What happened
On a choppy day for the markets, natural gas and LNG player Tellurian (TELL 7.47%) was up 11.3% on the day.
The beleaguered company, which has seen its shares fall by 75% over the past year, gave an earnings update this morning, and apparently investors either liked what they heard, or short-sellers heard something that made them cover their bets.
Tellurian owns some natural gas drilling wells in the U.S., but its main asset is the yet-unbuilt Driftwood liquefied natural gas (LNG) export plant. Higher interest rates have wreaked havoc on Tellurian's financing plans, and plummeting natural gas prices have also hampered its drilling operations. Yet, perhaps because things were thought so dire, any amount of halfway-good news could have been enough to send the stock higher today.
So what
It was hard to know exactly what was pushing the stock higher today. While Tellurian did report a 96% increase in revenues, that came entirely from its rather small natural gas drilling operation. Tellurian acquired lots of natural gas drilling assets in the summer of last year near the top of the natural gas market, and its drilling volumes actually more than tripled. And even those increasing drilling volumes resulted in a slight operating loss.
Much more important perhaps was the commentary around the status of Driftwood. On that front, management noted its recent $1 billion sale-and-leaseback transaction with a large asset management firm for some of its natural gas acreage it made at the beginning of April.
With that $1 billion in place, management gave contractor Bechtel notice to continue with construction. Tellurian had given Bechtel the go-ahead with Phase I of construction back in April 2022, and reiterated to Bechtel it should continue its work. Tellurian also noted that all critical areas have been cleared, and some preliminary construction proceeds.
So, the stock likely rose on news that work hadn't been interrupted and that things are going along at Driftwood. However, while management has managed to get more financing in place, the whole plant still will cost $14.5 billion to complete. Meanwhile, Tellurian has only funded and/or found financing for $2 billion of preliminary costs.
Now what
Tellurian is now seeking about $4.5 billion of equity financing, $7 billion of debt financing, and $1.5 billion of mezzanine and land sales, with the rest from internal cash flow in order to complete the project. So, the company still has a lot of work to do and is out to investors touting the need for more liquified natural gas exports going out in the future.
However, as inflation and interest rates have surged while the threat of recession looms, Tellurian hasn't received offers it likes yet. Even the sale-and-leaseback arrangement seems high cost, as Tellurian will have to make lease payments of 8.75%, with 3% annual escalators for 40 years.
If Tellurian management's long-term projections for annual cash flow are correct, the company could be a home run if it can find reasonable financing for Driftwood. However, the stock is extremely high risk, as the company needs to raise billions of dollars in an extremely adverse economic environment. If the Driftwood project doesn't happen, it's hard to know how low the stock can go.
