Tellurian (NASDAQ:TELL) is a penny stock that has rallied to $4.36, an increase of more than 235% year-to-date and nearly 390% over the past year. This is undeniably a great performance. However, TELL stock is still a risky — and pricey — natural gas bet.
Tellurian is an oil and gas exploration and production company founded in 2016 with headquarters in Houston, Texas. It has a very ambitious goal, as stated on its website:
“Tellurian is committed to supplying energy to the global market with a priority on decreasing urban pollution, reducing worldwide carbon emissions and slowing the pace of climate change. Tellurian is developing natural gas infrastructure efficiently and responsibly, providing consumers with a more reliable, cleaner energy supply and enabling advances in renewable energy alternatives.”
As a natural gas company dedicating itself to better environmental practices, it’s no wonder TELL stock is making moves. But is it an attractive buy?
TELL Stock Has Lofty Goals
Tellurian mentions on its website that it is focused on a very important task: the creation of value for its shareholders. I like this commitment, but based on the fundamentals and performance of TELL stock, this decision is not supported by actual figures or major key financial metrics.
The company’s description can shed some light on its goals:
“Tellurian intends to create value for shareholders by building a low-cost, global natural gas business, profitably delivering natural gas to customers worldwide. Tellurian is developing a portfolio of natural gas production and has nearly 100 drillable locations with an estimated one trillion cubic feet of net resource. It is also developing an LNG trading operation and infrastructure that includes an [approximately] 27.6 mtpa LNG export facility and an associated pipeline.”
This indicates that ultimately, Tellurian wants to raise capital via debt and stock offerings to operate its cornerstone project, Driftwood LNG.
A Closer Look at the Balance Sheet
Let’s start with its core commitment to create value for its shareholders. Analyzing its 10-K form for 2020, the following key highlights are notable:
- Total revenues for 2020, 2019 and 2018 were $37.43 million, $28.77 million and $10.29 million respectively.
- Between 2018 and 2020, operating income was negative and losses increased.
- Net losses for 2020, 2019 and 2018 were $210.69 million, $151.76 million and $125.74 million respectively.
- The weighted average shares outstanding increased from 211.57 million in 2018 to 267.62 million in 2020.
With these figures, the first conclusion to draw is that Tellurian has been unprofitable for the past three years. It has not been able to generate a positive operating income, and has engaged in stock dilution to fund its operations.
Its performance has harmed the shareholders’ value, as Tellurian has a history of negative free cash flow going back to 2016. In 2020, Tellurian reported a free cash flow loss of $73.05 million according to MarketWatch.
How TELL Stock Actually Stacks Up
Data from MorningStar also shows that other key financial metrics, such as its returns on both assets and equity, have not created any value for TELL stock.
Its return on assets has been consistently negative since 2015. It reached a loss of 62.4% in 2020 compared to a loss of 38.38% in 2019. Tellurian’s return on equity followed the same path, also negative over the past six years. It saw a loss of 153.09% in 2020 and a loss of 65.4% in 2019.
Finally, its return on invested capital — another key financial metric — has also been very poor. These figures have been negative since 2015, with a reported loss of 79.71% in 2020.
A company must see a positive return on invested capital to survive and to create value for its shareholders. Ideally, this figure should also be higher than its weighted average cost of capital (WACC).
As seen, Tellurian is performing poorly on all of the aforementioned financial metrics. It begs the question: Why has TELL stock rallied in 2021?
Natural Gas Growth Propelled TELL Stock
The answer could be found in its industry’s growth. A report by the International Energy Agency about the natural gas market detailed the trends seen in the market:
“Natural gas demand is set to rebound strongly in 2021 and will keep rising further if governments do not implement strong policies to move the world onto a path towards net-zero emissions by mid-century, according to a new report by the International Energy Agency.
Global gas demand is expected to rise by 3.6% in 2021 before easing to an average growth rate of 1.7% over the following three years, according to the IEA’s latest quarterly Gas Market Report, which also provides a new medium-term forecast. By 2024, demand is forecast to be up 7% from 2019’s pre-Covid levels.”
Lower growth for natural gas demand after 2021 should also mean an ease in the surging natural gas prices seen of late. The increase is being driven by global economic recovery, weather conditions and supply disruptions.
The good news for Tellurian is that it has signed several long-term contracts to deliver its liquefied natural gas (LNG). There is a 10-year agreement with Vitol, a deal with Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B) and a 10-year contract with Gunvor Singapore.
These contracts have made Tellurian’s management appear very optimistic about revenue prospects. Executive Vice President of LNG Marketing and Trading Tarek Souki stated the following:
“Our business model creates significant value for Tellurian; at today’s LNG prices, this agreement represents the equivalent of approximately $12 billion in revenue over the 10-year term of the agreement.”
Two Factors to Consider for Tellurian
Tellurian is now a promising, but risky bet on the future of liquified natural gas. First and foremost, the Driftwood project is currently in the early stages of the construction process. This adds a lot of risk and uncertainty about the timing of its completion.
A further stock offering may be needed to fund its development. That will harm the intrinsic value of Tellurian shares — and poor performance is not a strong argument in its favor.
I consider TELL stock a speculative bet. Outside of the balance sheet and its business plans, it now has a market capitalization of $1.85 billion. Tellurian is trading at 49.29x its 2020 revenue of $37.43 million, and that is too pricey.
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On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.