NEXT - Tellurian Stock: Drifting Away Downwards Revised

2023-07-24 17:42:32 ET

Summary

• I have concerns about Tellurian Inc. potential capital shortage and dilution for shareholders from convertible note holders.
• Recent developments, including selling portions of the business, raise doubts about the company's survival and growth prospects.
• Doubts persist about Tellurian's ability to capitalize effectively on the future of natural gas as an energy source.
• The company's track record raises questions about its long-term viability as an investment.

Rapid Recap

In my previous analysis , I wrote:

I estimate that Tellurian Inc. ( TELL ) is likely to run out of capital for its ongoing operations within 12 months.

I also believe that Tellurian will be diluting shareholders as convertible note holders are able to cash in $165 million worth of convertibles within 12 months. This equates to about 20% of its market cap.

[...]To sum it up, I suspect that an investment in Tellurian Inc. is a delusional dream. Nevertheless, I continue to hold out a small sliver of hope that it may work out, somehow, for investors.

And so, I recommend that Tellurian Inc. investors should approach this investment with their eyes wide open and appropriately size this holding as a very long-dated option.

Because for now, Driftwood is clearly drifting away.

That summed up my previous analysis. And yet, today, I'm downward revising Tellurian stock from a buy to a hold.

Recent Developments

Tellurian in my view is a pipe dream. I should have known better. It wasn't difficult to sieve through what was true and what was a little more than a gassy narrative. And yet. And yet. Here I am.

In the last few days , Tellurian announced that it's selling via a sale and leaseback operation portions of its business.

If there had been any doubt of whether this business could ever survive and thrive, this recent news item seems to have cemented any undue speculation on my behalf.

But wasn't it obvious that Tellurian wasn't going to work out?

Captain Hindsight

Looking back it was crystal clear Tellurian had massive problems. Nonetheless, here's an 8-K from July that should have wrung alarm bells.

The Fifth Supplemental Indenture amends Section 3.14 of the Prior Indenture to reduce the Company's minimum cash balance requirement from $100,000,000 to $60,000,000 during the period from July 18, 2023 to July 31, 2023.

Tellurian had to make countless amendments on ever more cumbersome terms because the business was bleeding cash and running out of capital. This latest amendment allowed its balance sheet to get down to $60 million.

Recall, for Q1 2023, Tellurian was burning through more than $60 million of free cash flow in that quarter alone.

Although, keep in mind, that at the time of the 8-K, Tellurian knew that it was only a few days from selling off 800 acres of land for $1 billion that would bring onto its balance sheet desperately needed capital.

So, What Lessons to Take From This?

Nobody disputes that natural gas is going to be the future of energy. In fact, I declare that natural gas will rival oil as the primary energy source in the world.

We won't be able to displace kerosene for freight and flying. But for many of the other energy sources, I believe that natural gas will displace oil. The easier task will be to charge electric vehicles ("EVs") with natural gas via electricity rather than pumping an internal combustion engine with oil.

But beyond this, for nearly all modes of transport (again asides from shipping and flying), I suspect that natural gas will in time be recognized as the main destination fuel.

I know this. You know this. Nearly everyone that understands energy will probably to a certain degree acquiesce with this perspective. Where I disagree is that Tellurian is the best vehicle to participate in the expression of this insight.

Case in point, during the past 2 years, the energy crisis hardly escapes any politician's lips. And even with that background hum, Tellurian still failed to complete its final investment decision (''FID''). Think about it!

Meanwhile, Tellurian's Chairman Charif Souki in his latest YT video is all too quick to note how both Sempra ( SRE ) and NextDecade ( NEXT ) saw their share price selloff once the companies got to FID, as investors desired better dealings to get FID completed. At least they got FID. What about Tellurian?

Despite Souki's proclamations that Tellurian's peers have performed badly on the back of getting ''poor'' FID equity deals, the market has been more than willing to reward Tellurian's peers in the past several months, when compared against Tellurian's share price. Indeed, the graphic above is a painful reminder that in the long run, the market is a weighing machine.

The Bottom Line

In my previous analysis, I raised concerns about Tellurian facing a potential capital shortage within a year, along with dilution for shareholders from convertible note holders.

Recent Tellurian Inc. developments, such as selling portions of the business, have further fueled my doubts about the company's survival and growth prospects.

While natural gas holds promise as a future energy source, doubts persist about Tellurian's ability to capitalize on it effectively. The company's track record raises questions about its long-term viability as an investment.

It's time for me to rate this stock a hold.

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