Dec. 1—Tellurian Chairman Charif Souki has traveled from boardroom to boardroom peddling plans for his massive liquefied natural gas project in Louisiana.
He attempted to raise $1 billion for the project through a public offering, promising to repay debt at a whopping 11.25 percent within five years. He took out a full-page ad in the Wall Street Journal urging readers to "invest in the energy of the future and the energy of now."
So far, no dice.
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Investing in the $13.6 billion Driftwood project — built on a riskier business model that could also allow the company to reap more profits — is a gamble no major investor has been willing to make, despite soaring overseas demand for natural gas after Russia's February invasion of Ukraine squeezed supplies. The project's precarious state raises questions about whether Souki, who is credited with building the LNG industry, has taken his aggressive deal-making too far.
Souki is reaching for a new business model that would allow Tellurian to benefit fully from swings in gas prices, but accomplishing that would mean exposing the company to risks that other LNG companies are sheltered from.
"He's trying to convince the world he can build a better mousetrap when the one that's there is working just fine," said Clark Williams-Derry, energy finance analyst with the Institute of Energy Economics and Financial Analysis.
That "mousetrap" is of a universal design in the U.S., where all operating LNG facilities, according to the Institute of Energy Economics and Financial Analysis, rely on 15- or 20-year contracts with buyers who pay a fixed price for turning natural gas into a liquid by cooling it to 260 degrees below zero. The guaranteed income provides financial stability to repay debt, carry on operations and turn a profit.
Souki, however, is pitching a plan that would have Tellurian operate like an integrated oil company — such as Exxon or Chevron — producing, transporting and liquefying natural gas and taking prices set by global markets.
The fee-based model, Souki says, is dying as rising prices, including that of natural gas, slash profit margins built into long-term contracts. Tellurian's plan allows it to profit fully from gas prices, which are notoriously volatile. For example, the benchmark U.S. price for natural gas, which Souki calls "the molecule," has bounced from about $2.60 per million British thermal units two years ago to more than $5. Souki believes prices will remain high, and as they are, he said, the project would pay for itself in a year and a half.
"With the molecule today, you make a $15 or $20 margin. With the concept of (fee-for-service) you make 50 cents," Souki said. "And people say, but at least my 50 cents is guaranteed. No it's not. Your 50 cents can blow up in a second. So I'd rather take a risk on $10 than a risk on 50 cents."
For Souki, the high-risk maneuverings are a continuation of a theme that dates to his time at the helm of Cheniere Energy. Souki's push to build more liquefaction capacity and his talent for raising billions from investors took Cheniere from the edge of bankruptcy in 2008 to the largest player in a fast-growing U.S. LNG industry.
But Souki's drive for more export capacity as gas markets weakened and the company hadn't yet turned a profit — combined with controversy over the size of his compensation package — put him at odds with his board and activist investor Carl Icahn, who called Souki's ideas "harebrained." Souki was ousted as CEO in December 2015 and began building Tellurian the following year.
At Tellurian, he set out to do what he hadn't been able to convince his colleagues at Cheniere to do — expose more of the company to the spot market instead of locking it up in fixed contracts, and open the company up to more profits. At Cheniere, Souki had aimed to leave at least 20 percent of the company's capacity open to the spot market, which can net huge profits when prices are high, while Icahn was more conservative.
"Can you imagine if they had 9 million tons today in the free market?" Souki asked.
But the 20-year fixed-fee contracts Souki presided over at Cheniere locked in revenue that covered the cost of construction while shielding the company from downturns like the one that slammed the industry during the pandemic, Williams-Derry said. It protected Cheniere against cost overruns, regulatory changes and price swings.
"The early Cheniere business model was focused on de-risking the business model in the U.S.," Williams-Derry said. "Souki's later plans were all about re-risking it."
To hedge that risk, Tellurian owns Haynesville gas acreage, but it makes up only a fraction of what would be needed for the LNG project, analysts said.
As Souki struggles to make his case to potential investors, inflation is rising and the cost to build Driftwood's 11 million-metric-ton first phase has ballooned to $13.6 billion from $11.9 billion.
Tellurian's business model has merit, but it will take more than philosophy to make Driftwood a reality, said Dan Pickering, chief investment officer for Pickering Energy Partners. He said Tellurian will likely need to make concessions to get funding.
"Vision isn't enough," he said. "You've got to have money."
Ben Nolan, an energy analyst with Stifel, said in a research note that his firm expects that Driftwood will need an investment of at least $5 billion to get funding. What's more, domestic and international gas prices are expected to converge in the latter half of this decade, jeopardizing Tellurian's margin at the same time construction inflation is rising.
"We don't believe the current management team is going to be able to move ahead with the project," Nolan wrote. "Ultimately, we think the company should sell itself for parts."
Skepticism around Driftwood hasn't scared off Souki, who said the company has already spent $1 billion of its own money on the project. He said Tellurian will keep slowly building the facility, tapping the roughly $600 million a year it makes as a gas producer in the Haynesville basin until the right partner comes along.
To be sure, the project could still move forward as Souki envisions it if a like-minded investor sees value in the gamble.
"All it takes is one person with deep pockets who sees the world the same way they do," Nolan said.
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