marketing teams are as busy as ever seeking to ensure we continue to get our fair share of term contracted LNG market. Thank you for your time and attention. And I will now turn the call over to Michael to review our financial results. Thanks, Anatol, and good morning, everyone. Turning to Slide 12. For the Q2, we reported a net loss of 114,000,000 dollars consolidated adjusted EBITDA of $615,000,000 and distributable cash flow of approximately $120,000,000 As Jack mentioned, our 2nd quarter results were impacted by continued softness in short term LNG market pricing, partially mitigated by strong LNG production as a result of excellent operational performance and early completion of trains. We are reconfirming our full year consolidated adjusted EBITDA and distributable cash flow guidance today. And we are presently tracking towards the low end of the EBITDA range of $2,900,000,000 to 3,200,000,000 dollars For the first half of the year, we generated net income of $27,000,000 consolidated adjusted EBITDA of approximately $1,300,000,000 and distributable cash flow of approximately $320,000,000 We exported 361 TBtu of LNG from our liquefaction projects during the Q2, of which 3 TBtu were commissioning volumes, representing the 1st cargo from Corpus Christi Train 2. Total volumes exported were 51 TBtu higher than exports in the Q1 of this year, primarily as a result of having Sabine Pass Train 5 and Corpus Christi Train 1 operational for the full Q2, as both trains were completed late in the Q1. For the first half of the year, we exported a total of 6.71 TBtu of LNG from our liquefaction projects. For the Q2, we recognized an income 3 52 TBtu of LNG produced at our liquefaction projects, consisting of 361 TBtu loaded during the quarter, plus 27 TBtu loaded in the prior quarter that delivered and recognized in the current quarter, less 36 TBtu or 11 cargoes sold on a delivered basis that were in transit as of the end of the second quarter. We also recognized an income 5 TBtu of LNG that was sourced from 3rd parties. Approximately 64% of the 3 52 TBtu recognized in income from our projects during the quarter or 2 26 TBtu were sold under long term SBAs and the remaining 100 and TBtu were sold by our marketing function under short and medium term contracts. Volume sold under long term SBAs were materially consistent with the prior quarter and short term marketing volumes increased approximately 80 TBtu due to the early completion of Sabine Pass Train 5 and Corpus Christi Train 1 before the DSCD of the SBAs related to those trains. We reached the Corpus Christi Train 1 on June 1 and expect to reach the FCD under the SBAs relating to SBEAM Pass Train 5 on September 1. So the proportion of our total production available to our marketing function for the second half of this year is expected to be lower than during the Q2. For the first half of the year, we recognized an income 634 TBtu of LNG produced at our liquefaction projects and 23 TBtu of LNG sourced from 3rd parties. Operating income for the 2nd quarter was $432,000,000 a decrease of $174,000,000 compared to the Q1. The decrease in operating income was driven primarily by lower margins on LNG, driven by market pricing, increased total operating costs and expenses as a result of additional trains in operation and certain maintenance and related activities at the SBL project and decreased net gain from changes in fair value of commodity and foreign exchange derivatives, partially offset by an increase in LNG volumes recognized in income, primarily as a result of additional strength in operation. Net loss attributable to common stockholders for the Q2 was $114,000,000 or $0.44 per share, a decrease of $255,000,000 compared to the Q1. The decrease in net income was primarily due to decreased income from operations and increased interest expense, primarily as a result of additional trains in operation as well as increased net derivative loss, partially offset by a decrease in net income attributable to non controlling interest due to a decrease in net income recognized by CQB, in which the non controlling interests are held. Turning to Slide 13. During the Q2, we entered into a transaction that we expect will refinance a portion of the Corpus Christi bank debt that I'd like to mention briefly. In June, Corpus Christi Holdings entered into a note purchase agreement with Allianz to issue an aggregate amount of $727,000,000 a 4.8 percent senior secured notes due 2,039. The transaction is expected to close and fund when the notes receive at least 2 investment grade ratings, which we expect to occur by late this year or early next year. We have structured the Corpus Christi project with investment grade credit metrics similar to the P and P pass, and we believe CCH is on its way to achieving investment grade ratings as as we continue to derisk the project with successful early completion of trains and standing up of long term customers. Entering into this IG price bond transaction as a high yield issuer with a closing contingent upon receiving investment grade rating demonstrates the confidence the market has in our continued ability to execute and achieve those ratings. In addition, these notes, which will be fully amortizing, support our broader balance sheet goals of strengthening the credit metrics at the project level and reducing consolidated