What happened
Shares of natural gas company Tellurian (TELL -6.25%) were bouncing back in a big way today, up 6.5% as of 11:06 p.m. ET.
There wasn't much in the way of company-specific news today, but today's gains didn't even recapture the losses from yesterday's decline, which was even larger.
Tellurian is a small-cap stock that's tied to the price of a commodity, natural gas. That's already a recipe for volatility; however, Tellurian's potential is also based on a construction project that may or may not be completed far out in the future, which adds yet another dose of volatility to this stock. But is the big upside potential worth it with the stock at these beaten-down levels?
So what
Tellurian has two businesses within the natural gas industry. Mainly, it was formed to build a new liquefied natural gas (LNG) export plant called Driftwood, which is projected to cost between $12 billion and $13 billion and not be operational until 2026. With Russian President Vladimir Putin holding back natural gas supplies to Europe, LNG exports should be in demand for years to come. The second of Tellurian's businesses is a small upstream operation that drills for natural gas in the U.S. However, the Driftwood project is far, far larger.
The recent problem Tellurian has run into is that as interest rates have spiked, Tellurian has had to back away from its recent $1 billion round of debt financing, which would have not only borne an 11.25% interest rate, but also would have diluted shareholders with warrants.The withdrawal means that construction of the Driftwood plant may be pushed out. In response, Shell terminated its long-term contract with Tellurian, which entailed purchasing 3 million tons of LNG for 10 years.
"It sets us back, definitely," Chairman Charif Souki said in a video statement. "It puts in jeopardy the ability to deliver gas on the schedule that we were hoping to stick to... We would never put in jeopardy the balance sheet of Tellurian to try to accelerate the process by taking disproportionate risks."
That leaves Driftwood with its natural gas upstream operations. Last quarter, the natural gas upstream operations brought in $61 million in sales, but the company recently closed an acquisition this summer that will bring on more wells and increase this number. Management has stated it will continue construction of Driftwood from its operating cash flow, but those cash flows are much lower than the $1 billion it was going to receive from a bond sale.
That leaves Tellurian as a small natural gas producer for now, and today, natural gas prices in the U.S. stabilized around $6.90. That's far down from their yearly highs near $10 as recently as August, but prices are up today, and are still almost double where they were to start the year. With Tellurian's stock also having sold off mightily over the past two weeks, a big bounce on a positive day is not surprising.
Now what
Tellurian remains akin to a call option on the price of natural gas. Investors shouldn't expect any dividends or cash flows for the foreseeable future; however, should interest rates come back down with inflation, the company could secure Driftwood financing once again. Of course, a lower interest rate may also be commensurate with a global slowdown, which may hurt the price of natural gas.
Investors should see Tellurian as a leveraged bet on the long-term price strength of natural gas. I think it was actually quite a positive sign to see management pulling away from financing so as not to harm the company's balance sheet, even if plans are delayed for a bit. If you believe in the long-term story on natural gas, this period just after the financing hiccup may end up being quite a good entry point over the long term.
