Developer recently unable to complete Petronet deal
Permian pipeline may not be built for terminal first phase
Houston — Tellurian has delayed its target to begin construction of its proposed Driftwood LNG export terminal in Louisiana until next year, the company's CEO said June 16.
The disclosure, made by Tellurian's Meg Gentle during an investor presentation that was webcast, follows the developer's recent inability to complete a key equity partnership agreement with India's Petronet.
Low international prices, weak demand and market shocks from the coronavirus pandemic have created enormous challenges for existing US LNG exporters as well as developers of new liquefaction terminals. Utilization at liquefaction terminals has fallen to 14-month lows, while final investment decisions on multiple projects have been delayed.
At full development of 27.6 million mt/year, about half of Driftwood's capacity is expected to be used by the equity investment partners Tellurian has been soliciting. The remaining capacity is to be retained by Tellurian to market on its own.
To date, however, after a preliminary deal with Petronet expired when it was not completed by the end of May, only France's Total has made a firm commitment to support the project – a $500 million investment signed last summer.
Tellurian continues to talk to potential partners and hopes to have sufficient agreements in place during the first half of 2021 so it can obtain financing and begin construction, Gentle said. Startup of LNG production is expected by the end of 2024, a delay from the previous target of late 2023. Full operations aren't expected until 2026 or 2027, Gentle said.
"I would expect that as we emerge from covid-19 and see JKM recover as we get over $5/MMBtu, we will be able to finalize those partnership agreements," Gentle said.
The Platts JKM for August, the new front-month, was assessed at $2.225/MMBtu on June 16. As the JKM has traded in a historically narrow spread to the US Henry Hub, it has been uneconomical to place some US spot LNG cargoes in Northeast Asia, the biggest importing region for LNG in the world.
A wave of cargo cancellations and deferrals driven by ultra-low prices in end-user markets in Asia and Europe have hit existing US LNG exporters and made it difficult for developers of new terminals to sign long-term deals with buyers.
Tellurian has cut costs by shedding staff and has reached new financing and loan arrangements to give it some breathing room as it works to commercialize Driftwood. There may be additional opportunities to bring down its capital budget, Gentle said.
Among other things, the CEO said that with reduced drilling in the Permian Basin, Tellurian does not need to build its proposed $4.2 billion Permian Global Access Pipeline, which would bring supplies from West Texas to Louisiana, for the first phase of the terminal project. No final decisions have been made, as the company continues to evaluate the economics of the pipeline.
During her presentation at the JP Morgan Energy, Power & Renewables Conference, Gentle said Tellurian continues to believe that its equity partner model and its experienced leadership differentiate Driftwood LNG from the rest of the pack of US export terminal developers.
"The $3.50/MMBtu cost of delivering LNG on the water is always going to beat the Henry Hub-indexed projects, especially in a rising Henry Hub price environment," she said.
Cash Henry Hub fell to $1.38/MMBtu on June 16, according to preliminary settlement data, which is the lowest spot price for the location since December 3, 1998.
This assumes Tellurian exists in 2021. Stock at 1.26. Market cap of $330MM.
I wonder if TOTAL will get their half a billion dollars back if Tellurian folds? And I expect some Tellurian royalty owners may have some questions also. Not a good time to attempt to sell the small Haynesville stake the company owns but the company may have no choice.
A little refresher on Tellurian might shed some light on the future potential of Driftwood. Also of note, his Aspen Valley Ranch is for sale listed at $220MM bones. Just slightly more than Cheniere paid him the last year he was there and just slightly less than the entire current market cap of Tellurian.
Energy tycoon Charif Souki launched Tellurian Inc. four years ago in an effort to repeat his success at Cheniere Energy Inc., the U.S. LNG pioneer he founded. But lightning has not struck twice.
Tellurian’s LNG plant remains unbuilt years after construction was due to begin. The company’s market capitalization has slid below $500 million from $4 billion since it listed and its fixed assets are worth less than the $220 million Souki is now asking for his Aspen ranch.
The company has dismissed 40% of staff. At its annual meeting on June 10 it won approval to double the number of common stock shares to allow future issuance that would dilute existing owners.
