December, 20, 2022
Please watch our latest Zoom call. We discuss the market outlook for 2023, the Great Rotation, Energy Transition Opportunities, the Inflationary Cycle, the commodity super cycle and the case for gold and precious metals. Tyson Halsey, CFA provides historical market valuation, cycle and bubble analysis. Rich Gula a veteran Boston institutional investor/consultant and creator of Fidelity’s Modern Chart Room reviews key charts. Jennifer Warren also comments on the energy transition, fusion, and the case for fossil fuel investments.
I also led a panel on investing at the IVY Family Office Network. I think Michael Belkin and the moderator’s comments are especially compelling.
Our moonshot idea for 2023 and next several years is gold and precious metals. We are big believers in energy and see great opportunities in the energy transition. We believe we are experiencing an inflationary cycle and commodity Supercycle, and the investment rules of the last 40 years no longer will work. By studying the 1970s and the 1999-2008 period as macroeconomic analogues, we believe we shed light on unconventional strategies which have strong historical precedent.
October 25th, 2022 - Tellurian trades at Liquidation Value and No Value for Driftwood LNG potential
- Tellurian’s shares are an attractive asymmetric opportunity.
- Recent debt and SPA cancellation reactions overdone.
- Strategic investors weigh climate and energy security, not just ROI.
Shares of Tellurian Inc. (TELL) declined nearly 50% since August 24 due to the cancellation of its $1 billion note offering and the subsequent cancellation of two SPAs (Sales Purchase Agreements). We believe the declines were overreactions.
- Powell’s Jackson Hole “pain speech”26.2022
- Announcement of deal29.2022
- Hot CPI data and Dow 1000 point plunge13.2022
- Cancellation of debt deal 19.2022
- Fed hike another 75 bps21.2022
- Cancellation of SPAs23.2022 Shares traded intraday to $1.53/share on 77 million in volume.
- Brightspeed debt cancellation29.2022
The investment opportunity for Tellurian Inc. lies in its ability to generate $11 billion in cash flow per year from its Driftwood LNG facility in Louisiana.
Just as Executive Chairman Charif Souki is considered a leader in the US LNG space, Tellurian’s team has great experience as well. Tellurian’s team “originated and executed c. 79% of U.S. LNG capacity development and c. 36% of global LNG capacity development across four continents.” Tellurian’s model is transformative; its integrated model seeks to capture the US versus international natural gas price spread rather than operate as a toll road process provider. Tellurian has “all FERC and DOE permits secured for Driftwood LNG terminal and pipelines.”
The chart below of Cheniere stock (LNG) shows its price performance during both facilities’ financing and construction phases and, since 2020, the international LNG price run up.
Is Morgan Stanley New Investment Banker?
How to Close Driftwood:
There is a benefit with the cancellation of the Shell and Vitol’s SPAs in that strategic funders can control who their LNG is sold to. For example, a potential funder, such as a Haynesville E&P, may want to sell to their own preferred buyers of LNG, not Shell or Vitol’s customers. The market reacted to the SPA cancellations as if the cancellation of their SPAs was because Shell and Vitol believed TELL could not secure funding. Furthermore, the lack of gasification capacity in Europe and extraordinary gas price volatility due to the Russian invasion, made the SPA terms problematic for Shell and Vitol. Both Shell and Vitol could return with revised SPAs which are priced to the market and accordant to their capacity to ship. [The 77 million share volume and price plunge to $1.58 intraday price for TELL on September 23, appears unjustified if not suspicious.]
Beyond investment return, demand for LNG can be driven by environmental concerns and energy security arguments. Following the Russian natural gas debacle, countries are increasingly interested in diversifying their supply sources. Certain European countries may want US LNG due to the absence of Russian LNG. India is a country struggling with terrible air pollution and it has indicated that it wants LNG to replace its massive coal fired electric generation plants. Worse still is the adverse health impact of people cooking in huts with wood and dried dung, which would be vastly improved by natural gas cooking common in North America.
