Tellurian (NASDAQ: TELL) is a natural gas company headquartered in Houston, Texas. The company has a near $300 million market capitalization, despite having no major assets, as it focuses on developing a global natural gas business. As we’ll see throughout this article, the company’s multi-billion dollar LNG project has enormous opportunity, but enormous funding risk.
Global LNG Markets
Tellurian LNG has a management team that’s focused on a unique opportunity. That’s global LNG demand and markets on the back of future energy demand.
LNG Market Recovery – Tellurian LNG Investor Presentation
Tellurian LNG has seen 2020E LNG trade decrease significantly as a result of COVID-19. However, export capacity have continued to remain fairly constant and LNG trade decreased significantly in 2019. However, in 2019 it recovered into the end of the year. With COVID-19 expected to improve over the next year, this represents, in our view, a bottom for LNG trade.
At the same time, LNG production capacity is expected to continue increasing. However, the increases are expected to be fairly minimal. As major market LNG imports remain strong, specifically China and India are both using more this year than in the same time period of 2019. That means there’s long-term demand for new projects.
Tellurian Long-term Projects – Tellurian LNG Investor Presentation
Long-term LNG demand has grown significantly worldwide and are expected to continue growing. However, due to cuts in capital spending, partially as a result of COVID-19, there’s expected to be shortages starting in 2021. Long-term, 100 million tonnes per annum in new construction are needed in the coming years.
Tellurian LNG’s projects represent, potentially, a substantial share of this.
Tellurian LNG Overview
Tellurian LNG is a company centered around a single project.
The company, long-term, plans to build a 27.6 mtpa LNG export terminal in Louisiana, a project known as “Driftwood LNG”. The company’s primary asset is Haynesville gas production, an asset with 1.2 Tcf of resources with production of 46 million cubic feet / day of resources. That’s a more than 70 year reserve life.
For reference, 1 cu. meter LNG is ~1 tonne of LNG. And it’s composed of ~21.7 thousand cu. feet of natural gas. That means for Tellurian LNG to build Driftwood LNG, a 27.6 million tonne per annum LNG export terminal, the company needs ~800 billion cu. feet in annual natural gas production. The company is at ~2% of that.
The important aspect worth paying close attention to here, is that the company will need to expand or buy natural gas significantly once the plant is at full size. The company has considered adding a Permian Basin pipeline, for $4.2 billion, or ~16% of the company’s market capitalization. The company’s management has significant expertise and expects significant FCF.
Long-term, the company sees the potential for a share price of $45-50. Theoretically, that could happen as early as 2026-2027. The company sees implied equity value of ~$14-19 / share at FID.
Tellurian LNG Integrated Model Overview
The company focuses on an integrated model that will drive value from low cost assets at each step of the chain.
Tellurian LNG Project – Tellurian LNG Investor Presentation
Tellurian LNG is focused on a fully integrated low-cost project and expects <$1000 / tonne in full costs. That includes upstream gas and multi-billion dollar pipelines. The company expects low natural gas costs regardless of Henry Hub market index prices. It’s worth noting that that’s above current prices, but lower than long-term prices.
As a result, the company expects <$3.5 / MMBtu LNG price counting debt services. For reference that’s below global LNG prices across a significant portion of the world. LNG transportation costs are ~$0.7 / MMcf, which compares to Asia prices of ~$4.9 / MMBtu to point to significant potential profit.
For reference, 1 tonne LNG is ~52 MMBtu, which implies for each tonne, $218.4 in costs and $254.8 in revenue. That’s roughly a billion dollars at current prices, assuming it all needs to be shipped somewhere.
Tellurian LNG Timeline – Tellurian LNG Investor Presentation
The project is becoming shovel ready and the company is expecting international price increases. The company expects an FID coming in the next year as it works to secure project financing and develop long-term commercial agreements. The company’s largest schedule here, as we will discuss is project financing.
However, this Phase 1 FID that’s coming up is the next major catalyst for the company. It’s something worth paying close attention to.
Tellurian LNG Financing Model
Tellurian LNG’s largest struggle will be its financing model and raising sufficient money to fund the project.
Tellurian LNG Funding – Tellurian LNG Investor Presentation
Tellurian LNG sees total costs being $16.8 billion, for 16 million tonnes / year of LNG. That would make this one of the lowest costs projects for the company. The company plans to use Bechtel LNG, one of the largest LNG project executors worldwide to build the main plant, an investor in the company, with a strong track record and low price.
To invest, Tellurian plans to commit roughly $600 million itself, earn $500 million from cargo as the project ramps up, have $6 billion in partner equity and $9.8 billion in debt. This would be an unheard amount of debt for the company and relies on equity investments for a number of partners. Partners like Total and Petronet Limited LNG India have agreed to purchase LNG.
Total especially has agreed to invest at FID at $10 / share in the next year. The company expects to be able to earn enough cash flow to cover debt. That’s believable, but you still have a $250 million company that needs to raise nearly $10 billion in debt. That’s a significant amount of debt that the company needs to raise and pay for.
Tellurian LNG FCF Potential
Tellurian LNG’s FCF is clearly visible from the company’s business.
Tellurian LNG – Tellurian LNG Investor Presentation
Tellurian LNG anticipates significant net back on a per barrel basis across a significant portfolio of production. The company has low costs, showing the potential for rapidly increasing cash flow. At $11 / mmBtu, one of the higher prices in recent history, but not abnormal, especially with a shortage, the company could see >$5 billion in annual FCF.
That’s a massive amount of FCF potential.
Tellurian LNG Risks
Tellurian LNG has two major risks which it might not be able to overtake.
The company’s first risk is the chance of a decline in LNG prices. Currently, it’s expected that the upcoming shortage along with demand for cleaner energy will lead to significant upcoming LNG demand. That demand could lead to significantly higher prices. However, it doesn’t mean that prices can’t go lower and that’s something worth paying close attention to.
The second risk is the need to continue raising massive debt. The company needs to raise and finance nearly $10 billion in debt to cover its obligations. The company needs to have a plan and a path forward for that by mid-2021, when it’s expecting to make its FID. While it can realistically accomplish this, there’s also a good chance it won’t. In that case, the company becomes nearly worthless.
Tellurian LNG is a unique company structured across a single exciting project. The company’s long-term project brings a unique management team to operate in a business that’s consistently growing, LNG. The company plans to make one of the world’s largest LNG terminals supported by low cost American natural gas.
Long-term the company could generate massive shareholder rewards. However, the company’s largest struggles are and continue to be its financing. While it’s made significant improvements recently, it doesn’t yet have the ability to prove that it’ll make enough capital raised by the FID. That’s a risk that Tellurian LNG investors will face, a potentially worthless investment.
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Disclosure: I am/we are long TELL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.