Tellurian Stock: Driftwood Financing Could Be A Game Changer (NYSE:TELL) - Seeking Alpha

Tellurian Stock: Driftwood Financing Could Be A Game Changer (NYSE:TELL) | Seeking Alpha

Tellurian: Driftwood Financing Could Be A Game Changer
Tellurian Inc. (TELL) 3 Comments

Summary

- Tellurian is expected to raise $12-15 billion in the coming weeks and months for its Driftwood LNG project, which could potentially increase TELL shares five-fold by year-end.
- Tellurian's share price has been volatile since 2015, largely due to the uncertainty surrounding the funding of the Driftwood LNG facility.
- The company's stock price is expected to rise if it successfully finances Driftwood LNG, with a potential market capitalization of $32 billion in 2029.

lyash01/iStock via Getty Images

Tellurian's prospects are improving with Driftwood LNG now poised to raise $12-15 billion in the coming weeks and months. If Tellurian (NYSE: TELL) funds Driftwood LNG, we believe that TELL shares could rise five-fold by year end or $8/share.

Tellurian's share price has been extremely volatile since 2015. TELL's price volatility is primarily a function of the odds that Driftwood LNG facility will get funded. Driftwood's business model is different than traditional liquefaction companies, like Cheniere Energy Inc ( LNG), in that TELL seeks to be a fully integrated LNG producer. Tellurian seeks to source its own cheap US natural gas, liquefy that gas, and then sell the LNG abroad at a large premium in international LNG markets. Cheniere and typical liquefaction facilities charge a processing or tolling fee for a fraction of the margin that Tellurian seeks to capture through its vertically integrated model. Cheniere and traditional liquefaction facilities sign long term tolling contracts and then use those tolling fees to fund the LNG projects.

Below is a chart of Tellurian's stock price over the last five years. The COVID Crash decimated demand for energy and Tellurian's stock price in 2020. In 2021, the company began discussing announcing a bank funding group to help finance Driftwood. In 2022, the Russian invasion of Ukraine led to a spike in energy prices and natural gas with Russia threatening to shut off energy to Western Europe. This appeared to be an ideal opportunity for Tellurian to secure funding and significant European demand. Unfortunately, Europe did not have degasification facilities and was partial to a hydrogen solution over LNG. In September 2022, with interest rates rising, Tellurian pulled a $1 billion high yield deal and stated that Driftwood's LNG production would likely be delayed. This deal cancellation crashed the stock from $4.66 to $1.54/per share. In the second half of 2022, commodities and natural gas prices turned lower further weighing on Tellurian's natural gas operating income and share price. In the first quarter of 2023, 25 million shares of stock that Charif Souki had pledged in a $100 million Aspen ranch development project, was seized and sold by Souki's creditors. This apparent sale by Souki created terrible Optics for the company which led to the company stock to bottom at $0.94/share on March 24th.

Tellurian's Wild Swings's (Yahoo Finance)

Writer's Tellurian Recap:

Due to the significant potential cash flow benefit of about $9 billion per year, compared to Tellurian's recent $150-400,000,000/year cash flow from its natural gas production business, Tellurian's shares swing wildly around the funding prospects for Driftwood LNG. Consequently, updating the company's boom bust funding prospects has led to multiple updates and this, our eighth, report on Tellurian. Our first article in October 2021 highlighted the exceptional return potential of Tellurian by quantifying Cheniere's 269% and 138% annualized rates of appreciation during Cheniere's funding and construction phases. Our second article in August 2022 covered the company's change to an equity first funding strategy. Our third article predicted that funding was imminent and was published a day before its debt with warrants offering. Our fourth article, October 2022, analyzed the bond offering cancellation, 50% share decline, and revised investment prospects. Our fifth article, February 2023, identified the first commercial sign that funding was still probable. Our sixth article highlighted potential strategic equity prospect through GAIL's "EOI" Expression Of Interest announcement. Our seventh article highlighted a $1 billion sale leaseback LOI that will provide $1 billion in equity/mezzanine capital for TELL.

