Cheniere Looks to Double LNG Exports Long Term Via Corpus, Sabine Pass Expansions

By Carolyn Davis September 13, 2022 naturalgasintel.com

Cheniere Energy Inc. late Monday unveiled a revised long-term capital allocation plan to invest in organic LNG export growth, while returning more capital to shareholders.

During an hour-long conference call, CFO Jack Fusco and CFO Zach Davis updated a capital allocation plan from a year ago. Since then the U.S. liquefied natural gas export leader has paid down $4 billion-plus in debt, repurchased shares and returned more in dividends. 

On the operations side, the Houston-based company in June sanctioned the third stage of the Corpus Christi Liquefaction Project (CCL Stage 3). In August, it also pre-filed for Corpus trains 8 and 9 with the Federal Energy Regulatory Commission.

The near-term goal, Fusco said, is to “achieve a 60 million ton/year platform.” The South Texas project was Cheniere’s second export facility after Sabine Pass in Louisiana. A brownfield expansion of Sabine Pass also is on the table. 

“These expansion projects are the low hanging fruit, as it satisfies construction operations and financial optimization,” Fusco said. “Over the longer term, we see a line of sight to growth projects on both sides, which could bring our total capacity to approximately 90 million tons/year, or double our size today.”

Maintaining ‘Sustainable’ Growth

Capital allocation, though, is to be guided by “financially disciplined growth,” the CEO said. “And we will maintain that discipline as we continue to develop organic growth projects.”

The priorities “are to achieve and maintain sustainable investment grade metrics,” Fusco said. “Our goal is to make our balance sheet bulletproof for the cyclical nature of the LNG industry.”

Cheniere plans to grow for “long-term sustainability,” Fusco said. “Given the company’s progress on its prior capital allocation plan, which is significantly ahead of schedule…Cheniere has reached a new cash flow inflection point and now expects to generate over $20 billion of available cash through 2026.” 

Cash flow is seen strengthening from “sustained higher margins on LNG through 2022,” Fusco told investors. The timing of “several cargoes” previously forecast for 2023 has been accelerated into 2022. Cheniere to date has completed a $4 billion-plus debt paydown too, with further paydowns to be maintained through CCL Stage 3 construction, he said. 

A sweeter pot for shareholders is in the mix too. Cheniere is planning to upsize the repurchase program by $4 billion for another three years. The potential also exists to repurchase 10% or more of the market capitalization with excess capital. In addition, the annualized dividend was boosted by 20% to $1.58/share from the inaugural $1.32 initiated last year. 

“Thanks to Cheniere’s continued financial and operational outperformance since we announced our capital allocation framework last fall, we have achieved significant progress on each of the four key pillars of that plan, in a matter of quarters, not years,” Davis said. “We expect to generate over $20 billion of available cash through 2026 and over $20 of distributable cash flow per share on a run-rate basis.”

‘Rarified Air’ To Refinance 

Analysts reacted positively to the plan. 

“Cheniere is now breathing rarified air in the LNG world, being able to self-finance much of its own liquefaction expansion, as it joins a club inhabited by only competitors including the nation of Qatar and a few major international oil companies,” Evercore ISI analyst Sean Morgan said. “The proportion of debt used for Cheniere now becomes more of a capital budgeting financial decision, rather than a potential tripping point to slow down expansion beyond Stage 3” at CCL. “This means that once regulatory approvals are attained, Cheniere can immediately start expansion work.”

Cheniere has delayed its guidance for 2023, but it’s likely to be higher than the strong results expected this year, Morgan said. That’s because of the potential that the company “can bring uncommitted new production volumes online and debottleneck capacity, as some existing hedges roll-off into substantially wider export spreads for the LNG spot marketing business segment…

“The kicker is that Europe really has not even begun to recontract the 155 billion cubic meters/year of Russian gas it needs to jettison,” Morgan said. 

Concerns that the recent adverse decision by the Environmental Protection Agency (EPA) would require Cheniere to adhere to emissions standards may have caused some consternation. “However, the company does not believe the EPA ruling could require major disruption to operations, so the main question is cost to retrofit any noncompliant liquefaction,” the Evercore analyst said. 

“The capital allocation plan should help to assuage any concern regarding the bill as the new capital allocation plan leaves a massive $10 billion of available excess cash. While any retrofit bill for EPA requirements will likely be well below that figure, it does help to have money available for increased regulatory mandated capital expenditures.”

Evercore has a favorable view of Cheniere, but it noted some “mostly macro” risks.

“While recently the economics of lifted cargos and global landed LNG prices have helped Cheniere resume normal export volumes, the rise in global virus cases and the risk of another more severe wave impacting the economy looms large,” Morgan said.

“A potential recession could disrupt global LNG markets, which could cause some U.S. export cargoes to be uneconomic. This would result in the cancellation of some export cargoes by Cheniere’s customers.”

Tudor, Pickering, Holt & Co. (TPH) analysts said, “In true fashion,” Cheniere “under promises the potential upside for equity holders with the new plan leaving more than $10 billion of excess cash unallocated through 2026 and uses conservative assumptions of unchanged long-term marketing margins and production guidance…

“We view protection of the balance sheet positively and anticipate an investment grade credit rating will be obtained across the complex in the coming months.”

However, the TPH team said the company may be “missing an opportunity here to use excess free cash flow to attract more new shareholders to the story by making the dividend story more compelling” than its peers.