Natural gas infrastructure giant Williams (WMB -0.48%) has been looking to expand deeper into the liquefied natural gas (LNG) market. Last year, it spent $2 billion on strategically located natural gas storage assets to serve the growing LNG market.

It has also looked into investing directly in LNG developments, including evaluating an acquisition of Tellurian (TELL 7.71%), which is developing Driftwood LNG. Investments to support the growing LNG market could give it more fuel to grow its cash flow and 5.1%-yielding dividend.

However, Williams has opted against acquiring Tellurian, deeming Driftwood too risky. Here's a look at why and what that means for Tellurian.

The strategy backfired

Natural gas pipeline giant Williams recently confirmed that it looked at buying Tellurian. The troubled LNG developer has been considering its strategic options. It hired advisors to help find potential strategic partners to fund its Driftwood LNG project and customers to buy the LNG it would produce.

The company also put its natural gas production business up for sale. It would also consider a full sale if it got the right offer.

It won't get that from Williams, which decided against putting in an offer because it considers Driftwood too risky. The issue is that Tellurian doesn't have commercial contracts with LNG buyers to back the facility.

Tellurian previously had some customers for the project but terminated those deals because it wanted to offer a strategic partner the ability to invest in the project and be a major customer of its capacity. That strategy backfired after it couldn't find a partner willing to be both an investor and a customer.

Rival LNG project developers, like Energy Transfer's (ET 0.12%) Lake Charles LNG, have secured commercial agreements with several natural gas producers and LNG buyers. Because of that, it has lined up a few companies interested in investing in the project, and some of them would also sign offtake agreements. While Energy Transfer still has a regulatory hurdle to clear before it can start building the project, its ability to secure long-term contracts with customers proves Lake Charles LNG is commercially viable -- something Tellurian can't offer potential investors.

What's next for Tellurian?

Tellurian is currently exploring all its options as it's seeking to find a way to move forward with Driftwood LNG. It's working with a financial advisor looking into alternative debt and equity financing options, including selling interests in Driftwood and Tellurian and the company's natural gas production business.

The LNG developer has a huge task ahead. It ended last year with $1.3 billion in assets and only $75.8 million in cash. The company only generated $166.1 million in revenue from natural gas sales last year, down from $391.9 million in 2022, due to lower prices. Meanwhile, its net loss ballooned to $166.2 million, up from $49.8 million in 2022.

Because of these issues, the company doesn't have the financial resources to develop Driftwood independently. It expects the first phase will cost $14.5 billion. While it has already invested over $1 billion into the project and has secured a sale-leaseback transaction for the 800-acre property where it's developing the project that would bring in another $1 billion, it needs one or more strategic partners willing to fund 60% to 65% of the equity required to build the project.

It hasn't found partners willing to commit to investing in the project. That's likely because, unlike Energy Transfer's Lake Charles LNG, Tellurian hasn't secured commercial contracts to derisk the project.

A risky bet

Tellurian is a very risky investment. It was so risky that even a deep-pocketed natural gas infrastructure giant like Williams wasn't willing to invest in the company. While it's still possible that Tellurian will find the strategic and commercial partners it needs to move forward with Driftwood, it's not a sure thing.

Because of that, investors should steer clear of the stock and consider investing in a financially stronger natural gas infrastructure company like Williams or Energy Transfer instead. In addition to their LNG-fueled upside potential, both companies pay attractive and growing dividends. These features could enable their investors to earn high total returns in the future.