shares of the earth (TELL 3.51%) was up just over 2.9% on Tuesday, despite broader markets falling.
The company, whose main asset is its liquefied natural gas (LNG) terminal under construction, has risen on a rise in natural gas prices as well as an upgrade from an otherwise skeptical Wall Street analyst.
on Tuesday, Bank of America Analyst Julian Dumoulin-Smith upgraded his rating on Tellurian stock to buy from neutral, despite lowering his price target to $4.50 from $6.50 in the process. Shares traded around $3.50, down from a high of $6.54 in early April following the Russian invasion of Ukraine.
While the lower target most likely reflects macroeconomic risks related to interest rates, Smith is more bullish following the July announced acquisition of Tellurian’s natural gas assets in the Haynesville Shale in Texas, Louisiana and Arkansas.
“In view of the successful growth and the experienced management team in a strong raw materials market, we see an improvement in the chances of a successful investment decision. [natural] Gas sales help offset cash burn,” Dumoulin-Smith wrote.
He’s felt more comfortable with the acquisition since Tellurian’s earnings call last week. It was perhaps an odd move for management to buy the manufacturing facilities with valuable corporate equity, since the Driftwood LNG facility would take years to build, plus billions of dollars, all of which have not yet been raised. Tellurian ended the second quarter with $834 million in cash, but the Haynesville Shale asset was valued at $125 million.
However, production from Haynesville should generate healthy cash flow if natural gas prices remain relatively high, as they are today. In the most recent quarter, Tellurian had an operating profit of $38.5 million from existing production and Haynesville Play’s natural gas production is expected to increase by 30%. Those cash flows should help burn some cash to build Driftwood.
Still, Dumoulin-Smith reminded readers that Tellurian remains risky as the driftwood mill will need more cash in a rising interest rate environment.
Tellurian remains a risky/high leverage bet on natural gas prices, which are up about 3% today. Although Tellurian’s market cap today is only $2 billion, management forecasts that the Driftwood facility, once operational, will cost $85 per barrel of oil and $14 per mmBtu on a JPM basis (Japan /Korea) will generate. 4 billion can generate cash flow. natural gas prices.
But Tellurian needs to raise a total of $12.8 billion to complete the export terminal, which won’t be operational until 2026 if all goes according to plan. The company hasn’t raised all of the money yet, and as interest rates rise, the cost of capital could become an issue.
US The future of LNG exports looks bright, especially after Russia’s invasion of Ukraine. Tellurian is probably one of the most risky but highly inverted ways to play this theme.
Bank of America is an advertising affiliate of The Motley Fool Company, The Ascent. Billy Duberstein holds positions at Bank of America. Your customers can own the shares of the mentioned companies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.