Earnings Call: Q2 2017

Aug 8, 2017

Good morning, everyone, and welcome to Cheniere Energy's 2nd Quarter 2017 Earnings Conference Call. The slide presentation and access to the webcast today's call can be found on our website located at cheniere.com. Participating on today's call are Jack Kusko, 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. 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 financial measures such as consolidated adjusted EBITDA, distributable cash flow and distributable cash flow per share. A reconciliation of these non GAAP measures to the most comparable GAAP financial measure can be found in the appendix of the slide deck. 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 and Cheniere Energy Partners LP Holdings or CQH. On this call, we do not intend to cover CQP or CQH's results separately from those of Cheniere Energy Inc. After prepared remarks, we'll open the call for Q and A. As shown on the agenda on Slide 3, Jack will begin with an overview of the quarter and give an update on construction and operating progress at our liquefaction projects. Following Jack's comments, we will hear from Anatol on our commercial activities and then from Michael who will review our financial results. I'll now turn the call over to Jack. Thank you, Randy, and good morning, everyone. I'm pleased to be here today for Cheniere's Q2 2017 earnings call. We had a great quarter and our outlook on the full year has improved. So we have raised and tightened our full year guidance. Our LNG trains are entering service earlier than expected. LNG production has ramped up faster than we forecast and our trains performance has been outstanding. Before I review the results and highlights, I'd like to spend a minute looking back on the last year as the Q2 marked my first anniversary of joining Cheniere as President and CEO. And it was a year defined by unprecedented transition and achievement. In just 1 year's time, we have declared substantial completion on 3 LNG trains at Sabine Pass and we expect to do so on the 4th over the coming months. We've produced and we've exported approximately 150 cargoes of LNG. We've raised over $10,000,000,000 of capital to strengthen our consolidated balance sheet and liquidity, achieved investment grade credit ratings at SPL, became the largest physical consumer of natural gas in the United States on a daily basis, became one of the largest charters of LNG vessels in the world and have commenced 20 year contracts with 3 of our foundation customers, all while implementing significant organizational changes internally. In the last four quarters, we have generated over $1,000,000,000 in consolidated adjusted EBITDA. From the Q2 of 2016 through the Q2 of 2017, LNG shares are up approximately 30% and have out performed energy indices, broad market indices and benchmark commodity prices over that period of time. We have turned into a proven LNG operator and have done so by and large without incident and have made it look easy. Certainly, we have encountered our fair share of challenges over the last year. But what we have accomplished is in many instances unprecedented and therefore all the more impressive and we hope the market will begin to recognize that. Once again, I'd like to acknowledge the hard work and dedication of Cheniere's professionals around the world for their efforts and the achievement of these accomplishments. With that said, however, we are just getting started. I don't view these achievements as milestones, but rather as stepping stones or a platform as we have positioned ourselves for significant growth via strategic business development efforts and world class execution throughout the company. The accomplishments I just mentioned are certainly not exhaustive. There are many more over the past year, but the central premise behind each is that they fit into our broader growth strategy and we look forward to delivering on that growth. Now let's turn to Slide 5 for an overview of some key operational and financial highlights for the Q2 of 2017. In the Q2 of 2017, we generated consolidated revenue of over $1,200,000,000 and $371,000,000 consolidated adjusted EBITDA. Growth in all metrics compared to the 2016 period is driven primarily by our continued transition into operations at our Sabine Pass liquefaction project. During the Q2, we exported a total of 48 cargoes of LNG from Sabine Pass, none of which were commissioning cargoes. For the 6 months of 2017, we exported 91 cargoes of LNG from Sabine Pass, 7 of which were commissioning cargoes. Thus far, LNG from Sabine Pass has reached 24 of 40 LNG importing countries around the world. Having our product already reach over half of the current addressable LNG markets is a key competitive advantage as we look to commercialize new capacity. Anatol will provide some color on the market for LNG cargoes during the quarter in a few minutes. During the Q2, we are once again active in the bond market to term out our bank capacity. Michael will cover our financial activity in a few minutes, but highlighting the quarter was a $1,500,000,000 bond offering at Corpus Christi and the receipt of our 3rd investment grade credit rating at Sabine Pass liquefaction. As I have stated on previous calls, we remain committed to managing the balance sheet throughout our structure and plan to continue to leverage our improving credit profile opportunistically as part of our long term balance sheet strategy that Michael discussed during our Investor Day last April. Now on Slide 6. Slide 6 provides an update on construction progress at our LNG projects at Sabine Pass in Corpus Christi. We remain very pleased with the overall progress of construction at Corpus Christi and construction and operations at Sabine Pass. As I have mentioned on all of our previous calls, our number one priority at the sites is to execute on the construction of our LNG platform safely, on time and on budget. Corpus Trains 12 have progressed to nearly 70% project completion as of the end of June. Cheniere's E and C team and our EPC partner Bechtel have that project moving along very well and we are seeing benefits of lessons learned nearly every day. Recent construction highlights include delivery and installation of the refrigeration compressors on Train 2 and the setting of the Train 2 methane cold boxes. Over at Sabine Pass, outlined in the Q2 was our achievement of the date of first commercial delivery or DFCD of our 20 year contract with CoGas. Subsequent to the end of the quarter, in early August, DFCD was achieved with Gas Natural Finosa. In recent investor meetings, many have asked us about the progress of Train 4, which began commissioning earlier this year. I am pleased to confirm that Train 4 achieved 1st LNG production in late July and will produce its 1st commissioning cargo later this week. We expect substantial completion to occur over the next few months. Now turn to Slide 7, which identifies a few of the key items influencing both long term and short term LNG market dynamics today. These are some of the key items we discuss with our customers, other LNG market participants, our regulators and the investment community. Each of these items influences how we think about our strategic efforts. So I wanted to touch on a few of them on today's call. LNG has become an important part of the global energy discussion and each of the items here suggest that trend will continue over the long term. I have divided them into 2 different categories, market driven and policy driven. 