Houston-based Tellurian seeking to become producer of natural gas with Haynesville assets
Stephanie Yang / Updated March 8, 2018 5:24 p.m. ET
Tellurian Inc. is in talks to buy Chesapeake Energy Corp.’s Louisiana drilling fields as it seeks to become a producer as well as exporter of natural gas, according to people familiar with the matter.
Chesapeake, a pioneer of the shale boom, has been selling off some of the vast holdings assembled by its late co-founder Aubrey McClendon as it struggles with low energy prices and a mountain of debt it took on to lock up drilling rights for swaths of land.
Tellurian is the latest venture by Charif Souki, who developed the first terminals to liquefy natural gas and export it from the U.S. Gulf Coast as founder of Cheniere Energy Inc. The company, which has few assets, has said it is looking to acquire drilling fields near a coastal site where it plans to build an export facility, to sell fuel overseas.
Chesapeake’s Louisiana fields, located in the Haynesville shale formation, are valued at about $2 billion, according to Jefferies analysts.
The talks to purchase Chesapeake’s fields could fall apart and there is no guarantee of an agreement. Tellurian has offered to Chesapeake to take equity as a part of the asset sale, something Chesapeake isn’t interested in doing, people familiar with the talks said.
Tellurian has also held talks with other producers with Haynesville assets to acquire more acreage, people familiar with the matter say. Tellurian’s stock closed up 1.5%, at $8.55 per share, Thursday and is down about 25% on the year.
The advent of shale drilling has flooded the U.S. with cheap energy, including vast resources of natural gas that producers have sought to export to generate electricity and heat homes around the world.
Mr. Souki founded Tellurian in 2016 after being ousted as chief executive of Cheniere in 2015. Cheniere sent the first shipment of liquefied natural gas from the mainland U.S. in 2016, after Congress lifted a ban on U.S. energy exports in late 2015.
At Tellurian, Mr. Souki is again trying to build out U.S. capabilities to send natural gas abroad, but additionally offering investors a stake in the full supply chain by owning producing assets along with pipeline and liquefaction capacity.
The strategy could potentially make it easier to raise capital to construct a multibillion-dollar export terminal, but it isn’t without risks. Tellurian will have to prove it can produce gas as cheaply as other operators who have years of experience.
By some estimates, Tellurian would have to become one the 25 largest natural gas producers in the U.S. to supply all the fuel it would need for its terminal.
“You have to find a business model that applies to the expensive financing of a project,” Mr. Souki said at the IHS Markit CERAWeek conference in Houston on Wednesday.
Last year, Tellurian acquired acreage in northern Louisiana for $85 million that currently produces about four million cubic feet of natural gas a day. Driftwood LNG is expected to start construction in 2019, pending regulatory approval.
In a February earnings call, Chesapeake executives pointed to opportunities to sell gas assets from its portfolio and reiterated plans to reduce debt by up to $3 billion this year through large transactions.
“Gas is extremely out of favor in the equity markets, as you all know, and extremely out of favor in many circles,” said Chesapeake Chief Financial Officer Domenic J. Dell’Osso Jr. on the call, but added, “there is real financial return to be created in these assets.”
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Tellurian is not like other Haynesville operating companies. They are not in the business of selling gas, they are in the business of sourcing their own gas. Since they will not be in a position to use their gas until 2022, it makes sense to maintain some level of cash flow from their Haynesville reserves to cover lease operating expenses. It is also possible that when they acquired the Samson units, they also assumed any gathering and treating minimum volume commitments. At some point these old Samson units will reach a point of depletion where new wells will need to be placed on line just to maintain the leases. There are a number of potential reasons to drill some wells but no incentive to drill a lot of wells as that would not be supportive of the business plan Tellurian is selling to potential investors.