Tellurian (NYSE:TELL) is one of those speculative stocks that seem to cast a spell over the "Bottom Fishing” investors of the world. It is its relatively low stock price-$1.36 per share (I won't say cheap, as it has no earnings, little revenue, and limited but not inconsequential assets, making any sort of valuation difficult.), that tempts these “stock-anglers with a few bucks to spare with dreams of the big score. Dreams that seem to get pushed further out with every press release. Does that mean TELL is too risky to be tradeable? We will make that call later in this article.
Tell has some compelling assets. One is the site upon which it hopes to build Driftwood LNG, and the Haynesville natural gas reserves that will supply it. Then there is its Executive Chairman, and bombastic impresario, Charif Souki. Souki is best known for largely inventing the current business model under which LNG exporters and would-be exporters are lining up to build multi-billion-dollar castles to compress, chill, and ship America's boundless gas reserves to points east. A feat he last accomplished when he ran what is now the biggest LNG shipper, Cheniere Energy, (NYSE:LNG), converting it from a degasification mode, whereby foreign LNG shipped to the U.S. would be sold into our markets, to its present configuration, that sends our gas overseas.
Finally, and perhaps their premiere asset, is the fully permitted status of Driftwood LNG, which has enabled TELL to give the prime contractor, Bechtel, limited notice to proceed.
Sometimes an encore is tough to pull off, and that's a fair assessment of the tap-dancing Souki must now do to keep the hounds of ill fortune at bay.
In this article, we will review recent events and provide our view as to whether Driftwood LNG-a proposed 27 mpta, 5-plant colossus, can grow legs and walk or leave investors holding losing ticket.
The emerging LNG market circa 2027-ish
Like any commodity supply/demand move, resources are developed until there is excess capacity. We see it historically in upstream crude oil and gas supply, and it continues through the value chain to derivatives like LNG. We see it today with gas supplies in storage that weigh on Henry Hub prices. WoodMac projects that U.S. LNG export capacity will more than double from present day to as much as 190 mpta in 2027 with over $100 bn of direct investment. It is into this market that Driftwood LNG will arrive, in the case where it actually is built.
WoodMac analyst, Sean Harrison, is quoted in the report, noting the competitive pressures emerging-
“As developers continue to push more projects forward, competition for service contracts will rise, creating a squeeze on both workforce and material prices. This could cause further cost inflation, along with delays to some projects. The combination of low fees and increasing costs means we estimate unlevered internal rates of return (IRRs) as low as 5-6% for some projects. Based on these returns, some projects are finding it challenging to secure finance, particularly via equity raises,” said Harrison.
There-in lies the rub for TELL. Securing financing to complete the project, is after all, the missing link in the TELL saga. The company is using all forms of artful equity financing, including doubling the size of its equity float to 1.6 bn shares. That won’t be enough. At some point TELL will need anchor financing for Driftwood LNG.
The thesis for TELL
As we have discussed so far, Driftwood has the makings of a solid project with a number of key factors in place. Among them-a world-class site, permits in hand, a local, low-cost supply source for about half of the Phase I throughput, and tuned-in management that knows the business backward and forward. What's missing?
Signed Sales and Purchase Agreements-SPA, for one. And, of course, financing for about 1/3 of the estimated ~$14 bn to build out Phase I. Pesky details Chairman Souki might say, but there we are. Short of cash to build out Phase I, and, perhaps related, a few SPA's short of s future income stream with which to base investing decisions. A conundrum, to be sure.
On the SPA front, they have actually been going in the wrong direction, losing SPA's with Shell, (SHEL) and Vitol, last fall. Its last remaining SPA with Gunvor, is on shaky ground reportedly. The trend is not Soukis’ friend in this case.
As we tie a bow on this section, we finally come to the financing challenge. As noted in the slide above, TELL is seeking equity partners for up to a 40% stake in Phase I. A quick glance at the slide above shows the non-standard capital structure of Driftwood. Over half is made up of LT debt and bonds, with cash flow from future sales of LNG making up about 15%, leaving investors with the balance. An outcome made perhaps more tenuous by the rosy projections for sales prices per mmbtu it includes. Prices that are some 25% above recent FOB prices for LNG into Asia as a recent article in Reuters notes. The article points that LNG prices have fallen 82% since peaking in August of 2022 at $70.50 per mmbtu.
TELL really has no moat, being on the U.S. Gulf Coast. Its cargos will have to sail through the Panama Canal to get to Asia. No worse or different than the other half a dozen LNG plants due to come online in the late 20's. It does have one unique asset, though, Souki.
TELL is beating the bushes for investors, and doing it fairly smartly in my view. Japan and India are both big consumers of LNG with an incentive to tie up new supplies on long-term contracts. It's also no surprise that companies from these countries might become equity partners for discounted future supplies. We'll see.
The company also mentions in the press release they having conversations with oil operators, and I don't see the same pathway to fruition here. Oil companies are already deeply involved in LNG on their own, and exactly what TELL would bring to the table in that scenario escapes me.
The stock recovered a bit from recent lows on news that an investor had been found for a sale and leaseback arrangement on 800 acres of land. The remuneration for this came to a billion badly needed dollars. Companies like Bechtel don't take IOU's or equity. Cash on the barrelhead is what keeps them shoveling away.
Finally, TELL has filed with the SEC to double its common share float, as noted above. At current share prices, this will raise a billion or so, but dilutes current investors by half. There may be some back and forth about this at their annual meeting in June, but will probably be approved.
TELL paints a grim picture, but not an impossible one. I actually think Souki may prevail with selling an equity position as part of a SPA deal. Right now, we are covered up in gas, picking up 75 BCF last week and putting us 20.5% over the 5-year average, as noted in the EIA Weekly Gas Storage Report. But, the pendulum can swing. We are one-harsh European winter, or one-crazy hot California summer away from sucking down the inventory substantially. It happens. But it may not. That's the beauty of this kind of investing. There's no predictable, rational basis; you just put your money down and watch the wheel spin.
TELL faces no liquidity crisis, with half a billion in cash on the books and little current debt. It can rock along like this for the foreseeable future. News that the company has been successful in pulling equity partners would give the stock a boost. A big boost probably. The company hit the $6.00 level mid-year '22. A tradeable event like an investor taking equity or a drawdown in supplies would be the catalyst for another upswing.
The company is as a speculative bet as you can make, but in the low $1 range it's one that's paid off numerous times in this saga. That would be my suggestion if you're a bottom fisher and the muses are speaking to you on TELL. Get in low, and take profits immediately when you hit your target. Rinse and repeat as opportunities arise.
By David Messler for Oilprice.com
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