leverage over time. We'll continue to manage debt maturities at the project level opportunistically as part of our balance sheet strategy. Turn now to Slide 14. As Jack and Anatol mentioned earlier, short term market pricing has been weaker than we expected earlier this year and that is impacting our results. That impact continues to be mitigated by strong production as a result of early train completion and excellent operating performance. And today, we are reconfirming our full year consolidated adjusted EBITDA guidance of $2,900,000,000 to $3,200,000,000 and distributable cash flow guidance $600,000,000 to 0.8 1,000,000,000 dollars With respect to our sensitivity to changes in market prices, as we look toward the second half of the year, we forecast that a $1 change in market margin would impact EBITDA by approximately $25,000,000 This is down materially from the last quarter since we had a significant amount of marketing exposure roll off during the Q2 and we have been actively de risking our exposure physically and financially for the balance of the year at significantly higher margins than the prompt month, given the contango in the market, which Anatol mentioned. Finally, as Jack discussed earlier in the call, our recently announced capital allocation framework prioritizes accretive growth projects, deleveraging to achieve investment grade consolidated credit metrics and the return of excess capital to shareholders. We developed this framework over the course of the year and we were pleased to announce a multi factor approach that we expect to increase the value of the consolidated enterprise, ensure balance sheet resilience across our structure and return excess capital to shareholders. Regarding capital return, as Jack mentioned, as of early August, we have repurchased over 100,000,000 dollars worth of stock, while preserving capital for near term debt pay down. That concludes our prepared remarks. Thank you for your time and your interest in Cheniere. Operator, we are ready to open the line for questions. Thank We will now take our first question from Christine Cho from Barclays. Please go ahead. Good morning, everyone. With the wave of legacy contracts across the industry set to expire in the early mid-twenty 20s. Curious if you've gotten the sense that these customers are looking to term up some of these expiring contracts or would they be comfortable procuring it on spot basis just given the market has become a lot more liquid? Or is it just too early to be having those conversations? Well, good morning, Christine. And thanks for the question. I'll ask Anatol if he can give you some insights on that market. Sure. Good morning, Christine. Thanks for the question. It will be a mix. We've already seen some of these contracts. You're absolutely right. The early '20s will bring a substantial amount of vintaging into the market. These are the 20 year deals, obviously, from when the market was about 100,000,000 ton market. So there is an appreciable amount of volume that will be open and we look forward to competing for that. As I mentioned in my remarks, it will also coincide, we think attractively for us with a time in the market when there's relatively few projects incrementally contributing to the supply portfolio in the 2021 through 2023 timeframe. But absolutely, the growth in aggregate and the competitive opportunity for these contract roll offs are 2 of the larger levers that we are pursuing. And those legacy deals will be a combination of extensions. Some of them will be for shorter tenor, some of them will be longer tenor. And at the margin, you will see customers being comfortable leaving some amount of their positions open. Okay, helpful. Thank you. And then there's you guys kind of reiterate your capital allocation framework, but just with reports out there for Blackstone wanting to potentially monetize their position, just curious about how we think about a potential CQP role and where that fits in to that framework? And I'm sure you guys always talk to Blackstone, but if there's any update there, we'd be curious to know as well. And whether or not you have ROFOs or ROFRs? So I'll take the last one first. The answer to that would be no. And then Christine, as you know, Blackstone has been a really good shareholder with us and our partner with us at CQP for a long period of time, now well over 7 years. And we would hope to maintain that relationship. But I think that whether or not they sell their units or whether or not there's some other transaction that happens with consolidation. Those are really 2 separate and binary discussions and decision points. And right now, as we've talked about, that's not in the works, a consolidation of CQP. Would be. We will now take our next question from Jeremy Tonet from JPMorgan. Please go ahead. Good morning. Just wanted to start off with the new IPM structure as you guys have recently talked about your Analyst Day and granted early days here, but just wanted to see if there's any other thoughts you can provide us as far as customer conversations, producer conversations could be going there, especially in light of Henry Hub falling to such low levels, Waha pricing being so depressed and if that's kind of influencing your conversations with potential customers? Thanks, Jeremy. I'll start off first. I mean, I'm extremely