If you are looking at Tellurian (TELL +0.00%), you have to pay very close attention to the energy sector specialist's construction plans. That's because its only real asset is the Driftwood liquified natural gas (LNG) export terminal. Well, it will be the only real asset once it is built and processing LNG in 2028. Which means that the next four to five years are going to be all about execution.
What's the opportunity for Tellurian?
According to Tellurian, LNG demand is expected to grow by more than 50% by 2035. That's a huge number, but the real problem is that global production isn't projected to keep up.
The shortfall is expected to be fairly large, but the really important aspect is that the U.S. is the largest exporter of LNG in the world. Tellurian is betting that the country ends up being a key player when it comes to solving the LNG production shortfall.
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The problem is that it is very difficult to move natural gas. The easiest way is via pipelines, but that requires the starting and ending points to be fairly close geographically.
If natural gas is to be moved long distances, such as over large bodies of water, it has to be cooled down until it becomes a liquid -- LNG. It can then be put onto a ship for transportation.
Turning natural gas into LNG requires large, specialized facilities. Which is exactly what Tellurian's Driftwood project is. The hope is that Driftwood comes on line as demand for LNG is increasing and the company can turn this project into a reliable cash generator.
Tellurian is only at the starting gate
So there's a good reason for Tellurian to build Driftwood. But that doesn't mean it will be easy to do. Large construction projects like this are complex, expensive, and time-consuming. A lot of things need to go right for them to work out. Tellurian looked like it wasn't doing so great on that front for a little while, and it recently brought in new leaders to right the ship.
NYSEMKT: TELL
Key Data Points
A lot has changed in a short period of time. The most recent event was the company agreeing to the sale of some pipeline assets to Aethon Energy. The cash from this sale will be used to pay down debt, which will give Tellurian more leeway to pay for the rest of the construction. This is good news, but the company still needs to sign up its first customer. To that end, the company that is buying the pipeline assets has begun negotiating for a portion of Driftwood's LNG export capacity. Although Aethon hasn't inked a definitive deal, the interest is an important indication.
Right now, this is probably the big story that investors should be watching. If Tellurian can't find customers for Driftwood, it might not be worth building. But as soon as one customer signs on the dotted line, things could start to move more quickly.
Still a long way to go
Finding that first customer might be the next obvious step for Tellurian, but it is really just one of many things that have to happen to get Driftwood completed on time. The next four to five years are also going to include a huge amount of execution risk on the construction front.
This is not a stock for risk-averse investors, even if it signs a customer and the expected supply/demand dynamics fall into place. But if you do buy Tellurian, or even if you just keep watching the company, you should be waiting eagerly for that first customer. Once it has one lined up, the LNG export terminal's successful start-up in 2028 will begin looking like a far more certain outcome.
