The current year has been rife with tensions related to the Russia-Ukraine war. This has resulted in a tight oil supply. However, the energy sector has significantly benefited from this situation.

Oil prices skyrocketed earlier this year, which has kept the sector buoyed in stark comparison with the broader market. The Energy Select Sector SPDR Fund (XLE) is up 67.6% this year, significantly outperforming the SPDR S&P 500 ETF Trust’s (SPY) 20% decline over the same period.

Moreover, OPEC expects global oil demand to increase to 103 million barrels per day (BPD) next year, reflecting an increase of 2.7 million BPD from 2022 and an increase of 1.4 million BPD from what was predicted for 2023 last year.

Natural gas producer Tellurian Inc. (TELL) reported a 25% increase in net natural gas production and a 32% increase in natural gas sales in the third quarter compared to the prior quarter.

However, the company reported that it had scrapped deals with two of its biggest potential customers – Shell plc (SHEL) and Vitol S.A., after withdrawing a $1 billion high-yield bond sale that would have funded the initial construction of its proposed multi-billion dollar Driftwood LNG plants in Louisiana.

The stock has gained 13% over the past month. However, it has declined 35.8% over the past year and 31.2% over the past six months to close its last trading session at $3.05.

Here are the factors that could influence TELL’s performance in the near term:

Top and Bottom Line Missed Estimates

For the fiscal third quarter ended September 30, TELL’s total revenues increased 418.6% year-over-year to $81.10 million. However, this figure missed the analysts’ estimate of $82.35 million by 1.5%. Its net loss per common share came in at $0.03, missing analysts’ expectation of an EPS of $0.04.

Stretched Valuation

In terms of its forward EV/Sales, TELL is trading at 4.40x, 117.2% higher than the industry average of 2.03x. Its forward Price/Sales multiple of 4.40 is 195.2% higher than the industry average of 1.49. In terms of its forward EV/EBIT, it is trading at 1,228.52x, significantly higher than the industry average of 8.39x.

Weak Profitability

TELL’s trailing-12-month gross profit margin of 26.71% is 31.7% lower than the industry average of 39.10%. Its trailing-12-month EBITDA margin and net income margin of negative 17.08% and 39.26% are significantly lower than their respective industry averages of 27.32% and 11.21%.

Its ROE, ROTC, and ROTA of negative 24.43%, 5.87%, and 8.54% compare to their respective industry averages of 19.98%, 7.70%, and 6.61%.

POWR Ratings Reflect Bleak Prospects

TELL’s POWR Ratings reflect the company’s bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TELL has a Value grade of F, in sync with its higher-than-industry valuation. The stock also has an F grade for Quality, consistent with its bleak profitability.

TELL has a Stability grade of F, justified by its five-year beta of 2.26.

In the 94-stock Energy – Oil & Gas industry, TELL is ranked #93. However, the industry is rated B.

Click here to see the additional POWR Ratings for TELL (Growth, Momentum, and Sentiment).

View all the top stocks in the Energy – Oil & Gas industry here.

Bottom Line

Despite the energy sector’s bright prospects, TELL’s potential customer losses look concerning. Moreover, its latest financial report came in cooler than analysts expected. The stock is trading below its 50-day and 200-day moving averages of $3.12 and $3.76, respectively, indicating a downturn. Hence, this stock might be best avoided now.

How Does Tellurian Inc. (TELL) Stack up Against Its Peers?

While TELL has an overall POWR Rating of F, one might consider looking at its industry peers, PrimeEnergy Resources Corporation (PNRG) and Marathon Petroleum Corporation (MPC), which have an overall A (Strong Buy) rating, and Berry Corporation (BRY) and Weatherford International plc (WFRD), which have an overall B (Buy) rating.

TELL shares fell $3.05 (-100.00%) in premarket trading Tuesday. Year-to-date, TELL has declined 0.00%, versus a -18.78% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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