As economies worldwide develop and shift away from coal or other energy sources, demand for liquified natural gas (LNG) has soared. Tellurian(NYSEMKT: TELL) is one company looking to capitalize on the long-term demand for this cleaner-burning fuel source by building a massive LNG export facility.
But buying Tellurian stock today is a high-risk, high-reward play for investors. Here's why.
The growing demand for LNG
LNG exports from the United States have soared in the past decade as many see LNG as a "transition" fuel, given its lower emission profile compared to coal and gas. This, coupled with its transportability and potential as an on-demand backup, makes LNG an attractive energy source amid the transition toward a carbon-free future.
New terminals have significantly increased the U.S. export capacity. From 2016 through 2023, LNG exports from the U.S. have skyrocketed from 189 billion cubic feet to 4.3 trillion cubic feet in 2023, a 22-fold increase over seven years.
Russia's invasion of Ukraine and the embargo by the U.S. and other Western countries on Russian natural gas added to the pressure for more LNG exports from the U.S. Last year, it became the largest exporter of LNG, surpassing Qatar.
Image source: Getty Images. A natural-gas fracking facility.
Significant investments have been made in producing and exporting LNG in the U.S., and Tellurian looks to capitalize on the growing demand with its Driftwood LNG terminal. The Federal Energy Regulatory Commission (FERC) authorized the construction of Driftwood in April 2019, giving Tellurian seven years to complete the facilities and pipeline.
But legal issues, falling fuel prices, the pandemic, and rising interest rates have resulted in several project delays. Earlier this year, the FERC granted Tellurian a three-year extension, giving it until April 2029 to complete the project.
A huge price tag
The project's price tag of around $25 billion will require help from outsiders. In the first phase of the project, Tellurian will build two LNG plants near Lake Charles, Louisiana, with an export capacity of 11 million tons per annum (MPTA), or about 40% of the project's total capacity once fully completed. This phase will cost $14.5 billion, with about $6 billion coming from equity investment.
In May, Tellurian sold its integrated upstream assets to Aethon Energy Management for $260 million. This eliminated debt and servicing costs associated with that debt and shored up Tellurian's balance sheet as it turns its attention to constructing Driftwood.
In another agreement, Aethon will purchase 2 million tons per annum (MTPA) of LNG from the Driftwood plant. Tellurian executive chairman Martin Houston said the agreement "provides the foundation to accelerate Driftwood and demonstrates that we have successfully aligned our commercial offerings to meet the needs of potential customers."
Gaining commercial contracts is vital for the success of Tellurian's Driftwood project, and getting Aethon on board is a step in the right direction. But the company still needs more backers. It has been working with a financial advisor to gather interest in funding and needs to secure commercial contracts for Driftwood's capacity to help de-risk the project.
Last month, the Saudi Arabian Oil Group (better known as Saudi Aramco) and Woodside Energy Group were mentioned as potential investors. According to a report by Reuters, Aramco officials visited the site three times during the year as it looks to strengthen its position in the LNG market. An investment from Aramco would be a huge win for Tellurian, but no investment has been made as of this writing.
Funding remains uncertain, but Tellurian does have one advantage: It is fully permitted to build and operate its facility without being affected by the Biden Administration's pause on LNG export projects, which went into effect earlier this year. The pause and uncertainty about how long it might be in place give the Driftwood project added value, potentially making Tellurian an acquisition candidate.
Is Tellurian a buy?
An investment in Tellurian today is a high-risk, high-potential-reward bet on Driftwood's completion and future success. For those optimistic about the future of U.S. LNG exports, the company provides one way to invest in this potential growth. An investment from Aramco or another huge player would be a step in the right direction for Tellurian's future success.
But it will take some time for investors to reap the rewards (if at all) because the company anticipates Driftwood producing its first LNG by 2028. For that reason, most investors are best off avoiding the stock for now and should take a wait-and-see approach on how things unfold for its Driftwood project's funding and construction over the coming quarters.
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Courtney Carlsen 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.
