What’s Next For Tellurian?

SL Advisors Talks Markets
SL Advisors Talks Markets
What’s Next For Tellurian?







/

Tellurian (TELL) CEO Charif Souki is one of the more colorful executives in the energy sector. In his book The Frackers, WSJ journalist Gregory Zuckerman memorably chronicles his career from a “shaggy-haired Lebanese immigrant” who spent seven years in Aspen where he “skied and bummed around” to founding Cheniere, today’s leading exporter of US Liquefied Natural Gas (LNG).

In 2016 Souki founded Tellurian, planning to develop a greenfield LNG export terminal (Driftwood). It was to be the next Cheniere. He assembled a team of former colleagues and set about designing the facility and signing contracts for construction and LNG shipments. Rounding up enough customers who will commit to long-term Sale and Purchase Agreements (SPAs) is necessary to obtain financing and reach Final Investment Decision (FID). It’s how all these projects progress. There’s no alternate use for an LNG facility, so twenty year contracts are the norm.

Today Souki’s weekly videos draw several thousand views on Youtube. Sycophantic comments are posted by true believers. It always seemed TELL was one SPA away from FID on Driftwood. Souki is the rare CEO who offers a regular public perspective on his business.

In a recent video Souki conceded to “tactical errors” which explain TELL’s slumping stock price. Convinced that the spread between foreign natural gas benchmarks and the US represents a long-term profit opportunity, TELL sought to retain the price risk in the SPAs they negotiated. Cheniere and most other exporters charge a liquefaction fee and seek to avoid exposure to commodity prices. This creates more stable, visible cashflows which lowers their cost of capital.

As Cheniere has shown, they still retain price risk on some contracts which has allowed them to raise their EBITDA guidance three times this year. TELL’s approach offers more upside if differentials remain wide, but the higher risk profile has made investors wary. Large pricing discrepancies have a way of self-correcting. The US is likely to attract manufacturing from Europe because of our cheaper energy, which may push domestic natural gas prices higher and European ones lower.

In August 2021 TELL raised $100 million in a secondary offering at $3 per share, a 25% discount to the prevailing price. Later that year they paid $8 million in cash incentive compensation to senior executives. Once again betraying his risk appetite, Souki publicly contemplated using the balance of the proceeds to help acquire an upstream natural gas E&P company. Although this type of vertical integration made sense with their desire to retain natural gas price risk, TELL should have been positioning itself as the seller not buyer in such a transaction.

Since then TELL has visibly struggled to obtain the financing necessary to build Driftwood. Russia’s invasion of Ukraine provided a boost to the US LNG sector, and Souki must have salivated at the huge prices European buyers have paid for LNG shipments. In March TELL announced construction of Driftwood had begun, in an attempt to create a sense of inevitability around their plans and draw investors in.

Falling stock and bond markets have reduced risk appetites. Last month TELL pulled a bond offering, presumably because the yield investors required was too high. In his recent video, Souki acknowledged that retaining price exposure to natural gas had been a mistake. They recently let two SPAs lapse. There is no longer any clear timeframe for FID on Driftwood.

Souki is used to adversity. Cheniere was originally planning to import LNG to compensate for falling domestic production. The Shale Revolution turned this calculus upside down. Souki pivoted to developing an export business – a non-trivial change since regassifying LNG imports uses very different equipment than chilling natural gas and loading it onto LNG tankers.

In spite of this success, in 2015 Souki was forced out of Cheniere by Carl Icahn who objected to excessive compensation and Souki’s desire to create a marketing arm to trade natural gas. He soon founded Tellurian.

Last year Souki received total compensation of $20,182,005 according to TELL’s proxy statement. Even Kinder Morgan, not known for a parsimonious philosophy towards its senior executives, restrained themselves to $18 million for CEO Steve Kean. There aren’t many analogous LNG start-up companies – NextDecade (NEXT) is the only true comparable. So TELL’s list of peers for compensation consists of profitable companies whose operations are generating positive cash flow, not something TELL can currently boast.

NEXT is included in TELL’s peer group, and paid its CEO Matthew Schatzman $9,202,686 last year. Even Cheniere’s CEO Jack Fusco was paid less than Souki last year at $18,091,084.

Charif Souki’s problem, identified by Carl Icahn back in 2015 when he was on Cheniere’s board of directors, is that he likes pay for performance in advance.

Stock prices for TELL and NEXT were approximately tracking each other through Russia’s invasion in February which boosted both. But in recent months TELL has slumped as investors tired of the promised financing to reach FID on Driftwood. Meanwhile NEXT has pushed ahead with signing SPAs, and we think they will reach FID on two, possibly three “trains” to deliver LNG to awaiting tankers by the end of this year. Of the two, NEXT now seems much more likely to execute their plan.

Souki offered his mea culpa on Youtube which was forthright of him even if he didn’t offer to return some of his already advanced performance-based compensation.

The lesson here is that investing alongside Charif Souki may work out – it did at Cheniere. But it always works out for Souki. Expect to see repriced stock option awards as a necessary step to keep him motivated. Whatever comes next for TELL, we think NEXT is a better run company.

We have three funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Inflation Fund

Please see important Legal Disclosures.

 

Print Friendly, PDF & Email
SL Advisors Talks Markets
SL Advisors Talks Markets
What’s Next For Tellurian?
/

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.

Print Friendly, PDF & Email
0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.