Tellurian Inc

AMEX:TELL

Earnings Call Transcript 2019-Q2

[Amit Marwaha, executive]

Good morning. This is August 7, 2019. This is Amit Marwaha, Director of Investor Relations at Tellurian.

I'm here today with Meg Gentle, CEO of Tellurian. We're here to provide you a brief recap on our 2Q 2019 results and give you a quick overview on our new corporate debt we put out by the month of August.

Meg, how are you?

[Meg Gentle, executive]

I'm doing great today, Amit. Thank you for having me and thank you for the listeners and shareholders for joining us.

We had a busy quarter, and we continue to push forward on the Driftwood projects on multiple fronts. You can find our latest financial results and corporate deck on our website, which we're going to summarize for you here today.

[Amit Marwaha, executive]

Thanks, Meg. Let's start with a quick recap on the commercial regulatory side of things, if we can go through a few of the highlights during the quarter. Can you provide some details there?

[Meg Gentle, executive]

I'm happy to, Amit. During the quarter, we materially derisked the Tellurian business plan by achieving our regulatory and commercial milestones.

So let's work through each of those. On the commercial side, the agreement with Total is for 1 million tonnes of LNG in the Driftwood project, and a $500 million investment in the Driftwood partnership. This sets the document template for the remaining Phase 1 partners.

Total has also executed a 15-year sale and purchase agreements for an additional 1.5 million tonnes from Tellurian's equity portfolio linked to JKM, and has committed to purchase an additional 20 million shares of Tellurian common stock when we reach FID on the Driftwood project.

On the regulatory side. In the quarter, we received our authorization from the FERC for the Driftwood LNG terminal and the Driftwood pipeline so we are now fully permitted to build the facility.

On the engineering side. We have, again, fixed our EPC price with Bechtel for the first 16 million tonnes at $10.6 billion, a slight increase from the $10.3 billion that had previously been guaranteed. That price will be fixed through the end of October 2019. We are pleased that the price refresh only resulted in a 3% increase, well within the contingency that we provided and will have no impact on our total CapEx budget.

The pipelines. We completed the open season process for the Permian Global Access Pipeline, the Haynesville Global Access Pipeline and the Delhi Connector. We're working to execute binding precedent agreements.

We have updated our CapEx numbers for the Permian Global Access Pipeline from $3.7 billion to $4.2 billion, reflecting progress on our construction estimates. These updates, along with the Bechtel update, have been incorporated into the 10-Q and also into the corporate presentation.

On the upstream side. We increased our natural gas production to approximately 60 million cubic feet a day, and we continue to confirm our assumptions for the Haynesville production costs.

As an overall package, if we had all of our assets in place today, we would be able to buy Permian gas and produce Haynesville gas and deliver LNG to ourselves and to our partners for less than $3 per MMBtu.

Even in today's low LNG price environment, we would be earning a margin on our LNG. This makes Driftwood the most competitive project in the U.S.

[Amit Marwaha, executive]

Thanks for the update, Meg. A lot of details there. Thanks for going through that.

So just to get a bit more granular on some of the items you listed there. So on the liquefaction plant side of things, it looks like we're -- we've completed the regulatory requirements there. And now we're working through the approvals of the pipelines. How long will the regulatory approval be for PGAP, HGAP and the Delhi Connector Pipeline? How should people think about that?

[Meg Gentle, executive]

We are expecting to work through finishing the open season and getting to binding precedent agreements. That will take the balance of the next 60 days to finish that on all 3 pipelines. We will then begin working through the FERC application process. We will initiate the application for the Permian Global Access Pipeline first as that pipeline will be part of the Phase 1 project scope for Driftwood.

And then subsequently, we will initiate permitting for the Haynesville pipelines as they will be part of Driftwood Phase 2 project scope.

We are expecting the FERC process to take about 18 months, and we are beginning to prepare the PGAP for prefiling with the FERC.

