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.

Finding Molecules

“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.