1st, what I am seeing are positive developments from market driven factors on both the supply side and the demand side. On the demand side, GDP growth and growth of natural gas in the overall energy mix in key emerging markets is leading to significant increases in LNG demand. Through the first half of twenty seventeen, Chinese LNG demand is up almost 40% compared to 2016. In places like Malaysia, Thailand and other emerging market Asian countries are up similarly. Countries in this region are undergoing significant growth and transformation and many have long term goals of significantly increasing natural gas in their overall energy mix. As prices have remained moderate, I've seen the effects of price elasticity of demand, which Anatol has covered on a previous earnings call. This has been aided by the development and deployment of FSRUs, which can and has unlocked new markets faster and with lower capital costs than with land based regas terminals. Additionally, increased liquidity and flexibility also helps to incentivize the development of new market participants. On the supply side, we are seeing favorable development with regard to both existing projects and proposed projects. Several large legacy LNG exporters in the Atlantic and Pacific Basins as well as the Middle East face growing supply challenges as reserves deplete or their own domestic gas demand has grown. In fact, several of these countries have already begun importing LNG to meet their needs. And on the competitive front, we recently saw the cancellation of a proposed large scale LNG project in Canada, which highlights the criticality of being cost competitive in today's LNG market. Moving to policy driven factors, certainly the most prominent lately has been the discussion of LNG from the new administration here in the U. S. And the many benefits LNG has to the administration's economic priorities, such as trade balances, domestic energy production, infrastructure investment, domestic manufacturing and of course jobs. Policy debate in key markets such as China, South Korea and Japan on environmental goals and international trade practices support LNG as a policy tool of growing importance in a more environmentally conscious global economy. The environmental piece is especially pronounced in high growth emerging market Asian economies such as China and India as they debate and implement more stringent environmental policies. As an example, just last week, the National Energy Administration in China announced the country will cut 20 gigawatts of legacy coal fired capacity by 2020, which is in addition to the already announced 150 gigawatts of coal fired capacity either planned or under construction that will be canceled. These sorts of policy driven environmental initiatives provide a compelling backdrop for long term demand growth of LNG. I look at all these factors and think about our strategic positioning in the marketplace. Most of these dynamics support my conviction that Cheniere is ideally positioned to capture incremental share of the LNG market by leveraging our competitive advantages of a full service LNG offering, significant in place LNG infrastructure at both sites and the expertise that has led to world class execution and operations. And now, Anatol is here to provide an update on our commercial activities during the Q2. Thanks, Jack, and good morning, everyone. We're proud to start our full sales and purchase agreement tied to the substantial completion of our 3rd train with CoGas at the beginning of June. And as Jack mentioned, subsequent to the end of the quarter, we commenced our STAs from our second train with Gas Natural Finosa and Shell. We look forward to a productive and mutually beneficial relationship with these foundation customers of Sabine Pass. Now please turn to Slide 9. U. S. LNG continues to find buyers globally at a premium to European gas markets and it continues to demonstrate the value of its destination flexibility. By the end of the quarter, Sabine Pass volume had reached 24 countries, an increase of 4 since our last call. Coming out of the peak demand months of the Northern Hemisphere winter, demand for U. S. LNG remained resilient and widespread with cargoes from Sabine Pass sent 16 countries in just the Q2 alone. Poland received its first cargo from our facility during the quarter, a delivery that came from our own asset optimization team based on Cheniere's equity volumes. We're very pleased and honored to attend the ceremony with the Polish Prime Minister at the Svanowushka terminal in early June to mark the first arrival of U. S. LNG. The first cargo was also delivered to Taiwan during the quarter. There's been a slight uptick in the number of deliveries to Europe with the UK and Netherlands rounding out the list of new U. S. LNG importers. However, deliveries to Europe remain less than 15% of overall deliveries from Sabine Pass. Cheniere's marketing group has continued to successfully place volumes from Sabine Pass, benefiting from a rebound in Latin American demand. The team has also been able to capitalize on sales opportunities in Asia and the Middle East as the overall market has stayed relatively strong. Turning now to Slide 10. Global LNG supply has increased over the first half of this year with the continued ramp up of projects in Australia and our own three trains at Sabine Pass. More than 15,000,000 tons of incremental supply came to the market through the end of June. This was in line with most expectations, which also anticipated the traditional reduction in demand during the Q2 shoulder months. But global LNG demand was resilient during the 1st and second quarters with Asian and European consumption leading the way. China's demand for LNG remains robust and is up nearly 40% in the first half and more than 50% during the second quarter alone. It's worth noting that we're in the process of opening an office in Beijing to get closer to customers in that very important growth market. Imports into Japan, South Korea and Taiwan all increased versus last year during the first half of twenty seventeen. France, Portugal, Turkey and Spain all posted material year over year increases during the period and kept European demand higher. While Latin American demand is slightly negative overall in the first half, the region has rebounded in the second quarter and is up about 8% as Argentina and Chile have increased imports heading into their winter. Despite 15,000,000 tons of incremental LNG in