What happened

Shares of Tellurian (TELL -0.92%) were tumbling on Tuesday, falling 11.5% as of 2:57 p.m. ET.

Tellurian's main asset is its Driftwood liquefied natural gas (LNG) project, which is underway near Lake Charles, Louisiana. Unfortunately, the project is only in its preliminary stages of construction and isn't fully funded. With financing costs skyrocketing with rising interest rates, Driftwood may have to delay or push back its 2026 operational start date.

Tellurian also has some natural-gas-producing assets in the U.S. that it hopes will produce some internal cash flow. The company even added to those assets with an acquisition last summer.

Unfortunately for Tellurian, those assets look less valuable now, as natural gas prices have plummeted. With both its own internal cash flow and outside financing possibilities in question, analysts at Bank of America gave Tellurian the rare and ignominious "double downgrade" from a buy to a sell rating today.

So what

Bank of America analyst Julien Dumoulin-Smith double downgraded Tellurian today while putting a $1.50 price target on the stock, slightly below where Tellurian's stock currently trades. It's a big reversal for the analyst, who had actually given Tellurian a price target as high as $6.50 last year.

The double downgrade comes as both sources of potential financing for Driftwood LNG -- both external investors and internal cash flow from natural gas production -- have dried up. While U.S. natural gas prices rose as high as $9.33 last August, prices have plummeted since then to $2.57 per MMBtu as of this writing. Futures markets now have natural gas prices averaging around $3 for 2023.

Unfortunately, in an effort to boost its internal cash flow, Tellurian purchased natural gas-producing assets in the Haynesville shale from EnSight Energy Partners last July, when natural gas prices were more than double what they are now.

Dumoulin-Smith notes that at expected natural gas prices, Tellurian would burn through about $265 million this year, or 40% of its balance sheet cash. Moreover, about $166 million of Tellurian's convertible bonds come due in May, which could put further pressure the company's finances, especially as interest rates are now much higher than they were last year.

Last September, the company canceled the sale of $1 billion in bond financing, as management didn't like the prices it was getting in the market. That had the potential to delay Driftwood's 2026 operational start date, and Tellurian saw two large contracts canceled as a result. With debt financing now even more expensive, management has shifted from targeting the debt markets to trying to find a strategic equity partner to finance Driftwood. However, there has been no news on that front since the debt financing cancellation. 

In total, the initial phase of Driftwood is projected to cost some $12.8 billion.

Now what

Things have really gone against Tellurian over the past six months, but it's a good lesson for investors on the risks of investing in what is basically a pre-revenue company. A bet on Tellurian is still essentially a levered bet on natural gas, and with the price of the commodity falling, it's no wonder the stock has plummeted as a result.

Still, all hope is not lost. The spread between domestic U.S. natural gas prices and prices for the Asian and European markets is still significant, with both the North West Europe and Japan/Korea LNG marker futures in the mid to high teens per MMBtu.

Therefore, Tellurian's fate pretty much depends on whether management can find an equity partner to invest at a reasonable valuation.

Tellurian remains a high-risk, high-upside bet on not only natural gas demand outside the U.S., but also on Tellurian's ability to attract financing on good terms.