Debt cliff looms for Tellurian
Question marks over Driftwood LNG project as would-be LNG exporter scrambles to service creditors
US LNG developer Tellurian had spoken optimistically about reaching FID on its landmark Driftwood LNG project this year. In July, French equity partner Total confirmed an investment of $500mn, and in September Indian importer Petronet signed a memorandum of understanding for up to 5mn t/yr. Momentum was starting to build.
But progress now looks less certain, ratcheting up investor nerves. During US President Donald Trump’s visit to India in February, Petronet announced it would delay its final decision by a further two months; the new deadline is 31 May. This uncertainty has combined with plummeting spot and oil-linked LNG prices—on the back of the Opec+ failure and Covid-19 impacts on demand— to send Tellurian’s share price down by over 80pc.
“Cost-cutting alone is insufficient, the company will have to also raise additional capital to remain solvent” Nolan, Stifel
The company remains hopeful that it can still salvage the Petronet agreement. India has pledged to raise the proportion of gas in its energy mix from 6pc currently to 30pc by 2030. But with Asian LNG prices below $3.15/mn Btu amid a persistent global supply glut, would-be buyers have options and large upfront costs are no longer attractive.
“Petronet does have the upper hand in the current, oversupplied LNG environment. They can afford to shop around, drag the process out and negotiate until they get the best deal for themselves,” says Hillary Cacanando, equity research analyst at US brokerage firm Odeon Capital Group.
Feeling the effects
Financial pressures are starting to take their toll on Tellurian. One of the company’s loan agreements stated that, if it failed to find a buyer for at least 4mn t/yr of LNG from Driftwood LNG by 28 February, then the lender could seek collateral. Tellurian chairman Charif Souki and vice-chairman Martin Houston were forced to offload a combined 7.4mn in shares to pay the lender. Souki’s family trust pledged a further 22mn in shares.
$88mn – debt due in May
But Tellurian faces another impending headache—an $88mn loan due in May urgently needs refinancing. The company has started what it terms a reorganisation to reduce costs, but it is unclear whether it can again tap capital markets considering its debt position. “It certainly helps the cash burn, but there is unquestionably still a cash burn and debt due,” says Benjamin Nolan, managing director at US bank Stifel. “Cost-cutting alone is insufficient, the company will have to also raise additional capital to remain solvent.”
Even if the Petronet deal is finalised, there are still doubts about Driftwood LNG making headway. “Tellurian still needs to secure an investor for another 4mn t/yr, as well as execute $1bn of convertible debt, as required by its agreement with Total, which will take time to complete and require lots of liquidity,” says Cacanando.
A note from US bank Cowen highlights that Tellurian has only around $80mn in cash. It estimates that the company has a minimum cash burn rate of $20mn/month and a further $22mn in deferred engineering costs due in 2020. Combined, the financial position is becoming increasingly fragile.
Tellurian’s share price slump could also make it a possible acquisition target, especially considering Driftwood has Ferc approval. “Tellurian’s equity business model could be attractive to some larger international players looking to gain exposure in the US LNG market,” says Cacanando. “The Driftwood project already has [Ferc] approval, which is valuable as it could take years to obtain [for other projects].”