the market and strong pipeline exports out of Russia, Norway and Algeria, gas and LNG prices in both Europe and Asia were higher during the first half of the year compared to 2016. The Continental European Gas Hub, TTF, maintained its premium over 2016 through most of the 1st 6 months as did Asian and spot LNG prices. New LNG supply clearing at higher prices underscores the organic growth for gas globally, while the lack of growth in cargoes into the balancing market of Northern Europe shows the LNG market remains more balanced in the Q2 than many were forecasting. As shown on Slide 11, market conditions continue to be challenging for long term deals as buyers have slowed the pace of contracting. However, we remain actively engaged with buyers interested in term contracts. The slow pace of contracting for long term supply is an industry wide trend. In addition, the majority of the firm LNG contracts that have been signed over the past year and a half will be supplied from liquefaction capacity already operational or under construction or from a portfolio of supply. These deals are locking in existing uncontracted capacity into term agreements and with very few exceptions are not underpinning new LNG export capacity. There's also been a bias of linkage to oil in these contracts as oil prices have dropped and leveled out over the time period. The uncertainty of future oil prices and the relationship to Henry Hub is a major contributor to the inertia from buyers on long term commitments. Although we're unable to give additional guidance by new long term sales at this time, our Henry Hub length LNG continues to represent a cost competitive and reliable source of new supply for buyers, providing them with highly desirable index diversification and destination flexibility. So we remain confident we are well placed to make additional term sales. In particular, our growing buyer relationships and the speed to market and cost advantages provided by the expansion of our existing projects are key competitive advantages we seek to leverage. In addition, despite the recent headwinds, as Jack mentioned, policy priorities domestically and in key LNG demand markets are supportive of our optimism on continued LNG demand growth and our ability to continue commercialize liquefaction capacity at our sites. With that, I'll now turn the call over to Michael, who will review our financial results. Thank you, Anatol, and good morning, everybody. I'm pleased to announce our financial results for the Q2 2017, a summary of which begins on Slide 13. We continue to be pleased with the progress of our financial results as we ramp up operations at Sabine Pass and our results year to date have led us to increase and tighten the guidance range for adjusted EBITDA for full year 2017 from $1,400,000,000 to $1,700,000,000 up to $1,600,000,000 to $1,800,000,000 As Jack mentioned, the guidance increase is driven primarily by trains entering service earlier than anticipated and LNG production levels ramping up faster than we forecast earlier this year. As a reminder, as we go through the financial results, Cheniere Energy consolidates the results of CQP and CQH. For the Q2 2017, we reported consolidated revenue of $1,200,000,000 compared to $177,000,000 in the Q2 2016. We exported 48 cargoes from Sabine Pass during the quarter, none of which were commissioning cargoes. 23 of those 48 cargoes were listed by our 3rd party SBA customers and 25 were listed by our marketing function. On a volume basis, during the Q2, we recognized revenue on approximately 160 TBtu produced at Sabine Pass. This total consists of 167 TBtu loaded during the current period, less 14 TBtu sold on a delivered or DES basis, which was still in transit at the end of the period, plus 7 TBtu loaded during the prior period, which was delivered and recognized during the current period. These volumes exclude any cargoes sold by our marketing function that were sourced from 3rd parties. Consolidated adjusted EBITDA for the Q2 2017 was 371,000,000 dollars compared to a loss of $4,000,000 in the Q2 of 2016, primarily driven by the continued start up of operations at Zaveen Pass. We had 3 trains in operation in the Q2 2017 whereas our first train was placed in service midway through Q2 2016. Total operating costs and expenses increased $714,000,000 for Q2 2017 as compared to Q2 2016, primarily as a result of additional trains in operation between the periods. Cost of sales, operating and maintenance expense and depreciation and amortization expense all increased in the current quarter compared to the comparable 2016 period due to our continued ramp up of operations at Sabine Pass. These increases were partially offset by a decrease in SG and A expense, which was 15% lower in Q2 2017 as compared to Q2 2016, primarily due to efficiencies resulting from the organizational changes completed in the Q1 2017. SG and A expenses for the Q2 2017 includes 13,000,000 of share based compensation expenses. Net loss attributable to common stockholders for Q2 2017 was 285,000,000 dollars or $1.23 per share compared to a net loss of $298,000,000 or $1.31 per share for Q2 2016. The net loss for the quarter was reduced by an increase in net income attributable to non controlling interest, which increased by $343,000,000 for the Q2 of 2017 compared to Q2 2016. The majority of the increase in loss, dollars 292,000,000 is a non cash item attributable to amortization of the beneficial conversion feature on Cheniere Partners Class B units. When the Class B units were originally issued, they were done so at a discount to the market price of CQP. This discount represents an official conversion feature, which Cheniere Partners amortizes through the conversion date. We anticipate amortization of the beneficial conversion feature on Cheniere Partners Class B units to have an impact of approximately $370,000,000 on income attributable to non controlling interest for the Q3 2017, but no additional impact in later periods as the Class B units converted to common units earlier this month. Please turn to Slide 14 for recent finance highlights and revised 2017 EBITDA guidance range. In May, Corpus Christi Holdings issued $1,500,000,000 principal amount of senior secured notes through 2027, which priced that bar to yield 5.125%. Net proceeds of the notes were used to reduce outstanding borrowings under the Corpus Christi credit facility. This was our 3rd bond transaction at Corpus Christi and there's now approximately $4,600,000,000 remaining on the Corpus Bank facility due 2022. We plan to continue to be opportunistic in terming out bank capacity into the bond market as part of our strategy to manage the debt maturity profiles across the company. Also in May, Moody's upgraded SPL senior secured debt rating to BAA3, an investment grade rating. With that upgrade, SPL is now rated investment grade by all 3 credit rating agencies. As you know, investment grade ratings benefit the project in terms of both borrowing costs and operations. We