In the increasingly competitive world of liquefied natural gas (LNG), shares of emerging companies like Tellurian ( TELL) will continue to experience downward pressure as the supply and demand dynamics adjust to trade wars and sanctions that the U.S. has issued against its partners. Therefore, we have a short-term downward view on Tellurian shares.
On the back of Bruce Kamish's bearish technical note late August, we think that TELL could trade down on geopolitical risk and the absence of near-term catalysts. TELL stock is down 10% for the year vs. the Energy Sector SPDR ( XLE) . Shares of TELL have also underperformed more stable operators like Cheniere Energy ( LNG) , whose shares are up 22% year-to-date.
While Tellurian's business plan has a diversified three-prong approach (upstream, midstream and liquefaction) and a world-class management team lead by its founders, LNG veteran Charif Souiki and Martin Houston, we think that this ambitious strategy is still in its early innings and today is more of a "show me" story. TELL is a long-term bet that is not for fast traders but for those with a long-term view of the small-scale U.S. LNG export trade.
Tellurian faces strong competition not only from other U.S.-based projects but also from exports of gas shipped from Russia, Australia and Qatar. While Souiki has mentioned in Jim Cramer's CNBC show that China tariffs are "no big deal," we think geopolitical headlines are putting a heavy cloud on TELL shares and it will take time for TELL to deliver tangible results to get investors excited.
Russia dominates the European market through its Nord Stream pipeline and Australia is leveraging its footprint in Asia. Today, China buys around 40% of its LNG from Australia and around 20% from Qatar.
There is also a logistical risk that TELL cannot control as its only way to cheaply get its crude from Louisiana to Asian markets is through the newly expanded Panama Canal.
According to the Energy Information Administration (EIA) the newly expanded Panama Canal is able to accommodate 90% of the world's current LNG tankers with capacity up to 3.9 billion cubic feet (Bcf). This expansion has significant implications for LNG trade as it reduces travel time and transportation costs for LNG shipments from the U.S. Gulf Coast to key markets in Asia. According to Reuters, the number of LNG tankers passing through the Panama Canal carrying U.S. LNG to North Asia has gone from five at the beginning of January to almost 25 earlier this year. The Panama Canal Authority has said that LNG volumes traversing the Canal could hit 30 million tons per annum (mtpa) before the end of 2020, up from 6 mtpa.
However, Sempra LNG & Midstream ( SRE) says that every day a cargo is held up at the canal it can cost a trader $45,000 a day, putting a high level of logistical risk that TELL, and the LNG industry in general, cannot control.
While we think Tellurian is a superb energy company, for now we prefer to use TELL shares as an offset trade vs. any long positions in LNG stocks.
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