Tellurian Stock’s Tall Tale (NYSE:TELL)

Everyone has a story

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Investment Thesis

Tellurian (NYSE:TELL) shareholders have been hit hard with bad news. Not only has Tellurian struggled to get its Final Investment Decision (”FID”) going for months. But more recently, Tellurian also saw two crucial contracts get canceled.

So is there any hope left for Tellurian? Well, there’s always hope. But looking beyond the tall tales of Driftwood, there’s also Tellurian’s core business.

Ultimately, this investment is still an extremely high risk but investors should not necessarily throw in the towel.

What’s it Like Investing in Story Stocks in Bull Market?

Tellurian has an amazing story. A story that’s going to be a win-win for all parties. A win for Europe, as they crave lower energy. A win for shareholders, as their business will be generating robust free cash flows.

And not only robust, but stable, and predictable! Indeed, what can go wrong? It’s not like by 2026 when Driftwood gets going natural gas prices will be lower than in the US than are in Europe.

Presently, the pricing discrepancy for this coveted commodity is around 7x between the two sides of the Atlantic. This is a simple case of arbitrage. This one is in the bag.

And Now, Where is the Story?

Reality got in the way. Tellurian needs to raise $12 billion. And the debt markets would not even consider $1 billion. There simply were no takers. Not even with an 11.25% coupon. This I already discussed in my previous bullish article.

Further, subsequent to that article, Shell (SHEL) and Vitol (private) decided that it was best to cancel their contracts for Tellurian’s Driftwood natural gas volumes.

Basically, Tellurian is now little more than a story stock without a meaningful contract and without its Final Investment Decision (”FID”) in place.

What is CEO Charif Souki’s Story?

As per usual, Souki took to YT to argue his take. Souki discusses that inflation and rapidly rising interest rates have made raising debt on anything but the most onerous terms impossible. This would severely limit Tellurian’s upside.

Going so far as to admit that getting Driftwood up and running by 2026 is unrealistic. This clearly is super advantageous to Cheniere (LNG). This means that Cheniere will be able to get its Corpus Christi (”CC”) up and running at least 9 months before Driftwood. This is of course if Driftwood ends up getting built at all.

Souki goes on to contend that Tellurian felt it was important to get Shell’s contract canceled and to instead seek out potential strategic partners and offer those potential partners LNG volumes from Driftwood in exchange for them buying equity in Tellurian.

Souki calls Driftwood the holy grail of the business model (~3:42). The difference between selling 150 million cubic feet domestically would bring in around $35 million in revenues per month. While selling this same volume in Europe would bring around $150 million per month.

And that Tellurian could then further increase its total volume.

But What About the Core Business?

Here’s the thing that a lot of investors have likely forgotten about. Tellurian also has its core business! Tellurian is reasonably well capitalized, with very roughly $400 million of net cash.

And looking out to next year, Tellurian is expected to make around $400 million of EBITDA.

So the core business is priced at 4x EBITDA. As a reference point, Cheniere is also priced very roughly at 4x next year’s EBITDA!

The Bottom Line

Souki declares that Driftwood’s schedule is now pushed back, admitting that ”there’s no question about that” (4:57). Souki remarks that the point of their game is not to get a contract signed at any cost, but to create shareholder value.

The one-line takeaway is this, Tellurian is a very high-risk investment. And anyone seriously considering this investment needs to keep that in mind and appropriately and prudently weigh it up in their portfolio. Everyone knows the risks. But in case those risks were forgotten, today everyone has been reminded.

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