Tellurian(NYSEMKT: TELL) had a bold ambition: to build an integrated natural gas giant. The crux of its strategy has been to develop its proposed Driftwood liquefied natural gas (LNG) facility, which would enable it to maximize the value of its gas production assets.
But now that falling gas prices and rising interest rates have thrown a wrench in its plans, investors should forget about Tellurian, which may never deliver on its vision. Instead, they should consider buying natural gas behemoth EQT Corp.(NYSE: EQT). Here's why it's a better option for those seeking to cash in on the natural gas market.
A risky bet
Tellurian has been developing its Driftwood LNG export project for years. The proposed facility would be able to export up to 27.5 million tonnes of LNG per year. The company had hoped to fund the multibillion-dollar development through the cash flows of its upstream natural gas production business and other sources, including strategic partners. Building Driftwood would be a real needle-mover for Tellurian because it would generate billions of dollars in predictable cash flow each year.
However, falling natural gas prices have turned its gas production business into a money pit. As a result, Tellurian recently agreed to sell that business to Aethon Energy for $260 million. That's well below what analysts thought it was worth and a big decline in value from when gas prices were much higher in 2022.
That sale will enable the company to repay debt, giving it more flexibility to fund Driftwood. It also secured a key partner for that project, as Aethon has agreed to purchase up to 2 million tonnes per year from that facility.
Tellurian has a long way to go before Driftwood becomes a reality. It needs more commercial customers like Aethon for the project. It also must secure some strategic partners willing to fund a portion of that project's costs. If it can get the support needed to make a final investment decision on the project, its share price could soar. However, failure to move forward with Driftwood could cause Tellurian's stock to continue falling.
Building a free cash flow machine
EQT is the country's largest natural gas producer. It owns over 1.1 million net acres in its core operating area, compared with 31,000 for Tellurian. That massive position gives it significant scale advantages, driving down its costs, and it enables EQT to generate free cash flow even in the current low natural gas-price environment. It produced $402 million in the first quarter alone, when Tellurian's upstream business lost $44 million in the period on only $25.5 million in revenue.
The company has taken a different approach to maximizing the value of its gas through its LNG strategy. Instead of investing in building an LNG export facility, it has signed deals with three LNG export facilities to export around 4 million tonnes per year starting in 2027. These deals will significantly increase its free cash flow in the coming years.
Meanwhile, EQT recently agreed to reacquire its former pipeline arm, Equitrans Midstream. The natural gas producer spun off its midstream operations in 2018 to form two separate publicly traded companies. However, since that plan didn't unlock the value its management team expected, EQT agreed to buy Equitrans earlier this year in a deal that will create a large-scale, vertically integrated natural gas giant. The transformational transaction will further enhance its scale and lower its costs, enabling it to produce more free cash flow in the future.
EQT believes its low-cost gas production business, LNG export contracts, and integrated midstream operations will transform it into a free cash flow machine. The company estimates that it can produce between $7.5 billion and $25 billion in cumulative free cash flow in the 2025 to 2029 period, assuming gas is between $2.75 MMBtu and $5 MMBtu. That will give it money to pay a growing dividend, strengthen its already solid balance sheet, and repurchase shares. The company's growing free cash flow and capital returns should enhance shareholder value in the coming years.
A better way to cash in on natural gas
Tellurian offers the potential for a high return if it can secure all the agreements needed to build Driftwood. However, there's a high risk that it might never finish that project.
That's why investors are better off with EQT, which is a much lower-risk way to cash in on natural gas. The company's larger scale and integrated strategy will turn it into a free cash flow machine even if gas prices remain weak. That should give it the fuel to create a lot of value for investors in the coming years, whereas Tellurian might continue to be a losing bet.
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Matt DiLallo has positions in EQT. The Motley Fool has positions in and recommends EQT. The Motley Fool has a disclosure policy.
