- LNG will power the global decarbonization transition.
- Tellurian is a potential game changer.
- Tellurian will export low-cost US LNG to high-priced international markets.
- Is Charif Souki energy’s Elon Musk?
Tellurian Inc. (NASDAQ: TELL) could be a clean energy disruptor much like its predecessor Cheniere Energy, Inc. (NYSE: LNG). Charif Souki is the Executive Chairman of Tellurian Inc., but he also was the co-founder and co-CEO of Cheniere Energy, Inc. Cheniere went public in 1996 and imported natural gas into the United States. Souki is a pioneer in the LNG business and was primarily responsible for Cheniere’s success, but things changed in 2008. The fracking revolution soon revealed the immense low-cost natural gas resources in the United States. Almost overnight, Cheniere’s whole business plan was turned upside down. Natural gas suddenly was cheaper to produce in the US than to buy internationally. In 2008, this macroeconomic 180-degree shift nearly wiped out Cheniere and tested Souki’s management talents. Souki succeeded at turning around Cheniere. Unfortunately, by 2015 when Cheniere had fully constructed natural gas liquefaction facilities and was positioned to be the leading US LNG exporter, billionaire Carl Icahn secured two board seats with 15% of Cheniere’s stock and pushed Souki out. Icahn wanted a great cash flow generating machine. Souki, who was comfortable with huge volatility and an LNG visionary and builder, wanted to continue building new facilities.
For basic journalistic disclosure, my background is important for the reader to know. My first job was as a clerk in the options pit on the New York Futures Exchange in 1984. In 1992, I won the USA Today CNBC National Investment Challenge trading options up 1087% in the first quarter by speculating on biotech stock price moves before critical data releases and pivotal FDA panels. As a result of this experience, I have run two derivative-oriented option hedge funds. I have produced both colossal losses and enormous returns and feel wiser for it. Tellurian Inc. looks like one of the best risk-reward opportunities that I have ever seen during my nearly four decades of investment experience.
Morgan Stanley estimates that upon Final Investment Decision “FID” TELL’s price target is $22 during mid-2022. From today’s closing price of $3.81, TELL stock could be a 5 bagger by summer 2022. Based on its September 2020 Investor Presentation Tellurian Inc., the company estimates that its shares should trade in the mid-teens price range on successful FID at the end of the first quarter 2022. Last time I saw such a huge upside was in 2013 in a research report on Tesla. Unfortunately, I got talked out of that idea. Having a credible research analyst model with a significant upside price target is key. Whether that means the company will successfully execute is another matter.
Tellurian seeks to build a low-cost global natural gas business that profitably delivers abundant low-cost US natural gas to customers worldwide. Bechtel, a global EPC (Engineering, Procurement and Construction) leader will build Driftwood LNG, a 27.6 mtpa LNG facility, near Lake Charles, Louisiana. The Driftwood Project has all the required permits to begin construction and has significant commercial momentum. Tellurian is developing a portfolio of natural gas production from the Haynesville Shale which it will convert into LNG at the Driftwood liquefaction facility. Tellurian is building a network of pipelines to deliver natural gas from the Haynesville Shale in Northeast Louisiana to its planned liquefaction facility 150 miles to the south. The natural gas assets, pipeline infrastructure and the LNG facility are known as the Driftwood Project.
The Tellurian team has built over 15% of the global LNG processing capacity. This year TELL’s sales purchase agreements (SPAs) with Vitol, Gunvor and Shell have sold the offtake for the first 12 mtpa phase of the 27.6 mtpa Driftwood LNG project. Since Souki has been an investment banker, he understands how to model businesses and write the contracts needed to make the Driftwood project viable. One reason we were particularly keen on Antero Resources, Inc. (NYSE:AR) and Antero Midstream, Inc. (NYSE:AM) over the last 18 months is that their executive team was a pair of former Lehman Energy Investment Bankers with a good reputation. Investment bankers know how to model their commodity business risks. While some analysts worried about AR’s debt wall, we figured that AR’s purchases of shares and debt in the open market was a bankable calculation that Antero Resources, Inc. was going to succeed — which they did dramatically.
