It’s a Bad Time to be Selling Below Average Gas Assets

novilabs.com

Tellurian needs the capital as it accelerates the construction of Driftwood; however, the asset quality and price

environment means the company will struggle to exit at an attractive valuation. 

The long-term bull thesis for Gulf Coast gas remains intact. If the rig count in the region stays flat, we

estimate there will be a ~9 Bcf/d deficit by 2030. The Haynesville rig count will need to ramp back to 70 by

2025. 

Prices will need to increase to encourage new supply. 

Even the most economic operators (GEP II, EXCO, C6 and SWN) breakeven at $2.70/Mcf to $3.50/Mcf HH. 

Given its capital requirements for Driftwood, we don’t think Tellurian can wait for higher prices to sell its

upstream asset. But, selling now could result in a sub-2.5x multiple.  Tellurian has some 1st-quartile acreage, but generally, its asset are of below-average quality, and the company has anomalously high completion

intensity. The company doesn’t rank in the top ten on a break-even basis. 

Tellurian’s management is approaching the sale from a pure capital allocation perspective. 

Driftwood LNG is far more impactful to the company than drilling its Haynesville wells. 

• The company owns ~32,000 acres (net) across Desoto, Bossier, Caddo, and Webster Parishes in Louisiana.
• Tellurian estimates it has interest in 160 producing wells and ~400 undeveloped natural gas wells, of which

~50% will be operated by Tellurian.

• On February 6th, the company announced its plan to sell its upstream assets. In a follow-up announcement

in mid-March, Tellurian announced that it had expanded its banker’s remit to include the possible sale of the entire company.

• Ultimately, the company’s equity is down ~90% versus its 2022 highs. With Driftwood construction set to

accelerate in H2/24, selling the upstream assets could be a non-dilutive way to move forward until the

equity recovers. Note that ~30% of the construction is complete and that the company has invested ~$1

billion to date.

Haynesville & Bossier Rock Quality

Tellurian’s upstream asset is located in the eastern margins of Haynesville. The southern half of this acreage is

prospective for tier-1 Bossier, but the remainder is of below-average rock quality.

In the unshielded NE portion of the basin, the sediment gets polluted by organic-poor and oxygen-rich sediment from the ancient Mississippi delta.  Rock deposited in the protected basin NW of the Sabine/Natchitoches Island

complex tends to have a higher TOC, which results in a better source rock.

In the Texas portion of the Haynesville, thickness and resultant gas in place tend to be higher. Ultimately, the

rock tends to have lower IP rates coupled with lower declines and higher EURs.

Tellurians Acreage Sits In the Northeast Fringes of the Play Where Rock Quality is Typically Low

Haynesville Supply Summary

As of Q4/23, Tellurian’s upstream arm produces ~178 MMcf/d net (~300,000 MMcf/d operated) across the Haynesville.  Tellurian is the 13th largest operator in the basin, slightly ahead of ExxonMobil.

Tellurian’s Laterals by Length

Tellurian is Drilling More Short Laterals Than Basin-Leading Peers

The most common design for Tellurian is a <5,000 ft well. This is not the case for any of the top operators in the basin.  GEP II’s acreage geometry has allowed it to exclusively drill XL Laterals.

Tellurian’s Proppant Loading

Tellurian Has Higher Proppant Loading Versus Top Quartile Peers

Due to Tellurian’s high proppant loading and short laterals, we estimate it has some of the highest D&C/lateral-ft costs in the basin.

Tellurian’s Breakeven Metrics

Lower Rock Quality and Expensive Wells Mean Tellurian Ranks Poorly on Breakeven Metrics

Compared with a top operator like GEP II, Tellurian has lower rock quality. This, coupled with Tellurian drilling shorter laterals, has translated to higher breakevens.

Tellurian’s Asset Sale

Tellurian is Selling an Average Gas Asset During a Time of Extreme Price Depression

We don’t think the asset quality, acreage geometry or the pricing environment will justify a premium, like the SWN-CHK deal, which we estimate transacted at over 4x 2023 operating CF.

Given Tellurian’s relatively average to below average rock quality and the short-term outlook for gas prices, we don’t believe Tellurian should or will receive a premium (>2.5x) operating cash flow multiple.

Ideally, the company would wait until 2025, when LNG demand is forecast to raise HH prices, and buyers may be willing to underwrite at a higher gas price.

With Driftwood construction set to start in H2/24, we don’t believe it will be feasible for Tellurian to wait, and it may be motivated to sell in the near term.

According to Tellurian disclosures, it spent over $200MM acquiring the assets. We speculate that it is very possible Tellurian will receive less if it sells this asset now.