Liquified Natural Gas (LNG) producer and supplier Tellurian Inc. (TELL) has been one of the best performing stocks in the industry over the past year, as evidenced by its 184.5% gains over this period. With oil prices rebounding over the past couple of months and currently hovering near their two-year high, shares of TELL have gained 144% over the past month to close yesterday’s trading session at $5.32. The stock has gained 315.6% year-to-date.

The demand outlook for the oil market is expected to remain strong in the near term, with developed and emerging countries now witnessing declines in COVID-19 cases. 

Furthermore, with OPEC+ countries extending their supply cuts until the end of this month, oil prices are expected to rise substantially in the coming months. But despite the bullish oil markets, analysts expect TELL’s EPS to remain negative until at least 2022.

Here’s what we think could shape TELL’s performance in the near term:

Long term Contracts and Industry Headwinds

On June 3, TELL finalized a 10-year sales and purchase agreement (SPA) with Vitol Inc., which is expected to generate $12 billion in revenues over the duration of the contract. Under the SPA, TELL is expected to supply three million tonnes of Driftwood LNG per annum to energy trader Vitol, at indexed prices. The company has entered a similar agreement with Gunvor Singapore Pte Ltd for the same quantity and duration at indexed prices.

TELL expects these long-term agreements to bring in $24 billion in revenues over the next 10 years. However, given the rising popularity of renewable energy, the demand for LNG is expected to decline over this period. Several companies are putting pressure on established oil and gas companies to reduce their carbon footprint substantially over the next decade as part of their goal to achieve carbon neutrality in the long term.

On May 26, a Dutch court ruled that Royal Dutch Shell Plc, one of the biggest oil and gas companies operating in Europe, is required to reduce its carbon emissions by 45% by 2030 from its 2019 levels. This is expected to act as a precedent in putting pressure on industry giants to reduce their carbon emissions significantly. In addition, Biden’s desire to reduce carbon emissions in the United States to 50%-52% of 2005 levels by 2030 should keep domestic companies like TELL under pressure.

Inefficient Operations

TELL’s trailing-12-month revenues were $37.92 million, indicating an 18.4% rise year-over-year. Its top line has increased at a 108.4% CAGR over the past five years. However, the company has yet to turn break even. TELL’s trailing-12-month gross loss came in at $3.28 million, translating to an 8.64% negative gross margin. Its trailing 12-month net loss and loss per share stood at $197 million and $0.65, respectively.

Also, TELL has been unable to generate positive cash flow from operations. Its net operating cash outflow and levered free cash outflow stood at $59.95 million and $32.23 million, respectively. TELL’s trailing-12-month levered free cash flow stands at negative 84.98%. Furthermore, the company’s ROE, ROA and ROTC are negative 119.93%, 72.87% and 14.81%, respectively.

TELL’s 0.12%  asset turnover ratio is 62.7% lower than the 0.32% industry average. Its 6.43% CAPEX/Sales ratio is 30.1%, which is higher than the 9.2% industry average.

Premium Valuation

TELL’s forward Price/Earnings estimates are negative, indicating poor earnings growth prospects. In terms of forward Price/Sales, TELL is currently trading at 32.24x, which is 2,100.3% higher than the 1.47x industry average.

The stock’s forward Price/Book and EV/Sales ratios of 10.13 and 29.71, respectively, compare with 1.74 and 2.76 industry averages.

POWR Ratings Reflect Bleak Prospects

TELL has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

TELL has a D grade for Quality, and F for Value and Stability. The company’s negative profitability is in sync with its Quality grade, while its higher-than-industry valuations justify its Value grade. The stock has a 2.62 five-year-monthly beta, consistent with its  Stability grade.

Of the 95 stocks in the C-rated Energy – Oil & Gas industry, TELL is ranked #89.

In addition to the grades we’ve highlighted, one can view TELL Ratings for Momentum, Growth and Sentiment here.

Click here to view the top-rated stocks in the Energy – Oil & Gas industry.

Bottom Line

Over the past couple of months, TELL has been deleveraging its balance sheet by repaying substantial proportions of its outstanding debt. However, TELL is failing to capitalize on the current low interest rate environment. This, coupled with its poor fundamentals, make the stock best avoided now.

TELL shares were trading at $5.15 per share on Wednesday afternoon, down $0.17 (-3.20%). Year-to-date, TELL has gained 302.34%, versus a 13.38% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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