LNG Macro Opportunity:
Tellurian’s opportunity is to buy cheap US natural gas, convert it into LNG and then sell it internationally where prices are substantially higher. As of October 25, the US nat gas benchmark Henry Hub is trading at $5.898/mmBtu (November 2021) while the spot price for Europe with the TTF is $30.220/mmBtu (November 2021) and in Asia where the TTK is $33.575/mmBtu (December 2021). The cost to convert to LNG and ship is about $3/mmBtu. That spread is potentially massively profitable. On Souki’s October 19th 2021 YouTube presentation, the Executive Chairman said that the company can make $12 to $20 billion a year in cash flow with current market prices. The challenge for Tellurian is to fund the $12 billion liquefaction facility, feedstock and pipeline network of the Driftwood Project.
The challenge is that it will take four years to construct a liquefaction facility when one cannot lock in long-term (4 year) futures contracts. However, “if anyone can do it, Souki can”, one former Citibank energy investment banker told me. The successful financing of the Driftwood project is not guaranteed at all. Morgan Stanley’s report suggests TELL’s downside is $0.01/ share and the price target is $7/share – which is likely based on some sort of probability weighting. These liquefaction deals don’t always work. Magnolia LNG in Australia was initially unsuccessful.
Natural Gas Intelligence, a trade magazine wrote in an article on September 17th that “Driftwood FID Extremely Likely.” Another industry source, Platts, wrote in late September that Souki said the company expects to be able to announce by the end of this year the banking group that will prepare to finance the project. These third-party industry sources provide some credible independent confirmation of the business prospects. These reports suggest that the opportunity researched by Morgan Stanley is quite attainable and credible. Whether they succeed is another question.
Tellurian offers exceptional research content for those willing to spend the time. Anyone seriously considering investing should watch Souki’s Two Minute weekly YouTube videos. Additionally Tellurian has 5 Investor Presentations since September 2020 which clearly detail their business plan. Lastly, Reddit has a Tellurian LNG thread that provides significant commentary from some very sophisticated observers, who provide even further granularity on technical issues and have discussions daily. While I had a decidedly negative opinion of Reddit and AMC Entertainment Holdings, Inc. (NYSE:AMC), and other Reddit stocks which traded to levels well beyond rational valuations, there is credible content on Reddit on Tellurian LNG. Reddit could enhance the momentum in TELL as the company meets the expected milestones of baby bond issuance, Haynesville property purchases, and the announcement of a banking syndicate by year end.
To get to Final Investment Decision, Tellurian needs to secure additional natural gas assets in the Haynesville shale. Currently, the company is on pace to produce 90mmBtu of natural gas up from 30mmBtu last year. The company will add another 13 rigs in 2022. With the $115 million raised from its August share offering, Souki looks to add additional capacity through asset purchases in Haynesville. This natural gas asset will provide TELL with the feedstock to liquefy and operate its first phase. Souki has stated in the company’s weekly two-minute videos that Tellurian has been negotiating with Haynesville operators for a long time and that they will announce the finalization of these agreements before year-end. When TELL announces these last natural gas property purchases, the Driftwood Project will be significantly de-risked. Effectively, TELL will have one leg of the US international gas arbitrage secured with its ownership of its own natural gas. When this natural gas asset purchase announcement occurs, TELL should have a decent bounce.
With the natural gas in hand, the banking syndicate in place, contractual terms can then be negotiated so that the Final Investment Decision can be achieved. FID entails banks rigorously reviewing all aspects of the business plan: engineering contracts, regulatory approvals, SPA contracts, feedstock and off-take agreements such that banks will then feel comfortable enough to finance the $12 billion Driftwood LNG facility. “We are very clear about what we need to do,” Souki said. “We want to acquire upstream production. That’s our focus right now. And then the banks will fall into place really easily.” When TELL announces the banking syndicate before year-end, the stock should get another bump.
TELL’s Move to NYSE:
Tellurian announced that it will start trading its shares on the NYSE on November 2, 2021. We believe this exchange move relates to TELL having sold 50 million in “baby bonds” which were then canceled by the NASDAQ due to a rule interpretation that the NASDAQ appears not to have warned Tellurian of in advance. Since Souki, a former investment banker, had said after the baby bond deal cancellation that they would price this deal, my expectation is that TELL will place $50mm in baby bonds on the NYSE within a week of moving to the NYSE.