structured our financings with investment grade credit metrics from the outset and are pleased to see the rating agencies recognizing the execution and derisking achieved to date. Finally, as a result of strong year to date results and increased visibility into second half twenty seventeen, today we are raising and tightening our full year 2017 consolidated adjusted EBITDA guidance. Our revised 2017 full year guidance range for consolidated adjusted EBITDA is $1,600,000,000 to 1,800,000,000 dollars which again is due primarily to trains entering service earlier than anticipated and LNG production ramping up faster than our earlier forecast. Guidance is unchanged for distributable cash flow at $500,000,000 to $700,000,000 and distributable cash flow per share of $2.10 to 2.80 dollars per share. Thank you for your time today and for your interest in Cheniere. Operator, we are now ready to open the line for questions. Thank We'll take our first question from Jeremy Tonet with JPMorgan. Good morning. Good morning, Jeremy. There's been some news articles out there regarding Gale and possibly looking to renegotiate some of their contracts with you and it's been topical in the marketplace. I was wondering if you could share your thoughts regarding that. Sure, Jeremy. This is Jack. So I'll start and I'll look to Anatol if he has anything to add. First off, we want I want all of our customers to be successful. And I especially want them to recognize that Cheniere delivers a product that is of high quality, it's affordable, it's reliable and it provides them with a lot of optionality to manage their portfolio by not having a destination clause. So secondly, I'd say India and specifically Gail are extremely important to Cheniere. As you know, India, its appetite for LNG has been growing dramatically and we view GEL as a long term customer in that the 20 year SBA is just the beginning of our relationship. And then thirdly, I'd say Cheniere intends to meet all of our contractual obligations. We intend to meet all of our commitments. I've said that over the course of the year now that we intend to meet our commitments with our regulators, our stakeholders, our shareholders. And in return, we expect our customers to meet all of their obligations and their commitments to Cheniere. So that's now I'll look to Anatol, see if you have anything more to add. Well, Jack, thank you. We do think that India is a rapidly growing market. It is making a lot of the right decisions and investments to increase the gas portion of its energy mix. And we think that U. S. And Sabine Pass LNG will be a key contributor to balancing their market and provides, as Jack said, a very attractive component to Yale's and India's portfolio overall. Thanks for that. Second question, just want to touch on the marketing aspect of the business came in, had a quite a nice quarter better than we expected. And I was wondering if you could talk more there, maybe we saw cargoes going to Mexico, South America, if there's different opportunities that you see there. And do you have any ability to kind of hedge or lock in on a forward basis, any harms that you guys are seeing on the marketing side further in the year? Hey, Jeremy. This is Anatol again. Yes, I would say to your point overall, the market has remained resilient. Again, the statistic that we have now delivered to 24 countries, I will say that if somebody said to me a year ago that Latin America will be the plurality of our deliveries, I would not have guessed that, especially the mix in Latin America. But it just goes to show the advantage and the flexibility of this business model and this product that it rapidly responds to market conditions. As Jack said, we've talked about price elasticity of demand and how pleasantly surprised we have been with that globally. Latin America is one of those markets as constraints surface, whether that is in LatAm, Asia, Europe, our product is able to respond to that and capture those premium prices. We touched on that a little bit in saying that less than 15% of our volumes have gone to what the world looks at as the balancing market of Northern Europe. In terms of hedging and locking in spreads, you know that we do look to short and medium term deals like the transactions we entered into in Asia that do secure some level of margin once we are confident that we will have the cargoes to deliver against those. So we do look to that and do take those opportunities off the table when we can. Great. Thanks for taking my question. And we'll take our next question from Christine Cho with Barclays. Good morning, everyone. We've seen one of your existing customers publicly say that they'd like more LNG supply and are contemplating taking more capacity, but are also evaluating other projects. What do you get is what do you sense is the most important factor in determining which way they go? Is it completely cost of the supply, execution track record, diversity of the gas? And do any of the customers you talk to want an equity stake in a train? And is that something that you're even open to? Well, thanks, Christine. This is Anatol. I'll take the first part and ask Michael to help out on the second. Really all of the above. It is a global market. It's becoming complex liquid. It is it presents lots of opportunities, but in a very dynamic fashion. So we are engaged, as you can imagine, with all of the potential counterparties, we think, and the asks run the gamut. So it is unquestionably a response to the flexibility that our business and our business model has brought to the table. There is no doubt that the destination flexibility is something that our customers covet and the ability of Cheniere to perform, as Jack mentioned, over the last year, given what the team has delivered, that box has been checked in space. So that security of supply, reliability, diversity and of course, price sensitivity and contract structure are all key topics and are all addressed in our discussions. In terms of investment, it is something that does come up from time to time. Michael, do you want to say a few words on that? Sure. Historically, one of the key tenants of our business has been to not take partners down at the project level and it's given us a lot of flexibility to run the business with just the people in this room instead of having to deal with a bunch of partners like some of our competition have had to dealt with. So I think our preference would be no and especially now given the cash flow we're going to be generating and we can really efficiently fund these things with on balance sheet debt and lots and lots of cash flow. Now having said all of that, if a very, very large strategic customer came to us and was willing to underwrite or off take very large quantities and wanted to look at an equity stake, of course, we would consider it. The numbers would have to make sense for us though. Okay. And then I don't know how easy this is to parse out, but can you give us an idea how much of your