It's important to remember these pipelines are each part of our strategy to provide the business with optionality to access lower-cost gas. But their timing is not relevant to completion of Driftwood LNG because we can buy all the gas we need for the plants from the Driftwood pipeline.

So our objective with the pipeline network and our strategy is to provide as much optionality to take advantage of volatility in the market and make sure that Driftwood has access to the lowest cost gas.

[Amit Marwaha, executive]

Thanks for the information there. So just to conclude with regards to PGAP. What's the bookends in terms of beginning of regulatory process to actual -- actually flowing gas on that pipeline? How should we think about that time line?

[Meg Gentle, executive]

We're expecting a regulatory process to take about 18 months, and we'll initiate construction thereafter with the plan for PGAP to be in service 2023.

[Amit Marwaha, executive]

Okay. That's helpful, Meg. Thanks for filling that up gap, and how does the calendar for Driftwood -- for the Driftwood project look for the balance of the year? And how should we think about the commercial progress, financing and FID time line from here?

[Meg Gentle, executive]

The balance of the year will be focused on completion of the agreements with our remaining Phase 1 partners and closing the bank financing a couple of months later. We are moving forward simultaneously with the banks to be prepared to close the financing very quickly. So we will need -- after we finish all of the project documents, a couple of 3 months to get the banks through their credit process and close the financing.

[Amit Marwaha, executive]

Okay. That's very helpful. Let's shift our focus now to the financial results on the quarter, and let's walk the audience through the 10-Q.

So just to give a quick highlight over here. We reported a loss of $0.19 for the quarter versus $0.16 the previous quarter. The loss was a bit wider than consensus estimate. However, I think most of our audience is focused on the balance sheet and cash flow deployed during the quarter. During the quarter, we ended Q2 with [ matching ] progress, around $104 million. Could you provide some color here?

[Meg Gentle, executive]

As you know, Amit, our expenses are really driven by development expenses and G&A. So the G&A of the company as we sustain the rest of the development program and then development expenses, primarily focused this quarter on funding the ordering of the GE equipment. And then some higher DD&A tied to upstream, offset by our production revenues.

[Amit Marwaha, executive]

Okay. And just to provide some color to our audience here. How do we feel about the level of cash on our balance sheet right now? And how do you think about capital allocation from here for the burn rate?

[Meg Gentle, executive]

We ended the quarter with about $100 million of cash on the balance sheet, and we are spending at roughly $11 million or $12 million a month.

I am completely comfortable with our liquidity positions. We are constantly evaluating funding alternatives, similar to the borrowing that we did over the last quarter, which put an additional $75 million of cash on the balance sheet. We will be determining other alternatives to make sure that we're continuously reviewing the liquidity position. I am completely comfortable with our cash position.

[Amit Marwaha, executive]

Okay. So we went through the earnings on the quarter, reviewed the balance sheet, cash burn, are there any other items to the Q that stood out for you or worth noting, in your opinion?

[Meg Gentle, executive]

I think you've covered it, Amit. We, obviously, keep a very close eye on cash. We're managing our budget very closely. We've managed through these conditions before together as a management team. We are completely comfortable on the decisions we've made to go forward. As you noted, the GE equipment order was the most significant change in our development expense, and we are continuing to fund engineering work with Bechtel to keep Driftwood on as an accelerated schedule as possible.

[Amit Marwaha, executive]

Excellent. On that note, let's shift our focus to the corporate deck we put out as well, post the Q. Can you give the audience some of the highlights here? We want to provide some color, I guess, on the LNG market and some incremental updates from our end. Can we walk through that here?

[Meg Gentle, executive]

Sure. And Amit, actually, I'd like to go through the beginning section of the corporate presentation. So I'm going to just go through the corporate update section.

So beginning on Page 4. Wanted to remind everyone and anyone who's new to the story. There are a number of things happening in the global market, but it begins here in the U.S.

