Tellurian(NYSEMKT: TELL) finally put an end to all the speculation about its future this week. The liquefied natural gas (LNG) developer has agreed to sell itself to Australian energy giant Woodside Energy Group (NYSE: WDS) for $1.2 billion. The all-cash deal will allow investors to recoup some of their investment in the beleaguered energy company.
Here's a look at the deal and what it means for investors in both energy stocks.
Drilling down into the deal
Woodside Energy has agreed to acquire LNG developer Tellurian for $1 per share in cash. That's a 75% premium to its closing price last week and 48% above its average price over the last 30 trading days. Woodside is paying $900 million in cash plus assuming Tellurian's debt and preferred equity, which pushes the transaction's enterprise value up to around $1.2 billion.
While 75% seems like a massive premium, the $1 share price is well below its 52-week high ($1.72 per share). The deal price is also significantly less than the shares traded for a few years ago (the stock was above $6 in early 2022 and over $8 before the pandemic).
Tellurian salvaged some value for investors, providing them a much higher sale price than its recent trading level. The transaction also gives investors value certainty, assuming the deal closes in the fourth quarter, as the companies expect. However, the sale represents a departure from the company's plan to remain independent and develop Driftwood to maximize shareholder value.
What this deal means for investors
For Tellurian shareholders, the sale to Woodside Energy represents the end of an era. Investors had hoped that it would be able to develop its proposed Driftwood LNG project, which could have created significant value.
However, after careful consideration, the company's board realized that it couldn't manage the risks and costs associated with developing such a massive project.While Tellurian sought equity investors to help finance a portion of the enormous investment, the company would have struggled to fund its share of the development. Ultimately, the sale to Woodside will enable investors to recoup a little bit more value.
For Woodside Energy investors, the deal is a potential needle mover over the long term. The company believes that buying Tellurian will create a global LNG powerhouse. It's purchasing a fully permitted LNG development project for $1.2 billion, which is an attractive entry point considering that Tellurian has already invested more than $1 billion into the project. Unlike Tellurian, Woodside Energy has the financial resources to develop Driftwood LNG.
Woodside also has expertise in developing LNG projects. It's currently building its Pluto Train 2 project in Australia (with Driftwood's contractor Bechtel). It plans to make a positive final investment decision on phase one of Driftwood's development in the first quarter of next year.
That project would have the capacity to produce 11 million tons of LNG per year. The company could develop four phases of Driftwood to reach its total permitted capacity of 27.6 million tons annually.
Driftwood represents a long-term, fairly de-risked growth driver for Woodside. It can leverage its expertise in the sector to fully commercialize the project, which was something Tellurian has struggled to achieve. It can also use its strong free cash flow and much lower cost of capital to finance the project's construction, enhancing the returns it can earn on the investment.
Tellurian's upside transfers to Woodside
When Tellurian realized it couldn't build the Driftwood project independently, that opened the door for Woodside Energy to acquire the company. Investors will recoup some of their investment, but Woodside stands to reap the potential long-term upside that Tellurian shareholders dreamed of.
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Matt DiLallo has positions in Woodside Energy Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
