Tellurian Stock (NYSEMKT:TELL)
Tellurian stock was up 6.5% as of 11:06 p.m. ET today after a recent downturn.
Not only did today’s gains not even come close to recouping the losses from yesterday’s dip (which was considerably greater), there wasn’t any company-specific news to drive the market today.
The value of Tellurian stock rise and falls with the price of natural gas, a commodity on which they are based. That in and of itself is a recipe for stock market volatility; moreover, Tellurian (NYSEMKT:TELL) potential relies on a building project that may or may not be finished long in the future. However, is the stock’s potential for growth at current low prices still worthwhile?
What’s the Point Then
In the natural gas market, Tellurian (NYSEMKT:TELL) operates two separate companies. Its primary purpose is to construct the Driftwood LNG export facility, which is expected to cost between $12 and $13 billion and won’t go into service until 2026. Due to Russian President Vladimir Putin’s restrictions on natural gas supply to Europe, LNG exports are likely in high demand for the foreseeable future. Two, Tellurian also has a minor upstream operation that drills for natural gas in the United States. The Driftwood project, however, is far bigger.
Recent issues for Tellurian include rising interest rates forcing the company to abandon a $1 billion round of debt financing that would have diluted shareholders with warrants and carried an interest rate of 11.25%.
The delay in building the Driftwood facility directly results from the withdrawal. As a result, Shell canceled its 10-year agreement to buy 3 million tons of LNG from Tellurian, thereby ending the relationship.
Chairman Charif Souki said, “it puts us behind, undoubtedly,” in a video message. “Gas delivery on the planned timetable is now in peril… We would never compromise Tellurian’s financial stability in an ill-advised attempt to hasten the process.”
Thus, Driftwood is responsible for upstream activities related to natural gas. Sales from upstream natural gas activities were $61 million in the previous quarter. Still, thanks to a recent business purchase last summer, those figures are expected to rise as new wells are brought online. While management has indicated that it would use operating cash flow to complete the development of Driftwood, this amount is far less than the $1 billion it was expecting to obtain via a bond offering.
As a result, Tellurian (NYSEMKT:TELL) is currently only a very minor U.S. natural gas producer. The gas price in the United States has settled at roughly $6.90 per million British thermal units (Btu) today. Even though prices are up today, they are still roughly twice what they were at the beginning of the year, and that is a long cry from their annual highs above $10 in August. Tellurian stock has also dropped significantly over the last two weeks. Hence, a significant gain on a good day is not unexpected.
Until the price of natural gas drops, investing in Tellurian stock is like buying a call option. No dividends or cash flows are expected in the near future. Still, if interest rates fall because of inflation, the firm might get Driftwood funding again. Lower interest rates may also indicate a worldwide downturn, which might negatively impact the cost of natural gas.
Investors should see Tellurian stock as a leveraged gamble on the sustainable price growth of natural gas. Even if it means postponing specific initiatives, for the time being, I believe it’s a good indication that management is backing away from financing to protect the company’s balance sheet. Long-term natural gas bulls may find the time immediately after the financing setback to be an attractive entry opportunity.
Featured Image- Megapixl @ Timonschneider