U.S. shale gas is overwhelming the domestic market and exports are the only solution. The Driftwood project can deliver LNG on the water today for less than $3 an MMBtu, if we had all of our assets in place.

LNG demand growth in the world year-over-year is over 14% and so the market is expanding very robustly, and we do not see an end to that.

Global markets need much more U.S. LNG export infrastructure to support growth as much as 250 million tonnes in total and more than 100 million tonnes coming from the U.S.

Tellurian expects, in this context, to build the Driftwood package and generate $8 per share of cash flow to shareholders when we are in full operations.

Turning to Page 5. If we look at natural gas export requirements. Last year, the U.S. was exporting about 4 Bcf a day. We expect that to grow by 2025 to roughly 30 Bcf a day of LNG that needs to be exported. This is primarily due to an increase in U.S. production of roughly 20 Bcf per day over that same time period. This is a significant investment that is required over $150 billion of investments to put in 100 million to 150 million tonnes of additional LNG export capacity.

If we look at the cost of gas in the U.S., we are competitive against the rest of the world. And much of that is being driven by low-cost gas coming out of the Permian.

If you turn to Page 6. We've provided a range of forecasts for Permian dry gas production, which by 2025, are expected by the range of forecasters to be between 16 and 25 Bcf per day.

The only way to support that kind of production of gas, and frankly, associated oil, is to build infrastructure to not only export the gas, but to install the pipelines that will bring gas from the Permian to the Gulf Coast.

On the international side, if you turn to Page 7. LNG demand is growing at roughly 14% year-over-year. And the utilization rate for capacity is increasing to almost 90%.

The demand growth in the market has been extremely robust in order to absorb expanding liquefaction capacity, which I think is the highest ever in 2019, due to projects coming online as scheduled and also projects coming online late from prior years.

If you look at Page 8. You can see since 2018 and really going through to 2030, how much LNG capacity is already under construction.

The peak in additions of liquefaction capacity is in this year, 2019, and then it falls steeply as we on the supply side of the market struggle to keep pace with demand. You can see, therefore, 2021, '22, '23, '24, we expect an extreme tightening in LNG prices as the market starts to rationalize demand because supply is not finishing construction.

The global capacity call, in fact, is between 100 million and 250 million tonnes of new liquefaction capacity that must go into construction in order to beat demand by 2025. The range depends on the overall ability for demand to grow, and we have simply estimated between 5% and just over 9%. But in fact, if the market continues to grow at a 14% growth rate, we need well in excess of 250 million tonnes of capacity.

So in that context, we're very comfortable that there's a supply-side push and a demand-side pull, and that Driftwood is very competitively positioned.

Page 10 looks at prices. As everybody knows, LNG prices are fairly low. And this year, as the market is expanding to absorb LNG, but the forward curve continues to be constructive for new U.S. LNG projects.

So in this context of overall market fundamentals, Tellurian is putting together a package of assets that is roughly $30 billion of investments and will result in $8 per share of cash flow once everything is constructed.

Just as a reminder, the package of assets includes almost 28 million tonnes of liquefaction capacity, roughly 1,000 miles of pipelines and 15 Tcf of upstream reserves.

If we add all the assets in place today, we would be able to deliver LNG on the water for less than $3 an MMBtu. We've provided one example for you here with Permian gas or gas at Waha roughly $0.50; transport to the Driftwood terminal, $0.35; cost of operating the terminal, roughly $0.50; and then $1 for debt service brings you to $2.35 an MMBtu.

For Tellurian, we're taking this package of partnership and creating a joint venture where we're selling roughly 51% of that joint venture, the Driftwood project, to third parties. Tellurian will retain a 49% interest, which will be a roughly 14 million tonne portfolio of LNG. It is off that LNG portfolio that we expect to generate roughly $8 a share of cash flow, which is about a $3 margin across the average.

