Tellurian LNG's Silence Is Not The Greatest Coverage

Tellurian LNG (NYSE:TELL) is a Houston based mostly pure gasoline firm with a $1 billion market capitalization. The corporate’s inventory has remained unstable, dropping 80% since pre-COVID-19 and greater than 70% from the corporate’s 2022 highs. As we’ll see all through this text, the corporate has the flexibility to drive substantial shareholder returns however is in a dangerous spot.

Tellurian LNG Producing Belongings

Tellurian LNG has technically constructed up a portfolio of manufacturing property because it tries to get Driftwood LNG off the bottom, just like how Africa Oil Company did attempting to get its Kenya undertaking off the bottom.

Tellurian LNG Production – Tellurian LNG Press Release

Tellurian LNG has quickly ramped up its internet manufacturing to 11.4 billion cubic toes for the three month interval. The corporate earned $81 million in income and $40 million in working revenue from $70 million in adjusted EBITDA. The corporate’s P/E was mid-to-high single-digits based mostly off this enterprise alone. That reveals the power of the corporate’s core enterprise.

We count on the corporate will proceed to construct up its pure gasoline enterprise and generate affordable returns right here.

LNG Provide and Demand

It is price noting that one facet of Tellurian LNG’s enterprise that is correct is the provision and demand nature.

LNG Supply and Demand – Tellurian LNG Investor Presentation

2021-2030 demand development is predicted to be substantial. It is anticipated to be a large ~200 mtpa. We count on that that quantity might change as governments transfer away from extra polluting sources (like coal) and the impacts of Russia’s invasion of Ukraine. Out of that, anticipated provide development is predicted to be 137 mtpa or cowl 65% of that.

Which means a large 64 mtpa is required in new provide. From a capital perspective, not even counting the pure gasoline required that is virtually $100 billion in capital required. Driftwood LNG is positioned properly to be a chief participant right here.

Driftwood LNG

Driftwood LNG’s Section 1 is predicted to price $13.6 billion, $9 billion of which is the LNG terminal itself.

Driftwood LNG – Tellurian LNG Investor Presentation

The corporate has began some development work that it is paying for. Cancelled bond gross sales present minimal demand for the corporate going at it by itself with excessive yield debt. The corporate is engaged on piling and cleansing up the construct web site by contractor, Bechtel, who the corporate is hoping to make use of to construct the LNG plant.

On the similar time the corporate is constant to work on infrastructure tasks and exercised numerous land ease choices. The corporate can be engaged on compressors for the pipelines to attach the pure gasoline manufacturing and the ultimate LNG plant. Nonetheless the corporate will probably be unable to make significant progress with out financing.

In 2027, the corporate is anticipating to earn $4 billion in working money circulation, assuming it could construct the plant as anticipated (Section 1/2). It plans to make use of that money circulation for the remaining $15 billion for Phases 3-5 which at that time will probably be comfortably reasonably priced for the corporate. That signifies that if the $1 billion firm can elevate the cash it could simply drive substantial returns.

Our View

Tellurian LNG initially said that it’d have a FID on its enterprise roughly 6 months in the past. Since then the corporate has supplied no substantial updates, in addition to it is engaged on addressing the issue, though it is misplaced some main potential offers with regard to calls for for its LNG enterprise. That hurts the enterprise case to lenders.

In a rising rate of interest surroundings, we predict it is much less doubtless that the corporate can obtain the loans it is searching for. The Russia invasion of Ukraine was a serious alternative, however now that we’re 11 months later, it looks as if it wasn’t the catalyst the corporate wanted to drive outcomes. It is left over with a decent and worthwhile pure gasoline enterprise.

We view the corporate as a high-risk high-reward alternative. If it could get Driftwood LNG financing, it could generate a number of occasions its market capitalization in returns. In any other case, we count on its market worth will dwindle considerably. Administration appears sluggish to transition and we’re unsure if they’re going to be capable to deal with that state of affairs.

Thesis Danger

The biggest danger to the thesis in our view is that Tellurian LNG cannot make Driftwood LNG occur by itself. The corporate is doomed to spend all its cash and nonetheless fail until it could elevate $10+ billion by a mixture of financing (fairness and financial institution). The rate of interest rising cycle makes the corporate’s time tougher.

The corporate stays prone to chapter until it could resolve this downside.

Conclusion

Tellurian LNG has seen its market capitalization proceed to go down. Buyers appear to assume that the Driftwood LNG undertaking that the corporate has spent years attempting to perform is changing into much less and fewer doubtless. In a rising rate of interest surroundings, we agree, particularly on condition that the corporate has misplaced some key clients.

The corporate has a thriving core pure gasoline enterprise that places a flooring on its worth, relying on whether or not or not the corporate’s administration shifts and by how a lot. Africa Oil Company managed to deal with an analogous state of affairs in Kenya, but it surely’s a troublesome state of affairs to deal with. Tell us your ideas within the feedback beneath.