CHAT with TELL

I-it's. A Amit Marwa here Director, of Investor. Relations and, finance at tellurian, today. I have the pleasure of joining, me Mike Weber. Senior, analyst. Shipping. At Wells Fargo hey. Mike how's it going great thanks for having me I love the interest, music by the way I love that song we're. Trying to please the car out that's great it's, an oldie but a goodie good deal. So, I've known Mike for a few years I used his help when I was on the buy side he's, been around, quite. A bit he's, institutional, investor. Ranked do you want to give us a brief a brief background of your yes, sure, so, I. Started. At I. Guess I came over from Deutsche Bank about 10 years ago to take the senior shipping seat at Wells Fargo cover. 35. Names, across. Shipping NL and G now, so. I focuses, having a really. Midstream, downstream, and upstream LNG. Exports, so companies. Like yourselves. Cheniere. Goal. Are gas, log. TK. Those kind of names then all the way down to the floating reed gas also. Cover tankers and containers and box leasing, and, LPG. And. In, dry bulk so pretty, wide coverage I've got a pretty big team a lot, of different verticals a lot, to keep on top of but LNG. Is easily my favorite sector spec person most of my time you're. Dealing with some aspect, of the LNG, supply chain so, you're one of the few analysts, that we at. Least I've seen you at various industry conferences, I think you're pretty plugged-in, to how both the, producers. As well as the investors, are thinking, about the space at various, depending. On their investment. Horizon, can you talk a bit about how from. As a shipping, analyst how your approach is, unique. Versus traditional energy analysts, and midstream, analysts, who are trafficking. The same LNG, infrastructure. Space for a Stickley, and globally yeah you know I should say it you know it's, been, kind of a gradual transition when. We covered, covered. A dozen. Marine ml fees and GPS the past five or six years which have been, kind of move from the periphery towards the center of kind of the energy and MLP landscape, so yeah names, that you know proposed they don't own, crude. Producing, assets, LNG. Carrier so we've kind of been gradually. Sliding, towards the center of the energy universe so I don't know that our approach is all. That different, I would say that we you. Know my underlying coverage tends to be pretty volatile, it, tends to be pretty. Asset, intensive, so, we tend to look at nav. Some of the parts and event risk quite. A bit, I've. Never really covered sectors, or names we're just gonna plug in some. Real high-level top-line, growth rate, and kind of call it a day, perspective. Right so you know we like to like, to do deep dives and really get in the weeds usually, there's a healthy degree a balance sheet risk around any, of these sectors and names especially. If they're mismanaged. So. I'd say in terms of our approach you, know we tried to especially with LNG especially, with with upstream and the export names it's, it's at this embryonic stage, for. At least US public, equities, so getting our arms around. The. Breadth of the global market, and really the sequencing, for how some of these projects, can get done what. The global bid looks like it's. It's really like drinking River rose there's a lot to try to figure out and I think you know globally. Everyone still kind of figure that out so we wanted to make sure we weren't too narrow in our focus and just say we're. Gonna cover one. Name in one project and that's the one that's going to get done for. No particular, reason we wanted to make sure we had a really reasonable. And, sound basis, for. Everything. We said, and did and ultimately you know this. Seaton my job is about credibility so you want to share your you know you can use that very very easily so so, I guess on the back of that this is probably the next wave I guess, the way you put it in your most recent.