Ideal investors in the Driftwood facility are strategic investors. That is, an entity which would enjoy a material benefit from the LNG Liquefaction facility itself. This most logical strategic investors are natural gas E&Ps in the Haynesville shale who would economically benefit from partnering with Driftwood to sell domestic natural gas at elevated international prices. Both Southwest Energy and Chesapeake Energy Corporation stated clearly in their q2 earnings calls that they are interested in selling into the international markets. Southwest Energy is 150 miles north of Driftwood and its CEO, Bill Way on its August 5th quarterly call said “We are evaluating on a risk adjusted basis, potential opportunities to benefit from global pricing by leveraging our approximate reliable long-term supply capability to help enable liquefaction projects to achieve FID.” Likewise, Chesapeake President and CEO Nick Dell’Osso said on his August 3rd conference call “we think we are a preferred seller of gas into the LNG world. We’re right there on the doorstep of the facilities, we have a tremendous amount of gas, we have good connectivity to market. There’s a lot of projects that are in the works….” Chesapeake Energy and Southwest Energy are representative and logical strategic funders of Driftwood. Charif Souki explains on May 17th how advantageous it would be to an E&P to sell its natural gas at the much higher international rates.
Since Gas Tech, we have noticed increased indications of a deal with India, where the strategic buyer, India, is an off taker of LNG. Having feedstock providers and an off takers, significantly de-risks funding Driftwood LNG. India is the fourth largest importer of oil in the world and “liquefied natural gas (LNG) imports are expected to quadruple to 124 billion cubic meters (bcm)” said Minister of Petroleum and Natural Gas. Secretary Pankaj Jain.
“India has resumed talks with Tellurian LNG as the world’s fourth-largest LNG buyer wants to strike new term deals to secure supplies” according to Energy Intelligence.
“India’s Federal Oil Minister Hardeep Puri, along with the chairmen of state-owned refiners Indian Oil Corp. (IOC), Bharat Petroleum Corp. Ltd. (BPCL) and gas pipeline utility Gail India met with Tellurian Chief Executive Officer Octavio Simoes in Houston.
“We exchanged notes on the evolving gas markets and opportunities for Indian oil marketing companies to invest in Tellurian’s project in US,” Puri, who has been in the US since Oct. 6, said in a Twitter post Tuesday.
Petronet LNG, India’s largest LNG buyer, signed an initial pact with Tellurian in September 2019 to negotiate the purchase of up to 5 million tons per year of LNG from the 27 million ton/yr Driftwood project” according to Energy Intelligence.”
Tellurian must close this Driftwood LNG financing. We believe it will now be willing to commit up to $3 billion of its own capital up from $1 billion this summer. That $3 billion is $1.2 billion committed through q1 2023, and another $1.8 billion from future cash flows from its upstream activities from 2023-2027. The company may have targeted those additional cash flows to expand its upstream activities, but funding Driftwood is essential. Since the company, in this scenario implied by the Morgan Stanley report diagram above, is not seeking more equity capital from the $3-3.5 billion range, investors should be pleased to see the liquefaction facility get financed without meaningful additional dilution or delay. Consequently, we believe that TELL shares could exceed its spring time high of $6.2/share in the first half of 2023, and upon securing the “Full Notice To Proceed” from Bechtel, shares could top $10/share.
In recent days, stock reflects fair value for upstream and assuming cash flow will fund driftwood construction though price reflects 0% chance of success. Yesterday EQT had a positive write up. They could be in the mix with SWN and CHK.
Today, TELL put out pictures of CEO Octavio Simoes with Koreans. India and Koreans could be meaningful offtakers. Obviously Europe does not have a policy and Ukraine makes decision making tough.
Yesterday WSJ had bearish case on LNG. It is shoulder months. Cold has yet too kick in. Tax losses and recession fears are pressuring commodity prices, but I believe we are in an inflationary cycle
Check out my YOUTUBE channel.
I think there is a lot of interest and soft commitments that TELL is working to cement and that is why they say first half 2023. This is not fast enough for me, but this seems like a good prospect for a triple in 6-9 months.
October 23rd, 2022
Income Growth Advisor’s Market update on October 20th gives insightful analysis and commentary on today’s challenging market. Tyson Halsey, CFA is joined by Rich Gula, Boston Institutional Investment veteran and several other sharp investment minds to assess market risks in this challenging period.
We discussed current market problems such as potential financial failures, equity market risks, reasons for a year end rally, and why gold may be a top performer in the years ahead.
Thank you for watching.
October 11th, 2022
Tellurian’s Charif Souki made positive comments on the economic logic of Europe financing the 100mta of permitted LNG facilities for $120 billion. Europe will spend 600billion Euros for subsidies to offset the energy price spike; however, that is an offset and not a cure to the problem.
