Tellurian plans spending cuts as US LNG market turmoil mounts

Houston — Tellurian will cut spending and try to extend a loan due in May to give it some breathing room, it said Monday, as it appears unlikely the developer will meet a previous target to build sufficient commercial support by the end of this month to advance its Driftwood LNG project in Louisiana.

The disclosures come as LNG markets are hemorrhaging, amid low international prices spurred by a supply glut, weaker than expected demand in key end-user markets and travel restrictions due to the spread of the coronavirus -- the respiratory illness first observed in China in December.

In the past two weeks alone, Cheniere Energy has disclosed a second cancellation of a cargo scheduled to load in April and postponed a final investment decision on a proposed midscale liquefaction expansion in Texas. Australia's LNG Limited floated a buyout offer to investors that it said is the best option to save its proposed Magnolia LNG project in Louisiana. And investors sharply sold off shares of Rio Grande LNG developer NextDecade, which is expected file its annual report in the next few days, in favor of more established players.

"We were headed this direction way before coronavirus," said Michael Webber, managing partner of investment research firm Webber Research & Advisory.

The combination of events increasingly suggests to analysts that few, if any, of the second wave of US liquefaction projects proposed to start up around the middle of this decade will go forward this cycle. S&P Global Platts Analytics forecasts that roughly 14.4 Bcf/d of LNG export capacity will be online in the US by the mid-2020s, representing only the full slate of projects that have been financed and are currently under construction.

In a statement, Tellurian said that although it continues to work with India's Petronet to finalize a preliminary partnership agreement reached in September 2019, the deepening coronavirus crisis has hampered discussions with other potential partners. It expects to complete those deals once the restrictions are eased.

That could be months or longer, with new cases and deaths being reported daily in the US and parts of Asia and Europe. A vaccine is at least a year away from being available, according to the US Centers for Disease Control and Prevention. Tellurian's only firm partnership agreement tied to Driftwood is a $500 million investment from France's Total covering 1 million mt/year of supply from the up to 27.6 million mt/year facility.

Feedgas deliveries

Meanwhile, feedgas flows to existing US liquefaction facilities were down approximately 1.2 Bcf/d from record levels reached earlier this year, Platts Analytics data shows, even as Sempra Energy's Cameron LNG in Louisiana began commercial service from its second train.

"Given current global financial market conditions and increasing restrictions on travel caused by the onset of coronavirus, we are taking the steps necessary to focus on preserving the value we have created at Tellurian and Driftwood LNG," Tellurian CEO Meg Gentle said.

She added, "We are highly confident that when travel restrictions are eased, we will be able to finalize several negotiations to complement the Petronet agreement and allow us to reach final investment decision."

Corporate overhead

The company will reduce corporate overhead – which typically includes indirect costs associated with running a business such as administrative and marketing expenses – and has started discussions with its lender to extend the maturity of an $87.5 million loan and related interest currently due May 23. Asked if job cuts were being considered, spokeswoman Joi Lecznar said in an email that "all options" were on the table.

Since executives returned from a trip to India in late February without completing the Petronet deal, Tellurian shares have cratered. The selling became more feverish after the company announced that the deal's target completion had been delayed two months, from the end of March to the end of May.

"It's like the emperor has no clothes; it is one of those moments," Webber said of Tellurian, which had seemed to be building momentum on the commercial front before the more recent turmoil in markets. "The real question isn't, 'Are they going to get done this cycle?' They aren't. The question is, 'What's the capital look like the next couple of years? Are they able to reset and have another go at it?'"