Tellurian Inc.: 2022 Will Be An Important Year For Driftwood Project

Summary

• Revenues for the third quarter were $15.64 million with a net loss of $15.93 million, or $0.04 per diluted share, compared with a $29.47 million loss in 3Q20.
• The Driftwood project in Louisiana isn't anticipated to produce its first feed gas until 2025–2026 and assume an FID by the first quarter of 2022.
• I recommend buying TELL below $3.05.
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Presentation

Tellurian Inc. (NYSE: NYSE:TELL) reported its third-quarter 2021 results on November 3, 2021. We are now a few days into 2022, and it seems a good time to look at the company again.

1 - Quarterly results snapshot - Q3

Revenues for the quarter were $15.64 million with a net loss of $15.93 million, or $0.04 per diluted share, compared with a $29.47 million loss during the same period a year earlier. Shares outstanding diluted jumped 39.7% to 407.20 million from 291.41 million in 3Q20. As a reminder, Tellurian had 96 million outstanding shares at the end of 2016.

President and CEO Octavio Simoes said in the release:

Tellurian recently brought production online from two newly completed natural gas wells, adding to our financial strength and integrated model that provides a valuable hedge to volatile global prices,

Furthermore, Tellurian Inc. has authorized a new drilling program and intends to drill 12 to 14 wells to produce approximately 220 million cubic feet equivalent per day by year-end 2022.

However, its goal is to finance its $12 billion Driftwood LNG processing and export complex project along the Gulf Coast. The plan is to give global construction and engineering firm Bechtel group notice to proceed with construction in early 2022.

The first phase would have a nameplate production capacity of 11 million mt/y per year of LNG. Tellurian in recent months chose to pursue the smaller of two options for the first phase of the natural gas liquefaction and export facility, which at full construction would be capable of producing up to 27.6 million mt/y. As recently as May, Tellurian had estimated a capacity of about 16.6 million mt/y for the first phase.

However, the project phase I capacity is now estimated at 11 million mt/y.

Note: The stock now trades in the NYSE American called the AMEX until 2008. TELL will not be delisted if the stock trades below $1.

2 - Stock performance

Data by YCharts

The stock is up significantly on a one-year basis after the company announced enough contracts to allow for a reduced project called project I.

3 - Investment Thesis

The investment thesis continues to be a tricky proposition for "LNG projects" not firmly secured but offering an appealing story nonetheless. NGL prices are going up, which has helped the narrative so far.

However, the earlier Cheniere's success is not a guarantee for future success, despite a few who believe using false narrative by continuity. A successful investor must be pragmatic and careful not to get over-excited.

The Driftwood project in Louisiana isn't anticipated to produce its first feed gas until 2025–2026 and assume an FID by the first quarter of 2022. The more crucial question is what LNG prices will be in 2025-2026? Tellurian is exposed to the spread between domestic prices overseas prices, and the NGL spread is crucial but very elusive.

In short, a few regard this company as a simple well-elaborated Ponzi scheme, and others firmly believe the project will be a great success.

Perhaps the truth is somewhere in between, considering all the speculation surrounding it. I am very skeptical at the moment, and I believe the chance of success is low but real.

It should warrant a small long-term position, but I would prefer a much lower value to make it work fine.

Even if the project can pass the smell test, it requires massive financing that will probably dilute the stock tremendously. I do not see any interest in investing in a stock used as a controversial currency.

On November 5, 2021, Tellurian priced an underwritten public offering of $50 million aggregate principal amount of 8.25% senior notes due 2028. Furthermore, as the company ramps up the project, it could go in for more dilutive offerings to fund it.

The financing is expected to be nearly $12 billion to build such a project in five years, capable of sending 11 million tons of LNG per year around the globe. It is not an easy task and requires timing as an investor to invest in the stock and expect a decent return a few years from now.

So far, on the bright side, the company has been able to find enough contracts to allow for a reduced project called project I. It is progress, but is it sufficient?

Tellurian signed 10-year agreements to sell 3 million tonnes per annum of LNG with commodity traders Vitol and Gunvor Group and in July with Royal Dutch Shell (NYSE: RDS.A) (NYSE: RDS.B) for 3 million tonnes per annum of LNG.

Questions remained about whether the company's strategy of using 10-year supply contracts to finance an LNG export project will ultimately be successful. LNG project developers have traditionally relied on longer-term sale and purchase agreements that cover periods of 15 or 20 years.

Source

Those three contracts total nine mtpa and nearly all of the capacity of Driftwood LNG's first two plants in Louisiana.