marketing contribution year to date came from listing 3rd party volumes and doing disbursement and things like that? Thanks, Christine. It's not a number that we want to share. Clearly, there is an optimization function that the team performs and that does capture some incremental value, whether that is through diversions or shipping optimization. It is, I would say, at this point relative to our financials, it's not a huge number. Michael, do you want to add? Christine, I just point you to the back of our queue. We have a volume table in there that shows how much volume was lifted by 3rd party customers, how much was lifted by our marketing affiliate and then how much our marketing affiliate procured from 3rd parties. So I would just look at that. Okay, thank you. And we'll take our next question from Alex Muir with Wolfe Research. Thanks. Good morning. A couple of questions. First is just on the Qatar announcement about them really trying to ramp up their capacity into the next decade. Is that kind of change the discussions or impact of the discussions on long term deals? And are off takers still very focused on the kind of mid-twenty 18 kind of trigger to make sure that supply comes online in the 2020, 2021 sorry, 2021, 2022 timeframe? Again, this is Anatol. Thanks for your question. I Qatari's lifting the moratorium reentering the market, of course, is a meaningful dynamic in the world of LNG. They are very capable competitor, very reliable supplier. And as everyone knows their upstream economics are very attractive. For whatever it's worth, we think that of the roughly 23,000,000 tons that they've talked about, something in the 10,000,000 to 15,000,000 tons is relatively low hanging fruit and debottlenecking and that can come online over the next 3, 4 years. Any incremental capacity would be coming online beyond that. But our one of the things that we've been discussing over the last year is again the growth of the LNG market and the incremental demand for this product at a reasonable price, which Cheniere and Qatar can meet and can continue to deliver to the market and the gap that opens up once you get into early next decade, right, because demand is much more difficult to handicap supply. These are large visible projects. And what is absolutely clear is that early next decade, very little incremental liquefaction will be coming to market. The only companies and entities that will be able to respond to that in relatively rapid fashion are players like Qatar and like Cheniere with our brownfield expansion. So we think the market will continue to grow and as we roll out to the middle and the latter parts of next decade, the incremental demand is 120,000,000, 130,000,000 tons that we don't see being met other than by incremental volumes from Qatar and some of the other low cost suppliers. So we think they're a credible competitor and we think the markets will happily absorb their volumes and ours as we continue to grow. Great. Thanks. And just my other question is just on the Class B conversion at CQP last week. Just any latest thoughts on conversations or anything like that with Blackstone over potential plans that they might have? With regard to Blackstone, I mean, you'd have to ask them what their plans are. We've said time and time again that we'd entertain structural simplification if it made sense for us, but I guess I'd leave it at that. Great. Thank you very much. We'll take our next question from Ted Durbin with Goldman Sachs. Thanks. Maybe I can start with sort of market again and there's a lot of chatter around a lot of heads of agreements being signed, including by some of your competitors. I guess I wonder if you could just comment on those and how much of those might actually translate into FTAs? It's Anupol again. We are, as you can appreciate, in discussions with myriad counterparties. And to some extent as we navigate the world, HOAs are kind of part and parcel of doing business and our steps that may lead to further discussions and in some cases are almost required to advance those discussions. So we're not against entering into HOAs kind of as a concept, whether they lead to contracts ultimately depends on all of the issues we've discussed on this call and others. Are you able to meet the requirements and compete effectively for that customer business? We think we will be. We think we'll get more than our fair share of the market. And in some cases, HOAs will be part of those discussions. But ultimately, it will come down to the ability to execute and deliver on the dimensions that are critical for that term supply to the customer. I guess have you entered any yet or is there a number that you could put on that or is it just something that you're considering? Yes. To the extent we would consider them to the extent that we need to enter them as a means to advance discussions. Again, we would to the extent that they would be for material volumes, we'll most likely let you know when that happens. Yes. And Ted, as what Annette said, I mean, we tend to kind of approach the market quietly. So we would rather execute on our construction plans, build our trains, process the LNG, shift the LNG to a variety of different countries and customers and get them comfortable with our product rather than have any type of ceremonies for HOAs or MOUs or anything of that nature. So I for 1 would rather go straight into a negotiation on an SPA than spend a lot of time with HOAs or MOUs, but that's just my own personal preference. And then just on the contracting again, at the Analyst Day you spoke about maybe taking on shorter tenure contracts, call it in the 3, 7, 10 year range. Is that still where the market is you think and kind of where's the demand for that 10 hour contracts versus the traditional 20 year deals? Thanks, Ed. Well, we're fortunate in that we have the flexibility of having volumes in the Cheniere marketing portfolio that we have a great degree of freedom in. You've seen us enter into shorter term contracts for those volumes already. We continue to entertain those and support our customers with their short and medium term needs. Just like for the long term discussions, which I would put the anything between 10 20 years just to calibrate in that long term bucket. We do have good appetite from counterparties for medium term 3, 5, 7 year deals and we're in discussions on those as well. Whether those ultimately form part of the portfolio that underwrites incremental liquefaction or again served out of the Cheniere marketing portfolio, that depends on myriad factors. So just we are engaged kind of along the duration curve with our counterparties and have the flexibility to support them with short, medium and long term deals. Okay, great. I'll leave it at that. Thank you. Thanks, Chad. We'll take our next question from Craig Shere with Tuohy Brothers. Good morning. Good morning. Are you still on pace for about 9 delivered cargoes a quarter for the legacy Asian pre sold volumes through the next year? Yes, let