Tellurian (TELL +0.00%) tanked last year. Shares of the liquefied natural gas (LNG) project developer have plummeted more than 70% over the past 12 months. Several factors have weighed on the company, including concerns about how it would fund its massive Driftwood LNG project.
However, a potentially massive upside catalyst has recently emerged. The LNG developer has hired investment bank Lazard, which will, among other things, explore a sale of the company. Here's a look at whether this new development makes Tellurian a buy.
NYSEMKT: TELL
Key Data Points
Seeking help
Tellurian has been looking for ways to fund its massive Driftwood project. The company has already started building the first phase of the LNG export terminal in Louisiana. The natural gas company estimates it would cost about $14.5 billion to develop the two-plant, 11 million ton per year project. That's a lot more than Tellurian can handle on its own. The company ended the third quarter with $1.3 billion in total assets and $59.3 million of cash and equivalents.
The LNG developer has been looking for equity partners to help bridge the gap between its resources and funding needs:
Image source: Tellurian.
As that slide shows, it's seeking partners willing to put up more than half the equity needed to fund the project. In addition, Tellurian wants those partners also to be customers of the facility, taking a portion of its LNG export capacity.
That has proved to be a tall order, leading Tellurian recently to hire Lazard to "help us look at commercial opportunities as we seek equity partners for Driftwood LNG," according to a company spokesperson. However, Bloomberg also reported that Tellurian is considering a sale. A buyout could fetch a premium price. Shares already spiked following that report.
Buy the rumor?
Driftwood LNG has the potential to be a very valuable project. Tellurian estimates that the project's first phase could generate $4.4 billion in annual operating cash flow before land lease and interest expenses starting in 2027. That would enable the project to self-fund the development of the other three plants to bring Driftwood up to its maximum planned capacity. At that point, it could produce $11 billion in annual operating cash flow before lease and interest expenses.
This potential cash flow profile should make Driftwood appealing to potential equity investors and suitors. It could become even more attractive after the Biden administration recently paused approvals for pending and future LNG projects since that could limit future investment opportunities in the sector.
However, none of that means that a buyer will emerge and offer a premium for Tellurian to gain control over its Driftwood project. Further, there's no guarantee that Tellurian will secure the equity partners it needs to fund the project on its own. That's a concern given the company's dire financial situation. Tellurian has already warned that it might not be able to continue as a going concern because it currently lacks the liquidity to satisfy its financial needs over the next year. If it doesn't find partners, it may need to undergo a financial restructuring that could wipe out current equity investors. In short, Tellurian is a really risky stock.
Way too risky
Tellurian is a very speculative investment. On the one hand, it has tremendous upside potential, especially if it finds a buyer willing to pay a hefty premium to gain full control over the Driftwood LNG project. However, it also has significant downside, given its precarious financial position. That downside risk outweighs the reward, which is why most investors should steer clear of Tellurian.
