This article originally ran as part of the Friday File for the Irregulars on January 12. It has not been updated or revised since then, though I’ve left the original reader comments appended and have also added an extra update comment at the bottom of the article.
–As Published on 1/12/18–
I’ve been working on putting together my Annual Review of all the stocks in my Real Money Portfolio for you, dear Irregular, but I’ve gotten such an overwhelming number of questions about the latest ad from Dr. Kent Moors at Money Map that I’m putting some of that annual review on hold so I can quickly address this pitch for you.
Here’s the headline that so many of you have been asking about today:
“Shocking Move by DOE Unlocks New $7 Trillion Energy Sub-Niche
“The race is on. Insiders are swarming. And now, a tiny $2 million startup has harnessed a patented technology that could ignite a 59,845% revenue-surge”
The ad is from Dr. Kent Moors for his Energy Inner Circle ($1,950/year), and on top of those stories about incredible revenue growth he’s got lots of breathless language about the Saudi’s taking this company over imminently, making you buckets of money.
So what’s the story? Let’s check the clues a bit…
“At the center of the frenzy, holding all the aces, sits a tiny $2 million startup
“This company didn’t even exist 18 months ago.
“It’s small, less than half of one-percent the size of Exxon.
“In fact, they barely cobbled together $2 million in revenue last year!”
OK… what else?
“And here’s the best part: This is pure ground floor.
“It’s happening so fast – and with such unstoppable momentum – that only a handful of Wall Street’s savviest players have been able to secure a position.”
Feeling that profit-lust rush to your head yet? Careful, copywriters are good and building the excitement… let’s see if we can add a dose of reality for you. First, to run through some of the other key clues, and Moors’ forecast (how can we come back and check the results if we don’t know what he’s promising, right?)
So we get some wild projections that this “$2 million company” could grow its revenue by 59,850%…
“This site is located along the Gulf Coast on the Calcasieu River, a proven natural-gas oasis…
“And this tiny $2 company has joined forces with engineering titan, Bechtel – to develop this acreage into the world’s premier natural gas export terminal…
“This one-of-a-kind facility will have 96 miles of natural gas pipeline, so as natural gas is pulled from the ground, it can be delivered directly for liquefaction.
“The facility will also contain 20 liquefaction units, each expected to produce up to 1.38 million tonnes of LNG per year!
“That’s a total of over 27 million tonnes of LNG per year!Are you getting our free Daily Update
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“At current Asian prices, that comes out to $12.7 billion!
“Remember, this is a $2 million company.
“Even at a mere 10% CAPACITY, that’s over $1.2 billion… a staggering 59,850% revenue surge!”
And he runs through a hypothetical cash flow example that leaves him with what he says is “a very conservative projection of $524 a share” for a company that is currently trading at about $10 a share.
And, of course, he says “time is of the essence” …
“… insiders are in an absolute frenzy…
“They’re putting their personal wealth into this tiny $2 million company like there’s no tomorrow.
“In fact, they’ve already grabbed up two out of every three available shares for themselves, and folks who hesitate could miss out on this deal completely.”
And the folks in charge have apparently generated huge returns in the past…
“For example, the Chairman of the Board guided his first company to 20,000% gains…
“The Vice Chairman sold his first company to Royal Dutch Shell for $70 billion…”
That would be BG Group, which helps to narrow down things a bit. This is, as some of you have no doubt already guessed, the LNG startup Tellurian (TELL).
And yes, insiders do own 2/3 of the shares of Tellurian… but that’s not because they’ve been “grabbing them up” — there haven’t been any insider purchases since the reverse merger that brought Tellurian public back in February (they took over the old listing of Magellan Petroleum)… those insiders got their shares at dramatically lower prices, mostly in the $5-6 neighborhood most recently if I’m following the right daisy chain of insider purchases and convertible bonds and other fundraisings that they did before the merger (including large investments from Total and GE). Insiders have generally been selling, in fact, though in very small amounts.
So what’s the business? Well, here’s how Moors describes it:
“The tiny $2 million company has harnessed a PATENTED scientific process that shrinks natural gas by 600-fold…
“And converts it into a liquid form!
“I’m telling you, this technology is Nobel Prize-worthy!”
That may be so… but notice the word he used: It has harnessed a patented process, not that it owns the patents. This doesn’t seem to be a technology company, and it’s unlikely that they have some unique technology in the natural gas liquefaction realm that makes them stand out from other companies who are developing liquefaction (gas-chilling, really) facilities.
There are a few major engineering companies who are capable of building big natural gas facilities for importing or exporting liquefied natural gas (LNG), including Bechtel, which is the firm Tellurian is working with, and I’m sure their technologies are slightly different, but as far as I know no one “owns” the patents on liquefaction or gasification to an extent that they can exert any leverage on these facilities (gasification, as you might guess, is what happens at the other end, when it leaves the tanker and gets put into the customer’s pipeline).
More from the ad:
“And now, this tiny $2 million company can take America’s $7 trillion bounty of cheap natural gas…
“And whip it around the world, in a moment’s notice, to the highest bidder!
“We are talking profit margins I’m projecting to be off-the-charts…
“And the upside potential is truly staggering…”
That may eventually be true, I suppose, though it requires some imagination — the first wave of their LNG project, which they call Driftwood, is projected to begin commercial operations in 2023, so that “in a moment’s notice” stuff would be happening many years in the future, and they first have to raise about $15 billion to build it, according to their investor presentation. They do have an interesting-sounding plan, on paper, to increase their profit margins by essentially pre-selling a lot of the production to a major partner, but this is a huuuuge project.