Source: precedent presentation

The company has started the financing process of Phase I that requires about $12 billion in investment. Furthermore, Tellurian will need at least a decade to build out their production and export facilities before generating revenue.

Tellurian exercised a long-term lease option with Port of Lake Charles in June 2021. It is a 20-year lease agreement with extension options of up to 50 years.

Because of the gambling nature of the investment, it would be unwise to invest a large amount of cash here.

But it is also essential to invest a good amount long-term and, above all, short-term trade LIFO about 60% of your long-term position until the payday eventually comes.

Tellurian Inc. - 3Q21 Balance Sheet and Trend - The Raw Numbers

TELL	3Q20	4Q20	1Q21	2Q21	3Q21
Total Revenues $ million	14.27	8.62	8.71	25.35	15.64
Quarterly Earnings $ million	-29.47	-11.65	-26.99	-30.60	-15.93
EBITDA $ million	-10.02	96.55	-18.44	-27.44	-11.23
EPS (diluted) $ per share	-0.10	-0.04	-0.08	-0.08	-0.04
Operating Cash Flow $ million	-9.14	-13.23	-10.48	-20.48	-8.22
CapEx in $	0.00	0.92	1.40	5.35	17.67
Free Cash Flow	-9.15	-14.15	-11.88	-25.83	-25.88
Total Cash in $ million	77.95	78.30	58.73	111.86	210.81
Total Borrowing in $ million	118.43	111.09	16.85	0	0
Shares Outstanding (diluted)	291.41	311.99	356.68	386.05	407.20
Revenue details	3Q20	4Q20	1Q21	2Q21	3Q21
Revenue Natural Gas	7.27	8.62	8.71	5.58	15.64
Revenue NGL	6.99	0.00	0.00	19.78	0.00
Total	14.27	8.62	8.71	25.35	15.64

Click to enlarge

Source: Company 10-Q

Analysis: Revenues, Free Cash Flow, Net Debt

1 - Quarterly revenues were $15.64 million for 3Q21

Revenues were $15.64 million in the third quarter of 2021, up from $14.27 million the same quarter a year ago.

Net loss was $15.93 million, or 0.04 per diluted share, compared to a loss of $29.47 million, or $0.10 per diluted share, in 3Q20.

2 - Free cash flow was a loss of $25.88 million in 3Q21

Note: Free cash flow is the cash from operations minus CapEx.

Trailing twelve-year free cash flow is a loss of $77.74 million with a loss of $25.88 million in 3Q21.

As you can see, the company is free cash flow negative and will need constant financing using its equity to survive.

3 - The company had no more borrowing at the end of September, but there is a catch

Tellurian had total cash of $210.81 million and no more borrowing at the end of September.

The company uses an At-the-Market Program with about $304.7 million remaining at the end of October. It is a vast potential dilution that any shareholder invested in the company should pay attention to.

In the recent 10-Q, the company said:

At-the-Market Program

We maintain an at-the-market equity offering program pursuant to which we may sell shares of our common stock from time to time. For the nine months ended September 30, 2021, we issued 66.4 million shares of our common stock under our at-the-market program for net proceeds of approximately $193.3 million. As of September 30, 2021, we had remaining availability under the at-the-market program to raise aggregate gross sales proceeds of up to approximately $334.6 million.

Subsequent to September 30, 2021, and through the date of this filing, we issued approximately 8.2 million shares of common stock under our at-the-market equity offering program for net proceeds of approximately $29.0 million. As of October 22, 2021, we have remaining capacity under our at-the-market program to raise aggregate gross sales proceeds of approximately $304.7 million.

The debt is gone, but the shares outstanding diluted are now 407.20 million compared to 291.41 million in 3Q20.

Technical analysis and commentary

TELL forms an ascending triangle pattern with resistance at $3.50 and support at $3.05. The trading strategy is to keep a core long-term position and trade short-term LIFO using the stock volatility.

I recommend selling about 50% of your position between $3.50 and $3.60. If the stock turns bullish, the following upper target is $4.20. Conversely, if the stock turns bearish later in 1Q21, TELL could drop below $2.80.

The main issue as an investor in determining the amount of cash you will be willing to gamble on TELL without getting in trouble in the worst-case scenario. Above all, trade LIFO a large part of your position and grow a long-term position using the short-term gain you could keep over five years.

This type of stock requires a leap of faith; no matter the fundamentals, you have too many variables that cannot be seriously assessed. Thus, simplify your investment thesis and do not play the CEO or pretend to figure out what is happening.

As you can see, the shares outstanding are going up, and it is only a beginning. The project will take many years, and the company is using the stock to finance the project, which creates dilution. Thus, be careful and invest in TELL what you can afford to lose.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.