This NYSE baby bond deal will then provide TELL with the additional capital that it will want to secure the upstream assets which are key to keeping this first phase on track for the end of Q1 2022 FID. With each step towards FID Tellurian, shares should move higher like a biotech company advancing through clinical trials.
Global Decarbonization Transition:
The world has repudiated the carbon economy. The fossil fuel industries which have powered the modern economy since the 1850s have seen a massive decline in favor of clean energy with a significant focus on wind and solar. Unfortunately, cleaner renewable alternatives are not generating the needed energy to help advance global economic growth to reduce global poverty as needed and prioritized in the United Nations Sustainable Development Goals. With the advent of electric cars and ESG
investing, investment in fossil fuel energy infrastructure has declined dramatically. This summer wind in Europe was below expectations, Europe is now faced with anticipated power outages this winter in the UK, Germany, France, Spain, and Italy. China is facing an energy crisis and India is struggling too. The situation is so dire that power plants are looking to burn oil to produce electricity. Coal, the fossil fuel with the greatest carbon footprint that has seen decreasing consumption for 13 years, is now being sought to make up the energy gap produced by poor planning around this multi-decade transition to low carbon emissions.
According to Souki’s October 19th two-minute update the cash flow prospects from the current gas prices is to generate between $12-20 billion in cash flow. Using Souki’s outlook, TELL should be able to generate 1.5 trillion cubic feet of natural gas which it will be able to acquire at $3-5/mmBtu and sell at $15-25/mmBtu and generate $12-20 billion per year in cash flow. At 4 x cash flow TELL could grow to be a $60 billion entity from its current market capitalization of $1.8 billion.
The politics of energy are a meaningful risk. Tellurian may be well-positioned. Amos J. Hochstein, a former Obama Administration employee was appointed by the Biden Administration to serve at the State Department as its Senior Advisor on Energy Security. Amos J. Hochstein is a diplomat with specific expertise in addressing national security and foreign policy through the lens of energy resources, markets and security of supply. He is a former energy executive and investor.
Between the Obama and Biden Administration, while in the private sector, Amos was Executive Vice President of the Houston-based energy company Tellurian, where he managed a global team in securing investments to develop a new integrated LNG export facility in the United States. The Biden Administration’s appointment of Hochstein we believe positions Tellurian in a good regulatory position.
Poor global energy planning in its quest for a decarbonized environment has created a structural shortage in energy which is manifesting itself in rising oil, coal, and natural gas prices every day. The underinvestment in traditional fossil fuel energy infrastructure over the last decade is creating a large opportunity for natural gas while the world slowly converts to a carbon-neutral environment over the coming decades. Natural gas is far cleaner than both oil and coal and the planet will achieve lower carbon emissions by replacing coal-fired electric plants with natural gas-powered plants. This macro-perspective was detailed by Tellurian Vice Chairman, Martin Houston, in an interview on Bloomberg yesterday, October 26th Tellurian On Transition Towards Low Carbon Energy Future – Bloomberg.
Tellurian Inc., looks to be wellpositioned to capitalize on this energy crisis and planning failure, by shipping cheap clean LNG worldwide for the next forty years. The fact that the structure energy gap from years of under-investment in energy infrastructure creates a sanguine long-term outlook for this commodity market.
With Tellurian’s planned move to the NYSE, TELL will get some more press, issue baby bonds, announce an acquisition in the Haynesville shale, and then announce by year-end a banking syndicate for its FID. With these announcements, the stock should appreciate smartly into the year-end as funding risks decline with each new milestone.
Since the FID announcement will likely be binary, we would be inclined to reduce high or leveraged exposure in early 2022. Options could be used to capture upside while reducing overweighted equity positions if TELL does not secure the FID.
TELL could be a dangerous stock for both the shorts and the longs. Given that TELL has a liquid stock options market, investors could get long Gamma (buy out of the money calls in size), and if shorts get caught, TELL could see a Gamma squeeze which could contribute to a spectacular rise.
We own Tellurian Inc. stock.
Disclosure: I/we have a beneficial long position in the shares of TELL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for educational and entertainment purposes. Investors are advised to do their own research and Tyson Halsey and Income Growth Advisors, LLC only make investment recommendations for its clients.
We welcome your thoughts and comments at this dangerous time.