Want the Gas? Buy the Company! A New Way to Finance US LNG
(Bloomberg) -- After amassing billions in debt and pushing a bold spending plan, Charif Souki was fired in 2015 by the liquefied natural gas company he founded. Now heading a new company, he’s changing his plan of attack.
Souki’s latest idea is to mostly deal debt out of the picture. The company he chairs, Tellurian Inc., is seeking investors to pay a total of $12 billion up front to fund the proposed Driftwood LNG export terminal in Louisiana. In return, they get a stake in the project and the ability to buy fuel at cost moving forward, with no markup based on a changing marketplace.
Included in the pitch: A plan to control supply by buying production fields and pipelines. While that part isn’t unique, the total package is, driven by a man whose ideas were once called “harebrained” by billionaire investor Carl Icahn. Will buyers bite? None have yet, but Souki’s previous success in launching the first U.S. gas exporter could tip the scales.
“They have a proven track record of executing a project," said Sam Margolin, lead analyst at Cowen and Company LLC in New York, in a phone interview. "These are expensive, really complicated, really difficult projects.”
Tellurian is in advanced talks with potential equity partners for Driftwood, Meg Gentle, the company’s chief executive officer, said in a telephone interview. Partners in the first phase of the project will get a board seat, according to the company.
So far, Total SA has invested $207 million in the company, Bechtel Corp. added other $50 million and General Electric Co. invested $25 million. Tellurian has also raised $100 million in public equity. according to a company presentation.
At the same time, the market is clearly skeptical: Tellurian’s value has fallen by half to just over $2 billion since February 2017, when it went public. The most likely reason: It’s based on a gamble. The company fell 3.5 percent to $8.50 at 9:50 a.m. Monday in New York.
Dealing Out Banks
“This cleverly removes the banks from the whole formula, and then it becomes the buyer’s problem,” said Jason Feer, head of business intelligence at Poten & Partners Inc. in Houston. “The fact that you don’t have a whole bunch of people falling over themselves to sign is an indicator of how complicated it is.”
Feer, in a telephone interview, said he couldn’t think of any company that’s “financed or done a major project that was structured like this. It’s a pretty radical departure.”
Souki was forced out as CEO at Cheniere Energy Inc., the first company to export U.S. shale gas in a super-chilled form, in a drive led by Icahn. Now, the 65-year-old Souki sees a chance to take a new approach. For Houston-based Tellurian, seeking equity up front and selling LNG at cost makes sense in an environment where abundant gas supply makes buyers more reluctant to sign long-term contracts, Souki said in an interview.
“You are in a commodity business, so it’s not very easy to get long-term contracts anymore,” he said. “I don’t think the customers are afraid of not finding molecules.”
Tellurian plans to spend $2 billion to buy up gas reserves to feed the terminal, starting with Louisiana’s Haynesville shale. And it anticipates spending a little more than that to build pipelines that will shuttle gas to the project, according to a company presentation.
Additionally, the company plans to source cheap gas from the Permian Basin of West Texas and New Mexico, where the fuel is produced as so-called associated gas, a byproduct of drilling for oil.
“You need to be integrated, you need to be able to add a source of associated gas that the producer of oil doesn’t need, or be able to produce gas yourself at a very competitive price,” Souki said.
The integrated model could allow Tellurian to load LNG onto a ship at $3 per million British thermal units or less after factoring in the price of the fuel and the cost of chilling and shipping it, according to Gentle. In January, the price for LNG at export for Cheniere’s Sabine Pass terminal in Louisiana was $3.15 to $6.15 per million Btu, Energy Department data show.
At the same time, the investors could end up paying more if gas prices or operating costs rise, the company has said.
Though the integrated model has been used to develop gas fields in Qatar, Mozambique and Australia, it’s only now starting to be pursued in the U.S. At least one other U.S. LNG project may employ a similar strategy: State-owned Qatar Petroleum is partnering with Exxon Mobil Corp. and ConocoPhillips to build the Golden Pass terminal in Texas. Exxon is reportedly in talks with Qatar over a partnership that could see the nation owning U.S. gas.
While added flexibility has been a much-discussed factor within the industry, buyers in Asia and other major gas-consuming regions may prefer the traditional model of an LNG contract linked to changes in oil prices, rather than signing for a fixed price, said Het Shah, head of natural gas research for Bloomberg New Energy Finance in New York.
“Most buyers would rather stick to an index and not speculate on price direction,” Shah said.
In the meantime, Tellurian has some financial breathing room: Souki and Tellurian co-founder Martin Houston, chairman of investment bank Tudor Pickering Holt & Co.’s international business, own more than half of the company, which allows them to play the long game and not sweat its volatile stock moves, Souki said.
Tellurian aims to begin construction of Driftwood in the first half of 2019, pending a final investment decision. If that time line holds, the terminal could be up and running in 2023.
To contact the reporters on this story: Naureen S. Malik in New York at firstname.lastname@example.org; Ryan Collins in Houston at email@example.com. To contact the editors responsible for this story: Reg Gale at firstname.lastname@example.org Christine Buurma.
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