The LNG market has been pummelled as the coronavirus pandemic saps demand. Gas prices overseas have fallen below those in the U.S., undercutting the economics of exports. While many expensive new projects to liquefy and ship the fuel have stalled, none has been headed by as well-known a promoter as Souki.
A restaurateur and investment banker, Souki established Cheniere in 1996 and eventually constructed an LNG import terminal at Sabine Pass, Louisiana. He pivoted to build an export terminal at the site when fracking was transforming the American gas supply, a prescient move that made him a doyen of the industry.
Cheniere fired him in 2015 weeks before its inaugural cargo in a boardroom coup orchestrated by activist investor Carl Icahn. Souki soon returned with Tellurian, introducing a plan to undercut his former business by 15%-20% on costs.
“I am right: it’s just a matter of when it happens,” he told the Financial Times in 2016.
His Houston-based company launched with grand ambitions, spending more than $80 million a year and hiring away top Cheniere executives as it drummed up business for the Driftwood LNG plant 40 miles east of Sabine Pass, which at a cost of $30 billion and a capacity of 27.6 million tonnes of LNG a year could have been the largest in the U.S.
“They went big. They came out of the gate walking and talking and acting like a company the size of Cheniere,” said Michael Webber, managing partner at Webber Research & Advisory.
The plan was to procure low-cost gas supplies and race ahead of a crowded field that Martin Houston, co-founder alongside Souki, derided as “amateur hour.” They found an important early backer in French oil major Total SA, which agreed last July to further increase its investment and buy 2.5 million tonnes of LNG a year from Driftwood.
No other buyers have finalized sales contracts. A tentative deal with Indian gas importer Petronet—signed last year during a visit to Houston by Narendra Modi, the Indian prime minister—expired in May.
Total, now with a 17.2% stake in Tellurian, has raised doubts about the need for Driftwood. The company has the right to back out of its new capital contribution agreement if Tellurian fails to greenlight Driftwood by July 2021, according to a securities filing.
“The priority is not to invest more in merchant projects in the U.S.,” Patrick Pouyanné, Total’s CEO, told analysts in early May, adding: “I think there is no reason it would be sensible to move forward on this one.”
Souki, Tellurian’s chairman, controlled 22.6% of the company’s outstanding shares in January. The position has been halved by involuntary sales earlier this year “effected by a lender to satisfy certain loan requirements”, according to securities filings. Held in trust for his children, the sold shares had been pledged as collateral “to secure financing for various investments”, the filings showed.
Souki’s stake now amounts to 10.7% of the company, or 28.5 million shares. Of those, 25 million have also been pledged “as part of a collateral package to secure a loan for certain real estate investments”, Tellurian said in a proxy statement.
John Coffee, a business law professor at Columbia University, said such pledges were rare. “This is an uncommon practice—sufficiently so that there are not generally rules against it,” he said.
Souki sent a confident and occasionally defiant message in an interview with the Financial Times last week. Acknowledging setbacks resulting from the pandemic, the weak global economy and the onrush of competing supplies, he said Driftwood’s progress had been slowed by a year-and-a-half to two years, but not stopped.
“There is no questioning the fundamental business model. America has cheap gas, cheap infrastructure; the rest of the world needs the gas. It’s just a matter of time,” Souki said. To raise capital the company “can sell stock any time we want.”
Wall Street has shown less patience. Tellurian’s shares have rebounded this week amid a broader rally in energy stocks, but at less than $2 a share they remain at a tenth of their peak. World LNG trade will have grown by a fifth between 2019 and 2025, but export capacity is likely to outpace imports, the International Energy Agency said on June 10.
Jason Gabelman, energy analyst at Cowen, said of Souki: “The fact that he was able to build one LNG company made some investors more comfortable that he could successfully build a second. Thus far, that thesis really hasn’t proven out to be true.”
The 813-acre Aspen Valley Ranch in Colorado once grew potatoes that fed silver miners, a local broker said. Souki and his children developed eight custom-built homes, a clubhouse, a gym and pool house, a barn with arcade games and another with horse stalls, according to promotional material.
The property was among a number of real estate investments for which his pledged Tellurian shares were used as collateral, Souki said. The decision to sell it, through an Aspen broker he also owns, was “completely unrelated to Tellurian,” he added.
