Quick! Where do you think the market is going to be in five years?
Don't worry: It's a trick question. There are so many variables that it's impossible for anyone to predict with any accuracy what's going to be happening half a decade down the line. Yet that's just what investors looking at liquefied natural gas (LNG) up-and-comers Tellurian (TELL 7.71%) and NextDecade (NEXT 2.24%) need to try to do. Both companies have big plans, but neither will come to fruition before 2023 at the earliest.
Given that uncertainty, how is an investor supposed to choose between the two companies?
Tellurian and NextDecade both hope to outperform by building LNG infrastructure. Image source: Getty Images.
Calls for speculation
Let me just say right off that both of these companies are highly speculative investments. Any risk-averse investor is sure to want to look elsewhere -- possibly at reliable dividend stocks. However, those who can stomach the risk should certainly consider Tellurian and NextDecade, because if their expectations about energy market realities down the road are met, investors who get in now could see big payouts later.
The U.S. is awash in cheap and abundant natural gas -- more than we can use domestically. Liquefying that gas and sending it to overseas markets is a logical reaction to that situation, and lots of companies are getting in on the action, building (or planning to build) export terminals on the Gulf Coast, and pipelines to connect them to the major gas fields in the Permian Basin of West Texas and the Haynesville Shale of Louisiana.
Tellurian hopes to become a "fullstream" LNG exporter, producing gas, transporting it through its own pipelines, then liquefying it and exporting it from its own terminal. NextDecade, on the other hand, plans to transport and export gas from other producers.
You'll notice a lot of references to hopes and plans in this section, and that's because in order to execute their strategies, both companies will need to do a lot of building.
If you build it, cash will come
Neither Tellurian nor NextDecade have actually started building their flagship pipeline-and-terminal projects. In fact, neither has even officially made a "final investment decision" regarding those projects! In theory, either company -- or both -- could throw up its hands and walk away at any moment. Of course, that's pretty unlikely.
Tellurian's big build is its Driftwood project, which will connect the company's gas acreage in the Haynesville Shale to the proposed Driftwood Pipeline through Louisiana, and then to the planned Driftwood LNG Facility on the coast. Once completed, the pipeline is projected to be able to transport 3.5 billion cubic feet of gas per day (Bcf/d), while the terminal will have a proposed export capacity of about 30 million tons of LNG per year.
NextDecade's Rio Bravo project is similar: The company will build a pipeline from the Permian Basin through central Texas to an export terminal in Rio Grande, on the southern tip of Texas on the Gulf Coast. While its pipeline is projected to have more daily capacity than Tellurian's at about 4.5 Bcf/d, its terminal is projected to have slightly less export capacity at 27 million tons per year.
All this sounds great, but remember that none of these projects are expected to be in operation until 2023. In the meantime, these projects have to get approved, financed, and built. And that's where one company has a (slight) edge.
How far we've come
In early April, it looked like Tellurian was outpacing NextDecade by a long shot. It had received the necessary regulatory approvals from the U.S. Department of Energy and the Federal Energy Regulatory Commission (FERC). It had secured a contract with Bechtel -- the world's largest builder of gas infrastructure -- to construct its Driftwood LNG facility. And it was actively seeking investors and partners for the project, having secured a commitment from French oil major Total.
NextDecade had signed a deal with an energy major of its own: LNG heavyweight Royal Dutch Shell. But it was farther behind in the regulatory approval process, and hadn't yet identified a builder. Since then, though, it has all but caught up with Tellurian. In late April, NextDecade received its final Environmental Impact Statement from FERC, which triggered a 90-day period before a final project approval could be made. In May, the company signed its own deal with Bechtel for its Rio Grande facility.
That means the only thing left for NextDecade to do is get its final approval from FERC. That could have come as early as July 25, but we're still waiting to hear. The commission hasn't met since July 18, however, and won't again until Sept. 19.
Given that FERC gave the thumbs up to Tellurian's project, as well as another LNG export terminal in February, there are no obvious reasons why it would deny NextDecade's application, but until it gets the official approval, there's always a risk. And of course, if it's application is denied, NextDecade's stock is likely to plunge.
And the winner is...
With five years before either of these companies' major projects come online, any number of things could happen to one or both of them, to energy markets broadly, or to the global economy that could upend whatever calculations we make today. So we'll just have to stick to the near term. Tellurian has gotten its project approved while NextDecade hasn't (yet), which makes Tellurian the slightly better buy, at least for now.
Obviously, if you have a high tolerance for risk, you could pick up shares of NextDecade on the bet that it's going to get its approval, at which point its share price is likely to rise. But with so much risk already attached to these projects, most investors should probably stay with the safer choice. There's plenty of time to get in on the action.
