Let me tell you a little story about disruption and opportunity.
About 15 years ago, the United States was expected to run out of oil and natural gas. For most of the mid-2000s, this idea of "peak oil" became the common wisdom: America had tapped all of its oil and gas, and it was just a matter of time before we would have to import every barrel and cubic foot we needed. Natural gas, which was particularly difficult to transport overseas at the time, skyrocketed.
Then shale changed everything.
Geologists have known about shale gas and crude oil for decades, but we didn't have any way to cost-effectively extract them. Enter hydraulic fracturing and horizontal drilling, which have made those resources recoverable, and the U.S. quickly went from fears of running out of domestically produced oil and gas to being awash in both within a mere few years.
There's so much natural gas that prices have cratered, down more than two-thirds since the mid- and late 2000s. And all that cheap, plentiful gas is expected to turn the U.S. into one of the biggest natural gas exporters in the world. That's right: A decade and a half removed from fears of running out of gas, America is now on track to send billions of metric feet of natural gas to markets all over the world.
For investors, that's creating an opportunity to profit from a massive shift in global energy. Two companies in particular, Tellurian (TELL -3.37%) and NextDecade (NEXT), should be high on investor's watchlists. While both are at relatively risky stages of their development, these pure-play LNG exporters have the potential to create enormous wealth for investors willing to buy early, and ride out the next few years. That's why I've added both to my portfolio in recent months, and why you should consider doing the same thing.
What Tellurian and NextDecade do
Both companies aim to become major exporters of natural gas, with plans to tap some of the lowest-cost natural gas supplies in the world, from the Permian, Haynesville, and Eagle Ford shale. These shale plays are particularly compelling because they generate substantial amounts of associated gas, that is, natural gas which comes from oil wells. At present, there simply isn't much of a market for a lot of this gas, and there's minimal infrastructure in place to gather and get it to market.
The end result is that a massive amount of associated gas simply gets flared, or burned off near the wellhead to dispose of it; simply letting it escape into the atmosphere results in about 20 times the greenhouse gas emissions versus flaring it. Put it together, and producers will benefit by monetizing associated gas that's only costing them money at this point, while Tellurian and NextDecade can benefit from access to lower-cost gas that's exceedingly plentiful.
Tellurian is planning to build its first LNG export facility, called Driftwood, along with a 96-mile-long pipeline; the 200-mile Haynesville Global Access Pipeline; the 625-mile Permian Global Access Pipeline; and the 180-mile Delhi Connector Pipeline. NextDecade's current plans are for its Rio Grande LNG facility and small, single header pipeline to connect it to natural gas coming from the Permian.
Here's the catch...
Everything discussed so far is just business plans; neither really does anything yet. At this juncture, neither has even broken ground on construction; actually they haven't even issued a final investment decision to officially move forward. They also are still working to secure the capital it's going to take to fund construction.
And, quite frankly, that's where all the risk lives.
Tellurian says it's going to cost $30 billion to build the three pipelines and its Driftwood LNG plant; the plan is to fund $21 billion with debt, and $7 billion through equity investments from the energy companies it will also rely on as customers. NextDecade's Rio Grande LNG facility and much smaller pipeline is expected to cost $12.6 billion.
That's a massive amount of money they'll need to come up with, and there are a litany of uncontrollable things that could transpire between today and 2023 to unseat even the best-laid plans. A few to consider:
- Access to capital markets could tighten.
- Oil and gas companies could back off from commitments.
- Gas prices could rise, changing all the cash flows assumptions. (investing in the energy industry is hard.)
- Construction costs could increase and delays could affect commencement of operations.
Simply put, with a lack of ongoing operations to help generate some cash flows, both companies are completely exposed to the whims of capital markets, their energy company partners to fund their ambitions, and construction contractors' ability to meet their commitments and price targets.
The risk is notable, but the potential is enormous
As mentioned, a business without an actual business is risky in and of itself. When it's going to take tens of billions of dollars to actually build that business, investors have to accept that every dollar they invest is at risk of evaporating if things don't go well.
However, the cash flows these two companies aim to generate is incredible. Tellurian expects to make $8 per share in cash flow when Driftwood is at full capacity, while NextDecade projects Rio Grande will generate up to $4.70 per share from the first phase. At recent prices, Tellurian trades for 0.84 times projected cash flows, while NextDecade trades for 1.1 times projected cash flows.
What's a reasonable cash flows valuation? In general, anything less than 10 times cash flows is considered solid value; so we're talking about turning a $1,000 investment into $10 grand in less than five years, if management hits their targets.
The amount the market has discounted both stocks below a reasonable multiple of their projected cash flows doesn't make them value stocks; it's a reminder of the risks. I'm willing to take on the risk I lose all the capital I've invested in both Tellurian and NextDecade. Before you take the plunge, make sure you are, too.