Why Now?

Central to this April 4, Sale Leaseback LOI, is the requirement that the equity funding parties need to be disclosed to the buyer by July 14, 2023. The precise language requires that the co-owners or strategic equity funders aka "contingent guarantors" will have the financial means to cover their share of the debt, rent, and other expenses to the satisfaction of the buyer. Those equity investors must be identified by July 14th and accepted by July 31, 2023 or the agreement will terminate.

" A requirement that the equity investors in Driftwood LNG or its affiliates be joint and several contingent guarantors of the Master Lease (the "Contingent Guarantors") and (V) a requirement that the Contingent Guarantors hold an investment grade rating of BBB or higher or attain an equivalent shadow credit rating, or be otherwise acceptable to the Purchaser. The LOI contemplates that the parties will use commercially reasonable efforts to finalize the Purchase Agreement and Master Lease on or before July 14, 2023. The LOI will terminate on July 14, 2023 if Driftwood LNG fails to identify the Contingent Guarantors by such date and will terminate on July 31, 2023 if the Purchaser elects, in its sole discretion, not to approve such Contingent Guarantors. The LOI is binding on the parties but is subject to the negotiation of definitive transaction documents and the approval of those documents by the Company's board of directors."

Souki has stated in his June 13 YouTube video that they have counterparties for the $7 billion in bank loans, $1 billion in mezzanine funding, $1 billion in sale leaseback funding, $1.5 billion Tellurian Driftwood (past and future) funding, and are seeking $1.8 billion in equity investment to fund Phase 1. With the identification of the equity funders, then it is simply a matter of bringing about the simultaneous closing of these varied parties within 90 days of the buyer's acceptance. The snip below from the June 13 video shows the nearly $12.3 billion in funding has been identified. And the operating cash flow of Driftwood Phase 1, based on year to date prices and the Driftwood model, is $1.6 billion year-to-date through June 8th.

Driftwood Financing overview (Tellurian June 15th 2 minute video)

What is encouraging about this illustration is that the equity partner's $1.8 billion investment -- for its 55% ownership of Driftwood -- should generate a cash flow of about $1.6 billion per year. Since there are two trains in Phase 1, both the equity investors and Tellurian get approximately $1.6 billion per year per train. This illustration allows us to extrapolate to when Phase 2 is complete in 2029, when Driftwood will have five trains, four will be owned by Tellurian and one by its strategic investors. Consequently, in 2030, Tellurian could generate 4 x $1.6 billion or $6.4 billion in cash flow per year.

This week LNG facility investing got a powerful endorsement. Warren Buffett's Berkshire Hathaway announced its planned purchase of Dominion Energy's Cove Point LNG facility for $3.3 billion at 10.8 times 2025 EBITDA. Of course, Cove Point is operating today, and Driftwood Phase 1 will not start producing LNG until 2027. But Tellurian is offering its equity at one times cash flow while Berkshire is paying about ten times cash flow. Our belief is that the biggest risk for Tellurian is closing this funding, because Tellurian's team has built 70% of US LNG capacity and Bechtel, their construction partner, is the world leader in liquefaction facility construction.

Positive Signs:

There still is a great deal of work to be done beyond identifying the funders and closing these contracts; however, Tellurian did hire an LNG investment banking ace, Simon Oxley, two months ago. Furthermore, we believe other announcements by insiders support the idea that funding is increasingly likely.

Hudson Bay Capital Management bought a $ 500,000,000 convertible from Tellurian in June 2022. The note pays off in three tranches of $166,000,000. Tellurian paid off the first tranche, which was due May 1, 2023, on March 31, 2023. The next tranche of the 6% $5.74/share convertible note is due May 1, 2024. This tranche is now a short term liability and Tellurian may want to restructure the remaining notes to help secure the $7 billion bank line.

On June 29, 2023, Tellurian announced that Hudson Bay Capital Management entered an agreement to "reduce the Company's minimum cash balance requirement from $100,000,000 to $60,000,000 during the period from June 30, 2023 to July 17, 2023."