proud of the team for being able to pull together that whole IPM transaction with Apache. And I think our relationship with Apache, our ability to actually move gas around to liquefy and get it off the shore was a big reason that that all made sense and we're very excited about offering that more broadly out to the market. In regards to the specifics around customer discussions, I'll turn that part over to Anatol and let him fill in the gaps. Thanks, Jeremy. Thanks, Jack. Yes, as Jack said, it took a village. Our upstream infrastructure and relationships are downstream capabilities and that demonstrated to a number of producers what is possible. It's an education process. We are engaged with a number of those relationship producers that have large volumes that are moving those volumes, as you said, to a market that is looking ever more saturated and are looking to get those volumes onto Bluewater and realize international indices as opposed to North American ones. So we're very optimistic. This is a great opportunity to demonstrate the Cheniere skill sets and the integrated model that integrates both upstream and downstream components around the plant and of course leverages the reliability and operational performance that we've demonstrated throughout our integrated platform. So we are quite optimistic. And as we've said on a number of opportunities, there are a number of attractive counterparties that meet our criteria for this kind of engagement. Given the upstream portfolios and the players in that market, that number is not infinite, all right. We need to check a number of boxes that a lot of producers have a difficult time checking these days. So we're optimistic and look forward to more of these transactions in the near to medium term future. That's helpful. Thanks. And just wondering if you could provide any incremental thoughts as far as the pace of buybacks granted you've given a certain amount over the next 3 years you want to do with your capital allocation program. It seems like the share price is not what you would think that the intrinsic value is kind of what I'm reading here. So I'm wondering how that influences the pace of purchases you might be doing at this point? I think Jeremy, it's obvious if you look at where we were at the end of the quarter versus where we are today with over $100,000,000 invested, we've been able to buy back close to 1% of the company at this point and just about 2,000,000 shares. So it's a very optimistic program. We've had a great window to implement the program and I'm very pleased with the performance to date. Yes, Jeremy, it's Michael. I'd just reiterate, we said that we determine our kind of quarterly excess liquidity every quarter and we said that'll kind of accumulate about $1,700,000,000 over the next 3 years. That's going to ramp obviously with how our contracts are coming on. And every quarter, there's going to be some sort of minimum debt pay down because we're committed to paying down debt. And then the balance would be a jump ball between debt and equity. We had to defer debt a little bit to be opportunistic with the stock. That's what we do. And so that's really where we are right now. That's helpful. That's it for me. Thanks. We will now take our next question from David Duignes from Credit Suisse. Please go ahead. Hey, good morning. It's John Mackay on for Spiro. Just wanted to follow-up on your questions detail on maybe what your potential levers are there? Yes, it's Michael. There's not many, right? We said a dollar move in market margins only impacts us to the tune of $25,000,000 or so. That's down from $145 ish last quarter. That was the biggest lever we had last quarter and I think going into the balance of the year, we've reduced that significantly just through placing volumes physically and in the paper market. So we have price certainty, you really don't price less than 10 cargoes exposed to price uncertainty. The rest, so the top line is pretty secure at this point. O and M could move around a little bit. We have a pretty significant turnaround going on right now, but don't expect any issues there from an O and M perspective. So that was the main lever and it's really been taken off the table for the balance of the year. All right. That's great. That's helpful. Thank you. Just follow-up is a little bit related. You guys took on a lot of shipping capacity last summer ahead of some of these trains coming online. Can you just remind us maybe when some of those charters might be rolling off and whether or not that could be a potential headwind or tailwind for kind of the second half of the year and into 2020? Thanks, John. Yes, we did enter into a substantial amount of shipping capacity as we anticipated these cargo by cargo cargo by cargo basis. We're very comfortable with our position now as these trains as ops and E and C have brought on these trains early and we've had these volumes reliably. We've been putting these ships to work and we're in a very good position now into this fall and winter period in terms of our shipping capacity. To answer your question about expiries, it's really a staggered portfolio. We have some amount, a modest amount of our shipping capacity that is on long term charters and we enter into those to support our long term business like the delivered business. The rest is We will now take