With the spread of coronavirus, Souki has been staying at the ranch since a February trip to India. He said he sought to spend a third of his time on Tellurian, a third on his private businesses and the last third enjoying himself.
“I’m 67,” he said. “I don’t want to wake up one day and find myself past my shelf life.”
Jay, thanks for posting / good summary item
Bet big ......and you may win or lose big. An ability to downplay risk and a willingness to make big $$$ bets, that is a mindset ingrained in the O&G business writ large.
Many on GHS can remember the Aubrey-Floyd battle for leases in the early GHS days. Floyd got so tired of losing to Aubrey on Haynesville Shale leases that in July 2008 he made sure to win a couple of key south Caddo Parish mineral leases in the state auction by bidding over $30,000 per acre......and a 30% royalty. Now that's letting your ego run away with you.... however big egos are also quite common in the O&G fraternity. Can be a deadly combination...and a company killer. Floyd never repeated his Petrohawk success and burned through a lot of investors and stockholders money in the process.
It will be the stockholders that stand to lose everything in the Chesapeake and other bankruptcies to follow. The days of O&G as a favored investment vehicle may all be in the rear view mirror.
Chesapeake is toast. Petrohawk got lucky and sold out. Neither of them had the business model that Tellurian is employing.
Yet Tellurian is a like example of ego and overreach by corporate managers with an aggressive business model. Floyd was lucky to sell Petrohawk to BHP for a princely sum...and then proceeded to apply his same MO to Halcon with considerably less luck. And yet he kept getting funding and trust based on his Petrohawk success. He was fired from Halcon and last I heard he was promoting a new company start up, Falconer. Seems he hasn't learned much, old habits die hard.
HOUSTON (Bloomberg) -- Legendary wildcatter Floyd Wilson is back with his “ninth or tenth” oil company, after his departure from Halcon Resources Corp.
Falconer Oil and Gas Corp., a Houston-based venture with a vague mandate from Wilson to “make money,” just two months after he stepped down as CEO of Halcon following a battle with hedge fund Fir Tree Capital Management LP. Fir Tree called Halcon’s spending “excessive,” citing Wilson’s insistence on flying private even after the company emerged from bankruptcy in 2016.
Wilson discussed exploratory drilling at a time when weary investors are demanding shale producers stop outspending cash flow -- an irony that wasn’t lost on him.
“Don’t get me wrong, I’ve never run a business that operated within cash flow,” he said. “But they all could have operated within cash flow some day.”
That’s just part of wildcatting, he said.
“Any business that can’t operate within cash flow is a hobby, or it’s an early-stage shale business, or it’s a business that needs to be sold or consolidated,” he said.
Still, not every investor is willing to wait, said Wilson, who characterized his departure as being a result of “a couple of nitwits in New York.” He later said that was probably harsh, adding that they were “smart” people but that he couldn’t run a business based on one shareholder’s demands. A representative for Fir Tree declined to comment.
Wilson aims to grow Falconer into a business to be valued in the “hundreds of millions,” hopefully reaching the $1 billion mark over time. He’s looking for oily assets in the Permian Basin in West Texas and New Mexico and the Eagle Ford shale in South Texas. Despite past moves, Wilson said he doesn’t have plans to go public via a reverse merger.
Wilson was previously CEO of Petrohawk Energy Corp., which was sold to BHP Billiton for $12 billion in 2011. In keeping with the bird theme, he named his next company Halcon -- Spanish for “hawk.”
When asked Tuesday whether he had any regrets about leaving the hawk name behind with Falconer, Wilson said: “Well, a falcon is a hawk.”
As a royalty owner, tellurian has not been a bad company to work with in as much as they get the check in the bank every month as they should and their prices seem to be in line with what Indigo is paying me whereas when Samson owned the same wells there was a vast difference between prices paid to me as a royalty owner. When it comes to my preference though, I think I would rather have my property with Indigo as they've been real easy to get a hold of and seem to drill better wells.
Tellurian may reach a point where they have to sell their LA HA units. If it is any time in the near future the chance of getting a decent price will be tough. It might be a situation where a sale is driven by negative cash flow on their upstream assets.