Initiation, You got wave. To of LNG US, Gulf Corp Gulf, Coast capacity, that's coming online you initiate it on us next. Decade, and. A couple others can you can. You talk a bit in terms of, what the reset, look like your. Evolution, over the last couple of years transitioning. From I guess tankers, to floating, LNG. The. Largest, domestic. Onshore. Liquefaction. Provider, yeah, how did that impact it, your process, in terms of looking at the wave to I guess. Yeah G project. Is gonna be online in public companies it's. A good questions I think when when the street first started looking at liquefaction. In general there's really only one option and of course that was gonna be the one that worked and you didn't relate to think about global. Competitive, dynamics, to the same degree they think it's a lot it's it's, the. Sector is kind of maturing, and I would say that we you. Know our. Process. I ran our thought process, around the group is certainly gonna mature along, with that to where you know we're, much more in the weeds now than we were two or three years ago around, you. Know what. Global SBA structures, look like where you know where, demand is coming from who's real and who's not and. Just trying to be thoughtful about really every aspect, of the process. The. You. Know the reset, or the kind of the idea behind the second wave. You. Know think we. Run the same kind of kinds. Of supplying. Two-man models that everyone else does and they've added, up 130 million tons of incremental demand between now and 2025. I think would max around 150. You're. In the fair we're in the fairway probably maybe a little bit more than conservative, side but you. Know so you know we get to uni, back out the 75 million tons that's being produced, right now that'll deliver in. The next or, come. To completion in the next couple years that leaves another 75. Potentially. To be absorbed by new projects, and that, kind of narrowed the scope for us to say this is what we had to play with at least for the 2020, to 2025 window, there's certainly a window beyond that and. Then, from. There we wanted to get a good grasp of what the global marketplace, looked like in the global project subset. Looked like to try to priority. Rank or kind of handicap. You. Know who's you know who's got the best likelihood of moving forward and it's very difficult because you know the nature of the people they're competing in the space is all, over the map I mean you've got you, know nation states you know that. Don't, play play about the same financing, rules you know a very, different kind of set, of geopolitical, factors impacting. You know cutter or even you know both, both domestically, and what they've got in Texas.

You've. Got shale, and Exxon you've got you know small guys like Oh Lord nibbling around the edges in West Africa, so it's really it's, actually unique in the sense that you know if I look at all the other sectors I cover who's, competing, in those sectors this is the widest, band, of competitors. The, easily, among any anger that I cover and do you think it's harder to handicap, these projects, this time around even though you've got more information you've delineated, more of these projects, you have track, records, you, have a better sense for you know where the credit risk is execution, risk do you think it's harder even though you got this much more information, yeah I think I think I, think it's hard because it's we don't yet have an accurate snapshot of, what the, priority, list for buyers truly. Looks like right. There if you could just have you had a set of criteria that. Was pretty. Firm you could just go down the list very. Accurate with this but you know the idea I think there's an idea that that that, every. Buyer is gonna be looking for the lowest cost gas I sure I think to a degree that's, true but I don't know that we've seen a ton of drew monster the monster Vil evidence to support that yet right, I think we I think we will, but. To what degree I think is a big question and, and how do those you know things like security supply. You. Know term. Structures, options. Include that you know how does how, does that actually impact, the. Middle, of the list and like you know you know how do those different factors interact of one other it's really really difficult right, especially, especially when you're dealing with with. Competitors. Globally. In nations, really that. That. Don't play by any financing, rules right so it's very from my perspective is very hard to get your hands around and I haven't really talked to anyone that can definitively say sure this is the exact order and this is how it's going to happen I think we're all kind of guessing at it right so, I guess, if we had to distill it down to three, things what, would you say we're like two top three conclusions, out of you out of the work that you did in the initiation, I, think that's the second half of that question is well what type of pushback did you get from the buy side in, terms of the conclusions, you came up with versus. Consensus, yes what's already out there yes, I would say the the, first. Conclusion, just really, kind of getting our arms around what the opportunity, set look like then with the competitor subset look like it, makes a ton of sense to me why second. Way projects, in the u.s. such as yourselves have to hustle right there's there's a wall out, there then, we just don't know when it's gonna come and if, if all of it will come but. There's, two. Just simply get in the back of the wine right, is is a recipe for failure right, so I think it's. Certainly you know when I talk to investors and we talk about the space and you. Know probabilities, and who's likely to get done you, know it's it's number. One is hustle. Right that gets guy if you're gonna get down into this window you're gonna have to beat some big projects, it might have some big risks and some big hurdles overcome, in terms, of First.

