Here’s the lead-in that got Gumshoe readers banging on my door this week:
“MAJOR ANNOUNCEMENT IMMINENT! SHOCKING PROPOSAL COULD IGNITE 59,850% SURGE
“This serial entrepreneur guided his first company to a massive gain. And now, his latest venture has harnessed a patented technology that unlocks new $7 trillion energy sub-niche…”
So even though this is from Dr. Kent Moors, whose publisher has spun many a tale in teaser ads that turned into disappointment once we looked into the facts, we still want to know what the heck he’s talking about. And we’re not so enthused about throwing $1,950 into the kitty for a subscription to Energy Inner Circle… so let’s look at the clues and figure out what he’s talking about.
Here’s what Moors’ email said yesterday:
“At this moment, a tiny $8 startup has harnessed a mind-blowing technology that could deliver a 58-fold sales surge in the blink of an eye.
“Already, insiders have snapped up two out of every three available shares. GE and BlackRock have rushed in. And Citibank just accelerated their stake by a stunning 2,622%.
“This opportunity is so lucrative, one of the biggest technology funds in the world – a $45 billion titan – is eyeing an ownership stake in this tiny $8 startup.”
So what is it? There’s a lot of chatter about how getting in now is like getting in on the oil market 147 years ago, when the roads were still choked with horses and oil was just beginning to become the new fuel.
And how you can join in as a “serial entrepreneur” takes advantage:
“Right now, this serial entrepreneur’s new startup company is tiny…
In fact, they barely cobbled together $2 million in revenue last year! ….
“But they won’t stay small for long. In fact, they’ve harnessed a patented technology that could open the door for a 59,850% sales surge in the coming months.
“But time is of the essence…
“In fact, insiders have already snapped up two out of three available shares.
“And the serial entrepreneur and his team have laid down stunning personal stakes worth fortunes on this $2 million startup.
“The founder’s stake is worth $346 million….
“His right-hand man – at the company – just placed a personal bet worth $266 million.
“And it gets even better: the President of the company has also gone all in with a personal wager worth $139 million!”
And we get the inevitable (for a startup energy stock) Rockefeller comparison:
“This tiny $2 startup owns every significant aspect of the supply chain.
“Yep, just like Rockefeller…Are you getting our free Daily Update
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“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.”
Which is when the bells start ringing. Yes, Moors says that “time is of the essence” … and yes, he says that “a few ground-floor spots are available” … but this is also the same stock he teased very similarly, using a lot of the same language, almost exactly a year ago.
Yes, sez the Thinkolator, this is another pitch for the LNG company Tellurian (TELL). We covered that for the Irregulars back in January of 2018 here if you’d like to compare, and re-posted it for everyone in May when Moors got hot and bothered about it again. That wouldn’t have done you any favors, unless you wanted to short it — the stock was in the $10-11 range back then, and is now just bouncing off of the December lows and trying to get back up to $8 a share.
What’s causing the latest surge? Mostly it’s the chatter about Saudi Arabia investing in US LNG, with the publicly traded vehicles available mostly being Tellurian, Cheniere (LNG) or Sempra Energy (SRE) … and TELL and SRE are arguably the most compelling for big investors and are reportedly on the Saudi’s four-project short list, since they would really need capital for their huge planned LNG construction projects (Sempra is also a big regulated utility in California, but they’re planning several major LNG projects, with the Saudi’s possibly interested in their Port Arthur one… Tellurian is really a pure play on their planned Driftwood LNG project).
I would assume that the Saudi’s would most likely invest directly in the projects as joint venture partners, but I guess they could also buy equity stakes — don’t know. Either way, all LNG plant builders require massive amounts of capital and take a long time to get their trains up and running (Cheniere, the most advanced LNG exporter, went from about $2 billion in debt to $25+ billion as they ramped up construction over the past five years — and that’s after putting $16 billion of debt on their MLP, Cheniere Energy Partners (CQP)).
LNG Liquefaction and export companies are largely driven by two things: The cost of capital, since they require so much money to build and operate; and the differential between domestic natural gas prices and the import price they can get in Europe, Japan, China or South Korea (or other places, but those are usually the main importers).
There are lots of other operational concerns, of course, particularly for a company that’s still in the permitting phase like Tellurian and hasn’t actually built a facility yet or raised all the money they need for construction… but those should be the operational triggers that tend to determine profitability (or lack thereof).
The argument in favor is that there’s plenty of low-cost natural gas in the US, and enough of a surplus, particularly around the Gulf Coast, that we can export it without driving prices up too dramatically… and that there’s huge demand in Asia and Europe for cleaner-burning natural gas, so they’re willing to pay big premiums for imports.
The only real problem is that we’re talking about 2025 or so when we try to imagine what the supply/demand balance will be — all these firms are signing contracts for supply, but those contracts don’t tend to have pricing attached so they’ll be at whatever the market price is at the time. So margins are a guess, both because we don’t know what the gas will cost them in the US and because we don’t know how much they can sell it for once liquefied, transported as a super-cooled liquid in specialized tankers, and then gasified in the end market.
And the US, of course, is not the only LNG source in the world — Australia has had major projects in development, and Russia and Qatar and others are also looking to expand their capacity.
I’m not trying to cool your jets on the whole “LNG will be huge!” idea, it very well could be, just noting that there’s some big-picture risk because we have no idea what the pricing might be five years from now, when more of these facilities, including perhaps Tellurian’s Driftwood LNG facility, will be online.