me just give you this update. I figured somebody would ask that. So we've always said we have 42 legacy cargoes. We're about 60% through that program, so about 17 cargoes left and about 80% of that 17 will be delivered over the second half of this year and then the balance in Q1 2018 and I think rate of oil is probably as good an assumption as any. Great. And appreciate that Michael. Look forward to seeing you tomorrow. Anatol, I wonder if you could just comment about or maybe I don't know if Michael wants to. This discussion about 3, 5, 7 year contracts, maybe more off takers are interested in translates into the ability to project finance new projects. Now I know you guys are in a better position than a lot of your peers in terms of your cash flow and being the 1st mover. But maybe you could speak to what you see in the market in terms of the tug between offtaker interest and what it really takes to finance a new project? I'll start and then turn it over to Anatol. I mean, we won't be constrained by the project finance market at all, okay. I mean, we'll do the right deals for the company and we don't need the project finance market to finance them. No, we may go to that market, but it's not a constraint of ours anymore. So in terms of the deals, you want to cover that? Sure. Again, Craig, we as Michael said, we have flexibility to support the customers' requirements and as they deal through their evolving markets and uncertainty, we bring a lot to the table, right. We bring destination flexibility. We bring the separation of the liquefaction from the upstream resource. We and we as Cheniere have the capability to support them with those short and medium term deals as again they work through their issues. We believe that to date, year to date, no contract that has been entered into supports incremental liquefaction. So to the extent that, as Michael said, we have degrees of freedom that some other players do not have and need more term and need more the right pricing structures, right? We have the capability to offer dimensions of support to our off takers that we believe some of the others cannot. Great. And last question, Anatol, I think on the Q1 call coming off what was some really robust margins, you were somewhat sober about the outlook through the rest of the year and into 2018, obviously, with the fall off of the winter season and then a lot of supply coming on. We're seeing more and more projects, including, I believe, a competing U. S. Project getting delayed. The latest announcement, I think, was pushed out at least half the year. Are you getting in any respect more optimistic than how you felt with the Q1 comments? Yes. Thanks, Craig. I am the uncharacteristically, I would say, the optimist in the shop. And as you look at the forecasts that the pundits put out a year ago, 2 years ago, 2016 was supposed to be sloppy, 2017 was supposed to be sloppy. And I think as you and I have discussed, we got a sort of advanced peak at what the winter of 2016, 2017 was going to look like when we participated in some market activity that cleared much stronger than we expected. Now the winter went on to be even stronger than that. And I think surprised a lot of the players in the market. But you had to as you work through that, you had to say that the shoulder period was going to have more supply coming on. We've seen this 15,000,000 ton number in the first half and seasonally just less demand. That said, we have been pleasantly surprised by the strength of the market, the kind of margins we're seeing, the optimization opportunities we're seeing. And as we sit here today with Henry well under $3 you have 6 handles in Asia and the contango in the market. So yes, we're clearly more optimistic than I would say even we were in Q1. And as Jack mentioned and we've talked about in the past, demand is continues to surprise us with how price elastic it is given this $6 $7 price signal. Great. Thank you. Thanks. We'll take our next question from Michael Webber with Wells Fargo. Hey, good morning, guys. How are you? Good, Michael. How are you? Good. Jack, first, I wanted to circle back to incremental offtake and kind of where the market is at. You guys already talked a bit about flexible destination clauses and direct equity investments and lots of other biggest bells and whistles, some of which are, I guess, effective life now within the market. But you've got a number of other competitors that are probably going to be more reliant on those than you guys would necessarily have to be, I guess, particularly kind of U. S. 2nd wave projects. But if we kind of push those to the side and just kind of look at clear kind of purely look at where the clearing price is right now for marginal offtake, do you think it's gotten more competitive quarter on quarter since some of those U. S. 2nd wave projects have gotten more active? And are you seeing more marketing done below where your breakeven or your hurdle rate would be for something like Corpus 3? III? No, I have to tell you. So we're working Corpus III. Well, first off, there's only one thing on my whiteboard in my office of things to do. And that one thing is FIDCC3. So I think we are totally 100% focused on growing the business. We think Corpus 3 should be the next logical train that gets built in the United States full stop for incremental LNG. I also think we're in the best position all the way around with all the existing infrastructure that we've invested in with our people, with our processes that we have and the fact that we can actually deliver DES. So it's not a toll. I've said this before, I'd like to touch every part of the LNG value chain and then rub pennies and nickels out of each part. And when you add it all up, it's a pretty big number, right? And we joke around here, Michael, that we feel like farmers, right, because we're in a volume business. We're generating large quantities of volume. Margins are good, but not great. And it's a good business, but it's not a great business to find new greenfield projects, but we don't need that. The customers have been very confused, I'd say, over the last year that I've been around on who to believe. So there's been a lot of rhetoric from especially from the U. S. Greenfield LNG participants about how cheaply they can do it. It hasn't panned out. So I think you're starting to see, I know I'm starting to see our customers have much more thoughtful discussions with us about what's achievable for a reliable supply of LNG delivered to their dock. So I for when I'm like Anatol, I feel much more optimistic about our ability to grow this business than I was a year ago. And the conversations are much more relevant pointed about what they need to make a commitment to Cheniere. Right. I guess the question would be what impact what lasting impact, if any, have U. S. Second wave projects add on that kind of that clearing price that you're now sitting down to talk to your customers about? Has that confusion led to any sort of degradation