Tellurian Inc., which is developing the Driftwood LNG project, relaunched itself as a pure-play LNG company with its deal to sell its Haynesville Shale upstream assets to Aethon Energy for $260 million.

While proceeds from the divestment will be used to reduce Tellurian’s debt, financial headwinds remain.

“The proceeds from the sale of our upstream assets allow us to retire senior secured notes and strengthen our balance sheet for the long term,” Tellurian Executive Chairman Martin Houston said in the release. Houston said the deal was an important moment for the company as it makes progress on its strategic plan.

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Analysts painted a harsher reality for Tellurian’s finances. The company sold its upstream assets for nearly $100 million less than their book value.

“The reality is if they use their proceeds plus a little cash that they've been generating, they can get rid of the 2025 maturities [but] they'll still have a 2028 maturity outstanding and no cash flow,” Stifel Financial Corp. Managing Director Ben Nolan told Hart Energy on May 29. Stifel had estimated Tellurian’s upstream assets were worth about $280 million.

“And not only would they have debt remaining still outstanding against no cashflow, they still have to pay the bills, G&A, the Driftwood development and all of these other things. The only means of paying for that, raising equity, is still very much a going concern,” Nolan said.

At the end of the first quarter, Tellurian’s upstream natural gas assets consisted of 29,883 net acres and interests in 167 producing wells located in the Haynesville Shale trend of northern Louisiana, according to the company’s first quarter Securities and Exchange Commission (SEC) filing.

Tellurian’s cash and cash equivalents were $51.8 million at the end of the first quarter, while the net value of its upstream assets were valued at $356.6 million. Additionally, pipeline construction related to Driftwood had a related value of $37.9 million.

Further down the balance sheet, the carrying value of Tellurian’s long-term borrowings due in 2025 was $260 million and consist of senior secured convertible debt ($49 million) and senior secured notes ($211 million). The current portion of the senior secured convertible notes was $25 million.

Importantly, the carrying value of debt to remain on Tellurian’s Balance Sheet is $55.5 million related to its senior unsecured notes due in 2028.

The jury is still out on the Aethon deal, since the $260 million deal covers Tellurian’s long-term borrowings but is still $96.6 million lower than the value of Tellurian’s upstream assets.

“I think the more immediate impact [of the Aethon deal] is that it's giving them $260 million to address their debt maturities [although] it doesn't address all of them. And that is, once again a problem, but it addresses close to all the near-term maturities,” Nolan said.

The lingering Driftwood ordeal

The proposed Driftwood export project in Calcasieu Parish, Louisiana, would have a liquefaction capacity of up to 27.6 million tonnes per annum (mtpa). The export terminal would include up to 20 liquefaction trains, three full containment LNG storage tanks and three marine berths, Tellurian said in a recent SEC filing.

Tellurian estimates the total cost of the Driftwood project at approximately $25 billion, including owners’ costs, transaction costs and contingencies but excluding interest costs incurred during construction and other financing costs.

While Tellurian has struggled to finance Driftwood, the Aethon deal includes a Heads of Agreement (HOA) to purchase from Tellurian 2 mtpa of LNG. The HOA contemplates the parties negotiating a 20-year offtake agreement which would be indexed to Henry Hub plus a liquefaction fee, according to Tellurian.

Tellurian has no firm sales and purchase agreements (SPA), Nolan said and despite rumors of Tellurian being connected with various potential offtakers, “none have developed.”

Nolan said the HOA between Aethon and Tellurian is non-binding and “very often they never convert into binding contracts.” Nolan also noted that Aethon didn’t have an investment grade credit rating, which could make it hard for Tellurian to underwrite debt with a low cost of equity.

But for its part, Tellurian continues to forecast it will produce its first LNG by 2028, according to a March 2024 corporation presentation.

“For Driftwood to move forward, we expect they would need approximately 15 mtpa of investment-grade SPAs. At the current pace of contracting for U.S. projects of 1 [mtpa]-3 mtpa per year, we do not see final investment decision (FID) any time in the next few years and very likely not ever,” Nolan said May 29 in a separate research report.

Aethon’s acquisition is expected to close in the second quarter 2024, Tellurian said in a May 29 press release.

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