Tellurian is in talks to sell its upstream business and capacity at its Driftwood LNG project.
Tellurian (TELL 1.49%) has been going through a brutal stretch. Surging interest rates and tumbling natural gas prices have caused its stock price to crater. Shares of the natural gas company are down more than 90% from their peak a couple of years ago.
However, a couple of catalysts could be just over the horizon. Here’s a look at whether investors should buy shares of the liquefied natural gas (LNG) project developer ahead of these looming catalysts.
An upstream sale could come soon
Tellurian hired a financial advisor earlier this year to, among other things, explore the sale of its upstream natural gas production business. The company initially envisioned using the cash flow produced by this business to help fund the development of its Driftwood LNG export project. It could eventually export that gas from Driftwood, making both businesses more profitable.
However, falling gas prices, surging interest rates, and other issues have led the company to seek alternatives for this business. Reuters recently reported that the company is currently evaluating several bids for this business and that it could make a decision on whether to sell in the coming weeks.
Analysts estimate Tellurian’s upstream business could be worth up to $365 million. However, that’s a lot less than it would have been worth a few years ago, considering that the price of natural gas has tumbled from $6.50 per mmBTU in 2022 following Russia’s invasion of Ukraine to less than $2 per mmBTU this year as markets adjusted.
That decline has had a big impact on Tellurian’s financial results. Its natural gas revenues have fallen nearly 50% over the past year (from $50.9 million in the first quarter of last year to $25.5 million in this year’s first quarter). Meanwhile, its loss has ballooned to $44 million (up from $27.5 million). Tellurian doesn’t have the scale to operate its gas assets profitably in the current environment.
Driftwood could finally get a new customer
Selling its upstream business would give Tellurian some much-needed cash to help fund its Driftwood LNG project. The company ended the first quarter with only $51.8 million of cash and equivalents on its balance sheet. Meanwhile, the company only had $1.3 billion of total assets. That’s nowhere near enough financial resources to develop the multi-billion-dollar Driftwood project.
Tellurian’s financial advisor is working with it to find partners to invest in the project. The advisor is also helping the company secure commercial contracts for Driftwood’s capacity. The lack of commercialization has made the project too risky for many potential partners.
That could be about to change. Bloomberg recently reported that Pacific Energy is in talks with Tellurian and rival LNG project developer NextDecade for natural gas cargos from their projects. The first phase of NextDecade’s Rio Grande project is already under construction. That puts it farther ahead of Tellurian’s Driftwood, which doesn’t yet have the financial and commercial backing to move forward. Securing commercial contracts for planned capacity could enable Tellurian to get the funding needed to make a positive final investment decision on the project.
Probably not enough to make Tellurian a buy
Tellurian appears to be close to selling its upstream natural gas assets, which could give it some of the funding needed to build Driftwood. It could also be close to securing a much-needed customer for the project.
While these catalysts could give the stock a jolt if they materialize, they probably won’t be meaningful enough to secure the company’s long-term future. Tellurian will probably need to secure a lot more funding and capacity contracts to build Driftwood. It’s a very high-risk investment that might never pay off if it can’t get Driftwood off the ground.
Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