our next question from Julien Dumoulin Smith from Bank of America. Please go ahead. Hey, good morning. Can you hear me? We can, Julien. Excellent. Hey, just a little bit of a follow-up from the last couple of questions here. If you elaborate a little bit, I mean it sounds that I know you're guiding to the lower end of the range at this point, but given the reduced sensitivity, I mean it seems like there's very few scenarios in which that would meaningfully move. Can you talk through the key sensitivities that would actually shift you out of the range at this point? It sounds like that's not the case. And then perhaps more strategically, as you're looking towards 2020, what kind of hedging have you engaged in? And how do you do we continue to see some of the pinch point into 2020? And do we continue to see some of the pinch point into 2020? And I'm cognizant that you're already seeing some improvement into the winter months already. But that's a lot those are my two questions. Yes. I'll take this is Michael. I'll take the first one. In terms of guidance for the balance of the year, again, I'll just maybe add a couple more comments to that. Timing of Train 2 at Corpus could move us a little bit. We feel real good about that given it's already making LNG and we think it's COD is imminent, but that could impact it. Again, O and M is a big number for us and has that team has done a good job projecting that number and forecasting it. So I feel pretty good about that, but that can move. Our upstream business in terms of what we buy gas at and what kind of margins are generated there, again, has been pretty predictable by that team, but that could move. But again, low end of the guidance and most of the marketing exposure taken off the table. Yes. And Julian, just to follow-up on your question of 2020, the last of this wave of supply is late 2019 2020 business. As we've said, the margins in 2020 are relatively healthy. 1st and foremost though is by the time we get to the Q2, the vast majority of our volume has been DFCD ed and we're supplying those under long term contracts. To augment that, we do have, as Michael said earlier, some amount of short and medium term physical and financial sales. Obviously, we're not discussing 2020 sensitivity, but the overwhelming majority of Cheniere volume is put away either through these long term contracts. The last tranche of Corpus Train 2 is May of 2020 as you know. So we'll have some exposure. 2020 could be another market, another year that plays out similar to 2019, somewhat weather dependent on the margin. But overall, unlike 2019, when we had 3 trains coming on and the teams brought those on early and reliably, 2020 is less of a variable. Overwhelming contracting, if I'm hearing you right? Well, just you know that that's the case from the long term business and then we've augmented that at the margin somewhat with short and medium term as well. Right, exactly. Okay, I'll leave it there. Next year is 8,500,000 ton CMI year and next year is probably half of that. And as Anatol said, we're already working actively to manage some of that. So it's going to be a fair amount smaller. Great. Thanks for the details guys. We will now take our next question from Alex Kania from Wolfe Research. Please go ahead. Thanks. Good morning. Just one question, I guess, on the ongoing commercialization efforts. I know bringing in the producers as another source of counterparty potential, but has there been a meaningful shift just over the last few months in terms of the customer mix here between, I guess, producers, portfolio players, kind of like your traders? Or is it pretty similar type of conversations you've had over the past several months? I would say it's more similar than not, Alex. And other than adding the producer conversations to the mix, I mean, a lot of our conversations have been directly with end use utilities, international utilities. And I think you're going to you'll see more of that delivered business, the DES side of the business become more and more important all the way around. Great. Thanks. And then a question for Michael. Just thinking about the deleveraging plan over the next several years, you've talked about the commitment you've gotten to get into credit investment grade rating at Corpus. But then just is there a preference more broadly just in terms of where you might be biased towards paying down debt either at Sabine or Corpus? Are there kind of constraints either ease of pay down at one facility over the other or kind of cash flow constraints, I guess, at the CQP side in terms of what they can do with their capital? Just kind of curious my thoughts there. No, I think over the 3, 4 year period, it's going to be at both. I mean, at our Analyst Day, we said Corpus would be the near term opportunity. They have $6,000,000,000 of bank paper that's got to go away. It's relatively short dated. We've been intentionally slow in refinancing some of that into the high yield market because we see IG right on the horizon, which is why we did that Allianz deal, which should fund later this year. But that will be the focus right now is that $6,000,000,000 chunk at Corpus. And then we'll revisit CQP in a year or 2. Great. Thanks. We will now take our next question from Michael Lapides from Goldman Sachs. Please go ahead. Hey, guys. Thank you for taking