The American liquefied natural gas (LNG) industry is poised for a historic breakout this year. Domestic producers of LNG boasted just 3.6 billion cubic feet per day (Bcf/d) of export capacity at the end of 2018, but are expected to exit this year with the ability to sling 8.9 Bcf/d across the globe. That ranks third globally behind Qatar and Australia -- not bad, considering Uncle Sam only joined the party about five years ago.
While Tellurian (NASDAQ:TELL) won't be contributing to the wave of growth taking place in 2019, it's still having a pretty good year. The company has received multiple regulatory approvals for its planned Driftwood LNG facility, which keeps it on track to begin construction this year and begin operations in 2023. It's also made progress in securing purchase commitments from various partners to de-risk the project. Given the size of the economic opportunity and the recent string of favorable developments, investors might be smart to buy the company near its current market cap of just $2.4 billion.
Milestones seem easy to hit for Tellurian
Tellurian wants to build and operate a full vertical of natural gas infrastructure, including an upstream production company, a pipeline network, and an LNG export terminal. It plans to own a 49% stake in the assets, while partners will own the remaining 51%. The approach is unique, but management hasn't deviated much from its original vision. The strategy appears to be working.
On the regulatory front, Tellurian now has the green light to build Driftwood LNG, operate the facility and the accompanying natural gas pipeline, and export product. Each authorization was granted by a different regulatory body in Q1 2019.
Management seized on that momentum to make progress on the commercial front. Tellurian announced a $500 million equity investment in the Driftwood assets from Total S.A. (NYSE:TOT), which will also have the right to purchase up to 333 million cubic feet per day. The French energy major also agreed to purchase $200 million in Tellurian stock once the final investment decision (FID) is made. Petronet LNG Limited INDIA also signed a memorandum of understanding to buy an equity interest in the Driftwood assets.
Investors should be confident, but remain grounded
While other equity partners will be needed, the initial funding helps to de-risk the development and construction of the project, as will the fact that Betchel is the engineering, procurement, and construction contractor. The company has built an estimated 30% of global LNG liquefaction infrastructure to date. Taken together, investors should have increasing confidence that the project is on track to begin construction in 2019.
As for the estimated start of operations, investors might want to remain a little more reserved. There's a lot of time between now and 2023, and given the size and complexity of an LNG export terminal even a minor delay can push project timelines back by a quarter or two. But the economic opportunity remains intact -- investors just have to stay patient.
Tellurian estimates that its 49% stake in the Driftwood assets could generate $2 billion in annual cash flow at full operation. The fine print around "full operation" is important, because the export terminal will be completed in four stages. Nonetheless, considering the United States might require 29 Bcf/d of export capacity by 2025 to support its domestic natural gas production, there should be plenty of incentive to complete the project on a firm timeline.
The stage is set, now the company needs to execute
Driftwood LNG is located along the Gulf Coast, giving it access to international shipping lanes and low-cost natural gas supplies from the Permian Basin, Haynesville Shale, and even Appalachia. Tellurian recently put out bids on three nearby pipelines to secure feedstock, help regional producers plan long-term capital investments, and further de-risk the project. Considering Driftwood LNG is progressing pretty much as planned on multiple fronts, investors with a long-term mindset should be pretty comfortable owning a piece of the growth opportunity.