Looking at Tellurian’s January 2018 investor presentation, they indicate that their Driftwood project will have a very low cost per tonne, and will have a massive capacity similar to the planned capacity of Sabine Pass — larger than even giant projects like the Gorgon field in Australia. Which is impressive sounding, to be sure, but also means the capital requirements are truly phenomenal… and it’s probably worth remembering that most of the huge global LNG projects have faced dramatic cost overruns over the past decade. These are huge, expensive and complex engineering and construction projects.
The hype is laid on pretty thick, even referencing Rockefeller…
“What John D. Rockefeller did with oil, this tiny company is doing with liquefied natural gas…
“And the upside could be tremendous…
“Now, by vertically-integrated, I mean the company CONTROLS every aspect of the business….
“This tiny $2 startup owns every significant aspect of the supply chain. Yep, just like Rockefeller…
“They own the land.
“They own the drills.
“They own the wells.
“They own the liquefaction modules.
“They own the storage tanks.
“And they own the ships.”
Well jeez, that does sound exciting, right? Except there are no liquefaction modules. There are no ships. There are a few wells, they say they’re currenlty producing 4 mmcf/d from 19 wells in Louisiana, though that’s a tiny fraction of the production they’re planning for 2022, as they begin to prepare for LNG export. They’ve just started the calendar ticking for the permitting process for their Driftwood LNG facility, the earliest that they might begin construction is probably mid-2019.
So yes, those things are all planned, some of the work is probably underway and perhaps ships are even ordered (I haven’t checked), and they may well come to pass, but they aren’t operating and churning out cash right now — these are far-future plans, particularly in the context of Wall Street.
What does that mean? Well, how many investors do you know right now who are basing their plans on 2023? Probably we all should, but there are a lot of things that can happen in the next few years, particularly with an extremely capital-intensive project that will be sensitive to both interest rates and commodity prices. And don’t pay any mind to the “$2 million” number — that’s largely irrelevant, as Tellurian generates a tiny amount of revenue on their producing natural gas wells, it has nothing to do with what they’re envisioning for the future. It’s not a “$2 million company,” that’s just the current level of their largely irrelevant revenues, it’s an ambitious $2.5 billion company trying to build a $15 billion project… any revenue that they generate before the LNG project is built will be completely overshadowed by the massive costs of building and financing Driftwood. If you want to buy this stock, you’ll need to do so based on projections for how profitable Driftwood will be when it is operational, perhaps as soon as six or seven years from now, and on what portion of that profit TELL will have to give up in order to get the project financed and built.
I’ve also seen some ads today that cite this as the possible next acquisition target of Saudi Aramco, as the Saudi oil company has been looking for US shale assets to buy lately… that’s possible, and has been reported by the Wall Street Journal, though I have no idea what the odds might be, or what the impact on Tellurian shares might be if a deal is done. Certainly Saudi Arabia has no need to import LNG, and definitely not from as far away as Louisiana, so they wouldn’t be as motivated to purchase future production for domestic reasons — there would presumably have to be a financial or strategic motivation.
So what does that all mean? Tellurian is attempting to become the next big LNG export company, and they do have an interesting-sounding plan for producing LNG at a relatively lower cost than many of the existing facilities, though such plans are probably easier to put to paper than they are to implement and the story will probably fluctuate a lot over the next few years as contracts are signed for production and we begin to get a better picture of what the profitability might be. After watching the ramp-up and decline of Cheniere (LNG and CQP) over the years, as fluctuating natural gas prices and massive borrowing costs have caused investors to flip from euphoria to despair and back again a few times, I’d hesitate to guess at what the Tellurian of 2023 might look like… but I would happily take the “under” if we’re betting on whether Tellurian will be at $500 a share by then.
The stock is relatively unchanged since Moors started promoting it in the second week of January, and that’s even after Jim Cramer’s Mad Money featured a fawning interview with Chairman Charif Souki on the 17th (Souki also founded Cheniere Energy and is a major TELL shareholder).
US natural gas is certainly abundant and inexpensive, though prices spiked last month because of the crazy cold winter, so exporting it to countries that need clean(er) energy (cleaner than coal, at least) makes logical sense, particularly because the prices that South Korea and Japan and China have been willing to pay for delivered LNG have been substantially higher than the cost to buy that gas on land in the US — so the big picture questions are really about where that cost differential will be when the facility is producing. The recent concern among investors and LNG exporters, both in the US and elsewhere, is that we might be getting to the point where the LNG export business is big enough that the buyers are getting some leverage… with uncertainty about where future demand will be relative to the aggressive ramp-up in future supply. There’s an article about that from Oilprice here, this is from last Fall but it gives some idea of the longer-term qualms that some folks have in this segment.
The huge amount of financing required means this company’s future results will likely be quite levered to natural gas differentials in the 2020s and 2030s (between the price in Oklahoma and the import price in Japan, for example), and the leadership of the Souki family, who Jim Cramer admires but who was fired by Cheniere’s board before that company started exporting gas a couple years ago (it’s widely reported that he was forced out by activist shareholder Carl Icahn, though I don’t know the details), means this stock is likely to get a lot of attention. Attention plus leverage can mean a bumpy ride, but much will depend on how they do their financing, and on what terms, and on how much the timeline and the project budget fluctuate over the next couple years.
Maybe Tellurian will indeed find a way to radically change the LNG industry, avoid massive delays and cost overruns, and extract more profit by reducing their input costs and being a gas producer as well as a liquefaction plant owner, or by getting a strong customer partner on board… I have no idea how it will play out… but I feel a lot more comfortable having a skeptical view of this one at this early stage. Your opinion may differ, of course… feel free to share it with a comment below.