Tellurian (NASDAQ:TELL) is a $2 billion liquefied natural gas (LNG) start-up that's shaking up the United States energy export economy. In mid-September 2019, I attended Gastech, the world's largest conference for natural gas and LNG, in Houston, Texas. The conference attracted more than 35,000 attendees in just a few days, including executives from every major private, public, and nationally-owned natural gas company.

Out of more than 700 booths, tiny Tellurian had the largest, most extravagant exhibition by far. Picture a custom-made booth around 40 feet in height which housed a string quartet, ice sculptures, full open bar, branded Moscow mule mugs, branded lemon peel garnish, a souvenir penny machine, dozens of waitstaff, an extensive buffet with several cuisines, and a lounge area holding more than 100 chairs and couches. It was spectacular and expensive, but it certainly got everyone's attention.

Hands holding wooden blocks that spell out the words risk and reward.

Source: Getty Images.

Tellurian is building the largest liquefaction export facility in the country and just signed the largest-ever LNG deal in U.S. history with the largest Indian importer of LNG, Petronet LNG. A liquefaction facility cools natural gas to -260 degrees Fahrenheit, which condenses the gas to 1/600th its original volume. From there, tanker vessels with average capacities ranging from 200,000 to 260,000 cubic meters transport the product to LNG import facilities, where the LNG undergoes regasification before distribution to end-users.

So how is such a small company making such a big splash? Well, aside from headlines, it hasn't -- yet. Tellurian is just getting started and faces several years of investment between now and the day it generates meaningful revenue. With so much uncertainty, does this partnership with India signal a buy for Tellurian, or does the young company still have a lot to prove?

Larger than life

In late September, Indian prime minister Narendra Modi visited Houston to attend the signing of a $2.5 billion deal between liquefied natural gas importer Petronet LNG and Houston-based LNG exporter Tellurian. According to a recent press release, Petronet plans to finalize the deal by March 2020 to secure 5 million metric tons of LNG per year from Tellurian's Driftwood LNG export terminal in Lake Charles, Louisiana. Out of the 19 Federal Energy Regulatory Commission (FERC)-approved LNG export terminal projects, Tellurian's Driftwood LNG export terminal is by far the biggest, with a maximum export capacity of four billion cubic feet per day (BCFD). The deal's signing is motivated by India's hopeful transition from coal to natural gas. Currently, India is more than 50% reliant on coal. Prime Minister Modi wants to increase natural gas from less than 7% to 15% of the nation's power generation mix by 2030.

Here's a look at Driftwood LNG's expected production and revenue:

Frequency

Million Tonnes

Billion Cubic Feet

Revenue

Annual

27.60

1,324.8

$3.5 billion

Daily

0.08

3.63

$9.6 million

Natural gas prices quoted at $2.64/thousand cubic feet. Data source: Tellurian. 

The scale of the Driftwood LNG project is difficult to fathom. The project is expected to be larger than even Cheniere Energy's (NYSEMKT:LNG) Sabine Pass LNG project, the crown jewel of a company eight times the size of Tellurian. Petronet LNG's deal to purchase 5 million metric tonnes of LNG per year equates to 18% of the facility's export capacity and $630 million in annual revenue from Petronet alone. Driftwood's anticipated export capacity is a whopping 14% of all approved LNG projects in record-setting 2019. The Sabine Pass facility and Driftwood are the primary reasons why Louisiana is the dominant LNG exporting state in the United States.

2019 FERC-Approved LNG Export Capacity by State

State

BCFD

Louisiana

16.44

Texas

8.93

Mississippi

1.50

Maryland

0.82

Georgia

0.35

Alaska

0.20

Total

28.24

Data source: FERC. FERC = Federal Energy Regulatory Commission. Export capacity by state (sum of Approved, Approved Under Construction, and Approved Not Under Construction capacity).

Delayed gratification

Tellurian's primary advantage lies in its management executives, many of whom left Cheniere, Tellurian's largest competitor, to start Tellurian. Tellurian was founded three years ago by co-founder and former CEO of Cheniere Charif Souki and former BG Group chief operating officer Martin Houston. Souki is Tellurian's chairman of the board, and Houston is vice chairman. Tellurian is headed by Anadarko Petroleum and Cheniere veteran Meg Gentle, one of two prominent female energy CEOs along with Occidental Petroleum's (NYSE:OXY) Vicki Hollub. (Note that Anadarko is now a subsidiary of Occidental.) Both women have spent time in the spotlight with their epic deals and personalities; Hollub with the acquisition of Anadarko Petroleum and now Gentle with her Petronet LNG deal.

Investors shouldn't expect to see a profit from Tellurian for several years. The company has trailing 12-month revenue of just $13 million, equating to a whopping 155 price-to-sales ratio. Most of Tellurian's revenue is from its production team of oil and gas professionals, who are extracting hydrocarbons around the Haynesville/Bossier shale. The production team is providing Tellurian near-term revenue and cash but these activities won't form the primary source of revenue as future projects ramp up in the coming years.

To put Tellurian's valuation in perspective, the company's price-to-sales (P/S) ratio is higher than that of any IPO this year, including CrowdStrike, Chewy, Lyft, Uber, Pinterest, Peloton, Slack, and Zoom. (Tellurian went public in 2017 through a reverse merger process.) Its P/S ratio is three times higher than even Beyond Meat, which has the highest price-to-sales ratio of all 2019 initial public offerings (IPOs). Almost all of Tellurian's cash cows are expected to begin producing in 2023, meaning several years of exhaustive capital expenditures until the company shows a profit, much less revenue. 

Tellurian's road to profitability is strewn with possible pitfalls such as disappointing earnings quarters, cash flow issues, and volatility. The stock could take a bit hit if projects are delayed beyond 2021. Delays could occur from rejected FERC permits, lack of funding, logistical problems, and other factors. Like many of the IPOs this year, Tellurian's short term price movement could shift in either direction for a variety of reasons.

Tellurian's Project Calendar

Project

2019

2020

2021

2022

2023

Delhi Connector Pipeline

FERC prefile

FERC permit

Detailed design and engineering; materials and procurement

Pipeline and facilities construction

Project in service

Driftwood LNG and 96-mile Driftwood pipeline

Final environmental impact statement, investment decision, and construction

N/A

N/A

N/A

Begin operations

Haynesville Global Access Pipeline

FERC prefile

FERC permit

Detailed design and engineering; materials and procurement

Construction

Project in service

Permian Global Access Pipeline

FERC prefile

FERC permit

Detailed design and engineering; materials and procurement

Pipeline and facilities construction

Project in service

Information compiled based on data from www.tellurianinc.com.

Purposeful dreamers

Once you know about a company like Tellurian, you can't forget it. Flashy and charming on the outside yet full of experienced and seasoned LNG veterans on the inside, the company enters the ring ready to pack a punch. As Prospero famously said in Act IV, Scene 1 of The Tempest, "We are such stuff as dreams are made on, and our little life is rounded with a sleep." The 170 employees at Tellurian are all experienced and purposeful dreamers with their eyes set on energy stardom.

It's hard to recall the last time an energy start-up embarked on a quest this grand and capital intensive. Tellurian has set the stage by securing deals and investing heavily in projects of unprecedented size and scope. The spotlight is turned squarely toward Tellurian. Now it's time for this upstart to make good on its promises and perform.