Where Will Tellurian Be in 5 years?

Tellurian (TELL 7.47%) is a $2 billion liquefied natural gas (LNG) start-up that is shaking up the energy industry with its multi-billion dollar deals and projects that will take years to complete. The entire business is centered around the Driftwood LNG project, the largest LNG export facility in North America.

The project and its accompanying pipelines are excepted to begin operations in 2023. Until then, there's a lot of uncertainty. Successful execution of Tellurian's capital intensive business plan is predicated on its all-star cast of industry veterans and their ability to secure partnerships while managing debt. If all goes according to plan, five years from now, Tellurian will be a major player in growing the energy export economy of the United States.

Tellurian was founded in 2016 by Charif Souki, co-founder and former CEO of Tellurian's main competitor, Cheniere Energy (LNG -0.93%), and former BG Group chief operating officer Martin Houston. Souki is Tellurian's chairman of the board; Houston is vice-chairman. Tellurian is headed by Anadarko Petroleum and Cheniere veteran Meg Gentle.

Source: Getty Images.

Short-term outlook

Investors shouldn't expect to see a profit from Tellurian for several years. The vast majority of Tellurian's $13 million of revenue comes from Tellurian Production LLC. According to the company,  Tellurian holds more than 10,000 net acres and operates 20 wells on the Eastern side of the Haynesville Shale U.S. natural gas basin located in west-central Louisiana. The previously undeveloped acreage was purchased from Rockcliff Energy Operating LLC in late 2017 for $87.8 million and has a total net resource of 1.4 trillion cubic feet of gas. Tellurian has high hopes for its upstream assets and believes they will be able to produce and deliver a steady stream of gas while Tellurian seeks investment in its long-term projects.

The gameplan

As with any start-up, Tellurian's future business prospects rely on two interdependent moving parts: investment partners and potential customers. To pull off the $35 billion Driftwood LNG project, Tellurian will need to secure investment revenue as well as sign contracts with potential customers.

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

*Natural gas prices quoted at $2.64/thousand cubic feet.

Since Tellurian Production LLC is too small to fund Tellurian's investment projects, the company is selling a combination of equity and future discounts to finance construction. Yet Tellurian's strategy only partially shields it from the dangerous debt market that has taken down droves of failed energy start-ups and behemoths alike. Tellurian plans to take on $21 billion in project finance debt as well as sell 51% of the facility to equity, leaving Tellurian with an annual production of a little less than 14 mtpa. According to Tellurian's August corporate presentation,the $21 billion in project finance equates to $1.00-$1.50/mmBtu but still leaves Tellurian with $2 billion in annual cash flow or $8.00 per share.

Similarly, Cheniere's Corpus Christi and Sabine Pass LNG export terminals are funded by loans so that Cheniere can control a higher portion of future cash flows. Cheniere now has more than $30 billion in debt,nearly double its market cap, bringing the enterprise value to nearly $47 billion.

Partners and customers

The primary difference between Cheniere and Tellurian is that Cheniere operates a Sale and Purchase Agreement (SPA) model while Tellurian operates an equity model. The SPA model means reliable 20-year deals that are independent of gas prices. Cheniere charges a per Million Cubic Feet (mmcf) annual processing fee and 15% of Henry Hub spot prices, meaning more predictable revenue and little commodity price risk. On the flip side, Tellurian's equity model allows the customer to own the entire value chain from wellhead to pipeline to the processing and export facilities at Driftwood. 

To diversify its risk, Tellurian management has secured partnerships with future customers. For example, Tellurian and French supermajor Total (TTE -0.32%) has signed multiple deals over the past two years that include a direct investment in the facility, multiple gas purchase agreements, and even an equity stake in Tellurian itself. 

Tellurian also signed a $2.5 billion deal, its largest deal to date, with Indian gas giant Petronet LNG. According to a recent press release, Petronet will secure 5 out of the total 27.60 million metric tonnes of LNG per year from Tellurian's Driftwood LNG export terminal in Lake Charles, Louisiana.

Long-term outlook

Data source: www.tellurianinc.com. *FERC = Federal Energy Regulatory Commission.

Partnerships help, but Tellurian remains an incredibly risky investment. In five years, Tellurian could have a dominate LNG export facility or it could be delayed due to a number of hurdles including but not limited to funding, construction, and problems securing regulatory permits. As you can see in the above chart, every project that Tellurian has on its calendar is dependent on Driftwood. The company hopes to construct a series of pipelines that will bring gas from nearby shale plays to Driftwood is an effort to bring LNG production costs down.

All in all, it's a grand plan, but investors need to realize that this is an incredibly risky, boom or bust stock. Investors interested in Tellurian must have confidence in Meg Gentle and her management team's ability to manage debt, secure partners and customers, and most importantly, stay on schedule. Five years from now, Tellurian could be a shining star or a fleeting memory.