Better Buy: Tellurian vs. NextDecade

In case you haven't heard, the United States is set to start slinging incredible amounts of supercooled natural gas around the globe. That promises to make liquefied natural gas (LNG) one of the most important investing themes of the next decade.

Tellurian (TELL 0.02%) and NextDecade (NEXT -1.61%) are two companies eager to kick-start the second wave of megaprojects coming online in the mid-2020s. Seeing as each is attempting to bring its export facility online by 2023, investors will need to remain patient to realize the potential of either investment -- if they succeed, of course. Of the two, which LNG stock is the better buy?

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Why should investors care now?

While investors will have to wait years for Tellurian or NextDecade to begin generating significant revenue and cash flow, the potential opportunity is impressive. Cheniere Energy, the pioneering LNG slinger, is valued at $16.7 billion today after successfully bringing its first export terminal online. Its second facility will begin operations this year. When all is said and done, the industry leader will boast a total export capacity of 6.3 Bcf/d.

What's more, global demand for LNG remains strong -- and could even result in a shortage in the mid-2020s according to Royal Dutch Shell. That makes the $2.4 billion market cap of Tellurian and $350 million valuation of NextDecade look worth the wait.

Image source: Getty Images.

The matchup

Tellurian is doing things a little bit differently than most of its peers. If it succeeds, it could represent a new model for ambitious LNG export projects. The business is developing a full vertical of natural gas infrastructure: an upstream production company, a pipeline network, and an LNG export terminal. A holding company, Driftwood Holdings, will own the $30 billion in assets. Tellurian then expects to generate income from a 40% equity stake in the holding company, while partners will own the remaining 60%.

The vertical business model could diversify operations away from LNG exports alone, although the entire business will be tightly linked to natural gas prices. Either way, Tellurian thinks its equity stake could generate roughly $2 billion in annual cash flow when all infrastructure is operating at capacity. It received a final environmental impact statement (EIS) from federal regulators in early 2019, which means construction on the project could begin before the middle of this year.

While a lot could change between now and 2023, long-term contracts being inked today suggest management's projections could hold up. The company's natural gas production cost of $2.25 per million BTU (well below historical benchmark selling prices) and the facility's 4 Bcf/d of export capacity (one of the largest in the United States) are promising signs that hint at strong financial performance should Tellurian pull it off.

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NextDecade has a similarly ambitious second wave LNG project. The company's pitch centers on moving stranded natural gas from the Permian Basin in West Texas to an export facility in Rio Grande (at the southern tip of Texas).

By purchasing natural gas that currently has nowhere to go (and is generally an afterthought for energy producers focused on the region's more valuable liquid resources), and by traversing through less densely populated areas in Southeast Texas compared to pipelines feeding other terminals along the Gulf Coast (allowing higher pressures in the pipeline), the Rio Bravo pipeline could secure feedstock for as little as $0.50 per million BTU. 

If the strategy pans out, NextDecade could generate considerable cash flow from the Rio Grande LNG terminal, which has a proposed capacity of 3.6 Bcf/d. Management estimates the terminal could generate $4 billion in annual EBITDA. For comparison, Cheniere Energy expects to generate between $4.4 billion and $4.9 billion in annual EBITDA from both of its facilities. The up-and-comer is even planning a second facility to the north, called Galveston Bay LNG, with a proposed capacity of 1.2 Bcf/d according to regulatory filings. There's also an import facility in the works in Cork, Ireland. 

Data source: Regulatory filings.

Given all of the potential, why is NextDecade only valued at $350 million? Well, an agreement with McDermott International to build Rio Grande was nixed in September 2018. That left the facility without a contractor ahead of several important regulatory decisions (Betchel, which has built a significant share of the world's LNG infrastructure, will build Driftwood). The company expects to receive a final EIS in April 2019 and secure enough contracts from customers to proceed with the project, but it doesn't expect to settle on a construction partner until the third quarter of 2019.

Wall Street is worried about the uncertainty. Will customers sign binding contracts relating to a facility without a construction guarantee? Will a contractor agree to build Rio Grande without customers in place? Will any of these hurdles delay the project's expected start date beyond 2023?

Check out the latest earnings call transcripts for the companies we cover.

Image source: Getty Images.

The better buy is...

Despite a significantly higher market cap, Tellurian is the better buy, as it has significantly more certainty than NextDecade. The management team -- including industry veterans like the founder of Cheniere Energy -- has done an excellent job executing on the company's long-term development strategy so far. That execution has the company on pace to begin construction on Driftwood LNG before the end of the year. It will take years for investors to fully realize what the company has to offer, but continuing to deliver on project milestones should gradually add value to its market cap between now and 2023.

While NextDecade could join its peer as an LNG stock to watch, especially given the company's multi-project ambitions and low-cost promises, there's simply too much uncertainty hovering over the business right now. It's better to watch from afar and ensure Rio Grande can get back on track before making an investment decision.