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Loan extension provides lifeline as Tellurian tries to advance Driftwood LNG project in US

Highlights

New repayment schedule comes with stiff terms

Commercial challenges exacerbated by virus crisis

Houston — Tellurian negotiated an 18-month extension Monday of the maturity of an $87.5 million loan that was due in May, in what amounted to a lifeline as it tries to secure enough commercial support to build its Driftwood LNG project in Louisiana.

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While a positive development, the agreement came with stiff terms, including paying $2 million up front and another $3 million within a month, issuing its lender 11 million company shares and accepting more expensive borrowing costs.

Tellurian will be able to reduce the amount of cash it must have in the bank at the end of each month to $12 million from $30 million, giving it more of a cushion to cover other obligations.

The big question is whether, with the additional time, Tellurian will be able to navigate the extraordinarily challenging market environment that was exacerbated by the coronavirus pandemic and sign additional partnership agreements to help cover the startup costs of its liquefaction terminal and main feedgas pipeline. It has cut 38% of its staff as its shares have cratered amid the uncertainty.

"It's a very expensive but much needed Band-Aid," said Michael Webber, managing partner of investment research firm Webber Research & Advisory. "A broader, longer-term restructuring is still needed – which is one of a number of reasons why we'd still stay away from the equity down here. Current dynamics are still unsustainable, but this buys them some time."

New contracting or partnerships tied to existing or proposed US LNG projects have been reduced to a virtual standstill since the global health crisis started to accelerate in February.

Falling oil prices have also contributed to the malaise in the marketplace in terms of signing new long-term supply agreements. Cheniere Energy, Sempra Energy, Freeport LNG and NextDecade are among operators and developers under pressure to sign commercial deals to advance proposed projects. Sempra was scheduled to issue an update to investors Tuesday.

Tellurian has recently not been providing updated guidance on when it will make a final investment decision on the Driftwood project, nor has it said whether it may delay a decision beyond this year. Tellurian had previously expected to begin construction in 2020, with first exports in 2023.

In a statement announcing the loan extension, CEO Meg Gentle said Tellurian officials "are working remotely with potential equity partners for the Driftwood project" and keeping staff productive so the developer can "regain commercial momentum" when the effects of the pandemic ease.

"As announced in early March, we are making necessary changes amid challenging global conditions," Gentle said. "We have restructured the organization and entered into an agreement to extend our term loan maturity to late 2021, which swiftly completes the second critical step toward resiliency in the current market."

Tellurian has said that although it continues to work with India's Petronet to finalize a preliminary partnership agreement reached in September 2019, the market turmoil has hampered discussions with other potential partners.

At full development of 27.6 million mt/year, about half of Driftwood's capacity is expected to be used by equity investment partners Tellurian has been soliciting. The remaining capacity is to be retained by Tellurian to market on its own.

LONG-TERM OUTLOOK

Tellurian's only firm equity deal on the books is a $500 million commitment from France's Total. The preliminary deal with Petronet covers an investment of up to $2.5 billion. Tellurian had hoped to have the Petronet talks completed by the end of March, but recently extended that to the end of May.

The term loan extension was critical because the company had warned that it did not have sufficient cash on hand to repay the loan and related interest in full by May 23. It will now have until November 23, 2021. Another $64.1 million in loans are scheduled to mature next year and in 2022.

"Even with the recent declines in oil prices, US natural gas should be a preferred supply for global LNG given it is still lower cost on a $/MMBtu basis, has surety of supply from shale, and has been less correlated with and less volatile than oil since '08," UBS said in note to clients Monday.