Nothing was given in return for this waiver leading us to believe that these notes are being renegotiated to facilitate Tellurian's simultaneous close efforts by removing a current liability.

On July 5th, 2023, Tellurian, Director, Jonathan S. Gross bought 100,000 shares of Tellurian stock for $1.38/share.

The chart below suggests Tellurian is bottoming and should exceed previous highs if it successfully finances Driftwood LNG.

Tellurian's 1 year stock chart (InterActive Brokers Trader Workstation)

In sum, the hiring of Simon Oxley, the July 14th equity partner identification date, the Hudson Bay Capital cash minimum accommodation through July 17th, 2023, and the insider stock purchase by Johnathan Gross give us comfort that Tellurian is moving to funding completion in the coming weeks and months and by year end as described in their weekly updates and interviews.

Valuation:

Tellurian's upstream business is worth about $500 million based on $200 million in revenues per year at a $2.50/mmBTU gas price. Last year, Tellurian's upstream business was generating about $400 million in operating cash flow when gas prices rose to $10/mmBTU. Gas prices appear to have bottomed with gas rigs counts declining and LNG exports increasing. Consequently, Tellurian's upstream business is probably worth $750 million or $1.3 per share.

Tellurian has 563 million shares outstanding and invested at least $1 billion in Driftwood. If the project looks viable, then Tellurian's Driftwood investment should be valued at $1 billion. Combine the upstream $750 million valuation and the downstream Driftwood LNG valuation of $1 billion and then divide the shares outstanding, TELL shares are worth $3.125/share.

The cash flow illustration provides a snapshot into the operating profitability of Driftwood of $1.6 billion per train. If Tellurian trades at five times cash flow of $1.6 billion in 2027, then Tellurian's market cap will be $8 billion. During Phase 2 the company hopes to add another train every 9 months bring a total of four trains and $6.4 billion in annual cash flow in 2029 or 2030. A conservative five times cash flow would imply a future market capitalization of $32 billion.

Natural Gas Demand:

The biggest risk will be the demand for natural gas in the 2030 time frame to determine if a higher multiple is commanded by the market. We are positive on natural gas prices because renewables have not been able to replace fossil fuels as quickly as many forecasted. Markets are beginning to embrace the idea that renewables simply cannot produce the needed energy and fertilizer for the world over the next decades. By embracing clean burning natural gas with its lower emissions than coal and oil, natural gas is a logical proven energy source which will allow UN Sustainability Goals number 1 "end poverty" and #2 "end hunger" to be met while reducing carbon emissions. Consequently, natural gas and LNG are becoming a critical transition fuel and pricing should remain elevated for years.

We also share Goldman Sachs' Jeffrey Currie's market view that we are in a commodity super cycle and that under investment in energy "green or brown" has left the world short of energy for the next several years. The world is in a net shortage of energy and inadequate capital investment in energy will keep energy prices higher for the long term.

Conclusion:

Tellurian CEO Octavio Simoes said he expects that Tellurian "will draw in its equity shareholders by year end." This is consistent with the timing that the sale leaseback will be agreed to between today and July 31. To close the sale leaseback in 90 days, a closing in mid to late October is likely. October is the last quarter of the year, and Simoes tends to be conservative in his guidance.

We believe we will see announcements soon which will demonstrate progress toward closing the funding of Driftwood. Closing equity funding deals is complex: "You have a suite of documents that you must evaluate on governance, operations, equity contributions, joint venture. So, to build the project on an equity basis is a much more complex process than signing an SPA that you take to the bank for financing," according CEO Octavio Simoes in Platts S&P Global Commodity Insights published on July 4th, 2023.

Tellurian's stock has had more than its share of bad news in the past year with Chairman Charif Souki's escrowed shares being sold, the Company pulling its September 2022 debt with warrants offering, and an 80% decline in natural gas prices. The stock appears fundamentally inexpensive with a $3.125 target in the coming months and a $32 billion prospective market capitalization in 2029.

This article was written by

Analyst’s 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

We own the stock and options on Tellurian.

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