Nations Or geopolitical factor, is that there couldn't certainly be a window but you're not going to get there by kind of taking your time okay and you got to be creative which is something we've talked about with with your model quite a bit right is it's kind of an an elegant. Solution to kind, of you, know a head start. It's. It's it's sad to think it's resonated pretty well with investors. In, famila takeaway is you know I think you, know it's funny that you know the we've talked a great deal about this but kind of the implied probabilities, with the market i think the mark is still kind of wrestling, with the. Things that i'm talking about and how to accurately probability. Weight projects, and really, get a handle on what matters and i think that's gonna remain for quite a while as people still try to figure out you. Know, false. Starts, and you know maybe someone might be completely Furka proved and it's project still might not get done I'll Lake Charles are still sitting there not so. And. And that was the one thing I want to say I would say is that there are some other companies, to cover like a goal or yeah where they've kind of been on the periphery they're never get you know they're not nearly the same size and scale but, they've been kind of nibbling around the edges, of the liquefaction, space kind of taking two, and a half million tons at a time and you. Know they've always at a very hard time with getting forward credit, or not always but in these last few, years yeah and I think that it's. You know in an odd way the, emergence, of the, second wave group in the US has actually helped them quite a bit because we might be wrestling, with what, kind of forward credit to give right any of the second wave projects, where you're looking and you could look at them say well winterman they've got they've got one done they're, on the gold one with a second they've got a feather so I think it's actually helped Samir. You're I wouldn't really call them a competitor I think it's more of kind of a, peripheral. You. Know maybe, appear anything right so you're essentially saying that the wave, to us projects. Are allowing, some of the other companies, that are out there to capitalize, some of that valuation, into. Their current equity, prices and. Yes. I, think I think it's helping to provide, more context, for the progress that some of these early adopters have made so, it's and this is what, they do they haven't the focus on floating liquefaction which is you, know even, more esoteric right, so it's there were some high hurdles there and there's a lot you know that we can get into the nuances that story but I think it's just the more visible the second wave has been and you guys have certainly led the led the way on that that it just provides more context, to a market that's still kind of coming into wood but why don't we talk about that a bit a lot of idea our, dinners that we do with institutional, investors, both women I was on the buy side and, on the sell side you're still seeing the same debate right now sometimes, people get really religious, about this the debate between floating.

LNG Versus. The merits of traditional. Onshore. Mega, large-scale. Projects, can you talk a bit about that how do you guys think about it you've seen both both, sides of the story yeah you know I wouldn't say that they directly compete. Yet I think it's transition, from you know the idea that floating low faction has been around forever I mean I think you know the first local faction train built at, least in the u.s. maybe ever was autumns on a barge right so it's been around for a long time right the problem for you know maybe the last 20 25 years with there there was this almost like an FPSO, model and the crude side where to. Get an F LNG project off the ground the guy that'd be providing the ask that effectively wanted to be you know last money in first money out right, and there, was way too much risk involved for that to work so, it took someone like goal or int or love to kind of take on a lot of risk, at. The right time to kind of get over the hump and build a shelf engineering, execution. For yeah is that the right way to think yes in terms of the risk and to really be entrepreneurial, around you know negotiating, with multiple parties at once and taking, the risk to build something on spec for a few months and really. Narrow the timeframe, you know you narrow the scope you say we have something delivering, we, need you know we need to get this figure down the next three months and it kind of it, it, brings everybody to the table I would. Say they globally. You, know it's gone from kind of a sideshow you know outside of say prey, right now they now would you like to use it you know fray loot is a Ferrari and what goal or does it's like a riding lawnmower right there look very different they're, very simple, yeah no, separate. Separation, treatment, is sure, half the time most of the projects they look at they're taking guests off the grid right. The. You're. Seeing it pop up more and more certainly. Around West, and East Africa, usually. Places where you don't want to build you. Know at the 15 billion dollar facility sure, but. You know there there are some cost advantages in the right scenario then you're typically going to places where the underlying, cost basis for the gas is gonna be extremely low yeah, and.

