Volatility has spiked over the last two weeks around the U.S. Liquefied Natural Gas (LNG) industry on the back of U.S.-China escalating trade wars, and the waves near term are against growing global natural gas rookie Tellurian Inc. (TELL) as the company is still in early stages of setting all their pieces for growth. However, with a strong management team and a $200 million cash war chest and no debt, TELL is poised to execute on its development plan on time to begin construction of Driftwood LNG in 1H19, and deliver LNG to the global market in 2023.
For long-term investors looking for exposure to the U.S. LNG market or Tellurian's long term growth plans, we recommend owning the TELL 7.5 Jan 2019 Calls. Premiums paid for the calls could be slightly offset by selling the TELL 5 Jan 2019 Puts. A major near catalyst is the announcement of Driftwood Partners in the 3Q-4Q of 2018.
What Sets Tellurian Apart?
Unlike its largest publicly rival, Cheniere Energy (LNG) , TELL is a global integrated natural gas company on the works, with holdings in natural gas reserves, major pipeline infrastructure projects, a liquefaction development and a strong LNG marketing arm with international delivery of cargoes that started in 2017. In contrast, LNG is asset heavy and cost intensive, concentrate in operating two multi-billion liquefaction facilities in Sabine Pass, Louisiana and Corpus Christi, Texas.
TELL's upstream assets include 1.4 Tcf resources in 11,620 acres at the core of the prolific Haynesville Shale. TELL also has over $7 billion of planned natural gas pipelines connecting major hubs like the Permian in West Texas and the Haynesville shale in East Texas/Louisiana and a $15 billion in liquefaction development.
Tellurian has a strong balance sheet consisting of approximately $373.5 million in assets, of which $90 million represents its proved natural gas properties.
Driftwood Facility, Pay to Play
Tellurian's LNG liquefaction facility buildout model includes TELL offering equity interests in Driftwood Holdings to LNG buyers. Driftwood Holdings will consist of: 1) a Production Company, 2) a Pipeline Network and 3) an LNG Terminal, with around 27.6 million metric tons per annum (mtpa) near Lake Charles, Louisiana. TELL currently has around 25 customer/partners conducting due diligence.
TELL is planning to retain 12 mtpa and 40% of the assets with an estimated $2 billion annual cash flow back to TELL once the assets are sold. TELL has already signed agreements with major players like Total (TOT), Bechtel and General Electric (GE).
Tellurian closed two open seasons on proposed pipelines in 2Q18 - the Permian Global Access Pipeline and the Haynesville Global Access Pipeline - receiving non-binding indications of interest for both projects in excess of available capacity.
This asset diversification provides TELL with a solid base and multiple avenues for growth in the upstream and midstream space and a natural hedge to the various parts of the industry.
ETF Membership, Not Always a Privilege
At $1.72 billion market cap, the company enjoy strong institutional investor support with the top 5% shareholders including Vanguard, GE, Blackrock, Capital and State Street. However, because Tellurian holds natural gas upstream asset, TELL also accounts for 0.34% of the SDPR Exploration & Production ETF (XOP) making the stock susceptible to be on the short side of any long positions against large players in the ETF (see top 5 holdings below).
Top XOP holdings:
Matador Resources (MTDR) 2.25%
SM Energy (SM) 2.10%
Diamondback Energy (FANG) 2.10%
Energen Corporation (ENG) 2.08%
Southwestern Energy (SWN) 2.02%
Cheniere Energy is a more mature company and thus an easier long-term hold story to own vs. early stage Tellurian. LNG is +13% for the year vs. -27% for TELL, +8.5%% for the XOP and +1.8% for the Energy Select Sector SPDR ETF (XLE). LNG is neither part of the XLE nor the XOP thus there's no major energy ETF index holding
Australians at The Gate
The U.S.'s most fierce competitors are not so much the state-owned enterprises of the Emirate of Qatar, but the major private players in Australia, developing large scale projects, such as Chevron ( (CVX) ), Shell, ConocoPhillips ( (COP) ), Woodside Petroleum ( (WOPEY) ) and Santos Limited.
Australia's Largest Projects:
15.6 mtpa - Gorgon (Chevron)
9.0 mtpa - Australia Pacific LNG (Conoco/Phillips/Origin)
8.9 mtpa - Wheatstone (Chevron)
8.5. mtpa - Quensland Curtis (Shell)
8.4 mtpa - Itchys (Inpex)
7.8 mtpa - Gladstone LNG (Santos)
4.3 mtpa - Pluto LNG (Woodside)
16.3 mtpa - North West Shelf (Woodside)
3.6 mtpa - Prelude FLNG (Shell)
3.6 mtpa - Darwin LNG (Conoco Phillips)
