Shares of Tellurian (NYSEMKT:TELL) finished down 13.4% on July 17, following a downgrade from an analyst at Stifel. In a note to investors, Benjamin Nolan changed his rating on the company's stock from "buy" to "hold" and slashed his target price from $16 to $9.
In his note, Nolan said he doesn't see as much upside for Tellurian, expecting that the growth in future supply of LNG would cause prices to fall overall, potentially squeezing Telurian's future margin. The future risk of oversupply is enough -- in Nolan's view -- that he no longer considers the risk/reward profile to be appealing for investors.
Frankly, I don't agree, or at least I don't think the risk/reward profile has deteriorated recently for Tellurian or for its investors. Tellurian's risk profile has always been on the higher-risk side; that's the reality of being a business that's little more than a business plan at this stage.
Tellurian has actually delivered some relatively positive news recently. On July 10, the company announced it had finalized a deal with energy giant Total (NYSE:TTE) that will raise its total investment in Tellurian and the Driftwood LNG facility to $907 million. This latest deal includes a $500 million stake in Driftwood, to purchase an additional 1.5 million metric tons of LNG per year from Driftwood.
I'm not saying Tellurian is a safe, can't-lose investment, because that's not true. It's most certainly a risk/reward bet on Tellurian's management team's ability to build a business from essentially the ground up, and managing to come up with nearly $30 billion in capital to fund development.
Oh, and without diluting or otherwise destroying per-share value so much that existing shareholders are left with little to show. But even after the latest deal with Total, which will add 19.9 million in new shares when it's completed later this year -- Tellurian must formally decide to move forward with Driftwood before the Total deals are officially finalized -- management still projects Driftwood and its associated pipelines will generate $8 per share in cash flows when fully operational in a few years.
That means massive, massive upside from here, with a share price below $7 after today's decline. The risk, of course, is management flubs this and we end up with nothing. But even if it's moderately successful, Tellurian should prove worth far more than today's share price. It's not going to be easy or a sure thing, but Tellurian has the leadership and experience to get it done.