I Think what's been helpful is that you know they're usually pretty small bites they're two and a half million tons per asset. You have one, maybe two counterparties. Those. Counterparties, then feel like they have more sway they're, not getting in line behind you know you, know big Asian utilities, and. It. Helps facilitate. Potentially. Kind of a quick a quicker incubation, period for the project so I would say that now you know we've got you, know Mozambique, you can see floating assets, they're yeah they're. Equatorial. Guinea. Mauritania. You know I think it's. Still gonna it's moved in from the periphery I wouldn't say it's literally gonna jump to the front and center of every, energy investors, mind and let until it comes to the US Gulf, yeah Delfin, is a project that's been here for a while right you, know we have them they don't have been towards the front of our list we kind of have in them in there kind of that second tier that's really gotta hustle and die sure great a footprint, in a certain window. But. I would say it's gone from. Sideshows. A bit strong but it's certainly it's. Certainly more widely accepted, now I think gotcha. But not I wouldn't. Call them a true competitor yet, got, it I guess, on, the back of that before we continue from here how, do you in, terms of your perspective. I mean in. The valuation you came out with with, tellurian, I mean it was pretty conservative, I. Don't want to make this you know an episode of he. Beat me up on this off-camera it's fine I constantly okay, it's it's fine just keeping you in check yeah can. You talk a bit about goals. What. What do you think you've given where crude prices are right now given, where jkm, is right now. Other, products, going, to the second half of the year what. Do you think will cause an upgrade cycle, you've seen that you few firms coming out taking up their crude decks what, do you think will motivate you guys to rethink, and you look, at your your valuations, for the group I would say you know and I, would, love this conversation, and you know how much I like to argue so I will have this conversation spirit it's a market but it has less to do with the crude deck and fundamentals, and it does that with the with the competitor subset so when we looked at this you know we looked at every public us second wave company and we, looked at okay these are you know if there's 75 million tons up for grabs I can identify, 104. Million times that are tied the energy majors in nation states yep right that. Could close the window for everybody but those are not all going to come to the market in the next two, to three years they're gonna be significant, delays so there could be a window a window.

From. There we kind of narrowed it down another. 10. Projects, or so I think that you would probably agree or you know relatively. Viable in that scenario that everyone has warts every nice things they need sure but, they're you know and. So when you look at when I look at you know say and. Say half that say, half that 75 million goes to well. You know what we would call you know second tier projects, and second tier literally means not backed by you, know right, so like it's a it's a solid tear, the. If, half, of that goes to kind, of more, merchant projects, you, know you know they're 10 companies and they're kind of competing for that right right and that's and what's the driving factor behind that as much as we all focus on you. Know open, season on pipe and, FERC, and everything else like it comes down to, what. Projects, are buyers really Willie really, willing to sign on the dotted line for and really commit themselves to do right and right when you get beyond say. A shell or someone that's going to park you know five or six FTAs, around the world but really they can hit on three or four or five and not care when, you go beyond that and you took Neolithic traders or, you. Know smaller you know maybe the Gallup recently signed an SBA some some smaller utilities. They're gonna be 15 16 billion a gap they might have one or two and it's gonna have a lot of due diligence on their part as you well know yeah, that goes into it so without, a ton of color, yet and without kind of clarity in terms of. Defining. Really, defining what matters the, most for that. Buying subset, when I look at that that project. List of ten we, kind of came up with a kind of a standardized, probability. Weighting to use on our dcs for all all, three, or four projects, so we shared up we, put that in place across the board and I can honestly say you know between, Tillery. And your competitors, there things I like about each, projects. Some. I think will ultimately matter more than the others yeah but the big thing that it to be clear that we came out with and we when we when we launched it was it we, separate time frame alright so in, terms of momentum and trend versus, kind of intermediate, in long term so well I don't think anyone can sit here and say the probability, to this project gets done is X, and I am I have a hundred percent certainty in that sure all right so that's that's more of a long-term proposition I, think we try to be very reasonable and, and thoughtful. About how we do that like the near term trend is very positive and I think there's gonna be a significant, amount of commercial progress, across.

