Tellurian (TELL +0.00%) has struggled mightily in recent years. Falling natural gas prices and surging interest rates have had a significant impact on its plan to build an integrated natural gas production and export business. Those issues have weighed heavily on its stock, which is down more than 90% from its peak in 2022.
However, Tellurian is finally making some progress on its turnaround plan. It has agreed to sell its upstream natural gas production assets to a company that will also support its Driftwood liquefied natural gas (LNG) export project. Here's a look at whether these positive developments make the beaten-down energy stock a buy.
NYSEMKT: TELL
Key Data Points
Unloading its upstream assets
Tellurian has agreed to sell its integrated upstream natural gas production assets to Aethon for $260 million. The business includes drillable land in two shale plays in Louisiana and some associated natural gas gathering and treating infrastructure. Tellurian was losing money from the business (a $44 million loss in the first quarter on only $25.5 million in revenue) due to lower natural gas prices and its lack of scale.
That purchase price is much less than analysts estimated it was worth. Furthermore, it's well below its value a few years ago when gas prices were much higher.
However, the sale will turn what has become a liability into an asset by providing Tellurian with some cash to repay debt. The company ended Q1 with only $51.8 million of cash and cash equivalents on its balance sheet against over $341 million of borrowings. If it can pay down that debt, reducing its interest expenses, it will have more financial flexibility to fund its share of the massive Driftwood LNG project.
Securing a customer for Driftwood
Aethon also signed an agreement to purchase 2 million tons of LNG annually from Driftwood. The proposed 20-year deal would enable Aethon to export some of its gas volumes to higher-valued global markets. Meanwhile, the contract is an important step toward commercializing Driftwood. It should help Tellurian secure project financing to build the export facility. Aethon also plans to explore additional opportunities to bring value to the project in the future.
"Today's agreements with Aethon take us several steps closer to developing the Driftwood LNG project, for which Aethon is a vital partner," stated Tellurian Executive Chairman Martin Houston in a press release unveiling the transactions. The company believes the contract provides a foundation to accelerate the project because it has now demonstrated it can successfully commercialize Driftwood.
While the company has secured a meaningful commercial contract, it still has a long way to go, given Driftwood's expected 27.6 million ton per-year capacity. The company will need to sign several additional contracts to commercialize the first phase (about 16.6 million tons per year). Furthermore, it needs to secure investors to help finance about half of the multibillion-dollar project.
Both tasks have proven difficult. There's lots of competition in the sector, as several companies are working to expand existing LNG export facilities or build new ones. They're competing against Tellurian for commercial customers and equity investors. Many of those rival projects are much further along in their commercialization.
For example, Energy Transfer (ET +0.77%) has signed six contracts totaling 7.9 million tons of LNG per year to support its Lake Charles LNG project. That's more than half its planned 16.5 million ton per-year capacity. The company has also seen significant interest from potential investors, many of whom also plan to be customers of the project. Energy Transfer believes it will only need to retain about a 20% equity stake in Lake Charles, significantly reducing its financial commitment. The midstream giant has ample financial capacity to fund its share of the project, something Tellurian severely lacks.
A big step in the right direction (but a long way to go)
Tellurian's agreement with Aethon is a strong first step. The energy company will sell its money-losing natural gas production business, giving it the cash needed to reduce debt. Aethon also signed a deal to support its Driftwood project.
However, Tellurian has a long way to go. It needs to sign additional commercial contracts and find some funding partners. The company will also need to figure out a way to finance the interest in Driftwood it retains, which will be a sizable investment. These factors make Tellurian an extremely risky stock. While Driftwood could be a needle-moving project, Tellurian has much to do to make it a reality.