my question. I actually have 2 of them and they're a bit unrelated. Coming back to shipping a little bit, if you can, how much of the total is under short and medium term contracts? And if you think about kind of the market, when those contracts roll, is that a headwind or a tailwind for you guys? It's neither. I mean, it's Michael. We took a bunch of short and medium term for this huge hump of volume that we have this year because of all the trains coming on early. And so that book is pretty matched. So we'll have a lot of shipping roll off over the balance of the year and then we'll sort of land into more of a long term piece, which has been, as Ansel said, matched to our term business. So the CPC deal, the Polish deal, all the DES business. And so there isn't a headwind or a tailwind. I mean, we're very busy this time last year really solving that equation, right? Absolutely. Yes. I was just kind of poking around in terms of thinking about the just the supply and demand dynamics for the manufacturers of tankers and whether you kind of think we're heading into an overbuilt or underbuilt market when it comes to new tankers? Yes. It's as you know, it's a cyclical business with a shorter cycle than liquefaction. The yards have had a relatively weak period in 2017 2018. The order books have refilled dramatically, and a lot of it depends on the cadence of things like this last wave of supply. Obviously coming in the Atlantic, the remaining volumes are Cameron Freeport, Elba, Australia is completely online. And to the extent that you think that demand is driven by Asian growth, we're adding a lot of ton miles to the portfolio. And then it'll be a cadence of the cadence of that and things like in the short term market, the steep contango driving floating storage dynamics just like it did a year ago. So right now we see pretty healthy charter rates over the winter in the low six figure range. And we think that it'll be largely a repeat of what we saw of 2018 going into 2019 once we come out of winter, shipping will loosen up somewhat. And in terms of the yards delivering shipping, that is really restarts in earnest in the next cycle in the 2021, 2022 timeframe. Got it. And then last thing, this little Michael question, a little bit of housekeeping. When we look at O and M for the first half of this year and especially the second quarter, is that an unusual number, meaning to the maintenance that you've incurred drive O and M elevated above what kind of a more normal run rate if you think about it on a per train basis? I think the answer is no. I mean, there were no large unusual events in Q2. We have some elevated turnaround activity, but it's not massively O and M intensive, I mean, relative to the overall number. Got it. Okay. Thank you, guys. Much appreciated. Yes, I mean, I would add sorry, I would just we had 2 trains come online, so that's hitting O and M. I mean, that's not that's going to be unusual growth, but not unusual on a run rate basis. Understood. Thank you, guys. Much appreciated. We will now take our next question from Jon Chappell from Evercore. Please go ahead, sir. Thank you. Good morning. I want to address 2 kind of bigger macro issues that seem to be weighing a bit on near term sentiment, first as in regards to trade. So Stage 3 of Corpus Christi, you're still talking about FID maybe later this year, early next year. Do you need a market the size of the Chinese market to move forward with that, with the 7 mid scale trains? Or is there enough demand that you see in maybe smaller markets where you can kind of do this in piecemeal and still move forward with that project without any resolution to this bigger issue? So John, just for clarity, we've never guided to this year for Stage 3 FID. We just FID'd Train 6 and I'm pretty excited about that one. We've always said it was a first half of next year event. And as far as and we're expecting to get our FERC license to build sometime this year. So it would be hard for us to really to FID it without having all of the regulatory approvals in place. But as far as China, as Anatol mentioned, China continues to grow in its demand for LNG. Over the next decade, we're there's a forecast of somewhere it'd be another doubling of where they are today in their forecast. They're going to consume a lot of additional LNG molecules, whether it comes from America or not is something to be seen. And we feel very good about our position there, but we're not waiting for China or for the trade situation to get rectified before we move forward. So there's a lot of demand for the product. As more and more of it moves to China, it leaves a lot of customers that are anxious and open and we're going to try to get our fair share of that pie. Okay. That's understood. Thanks, Jack. Sorry if I mispeaking before. Anatol, on your Slide 9, I thought the middle chart on the gas storage in Europe was really interesting, especially as we hear a lot of concerns with Europe being such a huge part of the first half volumes, but then the storage really getting filled up. How does that impact the storage where it sits today, your views on the second half of the year as far as kind of global pricing? Obviously, we've talked about the pressure there, but Jack mentioned some signs of winter spreads kind of showing up. Is the storage concerns in Europe, which