The Board this summer and I said we, would own the entire risker, for for liquefaction on. A trading basis, risk of meaning. From. Very speculative, to survey, of projects that have a backwater, which is probably. Going to be capitalized, and delivered over time if I if I look at shittier. As being. The. Kind. Of the investment great option in a space right I'm, glad to say. If, I look at them being at the front of the curve um and just in terms of costs Capital basis and towards the you know as you move back you get the second wave projects you get companies like goal are I think, that there's systems there's enough positive, momentum that. We don't yet have to pick a winner I think that eventually will need to get there but until we do yeah, the. Track record in the history of the space suggests, it you know we're using 35%, for phases one for, phase ones and and and 15 35 percent probability probability weighting, okay now and, 15 percent for for any second phases which, I actually tend to think is pretty generous and pretty pretty reasonable, okay and then you know we can adjust that as we, see real commercial progress, certainly that would be the most direct answer to your question as I start to see you. Know real progress on that front then we, absolutely would and that's kind of the the decision, we've made we didn't want to just dive in and say, we, liked this project for no particular, reason over, the rest you, know we'll treat everybody fairly, and you know it's kind of a ShowMe story which i think is pretty fair and obviously. I mean the upside associated, with you know a successful. Like a blue sky scenario, for for you all er or a. Number of others yeah, is. Significant. Right so I would say that it's certainly not. If. It looks like that's the direction a project is heading and I think we'll have plenty of incremental. Indicators, that you're making you know you're getting close then. Not. A trade we want to be on the wrong side of that can get and go against you so it sounds like two things either there'll, be a rear aiding for a lot of these equities, and you're at least in the public space once you get the event or the news coming up or, you're gonna need some rereading within, the commodity, world or the expectations. And the demand for gas. Demand, is that the right way to think about it yeah I think it's just I think the low probability weightings, and I would say across the board yeah, it's a reflection of how difficult, well you what everyone is trying to do right it's just really tough to do it really I mean it really there's there's, a reason why you, know it's only been pulled off once in the US right, it really today I mean there are some of the projects that are coming up now but you know and and you. Know. You. Guys had a lot to do that I think that I think that the. It's just difficult so I think we wanted to be respectful, of that in. Terms of a rereading. You. Know I think unfortunately. It's not a rising tide is gonna lift all boats for a while okay, for a while but I'm if, you look across all the second way projects not everybody's, getting done right right, so we, almost when, we looked at these almost looked at it with the lens of whether there was a third option and I actually think you'll see a lot of maybe, not a lot you'll see some meaningful M&A at some point where. Someone. Will make enough progress that they're viable, there's. Certainly value there, but the hurdles are so high that there's gonna be a lot of street value in some of these platforms so, and, again that's that's, a question they'll be answered in you, know a couple of years right does. This stage of where we are in the liquefaction, cycle, remind you of any of the, other sectors that you've covered on, the crude side LPG, is are, there any. Analogies. Or references. That you can make esters, or just a general audience to think about parallels, in terms of where you are the lifecycle terms. Of development, cycle I think it's I mean it's it's it's still very very early I think when across the entirety, of the LNG supply, chain I think, see.

If I started the bike if I start downstream, recast there's a lot of oversupply there a lot, of low-hanging fruit, in terms of we're replacing gas, in emerging market has been picked and now if. You're gonna place incremental. Gas in an emerging market it's gonna be more challenging you go to you know you're going to pull together multiple, countries you're this just takes, four or five years as opposed to parking a third F s are you in. Egypt or Jordan, midstream. I think there's a pretty. Healthy two or three year window here where we're gonna be under supply from a tonnage perspective, I, think the returns they're certainly more limited than what you guys are looking at I think the upside there's no. Other space that I've covered has the amount of upside that I think you can see and look. With action space in the second wave right and, with that upside comes risk and I heard sure, that. Makes sense the moat it's it's funny you know the lot, of the the commodity, oriented, shipping names right around the time that China joined the WTO when. They started this multi-year run and it, was I mean, close, to one parallel in. You know the preceding decades, it. Feels they may be a bit like that except. The counterparties, are just firmer when the companies are just better right, the, you know the governance is firmer or just seems. There's. So much white space in, LNG and that's one of the reasons why I spend so much time on it that you know Ellen G's a marine fuel we thought you know placing gas and you know somewhere like the Caribbean over there bill are burning heavy fuel oil eventually, eventually. There's gonna be necessity when. Ultimately, went craters and it being long enough gas and there's an incentive to get, more creative and more to place it that, there's, globally. There's more white space in LNG than any market I cover. We. Appreciate. That on that note thanks. Again Mike and the team at Wells Fargo they, do great work once. It's, a tellurian. Here and we'll see you next time. You.

2018-09-15 18:01

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