2023-09-06 11:03:34 ET
Summary
- I previously recommended a small allocation to Tellurian, but now believe even a 1% position is not advisable.
- The termination of an LNG Sale and Purchase Agreement with Gunvor Singapore Pte Ltd is seen as a significant setback for Tellurian.
- A new deal with Baker Hughes may not be enough to save Tellurian, considering its current financial situation.
Investment Thesis
Tellurian Inc. ( TELL ) is a business that has an amazing story to tell. I've discussed its many twists and turns over time.
In the past, I concluded by saying that an investment in Tellurian should be viewed as a long-dated call option. And that investors should keep its numerous risk factors in mind.
Consequently, previously, I stated that investors should only allocate Tellurian to their portfolio, the same as one would invest in an option. Meaning that no more than 1% to 2% of one's portfolio should be allocated to Tellurian. Those were my previous takes.
Then, more recently, I proceeded to downgrade Tellurian from a buy to a hold when I wrote Drifting Away . Noting that even 1% of one's portfolio in this name was a waste of their hard-earned capital.
And now, with yet two further critical turns, I believe that Tellurian has gone past the point of no return. Here's why I now can't even recommend a 1% position in this stock.
Recent Developments
With the benefit of hindsight, I reversed my bullish call on Tellurian at a good time.
Evidently, I should never have been bullish on this name to start with. When I penned Drifting Way, I drew on my experience to shed free of any previously held biases I held and called it a day on the stock just days before Tellurian's share price would embrace a further rapid descent. So what happened subsequently? Sadly, I believe the events that took place in August put the nail in the coffin for the bull case.
On August 1, 2023, the LNG Sale and Purchase Agreement, dated as of May 27, 2021, as amended (the ''LNG SPA''), between Driftwood LNG LLC, a wholly owned subsidiary of the Company, and Gunvor Singapore Pte Ltd was terminated. The parties were unable to reach agreement on the commercial terms of an amendment to the agreement. The Company’s focus continues being on investment-grade counterparties.
As you can see above, the reason why Tellurian states the Purchase Agreement was terminated was because Tellurian's focus to continue being investment-grade, not because Gunvor wanted to part with this purchase agreement, as Tellurian had not succeeded in getting its Final Investment Decision together. So is that where the story ends? No, because there's yet another twist to this story.
The Next Chapter for Tellurian
Yesterday, word broke that Tellurian had reached an agreement with Baker Hughes ( BKR ). News that Baker Hughes will supply eight refrigerant compression packages meant for Phase 1 of the Driftwood LNG project, with a view to supporting Driftwood’s ability to achieve initial liquefied natural gas (''LNG'') production in 2027.
Is this new deal going to be enough to salvage Tellurian? I don't believe so. After all, let's spend a few moments on Tellurian's balance sheet .
Tellurian holds $100 million of cash. While Tellurian burns through about $150 million of free cash flow per year. My twelve-month figure takes Tellurian's H1 2023 free cash flow figure of $85 million and assumes that in H2 Tellurian reduces its cash burn figure slightly.
However, keep in mind that this free cash flow figure does not include the approximate $150 million cash usage associated with building Driftwood.
One way or another, Tellurian is going to run out of capital in less than 18 months.
What's more, my 18-month assumption includes the subsequent events that took place after the quarter ended.
More specifically, on August 8, 2023, Tellurian entered into a private placement securities purchase agreement (''SPA'') to raise $250 million at 10% (Senior Notes due 2025), plus $83 million of 6% Secured Convertible Notes (Secured Convertible Notes due 2025). The net proceeds from these raises equals about $300 million, the majority of the raise being used to satisfy the outstanding principal repayment obligation under its previous Convertible Notes.
In sum, not only is Tellurian raising capital to stay afloat, but raising at 10% interest rates will be the nail in this coffin.
The Bottom Line
The story of Tellurian Inc. has taken an unexpected and tumultuous journey, with twists and turns that have left me reevaluating my stance on this stock. Initially, I viewed it as a long-dated call option, but soon, I downgraded it to a hold, warning against even a 1% allocation. Now, I find myself unable to recommend any position in Tellurian, given recent developments. The termination of the LNG Sale and Purchase Agreement due to disagreements on commercial terms signaled trouble.
Although a new deal with Baker Hughes has emerged, I remain skeptical, as Tellurian's balance sheet shows dwindling cash reserves and ongoing capital challenges. The recent capital raise at a high-interest rate further adds to the uncertainty. Tellurian's story has taken a dark and uncertain turn, and I can't help but feel that the road ahead is fraught with obstacles that may be insurmountable.
For further details see:
Tellurian: Drifting With Financial Intrigue