has been kind of the bathtub year to date, kind of temper your expectations for what the winter can really hold? Well, I guess the short answer is yes, somewhat. As you look at that chart, one of the things you'll see on there is once the surplus was built up, which was really early Q2, late Q1, early Q2, that slope really hasn't changed much and that's because of what Jack and I mentioned, Europe has rebuilt the muscle memory to consume gas and power generation, right? That's something that the U. S. Really started to learn early this decade and Europe is following suit. You've got healthy spark spreads for the first time in a decade and we show on the right side of that what has already played out. So you get the price signal from gas and of course carbon prices and you have a lot of latent demand that comes to the market and helps clean up this increase. That said, as Michael and I mentioned, we've put a number of cargoes to bed into this relatively firm pricing environment because we do have at the margin some concerns over the next couple of months. And I do think that there's a good chance that we don't know the chapter and verse on European storage like we do on U. S. Storage, right? The whole discussion about non coincident peak and can we put 4. 3 or 4 4 in the ground in the U. S. That level of precision doesn't exist in Europe because it's never been attempted. So we're going to learn some lessons about how Europe can operate, how much it can consume. And at the margin, we do think that there will be opportunities to use floating storage in order to take advantage of this contango. All right. That's super helpful. Thanks, Anatol. We will now take our next question from Jean Ann Salisbury from Bernstein. Please go ahead. Hi, good morning. There's been some recent news about Asian LNG contracts that are currently in arbitration with the buyers. Can you just remind us, does Cheniere have any contract openers, not necessarily just on price that could come up for arbitration before the end of the long term contracts? I think before you said that's a definitive no, but you've signed some contracts since then. So just wanted to check back in. No. Okay. Fair enough. And do you find that LNG buyers find it hard to look beyond the next 12 months of perceived oversupply even if they need more LNG in 4 years? Or said another way, do you anticipate that there won't be a lot of contracting activity in the market and then suddenly a lot in late 2020? No. As you know, over the past year to 18 months, we've signed over 9,000,000 tons. And a lot of that has been for DES delivery. A lot of it goes directly to the utility and in some cases to a port that's tied to a pipe that's tied to a big natural gas fired power plant on the end of that. And when they invest in that type of infrastructure like you're seeing that's happening in Asia, It needs a reliable, dependable, affordable supply for the long, long term. So each buyer is a little different and different in their business proposition and different in the way they use the product. But I would expect us to find those buyers that need us, that value our reliability, that like having a longer term affordable product. So I don't see any problems with our business paradigm. Great. Thank you for taking my questions. We will now take our next question from Jason Gabelman from Cowen. Please go ahead. Hey, thanks for taking the question. It seems like the regasification utilization in key growth countries, including China and India, was pretty high last year. And the growth of that regas in infrastructure seems to be slowing down over the next couple of years. I'm just wondering if that growth has kind of surprised you to the downside and is that another kind of demand concern over the next couple of years, recognizing it only takes a couple of years to build these regas plants? But I'm just wondering if you're surprised at the trajectory of the pace of that growth? Go ahead, Anatol. Thanks, Jason. So it's hard for a regas project to sneak up on you. So we have a pretty good idea of what's coming, of course, over the next couple of years. We've said over last year and a half or 2 that China which can run multiple facilities of 200% of nameplate on a month to month basis, as a case in point in 2019 actually is a relatively slow year in terms of infrastructure adds. We mentioned this 24% year on year growth, right? It's already the 2nd largest market. These are very big numbers, but your point is spot on in that 2019 is not a very big infrastructure add year. That said, just what's under construction today in China is ballpark another 30,000,000 tons really coming back into that infrastructure growth mode in 2021, 2022. And a lot of that I should also say is starting to play out at the behest of the Tier 2 and Tier 3 players, not nearly as the major SOE concentrated as it has been to date. So we expect them to continue to grow. And as Jack said, we have an affordable, reliable, creative commercial solution and we hope that the trade sky is clear and those 2 can be matched up directly. Great. Thanks for that color. And then just a housekeeping item. Looks like DD and A was up quite a bit quarter over quarter. And I know, obviously, you had new trains hit the income statement, but I looked I guess even higher accounting for those 2 trains and I was