In light of the recent decline in TELL stock, we remain positive on the stock. We agree with Morgan Stanley’s assessment that the company trades at liquidation value/fair value of upstream assets. If TELL can find some path to financing the Driftwood facility, TELL shares will likely soar.
September 2022 Zoom Meeting
Update posted on Yahoo 8.24.2022 at 3:35 PM EST
Tyson Halsey, CFA speaking. My August 18th Seeking Alpha article got good reception. I believe TELL will sign an equity deal and the SWN conference call transcript suggested they want to help companies get to FID. Given that SWN is the largest Haynesville operator, they would seem a logical Driftwood funder. Speculation — if I were Souki, I would think TELL would want to sign SWN and someone else so that combined they have $3.2 billion which with TELL’s own “1 billion” they would close the equity side with $4.2bn. EQT makes sense, but if they are still hung up on permitting, CHK, CTRA, BP… others could be an alternate to EQT.
The day I wrote the Seeking Alpha Tellurian Inc. article the stock had a huge 13% move. However, at noon, volume spiked on the Haynesville closing. So the market, IMHO, is moving the company on the nat gas prospects for TELL and not my article debunking the short narrative or improved prospects for funding under a rolling equity first strategy. Nat gas then broke out, and TELL stock pushed higher. However, the announcement that Freeport will not reopen until November vs October caused nat gas (HH) to pull back. That caused recent weakness from its recent high near 4.89 two days ago. So, today, I added more stock and options to my personal account. I used to work on the NYFE (New York Futures Exchange) and we looked at price patterns on the market indexes. In the last week TELL stock spiked up on good volume and then pulled back. That pattern is a bull flag with positive price volume correlation.
The market got super negative on TELL since April due to concerns about the SPAs, an energy correction, and exacerbated by Dizard’s publication and SA knocking TELL a month ago. Both written arguments were flawed. With TELL’s short (98mm shares) and the nice volume pick up, I bought the dip today.
Buying when a security is down is a way to reduce risk. I did. I hope I am right.
Terence Brogan of The Brogan Group a division of Wellington Shields in Boston wrote me yesterday and said he thought the stock could get to $16/share. If TELL has FNTP and possibly FID, I believe that upside is totally reasonable by year end or FID in early 2023.
When the company like TELL gets funded, it experiences a massive derisking. Valuation formulas of future cash flows change from a 40% to 15% discount rate or something on that order. TELL’s investor presentation shows potentially $11bn in FCF when all trains are running in 2026. That assumes a $8 margin per mmBTU. With the energy crisis it seems increasingly reasonable that TELL could have a margin of $16/mmBTU.
The volume since my article shows psychology is changing. It is comforting knowing Blackrock John Paulson, Citadel and DE Shaw are in this too.
TELL is a high risk play. Do your own research. However, if they get TELL funded, I suspect that the appreciation rates I cited at Cheniere during their construction/financing periods, is indicative of the significant potential. I think buying on each funding announcement this year would be the shrewd investor strategy which institutions will likely employ. I look to derisk my position at $16 hopefully in the next 6 months when the funding FID/FNTP are done.
In the meantime, the shorts may begin to feel uncomfortable if the stock starts moving rapidly. One can only hope a speculative longs like the Reddit MEME stock buyers jump in. They won’t get burned in TELL the way they were with AMC and BBBY more recently. They have a better chance of not getting burned because TELL could be a great growth stock for the next 5 years. I hope so. I am long.
Technical comment on Tellurian Inc. by Terence Brogan of The Brogan Group, Wellington Sheilds in Boston.
Inflation and Geopolitical Black Swan Risks and Opportunities Webinar
Webinar Key Takeaways:
- We have entered an inflationary environment that rewards an inflation-oriented investment posture.
- Inflation is out of control and interest rates are rising.
- Interest rates are artificially depressed due to Federal Reserve accommodative policies since 2009 of abnormally low Fed Funds rates and $9 trillion in asset purchases.
- This cycle should last 7 to 16 years and reward commodity-oriented strategies while punishing long-duration assets like bonds and technology stocks.
- From 1999 to 2008, an inflationary cycle, the XLE energy ETF returned a 22% compounded annual return “CAGR” while the QQQ Tech ETF returned -3.157% CAGR.
- During 2009-2022, a deflationary cycle, the QQQ returned 20% CAGR and the XLE returned 3.68%.