in pricing? Yes. No, I'd say the confusion. We're not going to chase the down market. We're not going to make an investment that doesn't make sense for our shareholders. And I think it will move right. And we have the most competitive project from a capital perspective in the U. S. Right now with Corpus 3. So the market will rotate back to us. I think and Anatol, do you have anything to add to that? Yes. Thanks, Jack. Thanks, Michael. I think as Jack said, probably 2 years ago, there was a lot of activity that was based on kind of advertised numbers and presentations that as those customers that you mentioned dealt further into, they figured out that those numbers were unachievable or at least unachievable reliably. And I would say it's hard to answer your question specifically because there has not been kind of market clearing activity that we can point to. But certainly there is a much more a much higher level of sophistication information. And I would say that to the extent that we do take a guess at where the market is, it has moved up pretty substantially from those kind of advertised numbers that people were throwing around 18 months ago. Got you. That's helpful. Just as my second question, I wanted to loop back to, I think actually an earlier question around sourcing third party LNG volumes. And Michael, I believe you called out the table in the back of the K in terms of the volumes kind of used, I guess, to cover CMI contracted volumes as opposed to using excess to being capacity. The 15 TBtu kind of listed there is a pretty healthy jump quarter on quarter. So I'm just hoping, can you put that figure in context for us? Is that something you think you would sustain through the balance of the year and into 2018? And then you talked about it a bit earlier, just the thought process that goes into that, whether it's primarily around optimizing or is it you're obviously keeping cash upstairs by doing that. So curious how much that weighs on that decision? Yes. It's like Jack said, it's really taking what the market gives you. So it's really totally unpredictable, but the marketing folks have set up short positions in Asia and occasionally you can source that cargo in Asia, free up our cargo in the Atlantic Basin and sell it locally basically and make good margin doing that, but it's really tough to predict. So I can't answer your question now, but I think something we can think about going forward. But I think it's going to be quite unpredictable. Okay. Thanks for your time guys. Thank you. We'll take our next question from Matthew Gillis with Guggenheim. Just circling back to Gail for a second. Have they approached you directly about renegotiations on the SBA or is this all being done via media at this point? Thank you, Matthew. No, I talk to all of my customers all the time. Earlier this summer, I did a trip through Europe and met with most of the foundation customers and I just think it's good business. So, but as I said before, a contract is a contract and that's been our position with all of our customers. When do you expect commercial data first commercial delivery on Train 4? Yes, March 1 is the DFCD date, is that what you mean for? Yes. Yes, March 1. March 1, okay, got it. And then big picture, I mean, I think the Korean energy reforms took the market by surprise. I mean, do you is it way too early to tell if you have visibility to new offtake here? I mean, have there been reports of a tender coming at any point this year? I mean, what is kind of the general view there? Thanks, Matt. This is Anatol and the rest of the team will pitch in. It is a pretty large seismic shift with one of the largest LNG buyers in the market today. The administration there as you know is new that The changes to the policy are relatively new, but they are very encouraging. And the combination of the new administration and the commencement of our RSP happened to coincide. So we had a wonderful opportunity to host the delegations at Sabine Pass in the United States. And we have a very good relationship. It's the start a 20 year at least a 20 year marriage and we hope to continue to grow our opportunity to supply South Korea. So we're very optimistic and we think that this is one of the many tailwinds, policy tailwinds that Jack talked about in his opening remarks. Okay, great. That's all for me. Next we have James Arlachar with U. S. Capital Advisors. Hi, thanks. I was wondering if you guys might be able to bridge the gap a little bit on Q1 versus Q2 EBITDA at CQP. You had an additional train in service, but EBITDA was down. I was wondering if you might talk about what some of those offsets were? Yes, sure. This is Michael. I'll talk broadly maybe more about CEI and the same things are impacting CQP, but we had volume up substantially, right, quarter on quarter. Our marketing business basically had the volumes from Train 3 almost the entire quarter until Cogas started there at the end. So volume was way up, but margin was way down and we're talking about sort of mid-three margins in Q1 and more like low dollar type margins in Q2. So that impacted it. But those are really the 2 main things, more volume, much less margin and that affects CEI and CQP. Okay. So it's really just a function of global prices? Absolutely. Yes, global price and the fact that the term offtakes had not commenced, right. So we had CQP to have a lot more exposure to that. Right. As I said on the last call, 2017 is the year of heightened exposure to the spot market just because our marketing teams have control of the trains when they start until the SCD is a contract. And so we just got through that on Train 3. We'll have it on Train 4 again through the winter similarly. So does that mean that when I guess Train 3 before it was substantially complete I guess or before DFCD, does the economics belong to, I guess, CEI at that point? Yes, CEI is marketing the volumes and sharing those margins with CQP. Okay. And then any update on remaining CapEx spend at Sabine Pass getting pretty close to commissioning Train 4? And any thoughts on what you do maybe with that kind of contingency CapEx that you've been holding back? No change to the contingency for now. Remember Train 5 still 18 months out, roughly. And so we'll let that progress more before we start making decisions on contingency. We have about $3,100,000,000 of capital remaining, again, mostly associated with Train 5. And then Corpus is about $4,000,000,000 if you're wondering about that project. Yes. That's all for me. Thank you. Thanks. We'll take our next question from Fotis Giannakoulis with Morgan Stanley. Yes. Hi, gentlemen. Anatol, I want to ask if you have any update about the modular LNG feed and if you can provide us with any update about the Chilean project? Thanks, Juarez. Yes, we are as you said, we are continuing to work through the feed. We as we said before, we are still cautiously optimistic. Our work there is not done yet, but we think it is a viable option and another arrow in the Cheniere quiver