Investors push Tellurian to offer debt sale concessions

Sept. 14, 2022
The company planning the Driftwood LNG project is proposing to add more collateral and set aside an interest reserve, among other things.

Potential investors in Tellurian Inc.'s planned Driftwood LNG plant are extracting a steep price from the company as it looks to secure its next round of funding.

In a Sept. 12 filing with the US Securities and Exchange Commission, Tellurian executives said they are proposing several adjustments to a planned debt offering first outlined late last month that would move forward the Houston-based company’s work on the $12-billion, 27.6 million tonne/year (tpy) Driftwood project in southwestern Louisiana. The company this spring started construction on the project’s first phase before securing full funding—in a recent investor presentation, it said some infrastructure and site preparation work has advanced—and executive chairman Charif Souki in May said he expected to quickly land financial backing (OGJ Online, May 12, 2022).

But that support hasn’t yet materialized as expected—although Tellurian this summer did sell $500 million in 3-year convertible notes paying 6% interest—and executives announced on Aug. 29 plans to sell senior secured debt paying 11.25% in interest while also giving investors warrants to buy the company’s common stock. This week, they said that talks with possible investors have led them to offer a number of deal sweeteners should the debt offering go ahead at all. Among them:

  • In addition to pledging as collateral equity interests in Driftwood, Tellurian also would pledge equity in its upstream oil and gas assets to help secure the bonds being marketed.
  • While the proposed 5-year notes are outstanding, Tellurian would commit to not issuing common stock or instruments convertible into common stock to help finance Driftwood.
  • Executives also say they are willing to establish a reserve that would cover up to a year’s worth of interest payments on the new debt.
  • The company also would buy back half of the $500 million of notes it sold in June and pay a $50 million redemption premium as part of changes that would make those instruments unsecured rather than backed by its upstream assets.

Tellurian’s treading water on financing comes as other players in the LNG sector struck deals this summer as the industry looks to ramp up capacity following Russia’s invasion of Ukraine. Last week, Devon Energy Corp. and Delfin Midstream Inc. entered an LNG export partnership via the latter’s planned port off the coast of Louisiana while, among others, Venture Global LNG Inc. made final investment decision on its $13.2 billion, 20-million tpy project in Louisiana, and Enbridge Inc. and Pacific Energy Corp. plan to jointly fund construction and operation of a 2.1-million tpy LNG plant in British Columbia (OGJ Online, May 25, 2022Aug. 2, 2022Sept. 6, 2022).

One main disparity driver, said Cowen Inc. analyst Jason Gabelman, is Tellurian’s approach of estimating its future cash flows based on natural gas prices rather than fixed fees from counterparties. That strategy, Gabelman said, has added uncertainty since backers need to try to forecast commodity prices 4 years into the future, when Driftwood is forecast to come online. And an LNG market with a growing number of investment options—the Cowen team forecasts 100 million tpy will come online 2025-2027, which is five times expected annual demand growth—also has made bank financing trickier to land.

“This shows investors are hesitant to back this offering,” Gabelman said. “We think other projects are more likely to get done. We have a high-probability bucket and a medium-probability one and Tellurian is in the medium one.”

Tellurian’s team hasn’t landed a long-term supply contract in 2022 after getting commitments for a combined 9 million tpy from Gunvor, Vitol, and Shell last year. The company’s shares (Ticker: TELL) fell more than 4% Sept. 13 to close at $4.03. Over the past 6 months, the shares have gained about 10%, growing the company’s market capitalization to about $2.3 billion.