The recent move in US Natural Gas prices has finally started to put the investment spot light on the Natural Gas industry. The price of Henry Hub (US Nat Gas) has exploded from the $2-3/MMBtu range just a few months ago to $5-6/MMBtu now. Jerry Jones’s Comstock ($CRK) and etf $UNG have been rocket ships over the past month.
While this spike in Henry Hub is new, global natural gas prices have been soaring since the Fall of 2020. European Natural Gas (TTF) and Asian Natural Gas (JKM) are now pushing $30/MMBtu! That dwarfs the Nat gas price in the US (Henry Hub). While US gas prices will likely subside over the next year or two (due to immense US production and reserves), the same is not the case for Europe and Asia. TTF and JKM will continue to be significantly higher than Henry Hub for the decades to come. Europe and Asia simply don’t have the resources that the US has. Furthermore, Asian demand for Nat gas is growing exponentially.
So how does Tellurian ($TELL) fit into this picture?
As I say in my pinned twitter post @E_Garr99: “If only there was some way to shrink nat gas down to a fraction of the size and ship it from the US to Europe or Asia… You would be a millionaire… or maybe a $TELLionaire.”
There actually is a way to take advantage of the arbitrage… It’s called Liquid Natural Gas (LNG). When natural gas is chilled cold enough, it shrinks down to 1/600 the size into its liquid form. It can then be shipped to anywhere on the globe and regassified. LNG is a way to take advantage of the extreme and permanent arbitrage that exists in the global Natural Gas Market. You can produce gas cheaply in the US, liquefy it, and sell at TTF/JKM prices as opposed to the much lower Henry Hub price.
Tellurian was founded by industry icon and visionary Charif Souki. “Industry icon” and “visionary” are very appropriate terms because Charif also founded Cheniere ($LNG) and is credited with basically single handedly creating and developing the entire US gas export industry…which is now huge. Here’s a mind blowing fact- the US started exporting LNG only 6 years ago, yet will be the largest Natural Gas exporter in the world by 2023. Thanks to Charif Souki, Cheniere was the first company to export LNG from the US back in 2016. Next year, Cheniere will overtake Shell as the largest nat gas exporter. Amazingly, Cheniere was a very small company not too many years ago. Souki built it into a powerhouse and was subsequently ousted by activist investor Carl Icahn. In response, Souki founded Tellurian in 2016 along with another industry icon- Martin Houston. Both have stellar track records. As a matter of fact, just today, Souki was awarded the 2020-2021 USEA Award in recognition for being the “architect of the liquefied natural gas (LNG) export industry in the United States.”
Tellurian’s flagship project is called Driftwood LNG. The project is shovel ready (fully permitted, all approvals and engineering is complete). At full capacity, Driftwood will be able to liquefy and export 27.6mtpa (million tonnes per annum). Unlike Cheniere, Tellurian’s business model involves owning the upstream assets to control costs. Cheniere doesn’t produce gas. They buy gas from producers and only serve as the liquefaction middleman between parties. Unfortunately for Cheniere, some of their supply agreements involve purchasing gas at prices linked to JKM (I did a separate DD on this topic- check that out).
Tellurian recently signed 3 massive LNG offtake deals with major players in the field (Shell, Gunvor and Vitol). The deals collectively represent about $40B of income over a 10-year span and would likely be renewed after the first 10 years. These deals represent 9mtpa of the 27.6mtpa capacity and will be enough for Driftwood to launch phase one next year. The remaining phases will be built out in the future. I recently posted other DDs on near term price targets and catalysts. Check out my recent post on the potential upcoming M&A and my post called “Addressing Concerns”.
It’s a little bit funny that it took a US gas surge for investors to be interested in Nat gas stocks while the export opportunity has been here all along. That said, the Henry Hub surge will help Tellurian move the project along more quickly. They already own about 10,000 acres of upstream production in the Haynesville (still need much more) but the higher Henry Hub pricing will help them generate cash flow during the build out of the project. Tellurian is one of the few producers that is not hedged and benefits fully from this sudden nat gas price surge.
With a conservative view of stabilized JKM/TTF pricing of $10-$12/mmbtu, 27.6mtpa of exports would generate about $6-$8 billion in cash flow per year. The stock is currently trading at $3.75 (with a market cap of 1.77B). Look at it this way, at full capacity, Tellurian will clear the entire current value of the company in a single quarter as cash flow. The risk is that the project doesn’t get built but when you consider the recent 9mtpa of offtake deals, the current global nat gas arbitrage insanity and the track record of the Tellurian team, this is a huge opportunity to go long on the ground floor… We could have gone long Cheniere with Charif before that empire was built. Now we are getting a second chance with $TELL.
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