that will allow us to continue to be the low cost and most responsive incremental liquefaction supplier in the U. S. We as Jack mentioned, the brownfield expansions of Corpus Train 3, Sabine Train 6 are the most attractive economics and we're going to work very hard to continue to maintain that kind of competitive posture. But we're not done yet. We're not fully through the FEED process there yet. But again, optimistic there. Yes, in terms of Chile, we continue to work with our partners on El Compasino. As you know, the permitting process has resumed. We're working through the indigenous consultation. We have a very valuable power purchase agreement and a fully permitted power plant and we're going to work alongside our partners to capture that value and remain cautiously optimistic about that as well. Thank you, Anatol. And to follow-up on the previous questions about incremental offtakes, particularly from the U. S. And your comment about your demand elasticity, the price elasticity of demand. How fast do you think that the demand can grow at LNG prices that they are higher than today and they can support these new projects, these expansion projects? Great question, Fotis. I wish we knew the answer to that, right? This is a period where the market is clearly demonstrating that between kind of $5.5 $7 is a tremendous amount of demand in the market depending where you get those kind of $7 or maybe $8 numbers will determine whether that is sufficient at call it a $3 Henry Hub to underwrite more liquefaction or not. I think the market is positioning itself for more term offtake, but it is in a period of digesting substantial incremental wave of supply. And again, since supply is a lot easier to handicap, all of these buyers who listen to us, who listen to all of our esteemed competitors and all of the consultants see this wave coming over the next couple of years. I would say to your question and previous questions, I think by and large, the market is surprised how quickly this incremental volume is being digested. So what was whatever people's guess was for the point at which the market rebalances must have moved up relative to their initial expectations in 2015, 2016. And we think with that the buyer appetite and an appetite for meaningful term commitments will come back and will come back sooner rather than later. So whether that what the global growth rate for LNG is against the new policy backdrops that you're seeing as we discussed out of South Korea, out of China, out of Vietnam, out of other countries? And how does that response to a price signal that's sufficient for incremental liquefaction projects. We're optimistic about that, but that point in the cycle is yet to come. Thank you, Anatol. Appreciate it. Thank you, Jack. Okay, Forrest. We'll take our next question from Pavel Masvidal with Raymond James. Please Just one question from me. You alluded to the recent decision to cancel one of the largest proposed projects in the United States or Canada rather. And yet there is still more than 60 Bcf a day of projects in the pipeline when we add up what's proposed in the U. S. As well as BC. So my question is, why do you think the pace of cancellations has been so slow, bearing in mind all of the contracting difficulties that you've been discussing? I would I could give you I'm not really sure Pavel, other than it just doesn't cost much to keep it alive, right? And hopefully there's a big pot of gold at the end if you're successful. So why not dribble it out and try to keep it alive for as long as you possibly can. Is the fact that there are all these projects that are kind of in limbo, is that actually creating a worse supply demand balance when there is this 60 Bcf a day potential supply overhang over the market? No, I don't think so. I mean, it's not the sense that I get from our customers myself. The customers want to deal with a reputable company that has proven execution that can deliver a reliable supply at affordable price. And I don't sense that there's any concern there with them waiting to see what happens with other folks. I'm looking at Anatol. Yes. Thanks, Jack. I'll just add a couple of things to Jack's point. I think the market is starting to also understand the integrated business model that Cheniere brings to the table as opposed to the challenges inherent in the tolling construct for the capacity holders. And with that, as the market becomes more sophisticated, keep in mind, again, the market did not have U. S. LNG before February 24 of last year. So this is kind of a new dynamic and everyone is getting smarter on what it means and what the again, while those projects between the market digesting this incremental supply and in some cases projects advertising numbers that I think at this point the buyers are realizing are unrealistic or at least include a lot more cost than just the advertised number. I think that competition is going to fall by the wayside quicker than it has over the last year and a half. Appreciate it, guys. Thanks. Take our next question from Jean Ancelsberg with Bernstein. Good morning. Separately from the true supply demand rebalancing in the early 2020s, there was a 90 MTA of re contracting demand from 2020 to 2025 that you showed at your Analyst Day. Are buyers already in the market for resigning and replacing these volumes? Or will that be more like 2018, 2019? Well, they're absolutely in the market. Again, these are 20 year deals in most cases that are rolling off. And absolutely, the discussions are well underway with that wedge of the market. I would say that that wedge you can further subdivide into suppliers that are less long than they were, either that's because of indigenous demand growth or resource constraints and suppliers that have those volumes to market. Obviously, the first bucket is easier to address and compete with than the second. And we're in discussions with all of those off takers for that next term commitment. Got it. Thank you. And then as a follow-up, Cheniere trades at a fairly high correlation to oil price. How do you think about the fundamental data to oil price that Cheniere should have? Don't even know how to answer that. When oil price goes up, it should be good for you to be able to sell more volumes because your competing price, I guess, has gone up as well. Is that fair? Well, you're right. But in that you're making the assumption that going forward, LNG prices will be oil linked. And we think that that's a premise that's going to continue to be challenged going forward. Okay. That's fair. Thanks a lot. And that does conclude today's question and answer session. I would like to turn the conference back over to Jeff Wessel for any additional or closing remarks. Yes. I just want to say thank you everybody for your support of Cheniere and for what we're trying to do here and we really appreciate it and talk to you soon. And once again, that concludes today's presentation. We thank you all for your participation and you may now disconnect.