What happened

During a volatile trading session for most stocks, shares of natural gas upstart Tellurian (TELL -10.31%) rose Wednesday, up 8.2% as of 2 p.m. ET. Natural gas prices were up strongly after having moderated over the past few weeks. However, Tellurian also announced an acquisition to take advantage of persistently high natural gas prices. This deal should help the company's liquidity, as Tellurian's main asset is a liquid natural gas (LNG) project that is still under construction and consuming cash.

So what

On Wednesday, Tellurian announced it would pay privately held EnSight Energy Partners $125 million for natural gas assets in the Haynesville Shale, a natural gas formation that spans east Texas, Louisiana, and Arkansas. Tellurian may also be on the hook for another $7.5 million payment to EnSight in 2023, depending on the price of natural gas. All in all, the assets are projected to expand Tellurian's annual natural gas production by 30% and its asset-level EBITDA (earnings before interest, taxes, depreciation, and amortization) by 25%.

Management projects that the new assets will produce asset-level EBITDA of between $90 million and $120 million in 2023, based on a $30 million capital investment program, and projects the 10-year present value of proved reserves in this field to be worth about $180 million. As long as those projections hold true, this looks like a solidly high-return acquisition.

Acquiring these upstream assets benefits Tellurian in two ways. First, they provide immediate cash flow the company can use to offset the costs of construction on its main asset: the Driftwood LNG facility. Tellurian recently contracted with engineering firm Bechtel, which began construction on Driftwood in April. The first phase of the Driftwood facility will include two LNG plants, is expected to cost some $12.8 billion, and will have a capacity of 11 million tons per year. That phase is scheduled for completion by 2026. Should the planned project be completed in full (with three additional LNG plants), the Driftwood operation is projected to cost $30 billion and have 27.6 million tons per year of capacity.

The second benefit to those newly acquired upstream assets is that they give Tellurian some captive supply close to the Driftwood site, which will help management be somewhat more independent and put it in a better negotiating position once it needs to buy natural gas to convert into exportable LNG.

Now what

Tellurian could be quite an exciting stock to own, as it is clear the world needs more natural gas right now. Europe is especially vulnerable these days, as Russia currently supplies much of its natural gas. In fact, there is already some natural gas rationing going on in Germany as a result. However, Japan and Korea also import lots of the fuel. Management projects $4 billion in annual cash flow once Driftwood phase one is up and running, assuming that oil prices remain around $85 per barrel, which management believes will enable JPM (Japan/Korea Marker) natural gas prices of $14 per million British thermal units.

Given that Tellurian's current market cap is only $1.8 billion, you might think it's a massive bargain. However,  it will cost tens of billions of dollars to build Driftwood -- money that Tellurian will have to borrow. Its upstream assets are still relatively quite small -- they only brought in $26 million in revenues last quarter. The company just sold $500 million in convertible notes last month with a yield of 6% and an option to convert into equity at a price of $5.73 per share. That's not cheap financing, and interest rates only look to be going up. Moreover, even when the first two Driftwood plants are up and running, their cash flows will go toward building out the next three. So investors won't be seeing much cash flow from this company for quite some time, and that future cash flow will be dependent on the price of natural gas.

Tellurian remains a high-risk, high-reward bet on the future of natural gas, and its stock should remain volatile for the foreseeable future.