Aethon has agreed to purchase Tellurian’s upstream assets for (US) $260MM below street estimates, which ranged from $270MM to $500MM. As part of the agreement, Aethon has signed a preliminary agreement to purchase two million tons per annum (Mtpa) of LNG from Tellurian’s ~28 Mtpa Driftwood project in Lake Charles, Louisiana. The deal is good for the company despite the market reacting poorly to the sale price. It will allow it to focus on more impactful projects and pay down $224 MM in debt, with the remainder going towards general purposes or construction. Below, we reflect on the deal and walk through what might be next for the play now that gas prices are back in the mid $2/Mcf range.
The Road So Far – Looking Back on the Deal
Our original analysis noted that Tellurian rock quality typically sat in the tier-2 to tier-3 category basin-wide, equating to our second and third machine-learning-derived rock quality quartiles. As a result, we came in relatively low on the valuation. We ran a scenario analysis that ranged from ~$140MM up to ~$415MM with a median case of $260MM, relatively close to the actual closing price of $264.5MM. We also highlighted that the valuation could have been lower (<$200MM) if the asset was sold at the end of Q1 or while the front month was still sub $2/Mcf. In hindsight, that outlook was likely too punitive, and conversely, the outlook from the street was frequently too optimistic (>$400MM). Looking at the deal now, the following can be said:
- Tellurian has one of the three unbuilt LNG projects with a non-FTA license. Put another way, Tellurian is one of three unbuilt projects not subject to the LNG permitting pause and can proceed.
- Despite the market’s dislike of the purchase price, Tellurian’s upstream assets were in the middle of the pack. For investors, it was an unwanted side project; with the asset sold, the company can focus on Driftwood.
- Aethon gets additional gathering and processing capacity to bolt onto its midstream assets in the basin and a production boost to an already compelling growth story as the company is now ~3x or ~2 Bcf/d higher than its 2020 exit rate.
A Quick Refresher on Haynesville Economics
To be blunt, the Haynesville is essentially not economic with gas sub $3/Mcf, although we note that some pockets can work down to the $2.50/Mcf range. Basin-wide, however, ~$3.00/Mcf is needed before the profitability index (PV15/CAPEX) increases to a ratio of over one. We also highlight that in the scenario analysis below, there is still a slight advantage to owning Louisiana assets versus Texas assets on a half-cycle basis. Additionally, as Louisiana’s LNG capacity expands disproportionately, we expect this advantage to increase.
Haynesville Rigs Have Cored Up and Increased
The five core Haynesville counties below have shown a resurgence in rig count versus the Q4/23 lows. In these five counties, the rig count is now only approximately fifteen rigs below the 2022 highs. As a result of this trend, horizontal gas production in Haynesville has begun to recover slightly and is now at 13.2 Bcf/d after dropping from ~15 Bcf/d down to only 12.9 Bcf/d in Q1/24. We expect production will stabilize, if not continue growing, over the next six to twelve months as strip pricing gradually improves.
Source: Novi Insights, Baker Hughes.
Source: Novi Insights.
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Key Takeaways
- Aethon agreed to buy Tellurian’s upstream assets for $260MM, below street estimates of $270MM to $500MM.
- Aethon signed a preliminary agreement to purchase 2 Mtpa of LNG from Tellurian’s ~28 Mtpa Driftwood project in Lake Charles, Louisiana.
- Tellurian expects the asset sale proceeds to pay down $224MM of debt, with remaining funds for general purposes or construction.
- Novi’s scenario analysis valued the upstream assets from ~$140MM to ~$415MM with a $260MM median, near the $264.5MM closing price.
- Tellurian is one of three unbuilt LNG projects with a non-FTA license and is not subject to the LNG permitting pause.
- Novi states the Haynesville is essentially not economic below $3/Mcf, with some pockets working down to $2.50/Mcf.
- Haynesville basin-wide economics require roughly $3.00/Mcf for the profitability index (PV15/CAPEX) to exceed 1.
- Haynesville horizontal gas production recovered to 13.2 Bcf/d after falling from ~15 Bcf/d to 12.9 Bcf/d in Q1/24.
One Response
1. The price of land is based on strip pricing, not prompt. Was disappointed to see you futhering a popular article misconception. Especially when you know better!
2. Curious about the LNG supply agreement terms and how much that may have hurt the price TELL got for the land.