We have an excellent team in place putting this together for you. The track record of success is compared by nothing else in the industry. We have, across our team, roughly 79 million -- so almost 80 million tonnes of capacity worldwide has been put into production by people that now today are working at Tellurian, with over 50 years of cost leading experience in the industry.

We also have large equity interest held by insiders, which enables us to be more flexible, move more nimbly and put together the most efficient business for the long term.

So Amit, that's what I was planning to summarize from the presentation. For those shareholders that have been with us a long time, the rest of the corporate deck is a project review, which you know.

For those of you who may be new to the story, the rest of the slides are quite informative as you can see how we're putting the assets together.

I would note that we have updated the CapEx estimates, as I mentioned earlier. So Page 1, which shows all of our capital budget, has been fully updated.

And with that, Amit, I'll turn it back to you.

[Amit Marwaha, executive]

Great, Meg. Thanks for the -- walking us through the slides there.

Just on a quick note. Any thoughts -- you've lived through a couple of these downdrafts in commodity prices, both on LNG prices as well as oil through the last decade. How do you think about that in terms of the mean reversion? Or, I guess, the pendulum swing going from a lot of scarcity, thoughts towards an abundance, a slowdown in growth. How do you think about that inflection point or that balance in the market that's being priced in? You've had extreme moves of late. Any thoughts there you could provide our audience.

[Meg Gentle, executive]

We all know that energy markets are highly volatile, and the great news with the LNG market is, it is finally becoming a fairly transparent commodity where price signals provide the right signals to demand to expand. And that's exactly what we've been seeing this year.

We've had a lot of supply coming into the market, over 35 million tonnes of new liquefaction capacity, and demand has shown an absolute resilience to be able to expand to take that volume.

I view the inflection point on price happening, either this winter, depending on weather or soon thereafter in 2020. And even the forward curve reflects over $7 an MMBtu Asian LNG price for calendar year 2020.

[Amit Marwaha, executive]

Okay. Sounds good. Meg, thanks for the time going through the earnings and the corporate deck. We'll be seeing a number of our shareholders in the next few weeks at a few conferences throughout the country. We look forward to seeing you over the next couple of weeks.

If you have any additional questions, please feel free to reach out to us at [e-mail]. Thanks for the time, Meg.

[Unknown Executive]

Cautionary information about forward-looking statements. This podcast contains forward-looking statements within the meaning of U.S. federal securities laws. The words anticipate, assume, believe, budget, estimate, expect, forecast, initial, intend, may, plan, potential, project proposed, should, will, would and similar expressions are intended to identify forward-looking statements.

Forward-looking statements here in relate to, among other things, the capacity, timing and other aspects of the Driftwood project, a potential equity investment by Total in the Driftwood project and Tellurian, a potential purchase by Total of LNG from the Driftwood terminal, the party's ability to enter into the definitive agreements on terms contemplated by the HOA and to close the related transactions, the party's ability to close the transactions contemplated by the stock purchase agreement with Total and projected annual cash flow per share. These statements involve a number of known and unknown risks, which may cause actual results to differ materially from expectations expressed or implied in the forward-looking statements.

These risks include the matters discussed in Item 1A of Part 1 of the annual report on Form 10-K of Tellurian for the fiscal year ended December 31, 2018, and other Tellurian filings with the Securities and Exchange Commission, all of which are incorporated by reference herein.

FID is subject to the completion of financing agreements that may not be completed within the timeframe expected or at all. Tellurian's projected annual cash flow per share of over $8 is based on the 5 plant case and assumes, among other things, a U.S. Gulf Coast netback price of $8 per MMBtu, a $4.50 MMBtu cost of LNG and $3.50 MMBtu margins.

The projected cash flow assumes the completion of certain acquisition, financing and other transactions, which may not be completed on the assumed terms or at all.

This presentation also includes forward-looking statements about trends in U.S. and international energy markets.

The forward-looking statements in this podcast speak as of the date it was posted. Although Tellurian may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so, except as required by securities laws.