The plan is for the project to have a “go ahead” decision sometime in the middle of 2019, they are currently awaiting their final environmental impact statement and expect a final order from the Federal Energy Regulatory Commission in the first half of this year that will allow them to make the Final Investment Decision and begin to access the capital they need (probably about $7 billion for pipelines plus $15 billion for the plant construction over four or five years, per current estimates). They anticipate producing their first LNG in 2023. I don’t know if the government shutdown will impact the review process, I suppose there could be delays, but presumably they’re pretty close to a decision already.
You can review their presentation here, the project details are particularly interesting. They are planning for vertical integration, using their Haynesville basin natural gas assets to partially feed the LNG trains, but they’ll also, pending approval and construction of more pipelines, tie into production in the Permian and elsewhere to get more gas. They’re also looking to buy production in Haynesville, so some of the small producers down there might get deals, all in an effort to avoid having to pay fluctuating Henry Hub prices (that’s the price most futures are based on).
Financing is coming partly from equity investors and borrowing, and partly from partners who are supplying up-front capital to secure the majority of capacity. They think they can deliver FOB (meaning the buyer pays for shipping from the Gulf Coast) for $4.50, including financing costs, so there’s ample room for big long-term returns if they’re right — assuming the prices their customers will pay are high enough.
Shipping and regasification will likely cost anywhere from $1-2/mcf depending on tanker supply, from guesses I’ve seen, and import prices in Japan and South Korea have hit both $4 and $15 in the past five years per the futures prices charted here. Tellurian’s working estimate is for $8 for the US Gulf Coast netback price (meaning what they can sell it for, with buyer paying the shipping cost above that), and if that’s the selling price they think that means they could have annual cash flow per share, assuming five plants are built, of $8.55.
That’s obviously appealing for an $8 stock, even though we’re talking about the cash flow coming through in many years (that’s for full production of the whole project, only the first phase is planned to be built by 2023), though they still have to raise $27 billion of capital by borrowing (and $8 billion in equity) to cover the construction costs, and I don’t know how much of that is committed (none of it is “on the books” right now). So the equity of Tellurian should be very levered — partners and lenders are going to assume most of the construction cost, but they’ll probably also have to sell some shares on the open market or sell an equity stake to a partner, and partners and lenders will also presumably have first recourse on access to product (for the partners) and cash flow (for the lenders), so if things go a bit wrong or the margin is tighter than they hope, it will have an outsize impact on Tellurian equity holders.
That’s way off in the future, though, for now this is a story about getting a final investment decision sometime in the next six months or so, getting final financing in place, and beginning construction… with valuations based on progress on financing and construction and, importantly, on sentiment for what LNG margins are going to be several years in the future, which depends on cost of production in the US and the size of the demand in (mostly) Asia, both of which will probably be cyclical to at least some degree.
So yes, I’m still pretty skeptical about getting involved in a hugely capital intensive project like this at such an early stage. If the story ends up playing out at all like Cheniere did while it was building its first LNG export terminal (Sabine Pass, which I think exported its first cargo in February 2016 — they do have a second plant in Houston, now, that exported its first cargo a couple months ago), then it could be a wild ride before we see any ships full of LNG heading off to the horizon — here’s what the shares of Cheniere (LNG) looked like starting six months before the final investment decision… so you can see that there were a few 20-30% drops along the way, along with that big scary drop in the year or so before they commissioned the first trains and had their first shipment.
Or if you want to have a less dramatic one, here’s the log scale chart.
That drop also came at about the same time that Cheniere was in substantial management turmoil, with CEO Charif Souki being ousted (reportedly under pressure from Carl Icahn)… and it was about a year later that Souki launched Tellurian, so I have no idea whether we’ll see that same kind of pressure brought to bear on his new company… but he and his other early investors and management team do have tighter control of the shares, at least for now.
So… interested in the same LNG story, a year later and a little closer to possible construction, and about 20-25% cheaper than it was when Dr. Kent Moors first tried to convince us of their possible 59.850% revenue surge? Ready to wait through some volatility as they finalize the project plans and begin construction? Think the financing costs will be what they expect, or that they’ll deliver on time? What will the cost of natural gas be in South Korea in 2025? Any answers to these questions, or even just guesses or comments, are always welcome in the discussion thread below … just use the friendly little comment box.
P.S. No, the stock is not ever going to surge 59,000% — at least, not without hyperinflation or many decades of good fortune — but their revenue will surge pretty dramatically if and when they actually begin production in (hopefully) four or five years… by way of comparison, Cheniere’s annual revenue “surged” about 3-5,000% from pre-construction to now (and revenue per share went up by about 800%), while the stock rose about 400% (and Cheniere had more revenue at the beginning than Tellurian does, partly because there was a little legacy business of LNG import before they switched to build an export company, so Tellurian’s revenue growth rate will look more dramatic… but it still won’t really mean anything, investors all know that this is a “starting at zero” company with an expectation of a revenue-producing business a few years out in the future, and the company is valued based on that future revenue and the risks inherent in the path to getting to that revenue, the “growth” won’t be an exciting surprise).
P.P.S. I went into some additional detail a year ago when I covered the first version of this ad — you can always check that out if you want to dig into it a little more. Enjoy!