wondering if there's anything abnormal in that number this quarter. Thanks. No, that's 2 trains. O and M is higher, depreciation is higher, interest is a lot higher. We're not capitalizing all the interest associated with that build. So that was the 2 change that's driving all of that. Got it. Thanks for the time. We will now take our last question from Shneur Gershuni from UBC. Please go ahead. Hi, good morning everyone. Just wanted to revisit a couple of questions here. Just first on the buyback versus leverage question. If I recall correctly at the Analyst Day, your plan, if I remember correctly, to get leverage to go lower over time was to start funding the new projects at higher levels of equity and to grow into it. So does the excess any excess cash flow you have go incrementally towards leverage pay down first or does it go towards buybacks? Just trying to understand the order of preferences sort of given that context of how you expected leverage to compress over time. Yes, you're right. Part of the deleveraging is 50% equity in our new train. So that was the case for Train 3 at Corpus, the case for Train 6 and that will be the case for mid scale Stage 3 at Corpus. That will be supplemented that alone won't get us there. So that will be supplemented by an additional $3,000,000,000 to $4,000,000,000 of debt over the next 2, 3, 4 years. We said over the next 5 years, we have kind of $10,000,000,000 of free cash flow to work with. The other part of that is though with near term liquidity, we just said that look, if the stock is in a place of opportunity, we will use that money to buy back stock subject to some minimum debt pay downs, okay. So that's how we're playing it for the near term. I mean, we'll get there eventually on the leverage, but as the stock provides us opportunities to buy it back, we'll slow that a bit when the market gives us that opportunity. So essentially you're price sensitive. If the price is low, you might try to use a little bit more towards buybacks versus a leverage reduction. Is that the right way to paraphrase it? No question. I mean the majority of our buybacks have happened in the past 10 trading days as you would expect. Not surprised. And then just a follow-up, I mean, if I sort of listen to all the Q and A throughout the call, everybody is very much focused on the global LNG prices and how it reflects on CMI and so forth. But I was just wondering, we've had a severe seasonality in gas prices within the domestic U. S. Markets for decades. And I know that there's been some with respect to that in the global markets now. Now that everything is sort of linking up, are we just really sort of in a transition phase where we're actually just experiencing more of a global recognitioning of the seasonality of demand cycles? I'm sure we've had some extra inventories this year. And are we not sort of projecting some fears about kind of the seasonal low point? Is that not the right way to be thinking about it? Or do you think there's more afoot here? Well, I'll start and I'll turn it over to Anatol. I think in a lot of the countries worldwide, I would say yes in Europe, because of price elasticity and you send a price signal and they can move quickly and the consumer sees it and you get the coal to gas switching, you get everyone the industrials headed to gas versus liquids. That same price signal doesn't happen in most of the world. And LNG, a good portion of it over probably over 90% of the market at a minimum today is indexed to oil. And oil is still high, so their LNG costs overall are high. I think there's a recognition now from a lot of the world that they need more U. S.-based LNG, more Henry Hub LNG, so they can get the benefits all the way to the consumer of lower price gas in their market. Yes. And just to follow-up on what Jack said, Europe rhymes with the U. S. Because it has a very large storage very large storage capacity that is used in a very similar way. Some of the other dynamics that are going to play out in Europe that will challenge that rhyming is that indigenous production is declining and we are tracking by 2025 order of magnitude 60 gigawatts of coal and nuclear generation that's going to come offline that will affect how that market re prices that storage and that seasonality. And then Asia, which is of course the driver of growth over the next decade, really doesn't have subterranean storage capacity, has cryostorage capacity, which is relatively small. So that's going to be influenced by the seasonality in Europe and the U. S. And the Atlantic basin in short and the transportation into Asia. So there's a lot of the market is becoming much larger, much more sophisticated. Markets are becoming more linked, but they have very large structural differences that will affect how that plays out. North American experience will rhyme into Europe and much less so into Asia, I guess is the answer to your question from our perspective. All right, perfect. Thank you very much guys. Really appreciate the color today. Thank you all. And thanks for your interest in Cheniere and your support. That concludes today's question and answer session. I will now turn the conference back to management for any closing remarks. Thanks everyone. We'll talk to you next quarter. This concludes today's call. Thank you for your participation. You may now disconnect.