TELZ - Tellurian Had A Plan; It's Over

2023-11-17 16:35:44 ET

Summary

• Tellurian faces a high risk of bankruptcy, in my opinion, due to its flagging liquidity, liabilities, and loss-making upstream operations.
• The company's cash and equivalents have fallen by 90% over the past year, reaching their lowest level since the first quarter of its fiscal 2021.
• Tellurian recorded a fiscal 2023 third-quarter GAAP net loss of $65.4 million and a free cash burn of $86 million, indicating a cash runway of less than 2 full quarters.

Tellurian ( TELL ) was a ticker I owned for the first half of 2023 shortly after my first article on the fledgling LNG company in December 2022. It was always going to be a speculative investment, a high-risk but potentially high-reward play on the company's plan to build an LNG export terminal in Louisiana. The importance of natural gas for the energy transition cannot be overstated. The International Energy Agency has placed natural gas as the single most important driver of the decline in global power sector carbon emissions for the last decade. How would a fossil fuel reduce carbon emissions? By the displacement of coal which is materially more carbon intensive and also emits more pollutants including sulfur dioxide. Gas-to-coal switching is the unsung hero of the global effort to check anthropogenic climate change and a macro trend that I've taken adjacent positions in including a position in LNG shipping company FLEX LNG ( FLNG ).

It's important to state this backdrop as it's the reason I took a position in Tellurian's common shares and briefly considered a position in the baby bonds ( TELZ ). I sold my shares at a loss in early summer, a retrospectively prudent decision as Tellurian has since lost roughly 60% of its value and now trades below the NYSE's minimum listing requirement to set the backdrop for a reverse stock split. Critically, the company's flagging liquidity base, liabilities, and loss-making upstream operations have materially ramped the risk of a near-term Chapter 11 bankruptcy filing, in my opinion. Tellurian recently reported a going concern warning as it races to secure funds and buyers for its LNG.

Balance Sheet Woes And Flagging Liquidity

Tellurian faces an existential risk from the year-to-date collapse of its liquidity position. Cash and equivalents as of the end of its recent fiscal 2023 third quarter at $60 million had fallen by 90% over its year-ago comp and was down by $47 million from its second quarter. Current assets at $96 million were exceeded by current liabilities as long-term borrowings of $372.4 million dipped by only $10 million from the end of 2022. A chart of the company's cash and equivalents is sobering with liquidity at its lowest level since the first quarter of 2021 and down from a peak of $825 million in the second quarter of 2022.

Tellurian's situation is rendered more critical as natural gas production from its Haynesville Shale basin acreage and gas wells continue to realize strong losses. The company's upstream operations have been a major drag on its liquidity position as the generational energy crisis that catalyzed US natural gas prices to rise as high as $9/MMBtu has radically peeled back. Natural gas prices are still elevated versus their pre-invasion averages but the current status quo has left Tellurian facing losses. The company recorded third-quarter revenue of $43.2 million , down 46.7% year-on-year and a miss by $10.08 million on analyst consensus. This came as the company produced 19.5 billion cubic feet of natural gas during the third quarter, 71% more than 11.4 billion cubic feet in its year-ago period.

Net Losses And Free Cash Burn

Tellurian recorded a GAAP net loss of $65.4 million , up from $14.2 million in its year-ago quarter. Free cash burn at $86 million did materially improve from a burn of $116 million in the second quarter and was down 57% from its year-ago comp. However, it's at a level that when compared against Tellurian's current cash and equivalents means a cash runway of less than 2 full quarters. To be clear, I expect Tellurian to be looking to file for bankruptcy in the first half of 2024 assuming it's unable to raise more funds and cash burn for the current fourth quarter mirrored third-quarter cash burn.

From a reverse stock split to push through a new equity raise to the full divestment of its upstream assets which still has 400 undeveloped wells, there are levers the company can pull to raise more funds. However, this would split its business plan of using the gas produced from the Haynesville Shale basin to supply Driftwood. Tellurian’s Haynesville assets included 31,149 net acres and interests in 159 producing wells. The bull thesis against this bleak backdrop is an eleventh-hour unexpected funding deal with a US or foreign player. This remains the hope of bulls but now seems ever beyond Tellurian's reach. Any larger player seriously interested in Driftwood would be able to possibly pick up the company for cents on the dollar in bankruptcy, especially if the company can gain approval from the Federal Energy Regulatory Commission to extend its license to complete the Driftwood build into 2029. Fourth-quarter natural gas prices have dipped from the third quarter to mean that net losses and a continued free cash burn are all but certain, in my opinion. It's hard to see how Tellurian survives. The shares are a sell.

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