North America is one of the biggest sources of low-cost natural gas in the world. Technology has unlocked our ability to get it out of the ground, and to liquefy it so that it can be shipped in large quantities anywhere on earth. The growth of the global middle class is set to drive demand for LNG higher for years to come.
One of the earliest and biggest winners from this has been Cheniere Energy (NYSEMKT:LNG). The company started from zero to become one of the largest LNG exporters in the world, and there's still immense opportunity to keep growing. And with the stock down by 35% during the coronavirus crash, investors have a chance to get in at prices we haven't seen in nearly three years.
But is Cheniere the best stock to buy in LNG exporting? One smaller start-up, Tellurian (NASDAQ:TELL), is on investors' radar. The company was founded by the same person who started Cheniere, and features many of the executives involved in moving that company from start-up to cash cow. If they can do it again, Tellurian could deliver enormous gains for investors who buy today.
So which is the better LNG stock? Let's take a closer look at the two and see which comes out ahead.
Cheniere Energy: Delivering today, with solid growth prospects
Cheniere was once a lot like Tellurian. Founded by Charif Souki as a natural gas importer in the late 1990s, the company reversed course when fracking and horizontal drilling unlocked North America's shale natural-gas resources. Souki was well ahead of the game, but it still took a decade for the company to develop and build its Sabine Pass, Louisiana, export facility and start shipping LNG.
Investors who took the early risk have been rewarded enormously. Even with the recent drop in the stock price, people who bought Cheniere a decade ago, when it was still a high-risk idea that Souki and his executives were trying to get funded, have enjoyed almost 1,500% in returns.
The company is in solid shape. Even amid the crash in demand for crude oil, as much of the world's economy has collapsed, demand for natural gas has held up better. Oil is primarily used for transportation, while natural gas is more often a feedstock for electricity generation and petrochemical manufacturing. Moreover, much of Cheniere's business is already locked up in long-term contracts, so it's been far more immune than other energy companies.
Cheniere generated almost $2 billion in operating cash over the past year, and $882 million in net income from its two LNG facilities.
The future looks pretty bright, too. Seven of the nine "trains" between the two facilities are on line now, with two additional trains set to commence operations in 2021 and 2023. These will deliver more cash flow on the other side of the current health and economic crisis.
Tellurian: A high-risk bet on the next Cheniere
In addition to Souki, Tellurian also counts Martin Houston as co-founder and vice chairman of the board. Houston was COO of natural gas giant BG Group, which was acquired by Royal Dutch Shell. Tellurian also counts Meg Gentle as CEO. Gentle was a key executive at Cheniere under Souki during the company's development phase. Having a leadership team that understands LNG and has delivered on a ground-up development is hugely important.
The catch is that right now couldn't be a worse time to get funding for a multibillion-dollar energy project. Much of the North American oil and gas sector is imploding under a record collapse in demand for oil, and the collapse in oil profits is cutting Tellurian off from the source of what was expected to be much of its funding.
Tellurian's strategy to fund its Driftwood LNG export facility and associated pipeline has been to partner with large integrated oil and gas companies. The company has a deal in place with French energy giant Total SA (NYSE:TOT), which will invest $500 million in Driftwood and $200 million in Tellurian common shares (at $10 per share) once a final investment decision (FID) for Driftwood is reached.
This deal is the model for what the company wants to use for the bulk of its financing, along with debt. Driftwood will cost about $15.5 billion to build, while the four pipelines Tellurian has planned will push the total above $27 billion.
Beyond the Total deal, Tellurian hasn't made much progress, and the oil collapse has many of its potential partners cutting back on spending, not looking at new projects. A memorandum of understanding with Indian Petronet LNG was extended until May 31, but at this writing the parties have not announced anything.
As a result, Tellurian remains a great idea that needs someone to agree to fund. The lack of concrete funding and no meaningful operations to even cover expenses is where the risk is.
The better buy: Floor or ceiling?
Between the two, Cheniere certainly has much less risk of permanent losses. Its existing business lends it strength in two ways: First as a source of cash to fund its projects, and second as evidence to lenders that it can deliver results and pay its obligations.
So it's both safer, and also offers some upside as it brings more LNG capacity on line in coming years. For most investors, that should put it far ahead as the better buy over Tellurian.
But for those with the willingness to put down capital today that they could lose all of, Tellurian is worth a look. The share price has fallen more than 85% this year as energy companies cut spending to ride out the oil crash. This has increased the risk that Tellurian runs out of money before Driftwood gets off the ground, wiping out shareholders in the process.
I'm not counting Tellurian out; management just got a lot of breathing room, adding $50 million in cash to the balance sheet and pushing a term loan that was set to mature in May out to November 2021. The company has $100 million in cash, and just lowered corporate expenses to $6 million per month, giving it time to keep developing Driftwood and to find investors and lenders ready to pony up. What's that worth to investors? A fully operational Driftwood could generate $6 to $8 per share in cash flows. That's a massive potential return from today's share price.
Whether it's worth the risk depends on your ability to stomach a nearly binary outcome of either massive returns, or a nearly total loss.